Corporate Income Tax

Corporate Income Tax is a tax on the profit earned by businesses within a state or jurisdiction, specifically corporations. This tax is usually calculated on the corporation's income after deducting business expenses, and the rate can vary widely depending on the state in which the corporation operates.

• How It's Calculated: Based on the corporation's total income minus deductible business expenses.
• Purpose: To fund government programs and services, as it's a significant revenue source for governments nationwide.
• Rates and Variability: Rates vary by state; some areas offer tax breaks or reduced rates to encourage business investment.
• Annual Filing: Most corporations need to report their earnings and calculate their tax due annually.

Corporate income tax is a tax levied directly on corporations by a state's government. It applies to corporations' net income—meaning it's based on the money they earn after subtracting costs associated with running the business. This tax is specific to corporations and differs from individual income tax, which people pay on their personal income. The funds collected through corporate income taxes support various public programs, infrastructure, education, healthcare, and government administration.

How Corporate Income Tax Works

1. Calculate Total Revenue: The company's total earnings, including all sales, investments, and additional income.
2. Deduct Allowable Expenses: Expenses directly related to business operations, such as salaries, rent, utilities, cost of goods sold, and certain types of depreciation on equipment, are deducted from revenue. These deductions reduce the taxable income amount.
3. Determine Taxable Income: After deducting expenses, the corporation arrives at its taxable income.
4. Apply Corporate Tax Rate: The government sets a corporate tax rate, and this percentage is applied to the taxable income to determine the amount owed.

Different types of deductions and credits may also apply, potentially lowering the final amount a corporation owes. For example, some areas offer tax credits for research and development (R&D), environmental initiatives, or job creation.

Key Points

1. Corporate Tax Rates Vary: Rates vary widely around the nation. Some states, like Nevada, have no or low corporate tax rates to attract business, while others have higher rates (New Jersey, for example).‍
2. Progressive vs. Flat Rates: Some states use a progressive tax system for corporations, meaning the rate increases as the corporation's income increases. Others use a flat rate, where all corporations pay the same percentage regardless of income.‍
3. Double Taxation: In some cases, corporate income is taxed twice. First, the corporation pays corporate income tax on its profits. Then, when profits are distributed to shareholders as dividends, shareholders may also pay taxes on that income. This phenomenon is known as "double taxation."‍
4. Tax Evasion and Tax Avoidance: Tax evasion is illegal and involves corporations purposely hiding income or falsifying deductions to avoid paying taxes. Tax avoidance, on the other hand, involves legally minimizing tax payments through methods like utilizing deductions, credits, or corporate structuring to reduce taxable income.

Review our Startup Costs tool to see your jurisdiction's corporate income tax rate.

Why Do We Have Corporate Income Tax?

Corporate income tax helps governments fund programs and services that benefit society. These funds go toward building infrastructure, public health, education, public safety, and more. In some cases, governments use corporate income tax rates to control economic activity, for example, by offering tax breaks in specific industries to encourage investment or by lowering corporate rates to foster a more business-friendly environment.

Steps to Filing Corporate Income Tax

1. Preparation of Financial Statements:
   • Corporations prepare (or maintain) detailed financial statements, including profit and loss statements, balance sheets, and cash flow statements, to outline income and expenses.
2. Calculate Taxable Income:
   • Companies subtract allowed deductions and expenses from their revenue to determine taxable income.
3. Apply Tax Credits and Deductions:
   • Credits like R&D credits, energy-efficient initiative credits, and job creation incentives may be applied to reduce taxes owed.
4. Submit Tax Returns:
   • In the U.S., corporations use IRS Form 1120 for federal corporate income tax returns. States will have their own requirements, usually submitting to a local tax division.
5. Make Estimated Payments:
   • Corporations often make quarterly estimated payments throughout the year to avoid large tax bills at the end of the fiscal year.

Benefits of Corporate Income Tax Planning

Planning for corporate income taxes helps businesses maximize their resources while complying with tax regulations. Companies can use strategic planning to minimize their taxable income through lawful deductions and credits, and larger corporations may also structure their operations internationally to benefit from favorable tax jurisdictions.