Business Taxation

Businesses in the United States face different tax obligations depending on their legal structure. Understanding these differences is crucial for business planning and compliance.

C Corporations

C corporations are taxed as separate entities at the corporate tax rate (currently a flat 21% under the Tax Cuts and Jobs Act of 2017). When the corporation distributes profits to shareholders as dividends, those dividends are taxed again at the individual shareholder level — this is called double taxation.

C corporations:

File Form 1120 (U.S. Corporation Income Tax Return)

Pay estimated taxes quarterly

May carry forward net operating losses (NOLs) to offset future income (limited to 80% of taxable income)

Pass-Through Entities

Pass-through entities do not pay entity-level federal income tax. Instead, income and losses "pass through" to the owners' individual tax returns.

S corporations (Form 1120-S) — income passes through to shareholders; subject to restrictions (100-shareholder limit, one class of stock)

Partnerships (Form 1065) — income passes through to partners according to the partnership agreement

LLCs — can choose to be taxed as a sole proprietorship, partnership, or corporation

Sole proprietorships (Schedule C) — the simplest; business income is reported on the owner's personal return

Pass-through owners may be eligible for the Qualified Business Income (QBI) deduction — a deduction of up to 20% of qualified business income (Section 199A).

Employment Taxes

Businesses with employees must withhold and pay:

Federal income tax withholding

FICA taxes — Social Security (6.2%) and Medicare (1.45%) for both employer and employee portions

Federal unemployment tax (FUTA) — paid by the employer

State unemployment taxes — vary by state

Self-Employment Tax

Self-employed individuals pay self-employment tax (the equivalent of both the employer and employee portions of FICA) — currently 15.3% on net self-employment income (12.4% for Social Security, up to the wage base, and 2.9% for Medicare).

Key Business Deductions

Common deductible business expenses include:

Salaries and wages

Rent and office expenses

Depreciation of business assets (including bonus depreciation and Section 179 expensing)

Business travel, meals (50% deductible), and transportation

Health insurance premiums (for self-employed individuals)

Interest on business loans

Professional services (legal, accounting)

Business Taxation