Corporate and Partnership Taxation

Introduction

The taxation of business entities in the United States depends critically on the form of entity chosen. C corporations are subject to double taxation —the corporation pays tax on its income, and shareholders pay tax again on dividends. Pass-through entities —including S corporations, partnerships, and LLCs —avoid entity-level taxation and instead pass income through to owners, who pay tax at their individual rates. The Tax Cuts and Jobs Act of 2017 created a 20% deduction for qualified business income from pass-through entities.

C Corporation Taxation

C corporations are separate taxable entities under Subchapter C of the IRC. The corporate tax rate is a flat 21%, established by the Tax Cuts and Jobs Act. Corporations compute taxable income similarly to individuals, with gross income minus deductions. Corporate deductions include ordinary and necessary business expenses, compensation, depreciation, and interest.

The double tax on corporate income arises because: the corporation pays tax on its earnings, and shareholders pay tax on dividends when distributed. Shareholders also pay tax on capital gains from the sale of appreciated corporate stock. The double tax creates an incentive for corporations to retain earnings and for business owners to choose pass-through entities.

S Corporation Taxation

S corporations under Subchapter S are pass-through entities that avoid entity-level taxation. To qualify as an S corporation, the entity must: be a domestic corporation; have no more than 100 shareholders; have only individuals, estates, certain trusts, and certain tax-exempt organizations as shareholders; have only one class of stock; and not be an ineligible corporation.

S corporation income, deductions, and credits pass through to shareholders, who report their share on their individual returns. The pass-through character preserves the limited liability of corporate form while avoiding double taxation. S corporations are subject to complex eligibility and operational requirements.

Partnership and LLC Taxation

Partnerships under Subchapter K are pass-through entities that offer flexibility in allocating income and losses among partners. A partnership does not pay income tax; instead, items of income, deduction, and credit pass through to partners. The partnership files an information return (Form 1065) and issues Schedules K-1 to partners.

Limited liability companies (LLCs) are state law entities that may elect their federal tax classification. A single-member LLC is disregarded for federal tax purposes (treated as a sole proprietorship). A multi-member LLC may be classified as a partnership or may elect to be taxed as a corporation. The flexibility of LLC taxation has made LLCs the most popular form of business entity.

The QBI Deduction

Section 199A, enacted by the Tax Cuts and Jobs Act, provides a qualified business income (QBI) deduction of up to 20% of qualified business income from pass-through entities. The deduction is available to individuals, trusts, and estates that own interests in sole proprietorships, partnerships, S corporations, and certain LLCs.

The QBI deduction is subject to limitations based on the type of business and the taxpayer’s income. For taxpayers with taxable income above certain thresholds ($191,950 for single filers and $383,900 for married filing jointly in 2026), the deduction is limited for specified service trades or businesses (SSTBs) and may be limited by wage and property factors.

Entity Choice

The choice of business entity has significant tax consequences. C corporations offer the benefits of the flat 21% rate and the ability to retain earnings, but suffer from double taxation on distributions. Pass-through entities avoid double taxation but may be subject to limitations on loss deductions and the QBI deduction.

The decision between entity types depends on factors including: the number of owners, the need to reinvest earnings, the desire to distribute cash to owners, the nature of the business, and the owners’ tax situations. The tax treatment of fringe benefits, retirement plans, and state taxes also varies by entity type.

Conclusion

Business taxation in the United States differs fundamentally based on entity selection. C corporations face double taxation, while pass-through entities —S corporations, partnerships, and LLCs —offer single taxation. The QBI deduction provides a significant benefit to pass-through entity owners. Entity choice remains one of the most important decisions in business planning.