The profits of a corporation are subject to the 21% federal corporate tax rate in the United States. A company’s taxable income, which is calculated by subtracting its expenses from its revenue, is used to pay taxes. Expenses consist of depreciation, research and development, selling and marketing, general and administrative (G&A) costs, and cost of goods sold (COGS).
Every country has a different corporate tax rate, and some are regarded as tax havens because of their low rates. Many deductions, government subsidies, and tax breaks can reduce corporate taxes; as a result, the effective corporate tax rate—the rate that a company pays—is typically lower than the statutory rate, which is the declared amount before any deductions.
Key Takeaways
- The government collects corporate taxes as a revenue stream.
- Taxes are calculated using taxable income following the deduction of expenses.
- The United States currently has a flat corporate tax rate of 21%. 35% was the corporate tax rate before the Trump tax revisions of 2017.
- To prevent double taxation, a business might register as a S corporation. Since the money is passed through to firm owners and is taxed on their tax returns, a S corporation is exempt from corporate tax.
Understanding Corporate Tax
Typically, the 15th day of the fourth month after the corporation’s tax year ends is when U.S. corporate tax returns are due. A six-month extension to file corporate tax returns in September is available to corporations upon request. For estimated tax returns, installment payments are required in mid-April, mid-June, mid-September, and mid-December. For U.S. corporations, Form 1120 is used to report corporate taxes. Companies with assets over $10 million are required to file online.
Special Considerations
The idea of double taxation is a major concern concerning corporate taxation. Some corporations pay taxes based on their taxable income. Shareholders who receive this net income are obligated to pay personal income taxes on the dividends they receive. Alternatively, a company may choose to register as an S corporation, in which case all profits are distributed to the shareholders. Since individual tax returns are used to pay all taxes, a S corporation does not pay corporate tax.
Advantages of a Corporate Tax
Business owners may benefit more from paying corporation taxes than from paying extra individual income tax. Family health insurance and other fringe benefits, including as retirement plans and tax-deferred trusts, are deductible on corporate tax returns. Additionally, it is simpler for a business to deduct losses.
While a sole owner must present proof of the intention to turn a profit before the losses may be written off, a company is allowed to deduct the full amount of losses. Last but not least, a corporation’s profit may be retained within the company, enabling tax planning and possible future tax benefits.