A corporate tax, also known as a corporation or company tax, is a type of fee imposed by the federal government on a business’s profits. According to the Federal Tax Cuts and Jobs Act of 2017, the current federal corporate tax rate is twenty-one percent. This means that after all business expenses have been deducted, a corporation will be required to pay the federal government twenty-one percent of its total revenue when filing a federal corporate tax return.
For example, suppose that after deducting all legitimate business expenses your corporation made $1 million dollars in revenue. At the time you file your business’s federal corporate tax return, you will owe twenty-one percent of that $1 million dollars in taxes to the federal government (i.e., $210,000).
It is important to keep in mind that the federal corporate tax rate is subject to change. Also, states may impose their own separate corporate income tax rates in addition to the federal corporate tax.
Not every state applies a state corporate income tax rate, however, and those that do tend to have rates that vary widely based on jurisdiction. The standard range for state corporate income tax rates is between one and twelve percent, with most state rates averaging in the middle.
In continuing with the above example, if you live in a state that applies its own separate corporate income tax rate, such as Kentucky (i.e., five percent rate), you will need to deduct both the federal (i.e., $210,000) and state (i.e., $50,000) tax amounts from your total revenue. Thus, you will owe $260,000 in federal and state taxes, which means you will be left with $740,000 of your total profits.
What Kind of Corporate Taxes Does My Business Have to Pay?
Aside from federal and corporate taxes, a corporation may also need to pay taxes that are specific to certain divisions of a business. Some common types of corporate taxes that a business may have to pay include:
- Employment or payroll taxes: These taxes refer to the percentage that gets taken out of an employee’s paycheck. They may be used to pay off taxes like those for social security benefits and Medicare or unemployment.
- Real estate taxes: Some businesses may need to pay real estate taxes on property it owns, such as if a corporation owns the building in which it operates.
- Estimated taxes: In some cases, a business may need to make installment payments on taxes periodically throughout a given tax year. This is usually required when a business expects to owe $500 or more in federal income taxes.
- Franchise taxes: Some states place a special kind of tax on businesses that want to operate or remain open in their specific state. This special tax is known as a “franchise tax”.
- Excise taxes: Excise taxes are only applied to certain goods, such as alcohol, gasoline, cigarettes, some luxury goods, and other items that are regulated by various tax laws.
How Do I Determine the Amount of Income Tax My Business Owes?
The amount of income tax that a business owes will be based on various state and federal laws as well as the type of business structure that was chosen when the company was initially formed or registered. Each kind of business organization is taxed differently.
For example, corporations are usually taxed in one of two ways: as a C corporation or an S corporation. Consider the following discrepancies:
- C Corporation: C corporations have what many refer to as a “double-taxation” issue. C corporations are first taxed at the corporate level. If the business has enough revenue left over to distribute dividends to its owner or shareholders, then those dividends will be taxed again both on the corporate level and at the shareholder or personal level. Hence, the term “double-taxation” because the entity and owners are taxed twice for the corporation’s dividends.
- S Corporation: Unlike C corporations, S corporations are a form of pass-through entities. Under this type of business organization, the business itself will not be required to pay federal income taxes. The corporate shareholders or owners, however, will need to claim the portion of income they receive from a business’s profits on their personal income tax returns.
Businesses may also be able to change their elected tax status, which can help to lower the amount of taxes they owe on company revenue.
For instance, a C corporation may want to switch their elected tax status to an S corporation. S corporations are not subject to the double-taxation issue found in C corporations. Thus, this may reduce the amount of income taxes that business owners have to pay since they will only need to report it a single time on their personal tax returns.
How Are Partnerships and LLCs Taxed?
In general, partnerships and LLCs have similar tax arrangements. Depending on the number of LLC members and how those members elect to be taxed, the IRS may treat the business as either a corporation, partnership, or as a disregarded (i.e., pass-through) entity.
For instance, the IRS typically treats LLCs that are owned by multiple members as partnerships. Although a partnership does not have to pay any taxes itself, its members will be taxed in accordance with their share of profits from the company.
This is true even if the company funds remain in a business’s bank account for the purposes of covering future expenses and are never actually distributed to individual members. Regardless, members must still pay taxes on that income.
Despite this fact, however, the company must file a business tax return with the IRS. This entails a separate form and process than what is required of individual members or partners of the business who are taxed separately. Individual members and/or partners will still need to pay taxes on a business’s profits and file certain forms with the IRS.
On the other hand, single-member LLCs (i.e., companies not owned by multiple LLC members) are considered pass-through entities by the IRS. This means that the business itself will not be required to pay taxes, but rather its income will be reported on member-owners individual tax returns. LLC members must inform the IRS about any profits and/or losses when filing their personal income tax returns.
In addition, some states may also require owners or members who are actively involved in the day-to-day operations of a business to pay self-employment taxes. If it is necessary to pay self-employment taxes, then owners or members of the company will be permitted to deduct legitimate business expenses from company revenue on their tax returns.
Lastly, it should be noted that some changes have been made to the U.S. Federal Tax Code in regard to claiming deductions on income taxes. Thus, it is important to consult a corporate tax attorney or Certified Public Accountant (“CPA”) for questions about the law and certain tax deductions prior to filing a business or personal tax return.
What About Sole Proprietorships?
A sole proprietorship is also considered a type of pass-through entity. In other words, any income or profits earned by a sole proprietorship will “pass through” the business, and then must be claimed on the business owner’s personal income tax returns instead.
Legitimate business expenses, such as costs for office supplies and/or services, may be deducted from a business’s profit margins. Depending on the state, business owners who are responsible for overseeing the day-to-day operations of a company may have to pay self-employment taxes as well.
Do I Need to Talk to a Corporate Tax Attorney?
Corporate tax laws are notoriously difficult to interpret and apply properly without enlisting the help of a corporate tax attorney. These laws are also constantly subject to changes each year, so you may need a legal or tax expert (e.g., a CPA) to inform you about any updates and whether they will affect your specific tax situation.
In addition, a corporate tax attorney can assist you in devising useful corporate tax strategies. For example, corporate taxes are based on the type of business you operate as well as on the tax laws enacted in a particular state.
A corporate tax attorney can counsel you on the different tax strategies you can employ to help you save money on business taxes. Your lawyer can also give you advice on how to handle your business taxes going forward.
Thus, if you have any questions on paying corporate taxes or are interested in learning more about corporate tax strategies to boost your business’s chances of success, you should contact a qualified business lawyer for further information.
Hiring an attorney is especially necessary if you are being charged or sued for issues involving corporate taxes or need to settle a claim with the IRS. Your lawyer will be able to guide you through the different legal and governmental procedures for both.