C Corporations — Formation, Taxation & Corporate Transactions (2025)

Formation — §351

No gain/loss recognized if:

• Property (not services) transferred to corporation solely for stock, AND
• Transferor(s) control the corporation immediately after (≥80% of total voting power AND ≥80% of each class of nonvoting stock)

Control: Must be 80% of ALL classes of stock with voting power (combined) + 80% of each other class. Measured immediately after transfer.

Boot received (cash, other property, or certain liabilities): Gain recognized up to lesser of boot or realized gain. No loss recognition ever in §351.

Services for stock: NOT covered by §351. FMV of stock = ordinary income to service provider. Stock basis = FMV.

Shareholder basis in stock = basis of property transferred − boot received + gain recognized − liabilities assumed by corporation (unless liability payment creates deduction).

Corporation basis in property = transferor's adjusted basis + gain recognized by transferor.

Liability Assumption

• Corporation assuming shareholder's liability generally NOT treated as boot
• Exception 1: If liabilities exceed adjusted basis of property → gain recognized up to excess (unless liability payments would create deductions, e.g., trade payables/interest)
• Exception 2: If no bona fide business purpose for assuming liability OR primary purpose is tax avoidance → all assumed debt treated as boot

§351 Non-Recognition Exclusions

• Investment company transfers
• Bankruptcy transfers (for creditor stock)
• Stock received for debt/debt interest
• Small-value transfers (property FMV <10% of stock FMV received)
• Transfers to foreign corporations
• Corporation settling debt with stock (FMV < debt → corporation recognizes COD income)

C Corp Taxation

• 21% flat rate on all taxable income (TCJA permanently)
• No standard deduction
• Form 1120 due April 15 (15th day of 4th month after year-end)
• June 30 fiscal year-end special rule: Due Sept 15 (through tax years beginning before Jan 1, 2026; after that, general 4th-month rule applies → Oct 15)
• Extension: Form 7004, 6 months (7 months for June 30 FYE through 2025)
• Late filing penalty: 5% of unpaid tax/month (max 25%); minimum $525 or 100% of tax if >60 days late. Based on tax due (unlike partnership/S-corp per-shareholder penalty)
• CAMT (Corporate AMT): 15% minimum tax on adjusted financial statement income (AFSI) — only for corporations with average annual financial statement income >$1 billion over prior 3 years (IRA 2022)

Dividend Received Deduction (DRD)

Exclusions: REIT dividends, §501/§521 exempt corps, stock held <46 days (common) or <91 days (preferred). If corporation has NOL: full DRD allowed (can create/increase NOL). DRD reported on Schedule C (Form 1120).

Capital Gains & Losses

• NO preferential rates — all income taxed at 21%
• Capital losses only offset capital gains (no offset against ordinary income)
• Capital loss carryback 3 years, forward 5 years (carrybacks to years with net capital gains only; carried as short-term)
• Cannot carryback to S-corp years

Charitable Contributions

• C Corp limit: 10% of taxable income (modified — before charitable deduction, DRD, NOL carryback, capital loss carryback)
• Excess carries forward 5 years (no carryback)
• Accrual-basis corps: can deduct contributions authorized by board before year-end if paid within 2.5 months of year-end (attach board resolution date statement)
• Non-cash donations: FMV basis (inventory = cost basis); >$500 requires description schedule; >$5,000 requires qualified appraisal (except cash, publicly traded securities, inventory)
• OBBBA (2026): 1% floor on charitable deductions (only amount exceeding 1% of taxable income deductible) — applies to tax years beginning after Dec 31, 2025; 10% limit continues to apply

Corporate NOLs

• Post-2017 NOLs: NO carryback, indefinite carryforward, limited to 80% of taxable income
• Pre-2018 NOLs: not subject to 80% limit
• Farm corporation: 2-year carryback (can elect to waive)
• Property/casualty insurance: 2-year carryback, 20-year carryforward (no 80% limit)
• Reported on Schedule K (Form 1120), line 29a
• Refund claims: Form 1139 (quick refund, within 12 months of NOL year-end) or Form 1120-X (within 3 years of filing)
• Form 4466: Quick refund of overpaid estimated taxes (if ≥10% and ≥$500 of expected tax liability)

Estimated Tax — Corporations

Must pay if expected tax ≥$500. Quarterly installments due: April 15, June 15, September 15, December 15 (calendar year). Note: 4th quarter is Dec 15 (not Jan 15 like individuals).

