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Editorial 7 MIN READ

The C-corp, a decade into the 21% rate

What vanilla looks like in August 2024 after TCJA, the Inflation Reduction Act, and a half-lived bonus-depreciation phaseout

The Editors
Staff, Incorporator.org
7 min read Updated
Contents 7 sections
  1. The rate, and why it still anchors the choice
  2. Section 1202 is doing a lot of work
  3. The CAMT, the buyback excise, and the ceiling on who cares
  4. The research-cost problem nobody fixed
  5. Bonus depreciation is phasing out on schedule
  6. Who this form still makes sense for
  7. Sources

he C-corp in August 2024 is the cheapest it has been to run in a generation and the most expensive to plan around. The rate is 21%, flat, and has been since 2018. Everything else, the minimum tax, the buyback excise, the research-cost capitalization, the bonus depreciation that is halfway through sunsetting, has been layered on top of that number in the six years since the Tax Cuts and Jobs Act.

If you are forming a C-corp this quarter, the rate is the good news and most of the rest is operational friction you have to price in before you pick this form over an S-corp or an LLC taxed as a partnership.

The rate, and why it still anchors the choice

The federal corporate income tax sits at a flat 21% under IRC § 11(b), as rewritten by Public Law 115-97 (the Tax Cuts and Jobs Act) effective for tax years beginning after December 31, 2017. There are no brackets. A C-corp with $100,000 of taxable income pays the same marginal rate as a C-corp with $100 million. The graduated rate schedule that applied before 2018, which topped out at 35%, is gone and has not been revisited by either party with any seriousness since.

A C-corp pays 21% at the entity level, and distributions are taxed again at the shareholder level at qualified-dividend rates, which for most founders at the top bracket means 20% plus the 3.8% net investment income tax under IRC § 1411, for an integrated rate of roughly 39.8%. An S-corp or partnership passes income through to the owner at ordinary rates up to 37%, with a 20% qualified-business-income deduction under IRC § 199A available below the thresholds in § 199A(e), bringing the top effective federal rate down to 29.6% on qualifying income. The thresholds for 2024 are $241,950 single and $483,900 joint; see Rev. Proc. 2023-34 for the inflation-adjusted figures.

Ten percentage points of integrated-rate differential is the spine of the entity-choice conversation, and it cuts against the C-corp unless you have a reason to retain earnings inside the entity or you expect a sale into which Section 1202 reaches.

Section 1202 is doing a lot of work

Qualified Small Business Stock under IRC § 1202 is the single biggest reason a founder picks a C-corp in 2024 rather than an LLC. For stock issued after September 27, 2010 and held more than five years, a non-corporate shareholder can exclude 100% of gain on sale, up to the greater of $10 million or 10 times the shareholder's basis in the stock. The corporation has to be a domestic C-corp, has to have had gross assets of $50 million or less at all times through the issuance (and immediately after), and has to run a qualified trade or business, which rules out most professional services, finance, farming, hospitality, and extractive industries under § 1202(e)(3).

A founder who holds qualifying stock for five years and sells for $10 million pays zero federal tax on the gain. The same founder selling an LLC interest pays up to 23.8% at capital-gains-plus-NIIT rates. That spread is what keeps the C-corp alive as a default for venture-funded companies; it is not the 21% rate.

The CAMT, the buyback excise, and the ceiling on who cares

The Inflation Reduction Act of 2022 (Public Law 117-169) added two features to the corporate-tax landscape that matter for the larger end of the C-corp universe and should not matter at all for the smaller end.

The corporate alternative minimum tax, codified at IRC § 55(b)(2) and § 56A, imposes a 15% minimum tax on adjusted financial statement income for applicable corporations, defined as those with average annual AFSI exceeding $1 billion over the prior three years. The tax is calculated off book income rather than taxable income; the structural point was that large corporations whose book-to-tax gap had become a political liability would pay at least 15% on the book number. Treasury issued proposed regulations in September 2023 and has continued to issue interim guidance through 2024. If you are forming a company this month, CAMT is not your problem.

The 1% buyback excise tax under IRC § 4501, also added by the IRA, applies to repurchases of stock by publicly traded domestic corporations after December 31, 2022. The tax is on the fair market value of the repurchased stock, reduced by new issuances. The Biden administration's fiscal 2025 budget proposed raising this to 4%, which has not been enacted as of this dateline. Private C-corps are untouched.

The research-cost problem nobody fixed

The unhappiest change from TCJA for operating companies, and the one that is still live in 2024, is the amortization requirement for research and experimental expenditures under IRC § 174, as rewritten by TCJA § 13206. Since tax years beginning after December 31, 2021, a taxpayer must capitalize R&E costs and amortize them over five years for domestic research, or fifteen years for foreign research. You can no longer deduct them in the year incurred.

For a bootstrapped software company with, say, $3 million in engineering payroll and no other expenses, this means taxable income of $2.4 million in year one even if the company has zero cash profit, because only one-tenth of the current-year research spend is deductible (five-year amortization with a half-year convention). The cash-tax bill at 21% is over $500,000 on no economic income. This is not a theoretical problem; it has been reported since 2022 and has produced real distress in companies whose cost structures are mostly engineering headcount.

Congress has tried several times to restore current expensing. The Wyden-Smith tax package (H.R. 7024), which would have retroactively restored § 174 expensing for domestic research through 2025, passed the House in January 2024 but stalled in the Senate in August. As of this dateline it is not law. Founders should assume § 174 capitalization applies and plan cash taxes accordingly.

Bonus depreciation is phasing out on schedule

Bonus depreciation under IRC § 168(k) is in the middle of the phaseout TCJA wrote into the statute. The first-year percentage was 100% for property placed in service through 2022, stepped down to 80% for 2023, is 60% for property placed in service in 2024, and will step down to 40% for 2025, 20% for 2026, and 0% for 2027 and later. The House-passed Wyden-Smith package would have restored 100% bonus for 2023 through 2025 retroactively, but that is also stuck.

For a C-corp that is buying equipment, the calculation in 2024 is straightforward: 60% of the cost is deducted in year one, and the remaining 40% depreciates under the normal MACRS schedule. A year of delay in purchasing equipment from 2024 into 2025 costs the buyer 20 percentage points of first-year deduction, which at 21% is 4.2 cents on the dollar in deferred cash tax. Not nothing, and worth modeling before a capital-equipment purchase.

Who this form still makes sense for

The C-corp in 2024 is the right choice for three kinds of companies and usually the wrong choice for everything else.

It is right for venture-backed operating companies expecting to exit through a stock sale, because QSBS under § 1202 does work no other entity form can replicate. It is right for companies that genuinely retain earnings to fund growth and want the lower entity-level rate on retained income rather than the owner-level ordinary rate that applies to pass-through income whether or not it is distributed. And it is right for companies with foreign shareholders or institutional investors that do not want to receive K-1s.

For a single-owner consulting business, a real-estate holding vehicle, or a family business with steady cash distributions, a C-corp in 2024 is paying 21% at the entity level plus 23.8% on the distribution, for an integrated rate near 40%, versus 29.6% through a pass-through with § 199A. The C-corp should lose that comparison decisively, and usually does once the math is on paper.

The interesting question for the next two years is whether the 21% rate holds. Both parties have floated changes, the Biden fiscal 2025 budget proposed 28% and the Harris campaign has endorsed that number, while the Trump campaign has floated 15% for domestic manufacturing. Neither is law. For now, 21% is the number to plan around, and the surrounding statutory furniture is what determines whether you actually want to sit in it.

Sources

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