Business Entity Tax Comparison: S-Corp, C-Corp, & LLC

Posted on Oct 1, 2025 in Finance

Key Factors in Choosing a Business Tax Entity

Qualified Business Income (QBI) Deduction

  • Provides a 20% deduction on qualified business income.
  • Available for S-Corporations and Partnerships (pass-through entities).
  • Not available for C-Corporations.
  • Subject to income thresholds (e.g., for 2024: $191,950 for single filers and $383,900 for joint filers), above which the deduction may be limited or phased out.

Self-Employment (SE) Taxes

  • Tax Base: Net earnings from self-employment * 0.9235.
  • Rates: 12.4% for Social Security (up to the annual limit, e.g., $168,600 for 2024) and 2.9% for Medicare (uncapped).
  • Sole Proprietorship / Single-Member LLC: The owner pays SE tax on all net business income. This includes 15.3% on income up to the Social Security limit, 2.9% on income above it, and an additional 0.9% Medicare tax on earnings over certain thresholds.
  • Partnerships / Multi-Member LLCs: General partners pay SE tax on their share of active business income. Limited partners typically do not.
  • S-Corporations: Owner-employees pay FICA/Medicare taxes only on their reasonable salary (wages), not on profit distributions.
  • C-Corporations: There is no SE tax. Owner-employees pay FICA taxes on their wages. Dividends are subject to capital gains tax rates (up to 20%) plus a potential 3.8% Net Investment Income Tax (NIIT).

Additional Medicare Tax

  • An additional 0.9% tax applies to earnings above $200,000 (single) or $250,000 (married filing jointly).

Dividends Received Deduction (DRD)

C-Corporations can deduct a portion of dividends received from other corporations based on ownership percentage:

  • 50% Deduction for less than 20% ownership.
  • 65% Deduction for 20% to 80% ownership.
  • 100% Deduction for over 80% ownership.

Comparing Entity Choices

  • C-Corp vs. S-Corp: If the business plans to retain most of its earnings and pay few dividends, a C-Corp might be preferable due to its flat tax rate.
  • Single-Member LLC vs. S-Corp: An S-Corp can potentially minimize payroll taxes (FICA) by paying a reasonable salary and taking the rest as distributions, which are not subject to FICA. A single-member LLC owner pays SE tax on all profits.

Handling Entity Losses

  • C-Corporation: Losses are trapped at the entity level and can be used to offset corporate income (Net Operating Loss carryforwards).
  • S-Corporation & Partnership: Losses pass through to the owners, who can deduct them on their personal returns, subject to basis, at-risk, and passive loss limitations.

Book-Tax Differences (BTDs)

These are differences between a company’s financial accounting income (book) and its taxable income. They are reported on Schedule M-1 (for smaller corporations) or Schedule M-3 (for larger corporations).

Permanent BTDs

  • Dividends Received Deduction (DRD)
  • Tax-exempt interest (e.g., from municipal bonds)
  • Expenses related to generating tax-exempt income
  • Death benefits from key-person life insurance
  • Premiums on key-person life insurance (where the company is the beneficiary)
  • 50% of meals and 100% of entertainment expenses
  • Fines, penalties, and political contributions
  • Federal income tax expense
  • Differences in stock option accounting (e.g., ISO vs. NQO)

Temporary BTDs

  • Depreciation methods (e.g., MACRS for tax vs. straight-line for book)
  • Gain/loss on asset sales
  • Bad debt expense (allowance method for book vs. direct write-off for tax)
  • Warranty expenses
  • Prepaid expenses and unearned revenue
  • Accrued bonuses
  • Goodwill amortization (tax-deductible over 15 years) vs. impairment for book
  • UNICAP (Internal Revenue Code Section 263A) rules
  • Capital Loss Carryforwards: Can only offset capital gains. For corporations, they can be carried back 3 years and forward 5 years.
  • Net Operating Loss (NOL) Carryforwards: NOLs from 2018 and later can offset up to 80% of taxable income in a future year. Pre-2018 NOLs may have different rules.

Corporate Tax Compliance Essentials

Corporate Alternative Minimum Tax (CAMT)

A 15% minimum tax on the adjusted financial statement income of very large corporations (average annual adjusted financial statement income over $1 billion).

Filing and Payment Deadlines

  • Main Tax Form: Form 1120 for C-Corps, 1120-S for S-Corps.
  • Corporate Tax Rate: Flat 21% for C-Corporations.
  • Due Date: The 15th day of the 4th month after the fiscal year-end (April 15 for calendar-year corporations). An extension is available.
  • Accounting Method: C-Corporations with average annual gross receipts over a certain threshold (e.g., $30 million for 2024) must use the accrual method.

Quarterly Estimated Tax Payments

Corporations must make quarterly estimated tax payments to avoid underpayment penalties. The required payment is the lesser of:

  • 100% of the prior year’s tax liability.
  • 100% of the current year’s tax liability.
  • 100% of the estimated current year liability using the annualized income method.

Note: Large corporations (taxable income of $1 million or more in any of the prior 3 years) can only use the prior year’s liability for their first-quarter payment.