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.

What is corporate income tax?

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.

Definition: Corporate tax

Corporate tax is special income tax levied on all entities registered as corporations in the USA. The taxable amount is the income received by the association within the tax year.

Unusually, corporations in the USA have the right to set the parameters of their own tax year, providing it lasts for 12 months or 54 weeks. It is up to their discretion to decide when this begins. If a corporation wants to change the parameters of their taxation period, they can only do so with written consent from the Internal Revenue Service (IRS).

Who pays corporation tax?

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.

Who doesn’t need to pay corporate income tax?

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.

Note

Entrepreneurs, sole proprietors, and farmers do not pay corporation tax. They are subject to income tax instead.

Corporate tax rate

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.

Note

Corporate tax is not the only tax that corporations are liable to pay. There may also be income tax and other kinds of tax on business or investment income.

How do you calculate your corporation tax?

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.

Rules for calculating corporate income tax

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.

Corporate income tax returns: deadlines and more

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

Partnership tax deadlines

Due Date

Original tax deadline for partnerships

March 15, 2019

Original tax deadline for S Corporations

March 15, 2019

Original tax deadline for C Corporations

April 15, 2019

Original tax deadline for sole proprietors

April 15, 2019

Original tax deadline for exempt organizations

May 15, 2019

Tip

You can apply to the IRS for a corporate tax extension. If approved, you will have 6 more months to file your corporate income tax return.

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.

Click here for important legal disclaimers.


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