Key Takeaways
- The federal corporate income tax rate is a flat 21%.
- The flat rate was established by TCJA (2017) and is permanent.
- Prior to TCJA, corporations faced graduated rates up to 35%.
- C corporations face double taxation: 21% + dividend tax to shareholders.
- Personal service corporations (PSCs) also pay 21% (no longer 35%).
- State taxes are in addition to the 21% federal rate.
Corporate Tax Rate (21%)
Why This Matters for the Exam
The 21% flat rate is fundamental to C corporation taxation. The exam tests the rate, the double taxation concept, and comparisons to individual rates.
Expect at least 2-3 questions on the corporate tax rate.
The 21% Flat Rate
All C corporations pay federal income tax at a flat 21% rate, regardless of income level.
| Income Level | Tax Rate |
|---|---|
| $0 - $50,000 | 21% |
| $50,001 - $100,000 | 21% |
| $100,001 - $1,000,000 | 21% |
| Over $1,000,000 | 21% |
Formula:
Federal Corporate Tax = Taxable Income × 21%
History: Pre-TCJA Graduated Rates
Before the Tax Cuts and Jobs Act (TCJA) of 2017, corporations faced graduated rates:
| Income | Old Rate |
|---|---|
| $0 - $50,000 | 15% |
| $50,001 - $75,000 | 25% |
| $75,001 - $10,000,000 | 34% |
| Over $10,000,000 | 35% |
The TCJA replaced this with a single 21% rate, effective for tax years beginning after December 31, 2017.
TCJA Made It Permanent
| Feature | Status |
|---|---|
| 21% rate | Permanent |
| Graduated rates | Eliminated |
| PSC special rate | Eliminated (was 35% flat) |
Double Taxation: The Full Picture
C corporations face two layers of tax:
| Layer | Rate | Applied To |
|---|---|---|
| Corporate level | 21% | Corporate taxable income |
| Shareholder level | 0%/15%/20% | Qualified dividends |
Double Taxation Example
| Step | Calculation | Amount |
|---|---|---|
| Corporate income | $100,000 | |
| Corporate tax (21%) | $100,000 × 21% | ($21,000) |
| After-tax profit | $79,000 | |
| Dividend distributed | $79,000 | |
| Shareholder tax (15%) | $79,000 × 15% | ($11,850) |
| Net to shareholder | $67,150 | |
| Effective combined rate | ($21,000 + $11,850) / $100,000 | 32.85% |
Comparison: C Corp vs. Pass-Through
| Factor | C Corporation | Pass-Through (S Corp) |
|---|---|---|
| Entity tax | 21% | 0% |
| Shareholder tax | 0-20% on dividends | Up to 37% on income |
| QBI deduction | N/A | Up to 20% (§199A) |
| Double taxation | Yes | No |
| Best for | Reinvesting profits | Distributing profits |
Personal Service Corporations (PSCs)
| PSC Rule | Current |
|---|---|
| Tax rate | 21% (same as regular corps) |
| Pre-TCJA | Was 35% flat |
| Activities | Health, law, engineering, accounting, etc. |
Real-World Scenario
Scenario: A C corporation earns $500,000 in Tax Year 2024. Calculate the federal tax.
- Tax: $500,000 × 21% = $105,000.
- If distributed as dividend: Shareholders pay additional tax (0-20% depending on bracket).
- Planning: Retaining earnings avoids immediate shareholder tax but triggers AET risk.
On the Exam
Expect 2-3 questions on the tax rate, typically:
- Rate Questions: "What is the corporate tax rate for Tax Year 2024?"
- Calculation Questions: "A corporation has $X income. What is the tax?"
- Double Taxation Questions: "What is the effective combined rate?"
The key is to remember: 21% flat rate. Apply to all income. Double taxation = 21% + dividend rate (up to ~33% combined).
What is the federal corporate income tax rate for Tax Year 2024?
A C corporation has taxable income of $500,000. What is its federal income tax?
What is the approximate combined effective tax rate for C corporation income distributed as qualified dividends?