Taxable Income: Income and Deductions

Two kinds of corporation

• The letters C and S are the subchapters of the Code. A C corporation is the “regular” corporation: any number and any kind of shareholder, income taxed at the entity level, shareholders taxed only on distributions.
• An S corporation is limited to 100 shareholders (a family counts as one) of restricted types, and its income is taxed to the shareholders like a partnership’s. Everything on these pages is about the C corporation.
• added 2026 The S corporation side of the office is covered on the footnotes pages for losses, reasonable compensation, distributions and late elections.

Gross income

• Same items as an individual or a proprietor: gross profit on sales (sales less cost of goods sold); interest from customers and investments; dividends; compensation for services; rents and royalties; gains and losses on property and involuntary conversions; discharge of indebtedness (with the usual exclusions); net capital gain.
• Losses on property dispositions reduce gross income on the way in; they are not “deductions.”
• Not income: interest on state and municipal bonds; life insurance proceeds; contributions to capital. Selling the corporation’s own stock is a contribution to capital, not a sale.
• A corporation cannot deduct a loss on a sale to a related party (a controlling shareholder, a sister corporation) — §267.

Capital gains and losses — the corporate difference

• The amount of gain or loss is figured the same way as for an individual. The treatment is different.
• Net capital gain, long- or short-term, is taxed at the regular corporate rate. There is no preferential rate. added 2026 That rate is 21%.
• An individual deducts up to $3,000 of net capital loss against ordinary income. A corporation deducts none. A corporate capital loss offsets capital gains only.
• Excess capital loss is carried back to the third prior year, then the second, then the first, and then forward five years. After the fifth year it is gone. The carryback cannot create or increase a net operating loss. (Details and the netting worksheet on the Capital Gains and Losses page.)
• Sale of a business asset at a gain: capital gain, except depreciation recapture, which is ordinary and cannot absorb capital losses. Corporations have an extra layer of recapture on real property under §291.
• Sale of business property held more than a year at a loss: an ordinary loss (§1231).

Deductions

• A corporation has no adjusted gross income, so there are no “for AGI” and “from AGI” deductions, no standard deduction, and no personal exemptions. Every allowable deduction reduces gross income directly.
• The test is §162: ordinary and necessary expenses of carrying on the business — rent, salaries, utilities, shipping, supplies, repairs, insurance, taxes, interest.
• Items a corporation deducts in full that an individual cannot: casualty and theft losses (no $100 floor, no 10%-of-AGI floor, no disaster requirement); investment interest (no net-investment-income cap).

Deductions that are limited

• Charitable contributions — 10% of taxable income, with carryover; updated 2026 and a 1% floor for tax years beginning after 2025. See Charitable Contributions.
• Officer compensation — must be reasonable; publicly held companies capped at $1 million per covered employee. See Compensation Limits.
• Business interest — §163(j) limits net business interest expense to 30% of adjusted taxable income, with an indefinite carryforward. updated 2026 For tax years beginning after December 31, 2024, ATI is again computed before depreciation, amortization and depletion (the EBITDA base), which raises the limit. added 2026 A corporation meeting the §448(c) gross receipts test ($31 million for 2025) is exempt from the limit altogether, so it rarely touches our clients.
• added 2026 Meals — 50% deductible when business-related and not lavish. The 100% restaurant-meal allowance was for 2021 and 2022 only.

Deductions that are not allowed

• Premiums on life insurance covering an owner, officer or employee where the corporation is directly or indirectly the beneficiary (§264(a)(1)). The “key man” policy.
• Interest on money borrowed to buy or carry investments whose income is tax-exempt (§265(a)(1)).
• Dividends paid to shareholders — a distribution of earnings, not an expense. This is the second layer of the double tax.
• Entertainment (§274(a)). Client dinners survive as meals at 50%; the ballgame tickets do not.
• The §199A qualified business income deduction — noncorporate taxpayers only. added 2026 Now permanent for them, which widens the gap between the S and C answers for a pass-through-sized business.
• added 2026 Fines and penalties paid to a government (§162(f)); lobbying and political contributions (§162(e)).

Special deductions

• Organizational and start-up costs; research and experimental costs; bad debts — each has its own page here.
• added 2026 Dividends-received deduction (§243): 50% of dividends from a corporation owned less than 20%; 65% if 20% to under 80%; 100% from an 80%-or-more-owned affiliate. Limited to the same percentage of taxable income unless the deduction creates or increases an NOL. The course mentions the DRD only as a “special deduction covered later”; it is on Schedule C of Form 1120.
• added 2026 Net operating loss (§172): for losses arising in tax years beginning after 2017, no carryback, indefinite carryforward, deduction limited to 80% of taxable income in the carryforward year. The 2020 CARES Act five-year carryback was for 2018–2020 losses only.
• added 2026 Corporate alternative minimum tax: a 15% tax on adjusted financial statement income applies only to corporations averaging more than $1 billion of book income. The old corporate AMT the course alludes to was repealed in 2017. Not a small-business concern.

Study questions 1–2

• SQ 1. Herald Corp: sale of its own preferred stock $800,000; gross profit $300,000; West Virginia revenue bond interest $60,000; §1231 loss on a building ($50,000); §1231 gain on land $20,000; taxable mutual fund income $10,000; capital gains $20,000. Gross income? $300,000 — the stock sale is a contribution to capital, the state bond interest is exempt, and the net §1231 loss ($30,000) offsets the $20,000 capital gain and $10,000 of fund income. check The course’s answer key treats the §1231 loss as reducing gross income; strictly a net §1231 loss is an ordinary deduction and gross income would be $350,000. Either way, the two things being tested are the stock sale and the muni interest.
• SQ 2. Cisco Corp: operating expenses $100,000; capital losses $10,000; interest paid to buy investment stock $1,000; dividends paid $50,000. Allowable deductions? $101,000 — the investment interest is deductible in full by a corporation; capital losses do not reduce ordinary income; dividends paid are not an expense.

Private reference, not client advice. Notes taken from a 2019 continuing-education course (Thomson Reuters Checkpoint Learning, C Corporations — Overview of Corporate Income Tax); figures and rules brought current to 2026 in October 2026 (P.L. 119-21, Rev. Proc. 2024-40, Rev. Proc. 2025-32). Verify current-year amounts before relying on them.