Introduction

This publication discusses the general tax laws that

apply to ordinary domestic corporations. It explains

the tax law in plain language so it will be easier to

understand. However, the information given does

not cover every situation and is not intended to

replace the law or change its meaning.

Step-by-step explanation

Main Content

Businesses Taxed as Corporations

The rules you must use to determine whether a

business is taxed as a corporation changed for

businesses formed after 1996.

Business formed before 1997. A business formed

before 1997 and taxed as a corporation under the

old rules will generally continue to be taxed as a

corporation.

Business formed after 1996. The following

businesses formed after 1996 are taxed as

corporations.

A business formed under a federal or state

law that refers to it as a corporation, body

corporate, or body politic.

A business formed under a state law that

refers to it as a joint-stock company or joint-

stock association.

An insurance company.

Certain banks.

A business wholly owned by a state or local

government.

A business specifically required to be taxed as

a corporation by the Internal Revenue Code

(for example, certain publicly traded

partnerships).

Certain foreign businesses.

Any other business that elects to be taxed as a

corporation.

Limited liability company (LLC). An LLC can elect to

be treated as an association taxable as a

corporation by filing Form 8832, Entity Classification

Election. See the Instructions for Form 8832. For

more information about LLCs, see Pub. 3402,

Taxation of Limited Liability Companies.

S corporations. Some corporations may meet the

qualifications for electing to be S corporations. For

information on S corporations, see the Instructions

for Form 1120S.

Personal service corporations.

A corporation is a personal service corporation if it

meets all of the following requirements.

1. Its principal activity during the "testing period"

is performing personal services (defined later).

Generally, the testing period for any tax year is

the prior tax year. If the corporation has just

been formed, the testing period begins on the

first day of its tax year and ends on the earlier

of:

a. The last day of its tax year, or

b. The last day of the calendar year in which

its tax year begins.

2. Its employee-owners substantially perform the

services in (1) above. This requirement is met if

more than 20% of the corporation's

compensation cost for its activities of

performing personal services during the testing

period is for personal services performed by

employee-owners.

3. Its employee-owners own more than 10% of the

fair market value of its outstanding stock on the

last day of the testing period.

Personal services. Personal services include any

activity performed in the fields of accounting,

actuarial science, architecture, consulting,

engineering, health (including veterinary services),

law, and the performing arts.

Employee-owners. A person is an employee-owner

of a personal service corporation if both of the

following apply.

1. He or she is an employee of the corporation or

performs personal services for, or on behalf of,

the corporation (even if he or she is an

independent contractor for other purposes) on

any day of the testing period.

2. He or she owns any stock in the corporation at

any time during the testing period.

Other rules. For other rules that apply to personal

service corporations, see Accounting Periods , later.

Closely held corporations.

A corporation is closely held if all of the following

apply.

1. It is not a personal service corporation.

2. At any time during the last half of the tax year,

more than 50% of the value of its outstanding

stock is, directly or indirectly, owned by or for

five or fewer individuals. "Individual" includes

certain trusts and private foundations.

For rules for determining stock ownership, see

section 544 of the Internal Revenue Code.

Other rules. For the at-risk rules that apply to

closely held corporations, see At-Risk Limits , later.

Property Exchanged for Stock

If you transfer property (or money and property) to a

corporation in exchange for stock in that

corporation (other than nonqualified preferred stock,

described later), and immediately afterward you are

in control of the corporation, the exchange is usually

not taxable. This rule applies both to individuals and

to groups who transfer property to a corporation. It

also applies whether the corporation is being

formed or is already operating. It does not apply in

the following situations.

The corporation is an investment company.

You transfer the property in a bankruptcy or

similar proceeding in exchange for stock used

to pay creditors.

The stock is received in exchange for the

corporation's debt (other than a security) or

for interest on the corporation's debt

(including a security) that accrued while you

held the debt.

Both the corporation and any person involved in a

nontaxable exchange of property for stock must

attach to their income tax returns a complete

statement of all facts pertinent to the exchange. For

more information, see Regulations section 1.351-3.

Control of a corporation. To be in control of a

corporation, you or your group of transferors must

own, immediately after the exchange, at least 80%

of the total combined voting power of all classes of

stock entitled to vote and at least 80% of the

outstanding shares of each class of nonvoting

stock.

