What Is a Corporate Tax Rate?
Let me explain what a corporate tax rate really is. In the United States, the federal corporate tax rate stands at 21%, and it applies directly to a corporation's profits. You calculate the taxes on the company's taxable income, which is basically revenue minus all those expenses like cost of goods sold (COGS), general and administrative (G&A) expenses, selling and marketing costs, research and development, depreciation, and other operating costs.
Corporate tax rates differ a lot from one country to another, and some places are known as tax havens because of their low rates. You can lower these taxes through deductions, government subsidies, and various tax loopholes, so the effective rate—what the corporation actually pays—is often lower than the statutory rate, which is the rate stated before any deductions.
Understanding Corporate Tax
Right now, the federal corporate tax rate in the US is a flat 21%, thanks to the Tax Cuts and Jobs Act (TCJA) that President Donald Trump signed in 2017, effective from 2018. Before that, the maximum rate was 35%.
For US corporations, tax returns are due by the 15th day of the fourth month after the end of their tax year, and you can request a six-month extension to file in September. Estimated tax payments are due mid-April, June, September, and December, and you report everything on Form 1120.
Some states add their own corporate income tax, ranging from a few percent in places like North Carolina to double digits in New Jersey.
Corporate Tax Deductions
Corporations get to reduce their taxable income with necessary and ordinary business expenditures. All current expenses for running the business are fully deductible, and that includes investments and real estate bought to generate income.
You can deduct employee salaries, health benefits, tuition reimbursement, and bonuses. On top of that, insurance premiums, travel expenses, bad debts, interest payments, sales taxes, fuel taxes, excise taxes, tax preparation fees, legal services, bookkeeping, and advertising costs all help reduce corporate taxes.
Special Considerations
One big issue in corporate taxation is double taxation. Certain corporations pay taxes on their taxable income, and if that income gets distributed as dividends to shareholders, those individuals pay individual income taxes on it too.
To avoid this, a business can register as an S corporation, where all income passes through to the owners, and taxes are paid only through their individual returns—no corporate tax at all.
Advantages of a Corporate Tax
Paying corporate taxes can actually be more beneficial for business owners than adding to individual income tax. You deduct medical insurance for families and fringe benefits like retirement plans and tax-deferred trusts on corporate returns.
It's easier to deduct losses in a corporation—you can deduct the full amount without proving intent to earn a profit, unlike a sole proprietor. Plus, a corporation can retain profits over time and plan tax payments strategically.
Common Questions About Corporate Tax
What do you mean by corporate tax? It's simply taxes paid by businesses.
Is the 21% corporation tax rate permanent? Yes and no—it's set at that percentage and doesn't fluctuate, but it has been adjusted in the past and could be again.
Who actually pays corporate income tax? Corporations do, but economists say the burden often shifts to shareholders via lower returns, customers through higher prices, and workers with lower wages.
The Bottom Line
The corporate tax rate is applied to a corporation's profits and collected by the government as income. It hits the company's income, which is revenue minus expenses. In the US, it's a flat federal rate of 21%, and states might add their own. Companies often use deductions, loopholes, subsidies, and other methods to lower their tax obligations.
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