C Corporation Taxation: Taxable Income and Distributions
By SimplyCPA · 11 October 2026
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- Rate: A flat 21% on taxable income, reported on Form 1120 (due the 15th day of the fourth month after year-end).
- Special deductions: The dividends received deduction (50%, 65% or 100% depending on ownership) and limits on charitable contributions (10% of taxable income, with a new 1% floor from 2026).
- Business interest: Generally limited to 30% of adjusted taxable income, which is again computed before depreciation and amortisation for tax years beginning after 2024.
- Distributions: Taxed as dividends to the extent of current and accumulated earnings and profits, then a return of basis, then capital gain.
- Property distributions: The corporation recognises gain (but not loss) as if it sold the property at fair market value.
Computing corporate taxable income
| Gross income (sales − cost of goods sold, plus investment income and gains) |
| − Ordinary and necessary business deductions |
| = Taxable income before special deductions |
| − Net operating loss deduction (limited to 80% of taxable income for post-2017 losses) |
| − Dividends received deduction |
| = Taxable income × 21% |
Dividends received deduction (DRD)
| Ownership of the paying domestic corporation | DRD |
|---|---|
| Less than 20% | 50% |
| 20% to less than 80% | 65% |
| 80% or more (affiliated group) | 100% |
The 50% and 65% deductions are limited to that percentage of taxable income (computed without the DRD, NOL and capital loss carryback), unless taking the full DRD creates or increases an NOL.
Other limits
- Charitable contributions: limited to 10% of taxable income. For tax years beginning after December 31, 2025, the OBBBA allows a deduction only for contributions exceeding 1% of taxable income. Excess contributions carry forward five years.
- Business interest (Section 163(j)): limited to business interest income plus 30% of adjusted taxable income. For tax years beginning after December 31, 2024, ATI is again calculated before depreciation, amortisation and depletion (an EBITDA-style measure). Small businesses meeting the gross receipts test are exempt.
- Capital losses: only against capital gains; carried back 3 years and forward 5.
- Meals: generally 50% deductible; entertainment is not deductible.
- Corporate alternative minimum tax: 15% of adjusted financial statement income for corporations with average annual financial statement income over $1 billion.
Worked example
A corporation has income from operations of $500,000 and receives $100,000 of dividends from a 30%-owned domestic corporation. Charitable contributions are $70,000.
- Taxable income before charitable and special deductions = $600,000.
- Charitable limit = 10% × $600,000 = $60,000; floor = 1% × $600,000 = $6,000. Deductible = contributions above the floor ($64,000), capped at $60,000 → $60,000. The rest carries forward.
- Taxable income before DRD = $540,000. DRD = 65% × $100,000 = $65,000 (65% of taxable income would be $351,000, so no limit applies).
- Taxable income = $475,000 → tax = $99,750.
(Carryforward treatment of contributions disallowed by the floor depends on the final rules — check IRS guidance.)
Earnings and profits and distributions
- Dividend — to the extent of current E&P, then accumulated E&P.
- Return of capital — reduces the shareholder's stock basis.
- Capital gain — any excess.
E&P approximates economic income: taxable income plus tax-exempt income and the DRD, minus federal income tax and non-deductible expenses, with depreciation recomputed on a slower basis.
Property distributions
- The corporation recognises gain on distributing appreciated property, as if sold at fair market value; losses are not recognised.
- The shareholder's dividend equals the property's fair market value minus any liability assumed; its basis in the property is fair market value.
Penalty taxes
The 20% accumulated earnings tax and 20% personal holding company tax discourage keeping profits in the company to avoid shareholder-level dividend tax.
Continue with tax basis vs book basis and REG C corporation taxation.