Required annual payment = lesser of:

• 100% of current year tax, OR
• 100% of prior year tax (safe harbor)

Safe harbor NOT available if: prior year was short year (<12 months), no prior year return filed, or prior 3 years had ≥$1M taxable income (first quarter can still use prior year). Must use EFTPS or Direct Pay for Businesses (2025+).

Corporate Financial Schedules

Small corps (gross income <$250K AND assets <$250K): exempt from Schedules L, M-1, M-2, M-3.

Closely-Held Corporations

• Not a PSC, AND >50% of stock value owned by ≤5 individuals (including certain trusts/private foundations) during last half of year
• Subject to additional limitations: officer compensation, passive activity loss rules, at-risk rules (similar to partnership partners)

Controlled Groups

Parent-Subsidiary Group

• Parent owns ≥80% of voting power of ≥1 other corp (subsidiaries can be ≥80% owned by parent or subsidiary)
• Foreign corps NOT members
• Can file consolidated return (Form 1120)
• Only ONE $250,000 accumulated earnings credit for entire group
• §179: treated as single taxpayer

Brother-Sister Group

• ≤5 individuals/estates/trusts own ≥80% of total combined voting power OR total value of each corp
• AND >50% identical ownership in each corp (only counting same ownership portion)
• Intercompany transactions subject to related party rules

Distributions (Dividends)

• Cash/property dividends: Taxable to shareholders as qualified dividends (15%/20% rate), NOT deductible by corporation
• E&P (Earnings & Profits): Determines dividend characterization. E&P starts with taxable income adjusted (add: tax-exempt income, DRD, life insurance proceeds, installment deferral; subtract: federal income tax, excess charitable contributions, exempt-income expenses, capital losses exceeding gains, non-deductible penalties, 50% meals)
• Accumulated E&P: Prior years' E&P not distributed. Distributions first from current E&P, then accumulated E&P = dividends. After E&P exhausted → return of capital (reduce basis) → then capital gain
• Income does NOT retain character when distributed (unlike S-corps/partnerships). Tax-exempt income becomes taxable dividend to shareholders.

Constructive Dividends

Informal distributions treated as dividends: excessive compensation, bargain purchases by shareholders, personal expenses paid by corporation, cancellation of shareholder debt, below-market shareholder loans (imputed interest), company car personal use.

Corporate Liquidation

• Form 966: Filed within 30 days of dissolution/liquidation resolution
• Shareholders: FMV received − stock basis = capital gain/loss. Gain recognized only after FMV exceeds total stock basis; loss only after final distribution
• Corporation: FMV distributed − asset basis = gain/loss recognized (as if sold at FMV). Can recognize losses in complete liquidation (unlike non-liquidating distributions where losses cannot be recognized). Losses NOT recognized on distributions to related parties (>50% owner)

Accumulated Earnings Tax (§531)

20% penalty tax on unreasonable accumulations above:

• $250,000 (most businesses)
• $150,000 (personal service corporations)

Not automatic — assessed only after audit. Corporation can prove reasonable business needs: expansion plans, business acquisition, product liability reserves, redemption of deceased shareholder's stock. Interest accrues from original filing deadline.

Personal Holding Company Tax (§541)

20% additional tax on undistributed PHC income. Applies if:

• ≥5 individuals own >50% of stock, AND
• ≥60% of adjusted ordinary gross income is PHC income (dividends, interest, royalties, rents — EXCLUDING personal service income)

Key Forms