Corporation

The rules you must use to determine whether your business is taxed as a corporation changed for businesses formed after 1996. However, if your business was formed before 1997 and taxed as a corporation under the old rules, it will generally continue to be taxed as a corporation.

Businesses formed after 1996. The following businesses formed after 1996 are taxed as corporations.

• A business formed under a federal or state law that refers to it as a corporation, body corporate, or body politic.
• A business formed under a state law that refers to it as a joint-stock company or joint-stock association.
• An insurance company.
• Certain banks.
• A business wholly owned by a state or local government.
• A business specifically required to be taxed as a corporation by the Internal Revenue Code (for example, certain publicly traded partnerships).
• Certain foreign businesses.
• Any other business that elects to be taxed as a corporation by filing Form 8832.

For more information, see the instructions for Form 8832, Entity Classification Election.

Forming a corporation. A corporation is formed by a transfer of money, property, or both by prospective shareholders in exchange for capital stock in the corporation.

If money is exchanged for stock, no gain or loss is realized by the shareholder or corporation. The stock received by the shareholder has a basis equal to the money transferred to the corporation by the shareholder.

If property is exchanged for stock, it may be either a taxable or nontaxable exchange.

Corporate tax. Corporate profits are normally taxed to the corporation. When the profits are distributed as dividends, the dividends are taxed to the shareholders.

In figuring its taxable income, a farm corporation generally takes the same deductions that a noncorporate farmer would claim on Schedule F (Form 1040). Corporations are also entitled to special deductions.

Form 1120 and Form 1120-A. Unless exempt under section 501 of the Internal Revenue Code, all domestic corporations (including corporations in bankruptcy) must file an income tax return whether or not they have taxable income. A corporation must generally file Form 1120 to report its income, gains, losses, deductions, credits, and to figure its income tax liability. However, a corporation may file Form 1120-A if its gross receipts, total income, and total assets are each under $500,000 and it meets certain other requirements. For more information, see the instructions for Forms 1120 and 1120-A.

More information. For more information on corporations, see Publication 542.

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