Example 1.

You and Bill Jones buy property for $100,000. You

both organize a corporation when the property has a

fair market value of $300,000. You transfer the

property to the corporation for all its authorized

capital stock, which has a par value of $300,000. No

gain is recognized by you, Bill, or the corporation.

Example 2.

You and Bill transfer the property with a basis of

$100,000 to a corporation in exchange for stock

with a fair market value of $300,000. This

represents only 75% of each class of stock of the

corporation. The other 25% was already issued to

someone else. You and Bill recognize a taxable gain

of $200,000 on the transaction.

Services rendered. The term property does not

include services rendered or to be rendered to the

issuing corporation. The value of stock received for

services is income to the recipient.

Example.

You transfer property worth $35,000 and render

services valued at $3,000 to a corporation in

exchange for stock valued at $38,000. Right after

the exchange, you own 85% of the outstanding

stock. No gain is recognized on the exchange of

property. However, you recognize ordinary income

of $3,000 as payment for services you rendered to

the corporation.

Property of relatively small value. The term

"property" does not include property of a relatively

small value when it is compared to the value of

stock and securities already owned or to be received

for services by the transferor if the main purpose of

the transfer is to qualify for the nonrecognition of

gain or loss by other transferors.

Property transferred will not be considered to be of

relatively small value if its fair market value is at

least 10% of the fair market value of the stock and

securities already owned or to be received for

services by the transferor.

Stock received in disproportion to property

transferred. If a group of transferors exchange

property for corporate stock, each transferor does

not have to receive stock in proportion to his or her

interest in the property transferred. If a

disproportionate transfer takes place, it will be

treated for tax purposes in accordance with its true

nature. It may be treated as if the stock were first

received in proportion and then some of it used to

make gifts, pay compensation for services, or

satisfy the transferor's obligations.

Money or other property received. If, in an otherwise

nontaxable exchange of property for corporate

stock, you also receive money or property other

than stock, you may have to recognize gain. You

must recognize gain only up to the amount of

money plus the fair market value of the other

property you receive. The rules for figuring the

recognized gain in this situation generally follow

those for a partially nontaxable exchange. If the

property you give up includes depreciable property,

the recognized gain may have to be reported as

ordinary income from depreciation. No loss is

recognized. See Pub. 544.

Nonqualified preferred stock. Nonqualified preferred

stock is treated as property other than stock.

Generally, it is preferred stock with any of the

following features.

The holder has the right to require the issuer

or a related person to redeem or buy the

stock.

The issuer or a related person is required to

redeem or buy the stock.

The issuer or a related person has the right to

redeem or buy the stock and, on the issue

date, it is more likely than not that the right

will be exercised.

The dividend rate on the stock varies with

reference to interest rates, commodity prices,

or similar indices.

For a detailed definition of nonqualified preferred

stock, see section 351(g)(2) of the Internal Revenue

Code.

Liabilities. If the corporation assumes your

liabilities, the exchange generally is not treated as if

you received money or other property. There are two

exceptions to this treatment.

If the liabilities the corporation assumes are

more than your adjusted basis in the property

you transfer, gain is recognized up to the

difference. However, if the liabilities assumed

give rise to a deduction when paid, such as a

trade account payable or interest, no gain is

recognized.

If there is no good business reason for the

corporation to assume your liabilities, or if

your main purpose in the exchange is to avoid

federal income tax, the assumption is treated

as if you received money in the amount of the

liabilities.

For more information on the assumption of

liabilities, see section 357 of the Internal Revenue

Code.

Example.

You transfer property to a corporation for stock.

Immediately after the transfer, you control the

corporation. You also receive $10,000 in the

exchange. Your adjusted basis in the transferred

property is $20,000. The stock you receive has a

fair market value (FMV) of $16,000. The corporation

also assumes a $5,000 mortgage on the property

for which you are personally liable. Gain is realized

as follows.

FMV of stock received $16,000

Cash received 10,000

Liability assumed by corporation 5,000

Total received $31,000

Minus: Adjusted basis of property

transferred

20,000

Realized gain $11,000

The liability assumed is not treated as money or

other property. The recognized gain is limited to

$10,000, the cash received.

