Flat corporate tax
C corporations, including personal service corporations, pay a flat 21% tax on taxable income under IRC §11. There are no brackets. All taxable income is taxed at the same rate.
Corporate Alternative Minimum Tax (CAMT)
The Corporate Alternative Minimum Tax applies beginning in 2023. It imposes a 15% minimum tax on Adjusted Financial Statement Income (AFSI) for large corporations.
Applicable corporations
A corporation is subject to CAMT if:
- It is not an S corporation, RIC, or REIT
- It has average AFSI over $1 billion for the prior three‑year period
- For U.S. members of a foreign‑parented multinational group, the domestic AFSI threshold is $100 million
Adjusted Financial Statement Income
AFSI is the corporation’s net income or loss reported on its applicable financial statement, adjusted for specific items under the Inflation Reduction Act and IRS guidance.
Purpose
CAMT ensures that large corporations with significant book income pay a minimum level of federal tax.
Accumulated Earnings Tax (AET)
The accumulated earnings tax is a 20% penalty tax on earnings retained beyond the reasonable needs of the business. Its purpose is to prevent corporations from avoiding shareholder‑level tax by hoarding earnings.
Safe harbor
Accumulations of:
- $250,000 for most corporations
- $150,000 for personal service corporations
are generally presumed reasonable.
Reasonable needs include:
- Specific, definite, feasible business plans
- Funds to redeem stock in a deceased shareholder’s estate
If earnings exceed reasonable needs without justification, the IRS may assess AET.
Personal Holding Company (PHC) Tax
The PHC tax is a 20% tax on undistributed personal holding company income. It prevents closely held corporations from sheltering passive income at corporate rates.
A corporation is a PHC if it meets both tests:
- Stock ownership test
More than 50% of the value of stock is owned—directly or indirectly—by five or fewer individuals during the last half of the tax year. Attribution rules apply.
- PHC income test
At least 60% of adjusted ordinary gross income is PHC income, which includes:
- Dividends
- Interest
- Rents
- Royalties
If both tests are met, the corporation must compute PHC income and pay the 20% tax unless it distributes sufficient dividends.
Summary
Corporate taxation includes:
- A 21% flat tax on taxable income
- A 15% minimum tax (CAMT) for large corporations with high financial‑statement income
- A 20% accumulated earnings tax on unreasonable earnings retention
- A 20% PHC tax on undistributed passive income in closely held corporations
These rules ensure corporations pay appropriate tax and do not use corporate structures to avoid shareholder‑level taxation.