A corporate tax, also known as a corporation or company tax, is a type of fee 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%; meaning, that after all business expenses have been deducted, a corporation will be required to 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, which would be $210,000.
However, 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. Not every state applies a state corporate income tax rate, and those that do generally have rates that vary considerably based on jurisdiction. The standard range for state corporate income tax rates is between 1-12%, with most state rates averaging in the middle.
To expand on the above example, Kentucky is a state that applies its own separate corporate income tax rate at 5%. You must deduct federal ($210,000), and state ($50,000) tax amounts from your total revenue. As such, you will owe $260,000 in federal and state taxes, leaving you with $740,000 of your total profits.
What Corporate Taxes Does My Business Have To Pay?
Aside from federal and corporate taxes, a corporation may also pay taxes that are specific to its circumstances. Some common types of corporate taxes that a business may pay include:
- Employment or Payroll Taxes: 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, which is generally required when a business expects to owe $500 or more in federal income taxes;
- Franchise Taxes: Some states place a special kind of tax on businesses that want to operate or remain open in their specific state, known as a “franchise tax,”; and
- Excise Taxes: Excise taxes are only applied to specific goods, such as alcohol, gasoline, cigarettes, some luxury goods, and other items regulated by various tax laws.
What Are Corporate Tax Rates?
Corporate tax rates refer to the taxes that businesses must pay as registered corporations. These may be different rates and values for other forms of businesses, such as a sole proprietorship or partnership. Corporate tax rates also differ from income taxes that individuals pay at the end of the year.
Various factors can change the rates at which a corporation is taxed, which include but may not be limited to:
- State of Incorporation: Choosing where to incorporate can affect specific tax rates, especially the franchise tax that is paid to the state. As was previously mentioned, this figure will vary according to state;
- Business Activities: Non-profit corporations generally have different tax needs due to their involvement with charitable expenses and charitable giving. As such, they are taxed differently than for-profit enterprises; and
- C vs. S Corporations: C corporations require the corporation itself to handle taxes, while S corporations require the shareholders to pay the taxes. This can translate into radically different tax figures for the company.
Finally, it is always recommended that you monitor the corporation’s tax documents and perform regular inspections of tax books and accounting documents. Tax violations can result in costly penalties for the company, which can drain the corporation’s time and resources. Negligent bookkeeping is sometimes responsible for tax violations and penalties, while intentional tax violations are generally punishable under criminal laws.
The Tax Cuts and Jobs Act (“TCJA”) reduced the top corporate income tax rate from 35% to 21%. TCJA also eliminated the graduated corporate rate schedule and the corporate alternative minimum tax. The TCJA allows full expensing of most new investments through 2022.
What Types Of Corporations Receive Tax Breaks?
Corporate tax laws can be considerably complicated and, as such, can be confusing to understand. Additionally, corporate tax laws differ dramatically from state to state, as previously discussed.
Some types of corporations are associated with specific tax breaks or benefits. Some of the corporate forms that are associated with unique tax treatment may include:
- Non-Profit Corporations: Non-profit corporations may be eligible for certain tax breaks, deductions, and refunds based on their charitable activities and charitable giving;
- Foreign Corporations: A foreign corporation is a corporation that is incorporated in a different state from the state(s) of its business activity. An example of this would be how some states, such as Delaware, offer more lenient tax treatment and are known as corporate haven states; or
- Delaware and Nevada Corporations: As was previously mentioned, many businesses choose to file in Delaware in order to take advantage of the unique corporate laws provided by the state. Nevada is another similar state.
While not specifically a “tax break,” there are distinguishable differences between C corporations and S corporations. Under a C corporation, it is the corporation that pays taxes as an entity. However, with S corporations, it is the shareholders who pay taxes.
This can result in very different results depending on the yearly profits for the corporation. Companies that file as S corporations must beware of double taxation issues. Alternatively, members of C corporations frequently enjoy various tax-free benefits because the corporation handles the taxes.
What Happens If A Corporation Violates Tax Laws? What Are the Penalties for Corporate Tax Violations?
Generally speaking, the corporation must request a tax credit or deduction to receive it. However, altering tax information to make the company appear eligible for a tax break is considered a violation of tax laws.
If the company violates corporate tax law, this could initiate an investigation by a government agency which may involve a close examination of the company’s tax documents. This would determine any issues associated with fraud or other types of white-collar crime.
Penalties for corporate tax violations include, but may not be limited to:
- Fines;
- Loss or suspension of business operating licenses;
- Criminal charges and criminal fines under specific circumstances; and
- Civil damages if other parties suffered losses as a result of the violation.
Do I Need A Lawyer For Help With Corporate Tax Breaks?
Corporate tax laws and corporate tax breaks can be confusing to understand. You should hire a tax lawyer in your area if you have any questions regarding the business laws in your state, such as how your corporation may be taxed.
An attorney can assist you in preparing tax documents, filing papers with the court, and representing you as needed should any legal issues arise. Also, tax laws can be subject to frequent change, but an attorney can keep you informed of any changes that might affect your rights.
