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At Padgett, our team provides solutions-driven, cost-effective tax services and accounting services to small and mid-sized businesses nationwide. It is our goal to empower you with the tools and resources that you need to build a financial foundation for your business. In this article, you will find an overview of the most important things to know about Form 1120 and corporate tax returns.
C corporations (C corps) are a traditional corporate structure. They are distinct legal entities that are separate from their owners (the shareholders). A consequence of this is that C corps are subject to unique taxation requirements. Understanding the taxation process for C corporations is crucial for owners and operators to help ensure compliance with the law and to optimize business planning. The most notable aspect of C corp taxation is the double taxation system.
Double taxation occurs when corporate income is, in effect, taxed twice. The first level of taxation is at the corporate level. A C corp must complete and file its own tax return. The second level of taxation is at the individual level when profits are distributed to shareholders in the form of dividends. Form 1120 comes into play at the corporate level. All C corps in the United States are required to complete and file a corporate tax return using Form 1120.
The bottom line: A C corp is its own distinct tax entity. A C corporation must file its own tax return using Form 1120. A C corp that has generated taxable income must pay taxes directly to the federal government. The corporate tax rate is currently 21 percent (2022).
Form 1120 is the key federal tax form for C corporations in the United States. Unlike S corporations, which pass through their income and deductions to shareholders, C corporations are subject to taxation at the corporate level. It is crucial that Form 1120 is completed accurately and filed in a timely manner. A C corp that underreports taxable income could face serious sanctions. Form 1120 consists of numerous sections that require detailed information about the corporation’s financial activities, including:
Income, deductions, and taxable income: The C corporation reports its income or loss from various sources, such as gross receipts, cost of goods sold, gross rental income, and other income types. It also lists deductible expenses, such as salaries, rent, taxes, interest, and depreciation. The net income or loss and taxable income are then calculated.
Tax: The C corporation calculates its tax liability based on its taxable income and applicable tax rates.
Refundable credits: The C corporation reports any refundable tax credits it may be eligible for, such as research credits or foreign tax credits. C corps should understand all refundable credits that may be available to minimize total tax liability.
Balance sheet: A C corporation should provide a balance sheet showing its assets, liabilities, and shareholder’s equity at the beginning and end of the tax year.
Reconciliation of income (loss) per books with income per return: The C corporation must reconcile its book income with its taxable income reported on the tax return in this part.
No. Unlike S corporations, partnerships, or most multi-member LLCs where income flows through to the owners’ individual tax returns, a C corp is not a pass-through entity. It files its own tax return. If your business is organized as a C corporation, Form 1120 must be filed each year.
Similar to individual tax returns, a C corp’s tax return using Form 1120 is due on the 15th day of the fourth month following the end of the corporation’s tax year. For calendar year corporations, the deadline is usually April 15th. Though, if the due date falls on a weekend or legal holiday, the deadline is extended to the next business day. Be sure to file in a timely manner.
Corporations that fail to file a federal tax return in a timely manner could face significant penalties. The late filing penalty is 5 percent of the unpaid tax for each month the return is late—with a maximum penalty of 25 percent of the unpaid tax. Failure to file may result in the IRS disallowing deductions and credits, leading to higher tax liability. To avoid these consequences, it is crucial that C corps file all tax documents promptly.
At Padgett, our tax advisors have the skills, experience, and financial expertise to help corporations with the full range of tax matters. Call us now or send us a direct message to arrange your fully confidential, no-obligation initial appointment. We are well-positioned to provide tax services, accounting services, payroll services, and business advisory services to corporations nationwide.
