How Does Corporate Income Tax Work?

Ambika Taylor July 13, 2021 News Comments Off on How Does Corporate Income Tax Work? 190 Views

Did you know that the federal income tax in the United States as we know it today was officially enacted in 1913? If you are a new business owner and want to make sure that you are taking care of Uncle Sam to avoid getting in trouble, you are in the right place. We have put together this short guide to share the ins and outs of corporate income tax.

Keep reading to learn what it is, how it works, and how you can calculate it.

Table of Contents

What Is Corporate Income Tax?

This is a tax that the federal and state governments impose on the profits that a business makes. Keep in mind that most companies out there are not subject to the corporate income tax because they are taxed as a pass-through business. This means that their income is reported under their own individual income tax vs a corporate tax.

Usually, corporate tax returns are due on March 15th. If a corporation needs to request an extension they can do up to a 6-month extension, making tax returns due in September instead of March. The taxes are reported on Form 1120 and if the corporation has more than $10 million in assets then it is mandatory to file online.

What Is the Corporate Income Tax Rate?

When President Donald Trump was in office he signed a law on December 22, 2017 (the Tax Cuts and Jobs Act) where it reduced the corporate tax rate from 35% to 21%. This is the lowest the rate has been since the year 1939.

You can use a reliable calculator like this one https://strata-g-tax.com, to help you figure out the tax rate for your business if you are subject to corporate taxes.

How Does Corporate Income Tax Work?

In lamest terms, the U.S. taxes the profits of C-corporations at 21%. The profits that are taxable are after the allowable deductions such as wages, cost of goods sold, interest, depreciation, advertising, etc.

This income tax is one of the largest sources of federal revenue for the United States. Corporate profits are also subject to another layer of taxes at the individual shareholder level.

How Corporations Avoid Paying Taxes

S corporations are the most common type and they do not pay corporate taxes because they are considered pass-through firms. They pay corporate income, losses, credits, and deductions to their shareholders. Then the shareholders are taxed on the losses or profits at their individual income tax rate.

Corporations are also allowed to reduce their taxable income with certain business expenditures. Also, when real estate or investments are purchased with the intent of making income this is also deductible.