C Corporation – Expense Limitations
Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
A C corp can't deduct everything it spends, and REG tests four limitations specifically: executive pay, interest expense, timing on accruals, and charitable contributions. Each has its own cap and its own carryforward rule.
How much executive compensation can a C corp deduct?
Up to $1,000,000 per covered employee, not $1,000,000 total. The covered group is the CEO, the CFO, and the three other most highly compensated officers, five people. Each one is individually capped at a $1,000,000 deductible compensation, so the company could deduct up to $5,000,000 combined if every one of the five is paid at least that much.
The $1 million limit is per person, not per company. It's easy to misread this as one shared $1M bucket split across five executives. It isn't: each covered employee has their own separate $1M ceiling.
How much interest expense can a C corp deduct?
Up to 30% of its taxable income. Anything above that is carried forward indefinitely, there's no expiration on the carryforward.
When are accrued bonuses and profit-sharing contributions deductible?
If a bonus is accrued at year-end but not actually paid until after year-end, it's still deductible in the year it was accrued, as long as it's paid within 2.5 months of year-end (by March 15 for a calendar-year company). The same 2.5-month rule applies to employer contributions to a profit-sharing plan.
What about bad debt?
Under GAAP, book bad debt expense is an estimate, recorded through an allowance for doubtful accounts. Tax rules don't allow an estimate: a C corp can't deduct bad debt until it's actually written off as uncollectible.
How much can a C corp deduct for charitable contributions?
Up to 10% of its adjusted taxable income, meaning taxable income computed before any capital loss carryback, before the dividends received deduction, and before the charitable contribution deduction itself. Anything given above that 10% carries forward for five years, the same carryforward period that applies to individuals.
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 95 on FAR. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.