18.2 C Corporation Taxable Income and Special Deductions
Key Takeaways
- C corporations pay a flat 21 percent federal rate on taxable income; TCJA repealed graduated corporate brackets, and that 21 percent rate remains the law after OBBBA.
- Beginning in 2026, a C corporation deducts charitable contributions only to the extent they exceed 1 percent of taxable income and do not exceed 10 percent, with a five-year carryforward of the amount above the 10 percent ceiling.
- The §243 dividends-received deduction is 50 percent if ownership is under 20 percent, 65 percent if ownership is 20 percent or more, and 100 percent if the corporations are affiliated at 80 percent.
- The DRD taxable-income limitation does not apply when taking the full DRD creates or increases a net operating loss for the year.
- C corporation capital losses offset only capital gains and carry back three years and forward five years; there is no $3,000 ordinary-income offset.
18.2 C Corporation Taxable Income and Special Deductions
REG Area V, Group B, Topic 1 asks you to calculate taxable income for a C corporation. After the M-1 / M-3 walk in Section 18.1 has produced income per return, apply the special deductions and the few percentage limitations that are unique to C corporations. Tax, credits, and net operating losses are Section 18.3.
A C corporation is a separate taxpayer. It files Form 1120 and pays a flat 21 percent federal rate on taxable income. The Tax Cuts and Jobs Act repealed graduated corporate brackets and set that 21 percent rate; OBBBA did not change it. Personal service corporations use the same 21 percent. There is no corporate-level preferential rate for long-term capital gains. Double taxation — entity-level tax, then shareholder tax on dividends — is the structural consequence, not a computational step on Form 1120.
Charitable contributions — 1 percent floor, 10 percent ceiling (2026+)
A C corporation's charitable deduction under §170(b)(2) is computed from taxable income determined without the charitable deduction itself, the dividends-received deduction, any NOL carryback, and any capital-loss carryback. Through 2025 the only percentage limit was a 10 percent ceiling. For taxable years beginning after December 31, 2025, OBBBA added a 1 percent floor: the deduction is allowed only to the extent aggregate contributions exceed 1 percent of that taxable income and do not exceed 10 percent. The currently deductible slice is therefore the window between 1 percent and 10 percent. Amounts above the 10 percent ceiling still carry forward five years, subject to the same floor and ceiling in the carry year. The first 1 percent is not a current deduction. These 2026-effective IRC changes are testable on REG beginning July 1, 2026.
If taxable income for the limit is $400,000, the 1 percent floor is $4,000 and the 10 percent ceiling is $40,000. A $55,000 cash contribution yields a current deduction of $36,000 (the amount above $4,000 that does not exceed $40,000) and a $15,000 carryforward of the excess over the ceiling. Do not import the individual 20 / 30 / 50 / 60 percent-of-AGI grid. Corporations do not have AGI.
Dividends-received deduction (§243)
To mitigate cascading entity-level tax on earnings moved among corporations, §243 allows a dividends-received deduction (DRD) on dividends from taxable domestic corporations. TCJA reduced the historic 70 / 80 percent tiers to 50 / 65; those percentages remain current after OBBBA. The 100 percent affiliated-group deduction was not reduced.
| Ownership of the distributing domestic corporation | DRD percentage |
|---|---|
| Less than 20 percent | 50 percent |
| 20 percent or more, but not affiliated | 65 percent |
| Affiliated group (80 percent vote and value, §243(b) / §1504) | 100 percent |
Ownership is measured by voting power and value, not by a seat on the board. Portfolio holdings sit in the 50 percent bucket. Using 70 percent or 80 percent is the pre-TCJA trap.
Taxable-income limitation (§246(b)). The 50 percent and 65 percent DRDs cannot exceed 50 percent or 65 percent, respectively, of taxable income computed without the DRD, the NOL deduction, a capital-loss carryback, and certain other special deductions. Exception: the limitation does not apply if the full DRD creates or increases an NOL for the year. The 100 percent affiliated DRD is outside this percentage-of-TI cap.
Worked: $10,000 dividends, 15 percent owned
Facts. A domestic C corporation receives $10,000 of dividends from a taxable domestic corporation. It owns 15 percent of that corporation's stock. No other DRD items. Taxable income before the DRD is large enough that the §246(b) limit does not bind, and the DRD does not create an NOL.
Ownership is under 20 percent, so the percentage is 50 percent.
DRD = $10,000 × 50% = $5,000.
The remaining $5,000 stays in taxable income. At a 21 percent rate, residual tax on the dividend is $1,050 — the remaining double-tax friction the DRD is designed to reduce but not eliminate at this ownership level.
If ownership had been 25 percent, the DRD would be $10,000 × 65% = $6,500. If the corporations were affiliated at 80 percent, the DRD would be $10,000.
If, instead, taxable income before the DRD were only $8,000 and the corporation were in the 50 percent bucket, §246(b) would cap the DRD at 50% × $8,000 = $4,000 — unless taking the full $5,000 creates an NOL, in which case the cap drops away and the corporation deducts $5,000 and reports a $1,000 NOL.
Capital losses
A C corporation may deduct capital losses only against capital gains. There is no $3,000 ordinary-income offset — that is an individual rule under §1211(b). Unused net capital loss carries back three years and forward five years under §1212(a) and is treated as a short-term capital loss in the carry year. Compare that short window with the NOL rules in Section 18.3: different statutes, different clocks. A net capital loss is not converted into an NOL merely because it cannot be used this year.
Organizational expenditures (recap)
In the year the corporation begins business, §248 allows an immediate deduction of the lesser of organizational expenditures or $5,000, reduced dollar-for-dollar once total organizational costs exceed $50,000, with the remainder amortized over 180 months. Stock-issuance costs are not organizational expenditures. The basis-side arithmetic is Section 12.2; here, remember that the tax amortization, not the book write-off, is the return deduction, so any book/tax difference belongs on the M-1.
Accrual versus cash — §448 conceptually
§448 bars the cash method for tax shelters and for C corporations (and partnerships with a C corporation partner) that fail the average-annual-gross-receipts test, generally a three-prior-year average against an inflation-adjusted statutory threshold. REG does not test the printed dollar. Qualified personal service corporations and farming businesses have statutory paths back to cash. A large C corporation on accrual still lives with the all-events test and economic performance — which is why warranty reserves and many accrued bonuses were temporary differences in Section 18.1.
Smaller C corporations that meet the gross-receipts test may use cash unless they are tax shelters or are otherwise required to account for inventories in a way that forces accrual. On a REG stem, identify whether the entity is a tax shelter or a C corporation above the receipts threshold before you allow a cash-method result.
A domestic C corporation receives $10,000 of dividends from a taxable domestic corporation in which it owns 15 percent. Taxable income before the DRD is well above the dividends, and the DRD does not create an NOL. What is the dividends-received deduction?
Which statement correctly describes a C corporation's charitable contribution limitation?
A C corporation has a $40,000 net capital loss and no capital gains. Which treatment is correct?