Loss on exchange. If you have a loss from an

exchange and own, directly or indirectly, more than

50% of the corporation's stock, you cannot deduct

the loss. For more information, see Nondeductible

Loss under Sales and Exchanges Between Related

Persons in chapter 2 of Pub. 544.

Basis of stock or other property received. The basis

of the stock you receive is generally the adjusted

basis of the property you transfer. Increase this

amount by any amount treated as a dividend, plus

any gain recognized on the exchange. Decrease this

amount by any cash you received, the fair market

value of any other property you received, and any

loss recognized on the exchange. Also decrease this

amount by the amount of any liability the

corporation or another party to the exchange

assumed from you, unless payment of the liability

gives rise to a deduction when paid.

Further decreases may be required when the

corporation or another party to the exchange

assumes from you a liability that gives rise to a

deduction when paid, if the basis of the stock would

otherwise be higher than its fair market value on the

date of the exchange. This rule does not apply if the

entity assuming the liability acquired either

substantially all of the assets or the trade or

business with which the liability is associated.

The basis of any other property you receive is its

fair market value on the date of the trade.

Basis of property transferred. A corporation that

receives property from you in exchange for its stock

generally has the same basis you had in the

property, increased by any gain you recognized on

the exchange. However, the increase for the gain

recognized may be limited. For more information,

see section 362 of the Internal Revenue Code. Also

see section 362(e)(2)(C) and the related regulations

for information on elections to reduce basis.

Capital Contributions

This section explains the tax treatment of

contributions from shareholders and

nonshareholders.

Paid-in capital.

Generally, contributions to the capital of a

corporation, whether or not by shareholders, are

paid-in capital. These contributions are not taxable

to the corporation. However, after December 22,

2017, the following nonshareholder contributions to

the capital of a corporation are not considered

nontaxable paid-in capital.

Any contribution by any civic group.

Any contribution by any governmental entity,

except any contribution that was made after

December 22, 2017, according to a master

development plan that was approved prior to

December 22, 2017, by a governmental entity.

Basis. The corporation's basis of property

contributed to capital by a shareholder is the same

as the basis the shareholder had in the property,

increased by any gain the shareholder recognized on

the exchange. However, the increase for the gain

recognized may be limited. For more information,

see Basis of property transferred above and section

362 of the Internal Revenue Code.

The basis of property contributed to capital by a

person other than a shareholder is zero.

If a corporation receives a cash contribution from a

person other than a shareholder, the corporation

must reduce the basis of any property acquired with

the contribution during the 12-month period

beginning on the day it received the contribution by

the amount of the contribution. If the amount

contributed is more than the cost of the property

acquired, then reduce, but not below zero, the basis

of the other properties held by the corporation on the

last day of the 12-month period in the following

order.

1. Depreciable property.

2. Amortizable property.

3. Property subject to cost depletion but not to

percentage depletion.

4. All other remaining properties.

Reduce the basis of property in each category to

zero before going on to the next category.

There may be more than one piece of property in

each category. Base the reduction of the basis of

each property on the following ratio.

Basis of each piece of property

Bases of all properties (within that category)

If the corporation wishes to make this adjustment in

some other way, it must get IRS approval. The

corporation files a request for approval with its

income tax return for the tax year in which it

receives the contribution.

Filing and Paying Income Taxes

The federal income tax is a pay-as-you-go tax. A

corporation generally must make estimated tax

payments as it earns or receives income during its

tax year. After the end of the year, the corporation

must file an income tax return. This section will help

you determine when and how to pay and file

corporate income taxes.

For certain corporations affected by federally

declared disasters such as hurricanes, the due dates

for filing returns, paying taxes, and performing other

time-sensitive acts may be extended. The IRS also

may forgive the interest and penalties on any

underpaid tax for the length of any extension. For

more information, visit IRS.gov/DisasterTaxRelief .

Income Tax Return

This section will help you determine when and how

to report a corporation's income tax.

Who must file. Unless exempt under section 501 of

the Internal Revenue Code, all domestic

corporations in existence for any part of a tax year

(including corporations in bankruptcy) must file an

income tax return whether or not they have taxable

income.

Which form to file.

