The U.S. Corporate Tax Structure
The federal corporate tax rate in the United States is set at 21%, applying to a corporation’s profits. These taxes are paid on a company’s taxable income, calculated as revenue minus expenses. Typical expenses include:
- Cost of goods sold (COGS)
- General and administrative (G&A) expenses
- Selling and marketing expenses
- Research and development
- Depreciation and other operating costs
Corporate tax rates differ widely by country, with some countries being known as tax havens due to their low rates. Corporate taxes can be reduced through various deductions, government subsidies, and loopholes, often resulting in an effective corporate tax rate lower than the statutory rate.
Key Takeaways
- Corporate taxes serve as a significant revenue source for governments.
- Taxes are based on taxable income after deducting expenses.
- The current U.S. corporate tax rate stands at a flat 21%, reduced from 35% prior to the 2017 tax reforms.
- Companies can bypass corporate tax by registering as an S corporation, which allows income to pass-through to business owners and be taxed at individual rates.
Deep Dive into Corporate Tax
The current flat 21% federal corporate tax rate in the U.S. stems from the Tax Cuts and Jobs Act (TCJA) signed into law in 2017. Corporate tax returns are generally due by the 15th of the fourth month following the year-end, with the ability to request a six-month extension. Installment payments for estimated taxes are scheduled quarterly in April, June, September, and December and are reported on Form 1120.
State-imposed corporate income taxes also exist, with rates varying significantly, from minimal percentages in states like North Carolina to higher rates in states like New Jersey.
Understanding Corporate Tax Deductions
Corporations can reduce taxable income through deductible business expenses essential for operations. Eligible deductions include:
- Employee salaries
- Health benefits
- Tuition reimbursement
- Bonuses
- Insurance premiums
- Travel expenses
- Bad debts
- Interest payments
- Sales and excise taxes
- Tax preparation, legal services, bookkeeping, and advertising costs
Special Considerations on Corporate Tax
A key issue in corporate taxation is double taxation, where corporations are taxed on net income, and shareholders are taxed again on dividends received. Alternatively, a business can register as an S corporation, passing income through to business owners for taxation at individual rates, avoiding double taxation.
Benefits of Corporate Taxation
Corporate taxation offers various advantages over individual income tax for business owners, including deductions and tax-efficient financial planning. Corporations can fully deduct losses and retain profits within the business for future planning, unlike sole proprietors who must demonstrate the intent to earn profit to deduct losses.
Tax Brackets and Differences Between Business Entities
No More Tax Brackets for C Corps
Since the Tax Cuts and Jobs Act, a flat corporate tax rate of 21% applies to C corporations, removing previous tax brackets.
LLC vs. C Corp Taxation
A primary distinction between LLCs and C Corps lies in tax treatment. C corporations are taxed at the corporate level, whereas LLCs, functioning as pass-through entities, allow owners to report profits or losses on personal tax returns, circumventing double taxation.
Countries with the Lowest Corporate Tax Rates
Some countries, such as the Bahamas, Bahrain, and the United Arab Emirates, impose no corporate tax. Others with notably low rates include Barbados (5.5%), Turkmenistan (8%), and Hungary (9%).
The Bottom Line
The corporate tax rate, applied to a corporation’s profits, serves as a crucial revenue mechanism for governments. In the U.S., a flat federal corporate tax rate of 21% is imposed, with additional state-level taxes in some jurisdictions. Companies often strive to minimize tax obligations through deductions, loopholes, and subsidies.
Related Terms: effective corporate tax rate, tax brackets, C corporation, LLC tax rates, tax havens.
References
- Internal Revenue Service. “Publication 542 (01/2022), Corporations”.
- Congress.gov. “H.R. 1, 115th Congress”.
- Internal Revenue Service. “S Corporations”.
- Internal Revenue Service. “Starting or Ending a Business 3”.
- Internal Revenue Service. “Publication 542 (01/2022), Corporations”.
- Internal Revenue Service. “Instructions for Form 1120 (2021)”.
- Internal Revenue Service. “Publication 535 (2021), Business Expenses”.
