Corporate income tax: the basics at a glance

Most people have a decent un­der­stand­ing of what sales tax is, who pays it, and why. But what about cor­po­ra­tion tax? Who is affected, how high is the corporate tax rate, and how can corporate income tax be cal­cu­lat­ed? Here, you can read the most important basics of corporate income tax, i.e. tax on the income of legal entities.

Corporate income tax, or cor­po­ra­tion tax, is a tax that “C cor­po­ra­tion” legal entities must pay. Be sure to take full con­sid­er­a­tion when in­cor­po­rat­ing your business to ensure that you are properly clas­si­fied – different clas­si­fi­ca­tions of cor­po­ra­tion have different taxation rules. In general, if the term “cor­po­ra­tion” is used, it can be presumed that it is a C cor­po­ra­tion since other types are often iden­ti­fied specif­i­cal­ly as such.

Cor­po­ra­tions are taxed at both federal and state level. According to sta­tis­tics from the US Treasury, $444 billion was paid in corporate taxes in the USA in 2017. That comes to one fifth of the $2.2 trillion gained in total taxes. Cor­po­ra­tion tax in America is currently regulated by the Tax Cut and Jobs Act, part of the con­tro­ver­sial GOP tax reform bill. This act was passed in December 2017, and has been in effect since January 1, 2018.

The following groups are subject to pay corporate income tax in the USA:

• C cor­po­ra­tions
• Foreign cor­po­ra­tions
• Some non­prof­its
• Co­op­er­a­tives (when reg­is­tered as cor­po­ra­tions for tax purposes)
• Public or state funded or operated cor­po­ra­tions

Companies and busi­ness­es in the USA have the option to become cor­po­ra­tions when they decide to undergo the in­cor­po­ra­tion process. They register their clas­si­fi­ca­tion election by filling out the Internal Revenue Service Form 8832. If you fail to fill out this form when un­der­go­ing the in­cor­po­ra­tion process, your business will au­to­mat­i­cal­ly be clas­si­fied as a cor­po­ra­tion provided it is a business that can be publicly traded. Any foreign companies operating in the USA must also be clas­si­fied as a cor­po­ra­tion. Cor­po­ra­tion tax is paid on their domestic income.

A wide range of gov­ern­men­tal and non-profit or­ga­ni­za­tions are exempt from cor­po­ra­tion tax. These include state-owned companies and assets – including federal and state banks to lottery companies. Cor­po­ra­tion tax is also waived for:

• S cor­po­ra­tions
• Insurance and health insurance funds
• Most non-profits
• Port operators (unless clas­si­fied as a cor­po­ra­tion)
• Political parties

OF course there are always ex­cep­tions to these rules, usually depending again on the clas­si­fi­ca­tion of the business whether cor­po­ra­tion, S cor­po­ra­tion, or sole pro­pri­etor. It is also worth noting that many of these US busi­ness­es are clas­si­fied as “flow-through” entities and are sub­se­quent­ly not required to pay corporate income tax. Instead of paying an entity-level tax, the owners of the company instead pay tax on their share of the business’s profits when filing their in­di­vid­ual income tax returns.

As pre­vi­ous­ly mentioned, the federal corporate tax rate in the USA stands at 21% flat since December 2017. Prior to this, the rate was 35%. In addition to federal corporate tax, cor­po­ra­tions are also liable to pay state cor­po­ra­tion taxes. These rates vary from state to state, and it is worth finding out more in­for­ma­tion to ensure that you are legally complying with all necessary taxes.

The financial re­la­tion­ship between companies and their share­hold­ers, as well as between companies them­selves, can be quite diverse. This means that cal­cu­lat­ing your cor­po­ra­tion tax bill can be just as complex.

Corporate income tax is generally based on net taxable income. This is the gross income minus any ap­plic­a­ble tax de­duc­tions. In any case, you should begin with de­ter­min­ing your cor­po­ra­tion’s annual income.

When it comes to the final as­sess­ment of cor­po­ra­tion tax, however, there are special rules that apply under certain con­di­tions. Here are some of the most important ones:

Graduated corporate income

The federal gov­ern­ment taxes cor­po­ra­tion profits at a range of graduated rates from 15 to 35%. The first $50,000 of prof­itable earnings by a cor­po­ra­tion is set at 15%, with profits and graduated rates in­creas­ing until they reach the maximum 21%. This rule means that small cor­po­ra­tion owners pay less taxes on their initial profits, resulting in more money left over to stimulate growth and increase next year’s graduated rate. The primary ben­e­fi­cia­ry of this rule are small cor­po­ra­tion owners.

De­ductible and non-de­ductible expenses

Since corporate income tax is levied on the profit of a cor­po­ra­tion, it’s up to the cor­po­ra­tion owner to make sure they have carefully doc­u­ment­ed their de­ductible and non-de­ductible expenses from their profit. After all, the more le­git­i­mate de­ductibles you have, the less corporate income tax you have to pay. Please consult the IRS website for more in­for­ma­tion on what con­sti­tutes a de­ductible or non-de­ductible expense.

Con­trolled foreign cor­po­ra­tion income deferral

US cor­po­ra­tions (and in­di­vid­u­als) are liable to pay income tax on any earnings made anywhere in the world. However, they do not have to pay cor­po­ra­tion tax on these earnings until the money is brought back into the USA. This results in many cor­po­ra­tions leaving their profits in offshore accounts in­def­i­nite­ly, to avoid paying double income tax in their location country and in the USA. This is a very common practice among cor­po­ra­tions, which has gained a lot of notoriety in the press in recent years.

Research tax credit

The research and ex­per­i­men­ta­tion tax credit is granted under IRS code section 41 to assist cor­po­ra­tions that carry out research and de­vel­op­ment in the USA. Having been renewed numerous times since it was first in­tro­duced in 1981, the tax credit was made per­ma­nent­ly available in 2015. Intended to help stimulate excellent research within the USA, the tax credit is also con­tro­ver­sial, since many de­trac­tors claim that the research would be carried out with or without the tax credit, ef­fec­tive­ly having the gov­ern­ment pay a cor­po­ra­tion to do its normal work.

Excluding interest on state and local bonds

Cor­po­ra­tions and in­di­vid­u­als who choose to invest in state and/or municipal bonds are not liable to be taxed on any interest redeemed from them. In addition to this, cor­po­ra­tions may sometimes issue tax-free bonds for any project or un­der­tak­ing of theirs that is ben­e­fi­cial to the wider public. This tax exclusion is designed to stimulate in­vest­ment in your community and country, and is legally au­tho­rized under U.S Code § 103.

Just like in­di­vid­ual income tax, corporate income tax is levied annually, at the end of the financial year.

2019 tax deadlines for filing 2018 business returns

In order to file your corporate tax report, you will need to fill out Form 1120 either elec­tron­i­cal­ly online or through the mail. This form is submitted along with all other tax return forms, and based on the forms and sup­port­ing documents submitted, you will receive a bill for tax to be paid and any ad­di­tion­al sur­charges. You can then choose either to pay or dispute this tax as­sess­ment.

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