A business entity may be taxed as a corporation if it is organized and
operated under a state corporation statute or if it meets the requirements for being an association taxable as a corporation or a publicly traded partnership. A basic decision in organizing any business venture is the choice of whether it will be conducted in corporate form or otherwise.
If an entity is taxable as a corporation, it is normally taxed under rules applicable to C corporations. It may, however, qualify for special treatment depending on factors such as the nature of its business and the number and identity of its shareholders. A corporation may receive such treatment if it meets the requirements for being an "S" corporation. If the shareholders of a new corporation elect to have the corporation treated as an S corporation, however, they are not prevented from later deciding to have the corporation become a C corporation (and vice versa).
A C corporation computes its taxable income differently from an individual. For example, it may take a deduction for any dividends received from other corporations. This deduction is not available to individuals. Similarly, special rules may apply to its charitable contributions deduction, organizational expenditures, capital losses, "passive activity" losses, and amount "at risk" in an activity. For instance, a new corporation may elect to deduct a pro rata portion of its organizational expenditures each year over a period of 60 or more months.
Certain deductions are curtailed for corporations, and certain capital gains may be recharacterized as ordinary income. For example, a corporation is limited in its ability to deduct expenses for "disqualified interest," which is interest paid to a related person if the payee is exempt from U.S. tax on such interest. For years after 1993, disqualified interest may also include interest paid to unrelated parties if certain conditions are met.
A C corporation is an entity apart from its owners. Hence, for both tax and financial purposes, it selects its own accounting method and accounting period. Further, the corporation's income and deductions may be affected by transactions that are either peculiar to corporations (e.g., reorganizations) or treated differently for corporations (e.g., distributions and liquidations).
The rules regarding the tax rates and tax returns of C corporations are different than those for individuals. For example, instead of filing separate corporate returns, a group of affiliated corporations may file a single, consolidated tax return. Furthermore, C corporations are subject to taxes that do not apply to individuals. For instance, a C corporation may be subject to an environmental tax, a personal holding company tax, and an accumulated earnings tax.