Corporate Tax: Definition, Deductions, How It Works

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Corporate Tax: Definition, Deductions, How It Works

What Is Corporate Tax?

A corporate tax is a tax on a corporation’s earnings. Taxes are levied on taxable income, which comprises revenue less cost of goods sold (COGS), general and administrative (G&A) expenditures, selling and marketing, R&D, depreciation, and other operational costs.

Corporate tax rates vary greatly across nations, with certain countries called tax havens owing to their low rates. Corporate taxes may be reduced by a variety of deductions, government subsidies, and tax loopholes, therefore the effective corporate tax rate, or the rate a firm actually pays, is often lower than the statutory rate; the declared rate before any deductions.

Key Takeaways

  • The government collects corporate taxes as a source of revenue.
  • Taxation is based on taxable income after costs are subtracted.
  • In the United States, the corporation tax rate is presently set at a flat rate of 21%. Prior to Trump’s 2017 tax revisions, the corporation tax rate was 35%.
  • To avoid double taxes, a business may form a S corporation. An S company does not pay corporate tax since its income is taxed on the individual tax returns of its shareholders.

Understanding Corporate Tax

As a consequence of the Tax Cuts and Jobs Act (TCJA), which President Donald Trump signed into law in 2017 and went into effect in 2018, the federal corporation tax rate in the United States is now a flat 21%. Previously, the maximum corporate income tax rate in the United States was 35%.

Corporate tax returns in the United States are typically due on the 15th day of the fourth month after the conclusion of the corporation’s fiscal year. Corporations may seek a six-month extension in September to submit their corporate tax filings. Estimated tax return installment payments are due in the middle of April, June, September, and December. For US firms, corporate taxes are recorded on Form 1120. If a corporation’s assets exceed $10 million, it must file online.

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Corporate Tax Deductions

Corporations may deduct some essential and customary business expenses from their taxable income. All current operating expenditures for the company are totally tax-deductible. Purchases of investments and real estate with the intention of creating revenue for the company are also deductible.

Employee salary, health benefits, tuition reimbursement, and incentives may all be deducted by a company. A corporation’s taxable income may also be reduced by deducting insurance premiums, travel expenditures, bad debts, interest payments, sales taxes, fuel taxes, and excise taxes. Tax preparation expenses, legal fees, accounting fees, and advertising charges may all be deducted from company revenue.

Special Considerations

The notion of double taxation is a major problem in corporate taxes. Certain companies are taxed on their taxable income. If this net income is transferred to shareholders, the dividends paid are subject to individual income taxes. Instead, a company may register as a S corporation, with all profits passing directly to the proprietors. Because all taxes are paid via individual tax returns, a S company does not pay corporate tax.

Advantages of a Corporate Tax

Paying corporation taxes may be more advantageous to company owners than paying extra individual income taxes. Medical insurance for families, as well as fringe benefits such as retirement plans and tax-deferred trusts, are deducted from corporate tax returns. It is also simpler for a business to deduct losses.

A company may deduct the whole amount of losses, but a single owner must present proof of intent to profit before losses may be deducted. Finally, a company’s earnings may be retained inside the business, providing for tax planning and possible future tax benefits.

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