A corporate tax, or a corporation or company tax, is a specific fee that the federal government imposes on a business’s profits. According to the Federal Tax Cuts and Jobs Act of 2017, the current federal corporate tax rate is 21%. After all business expenses have been deducted, a corporation must pay the federal government 21% of its total revenue when filing a federal corporate tax return.
An example of this would be if your corporation made $1 million in revenue after deducting all legitimate business expenses. When you file your business’s federal corporate tax return, you will owe 21% of that $1 million in taxes to the federal government, or $210,000.
It is important to note that the federal corporate tax rate is subject to change. Additionally, states may impose their own separate corporate income tax rates in addition to the federal corporate tax. However, not every state applies a state corporate income tax rate, and those generally have rates that vary widely based on jurisdiction. The standard range for state corporate income tax rates is between 1% and 12%, with most state rates averaging somewhere in the middle.
Other than federal and corporate taxes, a corporation may also need to pay taxes specific to certain business divisions. Some of the most common types of corporate taxes that a business may be required to pay include:
- Employment or Payroll Taxes: These taxes refer to the percentage that gets taken out of an employee’s paycheck, which may be used to pay off taxes such as those for social security benefits and Medicare or unemployment;
- Real Estate Taxes: Some businesses may need to pay real estate taxes on property that it owns, such as if a corporation owns the building in which it operates;
- Estimated Taxes: A business may need to make installment payments on taxes periodically throughout a given tax year, such as when a business expects to owe $500 or more in federal income taxes;
- Franchise Taxes: Some states place a tax on businesses that want to operate or remain open in their specific state, which is known as a “franchise tax;” and
- Excise Taxes: Excise taxes are only applied to certain goods, such as alcohol, gasoline, cigarettes, some luxury goods, and other items regulated by various tax laws.
What Is Conversion?
Conversion is an intentional tort defined as knowingly taking or using another person’s personal property, depriving the owner of their rights to the property. While the wording may vary between different state laws, the elements that are needed to prove conversion are as follows:
- You must have changed another person’s property;
- The change prevents the owner from using their property, either altogether or in a way that the owner wanted to use the property; and
- Damage is caused to the property owner.
To simplify this concept, some examples of conversion are:
- Taking someone’s computer and locking it away so that the owner cannot use it; or
- Cutting down a fruit tree that is on another person’s land.
If you are sued for conversion, some of the most common defenses to a claim of conversion include:
- Abandonment of the property;
- Authority of law, or when a person operates under the authority of law such as a law enforcement officer or by court order;
- Consent;
- Lack of value, as some states, will not allow a claim of conversion if the property has what they consider to be little to no monetary value; and
- In some circumstances, a person may be privileged to commit an act considered a conversion. An example would be if the action were necessary to protect the person’s property or avoid physical harm.
The legal remedies for conversion generally require the interfering party to return the property to the owner or to reimburse the owner for the value of the property. Alternatively, the interfering party could be ordered to reimburse the owner for the value of the time that the owner was deprived of the property. This is considerably harder to calculate and may end up being more than the property’s actual value.
While conversion is a civil claim, it is possible to face criminal charges for theft. The owner of the converted item can decide to press charges, but it is ultimately up to the prosecutor and government in terms of whether they want to charge the defendant with theft.
The requirements for theft vary from state to state, but they generally follow the same basic elements. As such, it is possible, however unlikely, that you can be charged with theft in one state and not charged with theft in another.
What Is Involuntary Conversion?
When a property is:
- Destroyed;
- Stolen;
- Condemned; or
- Disposed of under the threat of condemnation, and the taxpayer receives money or other property in return, the property is said to have been involuntarily converted.
The taxpayer may be able to defer the recognition of gain from the involuntary conversion, but only under specific circumstances.
There are two situations in which a taxpayer may defer the gain from an involuntary conversion:
- The taxpayer only receives property that is similar or related in service or use in return for the involuntarily converted property; or
- The taxpayer receives money or unlike property and buys a replacement property similar or related in service or use to the involuntarily converted property. This must generally be within 2 years after the year of the conversion.
There are differences between these two situations in which a taxpayer may defer the gain from an involuntary conversion. Under the first circumstances, deferral of the gain would be mandatory if the only thing you receive in return is a similar or related property in service or use.
Under the second set of circumstances, the taxpayer may choose to defer the gain from an involuntary conversion by using the conversion’s proceeds to purchase a replacement property. Gain will be recognized to the extent that the proceeds from the conversion had not been used to purchase a replacement property.
An example of this would be if a person receives insurance money of $5,000 for their car that was destroyed in a fire. The basis in their car was $3,000. They use $4,000 to purchase a car, so they will need to recognize $1,000. This is because they realized a gain of $2,000 from the conversion and only used $4,000 of the $5,000 proceeds.
Are Losses Also Deferred In An Involuntary Conversion? What Is The Basis Of My New Property?
In short, no. The involuntary conversion rules only apply to deferral of gains. Losses might be deductible if the involuntarily converted property was used in a business or for the production of income. This means that losses from personal use property, except theft, are generally not deductible.
If your new property was acquired under the first set of circumstances discussed above, the basis of your new property is generally your basis in the involuntarily converted property. If you purchased your new property under the second set of circumstances, the basis of your new property is the amount that you paid for the new property, less any gain not recognized from the involuntary conversion.
To continue the above example, the person will have a basis of $3,000 for the purchased car. This is because $4,000 cost – $1,000 gain not recognized.
Do I Need A Lawyer For Help With Involuntary Conversion?
Tax laws are complex and ever-changing. You should consult with a business attorney if you have any questions or issues, especially associated with involuntary conversion.
Your tax lawyer can help you understand your legal rights, options, and obligations according to your state’s specific tax laws. Additionally, an attorney will also be able to represent you in court, as needed, should legal action become necessary.
