What can happen if a C corporation's tax deductions exceed its taxable income?

When a C corporation's tax deductions exceed its taxable income, it results in a net operating loss (NOL). This situation arises when a corporation's allowable tax deductions surpass its revenues, leading to negative taxable income for the year.

Net operating losses are significant as they can be carried forward to offset future taxable income, thus reducing tax liability in subsequent years. This provision helps businesses manage cash flow during tough economic times and provides tax relief by utilizing the losses in profitable years.

While the other options present potential considerations for corporations, they do not directly convey the impact of deductions exceeding income. For example, an audit or penalties may occur under certain circumstances but are not a direct result of having an NOL, nor does having an NOL prevent a corporation from filing taxes during that period. Instead, it is a key financial condition that enables corporations to utilize past losses beneficially in future fiscal situations.