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Corporate Tax

Corporate Tax

What is corporate tax?

Corporate tax is a tax on the profits of a company. The tax is paid on a company's taxable income, including revenue less the cost of goods sold (COGS), general and administrative (G&A) expenses, sales and marketing, research and development, depreciation, and other operating costs.

Corporate tax rates differ widely from country to country, with some countries considered tax havens due to low rates. Corporate taxes can be reduced through various deductions, government grants, and tax loopholes, so the effective corporate tax rate, the rate paid by a business, is often lower than the statutory rate, the rate shown before any deductions.

 

Understanding Corporate Tax

The federal corporate tax rate in the U.S. is currently 21%, according to the TCJA (Tax Cuts and Jobs Act), which former President Donald Trump signed in 2017 and took effect in 2018. Previously, the main corporate income tax rate in the United States was 35%.

In general, U.S. corporate tax returns must be filed by March 15. Businesses can request a six-month extension to file corporate tax returns in September. The deadlines for payment of the tax estimate in several installments are mid-April, June, September, and December. Corporate taxes are disclosed on Form 1120 for U.S. corporations. If a company has more than $10 million in assets, it must file online.


Corporate Tax Deductions 

A corporation can reduce its taxable income through certain common and necessary business expenses. All current expenses necessary to operate the business are fully deductible. Investments and property purchased for the purpose of generating income for the business are also deductible.

A business can deduct employee wages, health benefits, tuition reimbursements, and bonuses. Additionally, a business can reduce its taxable income by deducting insurance premiums, travel expenses, non-performing debts, sales taxes, fuel taxes, interest payments, and excise duties. Tax preparation fees, legal services, accounting, and advertising fees can also be used to reduce business income.


Special Considerations

The concept of double taxation is a central problem in corporate taxation. Some corporations are subject to tax on the taxable income of the corporation. If this net income is distributed to shareholders, these persons are liable for personal income tax on the dividends received. Instead, a business can register as an S corporation and transfer all income to the owners of the business. The S Corps does not pay corporate tax because all taxes are paid through personal income tax returns.

 

The advantages of a Corporate Tax

Paying corporate taxes may be more beneficial to entrepreneurs than paying additional personal income taxes. Corporate tax returns deduct family health insurance as well as supplemental benefits, including pension plans and tax-deferred funds. It is also easier for a business to deduct losses.

A business can deduct the full amount of losses, while a single owner must provide proof of intent to make a profit before losses can be deducted. Finally, profits from a business can stay with the company, allowing for tax planning and possible future tax benefits.


Summary

  • The government collects corporate taxes as a source of revenue.

  • Taxes are based on taxable income after expenses.

  • The U.S. corporate tax rate is currently set at 21%. Prior to Trump's 2017 tax reforms, the corporate tax rate was 35%.

  • A corporation can register as an S corporation to avoid double taxation. S Corps does not pay taxes on profits because the income goes to entrepreneurs who pay taxes through their individual tax returns.


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