C Corporation – Expense Limitations

Now, let’s discuss expense limitations for a C corp. A C Corp is not allowed to deduct more than $1 million of salaries paid to the top five executives, including the CEO, the CFO, and three other executives.

The next limitation involves interest expense. A C Corp is not allowed to deduct more than 30% of its taxable income as interest expense. Anything in excess is carried forward indefinitely.

Now, consider limitations for the deductibility of accruals. What if a company decides to expense a bonus at year-end but doesn’t pay the bonus until after year-end? As long as it’s paid by March 15th (2.5 months after year-end), then it’s deductible in the prior year. The same applies to an employer contributing to a profit-sharing plan for their employees. If it’s paid out within 2.5 months after year-end, then it is deductible.

Lastly, we need to address bad debt expense. Under US GAAP for the books, we estimate bad debt. We have a bad debt expense and record allowance for doubtful accounts. But for taxes, we cannot deduct it until we actually write off the bad debt (i.e., when we deem it as uncollectible).

Now, let’s discuss charitable contribution limitations for C Corps. A C Corp is limited to deducting 10% of its adjusted taxable income for charitable contributions.

Adjusted taxable income is the income before any capital losses, before any dividends received deduction, and before any charitable contributions. A C Corp can deduct up to 10% of this amount, and anything in excess can be carried forward for five years, similar to the individual rule.