Corporate tax rates refer to the taxes that businesses pay as registered corporations. These may be different rates and values for other forms of businesses, such as a sole proprietorship or partnership. Corporate tax rates are also different from the ones paid by individuals at the end of the year in relation to income.
Corporations are required to pay various taxes, including:
- Income tax: these rates depend on the corporation’s income figures.
- Excise tax: These are taxes on certain goods such as fuel, alcohol, cigarettes, and other regulated items.
- Real estate tax: These are taxes on real property held by the corporation.
- Franchise tax: Franchise taxes are paid to the state where the company is incorporated in.
- Payroll tax: These are taxes based on the company’s employment payrolls.
Thus, corporate taxes are usually fairly complicated, even for newer or smaller corporations. Corporate haven states are states that are considered to have favorable tax rates for corporations, along with other benefits.
What Are Some Factors to Consider When Analyzing Corporate Tax Rates?
There are various factors that can change the rates at which a corporation is taxed.These include:
- State of incorporation: Choosing where to incorporate can affect specific tax rates, especially the franchise tax that is paid to the state (this will vary according to state).
- Business activities: Non-profit corporations usually have different tax needs due to their involvement with charitable expenses and charitable giving, taxed differently from for-profit enterprises.
- C vs. S Corporations: C corporations require the corporation itself to handle taxes; S corporations require the shareholders to pay the taxes. This can translate into radically different tax figures for the company.
Lastly, it is always best to monitor the corporation’s tax documents and to perform regular inspections of tax books and accounting documents. Tax violations can lead to costly penalties for the company, which can drain the corporation’s time and resources. Negligent bookkeeping is sometimes responsible for tax violations and penalties. Intentional tax violations are often punishable under criminal laws.
How Did Corporate Tax Rates Begin?
The first federal income tax was enacted into law in 1861. The law was challenged on a constitutional basis in 1872, leading the law to expire. A corporate income tax was enacted in 1894 briefly until it too was held to be unconstitutional. In 1909, Congress enacted an excise tax on corporations based on income.
After the 16th amendment was ratified to the Constitution, the corporate provisions of the federal income tax were born. Almost all revenue acts with provisions pertaining to the federal income tax have been amended since. Corporate tax provisions are incorporated in Title 26 of the United States Code, known as the Internal Revenue Code. The current tax rate on corporate income was adopted in the Tax Reform Act in 1986.
What is Taxable Income?
What is taxable and at what rate is determined at the federal level based on U.S. tax laws. Federal taxable income is the gross income of a corporation minus the costs of goods and tax deductions. The gross income of a corporation, along with business deductions, are determined in a similar manner as for individuals.
All income of a corporation is subject to the same federal tax rate, but corporations may reduce their federal taxable income by having a net capital loss. Deductions are more limited, and certain deductions are available only to corporations. These deductions include those for dividends received. Some states tax the business income of a corporation differently than its nonbusiness income.
Recognizing income and deductions comes down to financial accounting. The timing of income or deduction, tax exemptions for certain income, and the disallowance or limitation of certain tax deductions must be disclosed to the IRS.
What is the Federal Tax Rate?
The top corporate tax rate in the U.S. reached a high of 53% in 1942. The tax rate was maxed out at 38% from 1993 until 2018. After the Tax Cuts and Jobs Act was passed in December 2017, the corporate tax rate changed to a flat 21%.
What are Corporate Tax Deductions?
Corporations can reduce their taxable income by using certain business expenditures. Expenses required for the operation of the corporation are fully tax-deductible. Investments and real estate purchased to generate income for the corporation are also deductible.
Corporations can deduct employee salaries, employee health benefits, tuition reimbursements, and bonuses. Corporations can also reduce taxable income by deducting insurance premiums, travel expenses, bad debts, interest payments, sales taxes, gas taxes, and excise taxes. Other means of reducing business income include tax preparation fees, legal fees, bookkeeping, and advertising costs.
What are the Advantages of Corporate Taxes?
Paying corporate taxes may be more beneficial for business owners than paying additional individual income taxes. Corporate tax returns deduct family medical insurance and fringe benefits. Retirement plans and tax-deferred trusts are also deducted. Corporations can easily deduct losses, too.
Corporations may deduct the entire amount of a loss, while a sole proprietor must provide evidence regarding the intent to earn a profit before a loss can be deducted. Profits earned by corporations may be left within the corporation, which allows for tax planning and future tax advantages.
What are the Recent Changes to the Corporate Income Tax?
The Tax Cuts and Jobs Act (TCJA) reduced the top corporate income tax rate from 35% to 21%. It also eliminated the graduated corporate rate schedule and the corporate alternative minimum tax. The TCJA allows full expensing of most new investments through 2022.
How Do Corporate Taxes in the U.S. Compare to State and Local Income Taxes?
Almost every state and locality charges a tax on corporation income, although the rules for determining the tax rate vary from state to state. Many states calculate taxable income by referencing federal taxable income with specific modifications. States do not allow tax deductions for income taxes on either the federal or state level.
Furthermore, a majority of the states deny tax exemptions for interest income that is tax exempt federally. Corporate income taxes range from 1% to 12% depending on the state. State and municipal taxes are considered deductible expenses for federal income tax purposes.
Many states tax both domestic and foreign corporations on their taxable income derived from business activities. Tax treaties do not apply to state taxes.
It is unconstitutional for a state to tax the income of a resident of another state unless there is a connection with the taxing from the other state. Many states do not tax non-business income from out of state corporations. Taxes must be fairly apportioned, so states and localities compute income out of state corporations taxable in the state by applying a formula to the total taxable income of the corporation. This formula is based on property, payroll, and sales within the state compared to items sold outside of the state.
Do I Need a Lawyer for Help with Corporate Tax Rates?
Certain types of corporate forms may be associated with favorable tax rates. You may wish to hire a tax attorney if you have any questions about corporate tax rates, incorporation, filing, or other business matters. Your attorney can review your company’s profile to determine if there are any outstanding issues to address. Also, in the event of a dispute or a legal violation, your lawyer can represent you in court.