A domestic corporation generally must file Form

1120, U.S. Corporation Income Tax Return, to report

its income, gains, losses, deductions, credits, and to

figure its income tax liability. Certain organizations

and entities must file special returns. For more

information, see Special Returns for Certain

Organizations in the Instructions for Form 1120.

Electronic filing.

Corporations generally can electronically file (e-file )

Form 1120 and certain related forms, schedules, and

attachments. Certain corporations with total assets

of $10 million or more that file at least 250 returns a

year must e-file Form 1120. However, in certain

instances, these corporations can request a waiver.

For more information regarding electronic filing, visit

IRS.gov/Businesses .

When to file. Generally, a corporation must file its

income tax return by the 15th day of the 4th month

after the end of its tax year. A new corporation filing

a short-period return generally must file by the 15th

day of the 4th month after the short period ends. A

corporation that has dissolved generally must file by

the 15th day of the 4th month after the date it

dissolved.

However, a corporation with a fiscal tax year ending

June 30 must file by the 15th day of the 3rd month

after the end of its tax year. A corporation with a

short tax year ending anytime in June will be treated

as if the short period ended June 30 and must file

by the 15th day of the 3rd month after the end of its

tax year.

If the due date falls on a Saturday, Sunday, or legal

holiday, the due date is extended to the next

business day.

Extension of time to file.

File Form 7004, Application for Automatic Extension

of Time To File Certain Business Income Tax,

Information and Other Returns, to request an

extension of time to file a corporation's income tax

return. The IRS will grant the extension if the

corporation completes the form properly, files it, and

pays any tax due by the original due date for the

return.

Form 7004 does not extend the time for paying the

tax due on the return. Interest, and possibly

penalties, will be charged on any part of the final tax

due not shown as a balance due on Form 7004. The

interest is figured from the original due date of the

return to the date of payment.

For more information, see the Instructions for Form

7004.

How to pay your taxes. A corporation must pay its

tax due in full no later than the due date for filing its

tax return (not including extensions).

Electronic Federal Tax Payment System (EFTPS).

Corporations generally must use EFTPS to make

deposits of all tax liabilities (including social

security, Medicare, withheld income, excise, and

corporate income taxes). For more information on

EFTPS and enrollment, visit www.eftps.gov .

Penalties

Generally, if the corporation receives a notice about

interest and penalties after it files its return, send the

IRS an explanation and we will determine if the

corporation meets reasonable-cause criteria. Do not

attach an explanation when the corporation's return

is filed. See the instructions for your income tax

return.

Late filing of return. A corporation that does not file

its tax return by the due date, including extensions,

may be penalized 5% of the unpaid tax for each

month or part of a month the return is late, up to a

maximum of 25% of the unpaid tax. If the

corporation is charged a penalty for late payment of

tax (discussed next) for the same period of time, the

penalty for late filing is reduced by the amount of

the penalty for late payment. A minimum penalty

applies for a return that is over 60 days late. The

minimum penalty amount may be adjusted for

inflation. See the Instructions for Form 1120 (or the

instructions for your applicable return) for the

minimum penalty amount for the current tax year.

The penalty will not be imposed if the corporation

can show the failure to file on time was due to a

reasonable cause.

Note.

If the corporation is charged a penalty for late

payment of tax (discussed next) for the same period

of time, the penalty for late filing is reduced by the

amount of the penalty for late payment.

Late payment of tax. A corporation that does not

pay the tax when due may be penalized half of 1% of

the unpaid tax for each month or part of a month

the tax is not paid, up to a maximum of 25% of the

unpaid tax. The penalty will not be imposed if the

corporation can show that the failure to pay on time

was due to a reasonable cause.

Trust fund recovery penalty.

If federal income, social security, and Medicare

taxes that a corporation must withhold from

employee wages are not withheld or are not

deposited or paid to the U.S. Treasury, the trust

fund recovery penalty may apply. The penalty is the

full amount of the unpaid trust fund tax. This

penalty may apply to you if these unpaid taxes

cannot be immediately collected from the business.

The trust fund recovery penalty may be imposed on

all persons who are determined by the IRS to be

responsible for collecting, accounting for, and

paying these taxes, and who acted willfully in not

doing so.

A responsible person can be an officer or employee

of a corporation, an accountant, or a volunteer

director/trustee. A responsible person also may

include one who signs checks for the corporation or

otherwise has authority to cause the spending of

business funds.

