Certain entities are automatically taxed as corporations under federal law, while others may elect corporate status. Corporate taxation applies regardless of the business’s internal structure when the Internal Revenue Code requires it.
Entities Automatically Taxed as Corporations
The following are treated as corporations for federal tax purposes:
- Entities formed under federal or state corporate law (corporation, body corporate, body politic, joint‑stock company, joint‑stock association)
- Insurance companies
- Certain banks
- Wholly state‑ or locally‑owned businesses
- Entities the Internal Revenue Code requires to be corporations (e.g., certain publicly traded partnerships)
- Certain foreign entities that meet IRS classification rules
Any eligible business may also elect corporate taxation by filing Form 8832.
Personal Service Corporations (PSC)
A 21% flat corporate tax rate applies to all corporations, including PSCs.
A corporation is a PSC if:
- Principal activity during the testing period is performing personal services in:
- Accounting
- Actuarial science
- Architecture
- Consulting
- Engineering
- Health (including veterinary)
- Law
- Performing arts
- Employee‑owners substantially perform the services
- Employee‑owners own >10% of the FMV of outstanding stock on the last day of the testing period
A corporation may be a qualified PSC if 95%+ of the stock (by value) is owned by current or retired employees performing the services, their estates, or their beneficiaries.
Closely Held Corporations
A corporation (other than a PSC) is closely held if:
- More than 50% of the value of outstanding stock
- Is owned (directly or indirectly) by five or fewer individuals
- At any time during the last half of the tax year
Closely held corporations face additional limitations on:
- Passive activity losses
- At‑risk rules
- Compensation paid to corporate officers
Affiliated Groups
An affiliated group exists when:
- A common parent corporation owns
- ≥80% of voting power, and
- ≥80% of total value
- Of at least one other includible corporation
Affiliated groups may file consolidated returns if requirements are met.