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Federal Tax and Non-Tax Implications for C Corporations in 2025

Posted March 10, 2025 at 3:39 PM

Business & Tax, News & Events

Given the uncertainty surrounding the future of tax policy, it is difficult to estimate where tax rates are headed. While the 21% corporate tax rate was made “permanent” by the Tax Cuts and Jobs Act of 2017 (TCJA), tax rates for individuals are already scheduled to increase, and the estate and lifetime gift exemptions are scheduled to drastically decrease, after many of TCJA’s provisions expire at the end of 2025. While Congress is currently pursuing an extension of the tax cuts, and possibly further reducing the corporate rate to as low as 15%, it’s unclear what tax plan may ultimately prevail.

There may be steps business owners can take today to better manage their current tax bill or to hedge the risk of future higher tax rates. The first half of the year may be an opportune time to assess finances and determine if adjustments are needed in business structure and consider new ideas for tax-efficient planning. This article focuses on a business’ choice of entity, and specifically the possibility of starting or converting to a C Corporation.

Choice of Entity – A Business and Tax Decision
Business structures impact tax, liability, and long-term planning for businesses and their owners. The key factors driving a change in entity are:

  1. Evolving Tax Code – New legislation reshapes tax implications.
  2. Business Performance – Business growth, ownership changes, exit strategies, and liability concerns.
  3. Beyond Tax – Legal, regulatory, and risk management factors matter too.

The most common legal business structures are:

  • Limited Liability Company (LLC)
  • C Corporation
  • S corporation
  • Limited Partnership
  • Limited Liability Partnership
  • Sole Proprietorship (disregarded entity)

When choosing a business structure, it is important for owners to consider the following tax implications:

  • Tax Rate
  • Shareholder/Member Eligibility
  • Employment Taxes
  • Flexibility with Distributions and Tax Allocations
  • Ability for Shareholders/Members to Use Losses
  • Exit Strategy
  • State and Local Taxes
  • International Tax

Business owners should also consider the following non-tax items when structuring a business:

  • Liability Protection
  • Corporate Governance
  • Employment Law Compliance
  • Licensure & Regulatory Issues

C Corporation Tax and Non-Tax Considerations for 2025
C Corporations have the following federal tax implications for 2025:

  • Flat tax rate of 21% on ordinary income and capital gains
  • Possible opportunity to own Qualified Small Business Stock (QSBS)
  • Sale of QSBS Stock is up to 100% tax-free up to the greater of $10 Million or 10x the shareholder’s adjusted basis in the stock
  • Must qualify as QSBS to take advantage
  • C Corporation Stock
  • Original Issuance
  • 5-Year Holding Period
  • Applicable to Stock Sale (not sale of assets)
  • Shareholders of C Corporations are taxed on dividend distributions from the corporation
  • Distributions from the C Corporation are generally non-taxable to the corporation
    • EXCEPTION: A distribution of appreciated property triggers tax at the corporate level on a deemed sale of the asset
    • This is one reason that corporations should usually NOT own real estate, based on the assumption that real estate will appreciate and therefore may not be distributed tax-free
  • FICA tax rate for employers of 7.65% (6.2% for Social Security and 1.45% for Medicare)
  • Exit Strategy Options
    • Corporate Reorganizations/Conversions may result in a taxable event
    • Deferred Compensation/Phantom Stock to Key Employees upon a “change of control”
    • At death of owner will lead to Step-up of basis in stock – NOT the assets within (different for partnerships that may elect §754 treatment)
  • Can operate on a fiscal year basis regardless of shareholders
  • Carryover losses

C Corporations have the following non-tax considerations for 2025:

  • Generally formed as a state law “for-profit” corporation
  • Limited liability
  • Corporate formalities
  • Raising capital
  • Plans to go public
  • Differing classes of stock for employee incentives
  • No shareholder restrictions
    • Number of shareholders
    • Type of shareholder (entity, citizenship)
    • Classes

What C Corporations Might Anticipate for 2026
C Corporations may want to consider the following items that don’t impact 2025, but may change for 2026:

  • Corporate Alternative Minimum Tax (AMT) was repealed in 2017 under TCJA.
  • The Inflation Reduction Act of 2022 introduced a new 15% minimum tax on large corporations.
  • Will AMT “fully return”?
  • Changes in Business Deductions
    • Bonus Depreciation – Phased out by 2027?
    • Section 179 Expensing – What remains deductible?
    • R&D Expensing vs. Capitalization – Will businesses still be required to capitalize R&D costs instead of deducting them?
  • Under TCJA, there was no carryback on business losses with indefinite carryforward; but limited to 80% of taxable income.
  • TCJA capped business interest deductions at 30% of adjusted taxable income (ATI).

How MM&C Business & Tax Attorneys Can Help
Please contact Miller, Miller & Canby should you have any question dealing with business entity formation, tax and non-tax implications of business structures, and Qualified Small Business Stock.  Peter Randolph is a Shareholder and leads Miller, Miller & Canby’s Business and Tax practice group. His multijurisdictional practice is focused on taxation, business, and probate and trust administration. He advises small businesses on partnership and corporate taxation, corporate governance, buy-sell agreements, reclassification, restructuring and succession planning. With nearly two decades of comprehensive experience, he provides in-depth knowledge and expertise to craft effective strategies tailored to each client’s individual needs.  To learn more, contact Peter at pdrandolph@mmcanby.com or (301) 762-5212.

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