"Willfully" means voluntarily, consciously, and

intentionally. A responsible person acts willfully if

the person knows the required actions are not taking

place or recklessly disregards obvious and known

risks to the government's right to receive trust fund

taxes.

For more information on withholding and paying

these taxes, see Pub. 15 (Circular E), Employer's

Tax Guide, and Pub. 51 (Circular A), Agricultural

Employer's Tax Guide.

Other penalties.

Other penalties can be imposed for negligence,

substantial understatement of tax, reportable

transaction understatements, and fraud. See

sections 6662, 6662A, and 6663 of the Internal

Revenue Code.

Estimated Tax

Generally, a corporation must make installment

payments if it expects its estimated tax for the year

to be $500 or more. If the corporation does not pay

the installments when they are due, it could be

subject to an underpayment penalty. This section

will explain how to avoid this penalty.

When to pay estimated tax. Installment payments

are due by the 15th day of the 4th, 6th, 9th, and

12th months of the corporation's tax year.

Example 1.

Your corporation's tax year ends December 31.

Installment payments are due on April 15, June 15,

September 15, and December 15.

Example 2.

Your corporation's tax year ends June 30.

Installment payments are due on October 15,

December 15, March 15, and June 15.

If any due date falls on a Saturday, Sunday, or legal

holiday, the installment is due on the next business

day.

How to figure each required installment.

Use Form 1120-W, Estimated Tax for Corporations,

as a worksheet to figure each required installment of

estimated tax. You generally use one of the

following two methods to figure each required

installment. You should use the method that yields

the smallest installment payments.

Note.

In these discussions, "return" generally refers to the

corporation's original return. However, an amended

return is considered the original return if it is filed by

the due date (including extensions) of the original

return.

Method 1. Each required installment is 25% of the

income tax the corporation will show on its return

for the current year.

Method 2. Each required installment is 25% of the

income tax shown on the corporation's return for

the previous year.

To use Method 2:

1. The corporation must have filed a return for the

previous year,

2. The return must have been for a full 12 months,

and

3. The return must have shown a positive tax

liability (not zero).

Also, if the corporation is a large corporation, it can

use Method 2 to figure the first installment only.

See the Instructions for Form 1120-W, for the

definition of a large corporation and other special

rules for large corporations.

Other methods. If a corporation's income is

expected to vary during the year because, for

example, its business is seasonal, it may be able to

lower the amount of one or more required

installments by using one or both of the following

methods.

1. The annualized income installment method.

2. The adjusted seasonal installment method.

Use Schedule A of Form 1120-W to determine if

using one or both of these methods will lower the

amount of any required installments.

Refiguring required installments. If after the

corporation figures and deposits its estimated tax it

finds that its tax liability for the year will be more or

less than originally estimated, it may have to

refigure its required installments to see if an

underpayment penalty may apply. An immediate

catch-up payment should be made to reduce any

penalty resulting from the underpayment of any

earlier installments.

Underpayment penalty.

If the corporation does not pay a required

installment of estimated tax by its due date, it may

be subject to a penalty. The penalty is figured

separately for each installment due date. The

corporation may owe a penalty for an earlier due

date, even if it paid enough tax later to make up the

underpayment. This is true even if the corporation is

due a refund when its return is filed.

Form 2220.

Use Form 2220, Underpayment of Estimated Tax by

Corporations, to determine if a corporation is

subject to the penalty for underpayment of

estimated tax and to figure the amount of the

penalty.

If the corporation is charged a penalty, the amount

of the penalty depends on the following three

factors.

1. The amount of the underpayment.

2. The period during which the underpayment was

due and unpaid.

3. The interest rate for underpayments published

quarterly by the IRS in the Internal Revenue

Bulletin.

A corporation generally does not have to file Form

2220 with its income tax return because the IRS will

figure any penalty and bill the corporation. However,

even if the corporation does not owe a penalty,

complete and attach the form to the corporation's

tax return if any of the following apply.

1. The annualized income installment method was

used to figure any required installment.

2. The adjusted seasonal installment method was

used to figure any required installment.

3. The corporation is a large corporation figuring

its first required installment based on the prior

year's tax.