Corporate Tax: What Is It, Deductions, and FAQs

Alex Kehayias | Apr 21, 2024

Corporate Tax: What Is It, Deductions, and FAQs

If you’ve recently formed a corporation, you’re probably learning that the tax environment is much different from the one you were used to when you worked for someone else.

Corporate income tax has many unique requirements and allows corporations to take deductions unavailable to individuals. We have everything you need to know about corporate tax systems.

What Is Corporate Tax?

Corporate income tax is the percentage of taxes corporations must pay on their taxable income. Taxable income is generally income minus expenses and qualified deductions, which only accounts for profit.

Nonprofit corporations and corporations that spend more money than they make in a given year won’t have to pay taxes due to their operating loss. Corporations that generate a profit will have a tax liability.

The standard corporate income tax rate in the United States is 21 percent, although corporations rarely pay that much in taxes. Tax advisors often help corporations find deductions and utilize tax laws to their advantage in order to minimize tax liability.

How Does Corporate Tax Work?

The previous government administration recently lowered the corporate tax rate from 35 to 21 percent via the Tax Cuts and Jobs Act (TCJA). Corporate taxes are fully due by April 15 for most businesses, but some businesses may have their tax years structured differently. Corporations are able to request an extension of up to six months on their taxes if they meet the eligibility criteria.

The IRS expects corporations to pay corporate taxes in quarterly installments based on income estimates and projections from the previous tax year. Your corporation may not have accurate data for estimated tax installments if it’s your first year in business because you won’t have a previous fiscal year to utilize for your calculations.

Most corporations in the United States can utilize a traditional paper tax form and file by mail, but filing online is often far more convenient. Corporations with over $10 million in assets cannot use paper filing methods. They’re required to utilize online filing for large income tax reports.

In addition to federal corporate taxes, some states will impose their own taxes on businesses registered in or operating within a state. State corporate tax rates can vary significantly in states that utilize them.

What Are Common Corporate Tax Deductions?

Almost any cost deemed necessary for the purposes of doing business can be deducted as a business expense. This includes products and services necessary for the operation of the business, including salaries paid to employees, consultants, and contractors. Professional services like accountant fees or fees paid for tax preparation (to a tax lawyer or accountant) are also deductible.

Some costs associated with employee benefits can be deductible. Employers who offer tuition reimbursement or assistance to their employees may be able to deduct the cost of employee education if their education is relevant to the work they perform for the corporation. Healthcare costs for employees are also often deductible.

Every business will have unique tax circumstances. It’s best to consult with a tax professional when determining your eligible deductions to assure compliance with the law. If you’re unsure about whether or not you may qualify for a specific deduction or what the maximum threshold for a deduction should be, it’s wise to let an expert make that determination on your behalf.

Remember that it’s best to err on the side of caution to avoid creating potentially serious discrepancies on your tax return. Errors can result in hefty penalties or audits that may be difficult for a small business to withstand.

Do All Corporations Have To Pay Corporate Tax?

Certain types of non-profit corporations can apply for special tax exemptions that would allow them to forgo paying certain types of taxes if deemed eligible by the Internal Revenue Service.

S corporations are an exception to the rule. With an S corporation, income is divided among members who each file separate tax returns on their profit share. Filing a corporate tax return would result in double taxation. As long as all of the profit is distributed within the partnership and each partner files an individual income tax return, there’s no reason to file a business return.

Tax policy dictates that corporations will automatically be classified as C corporations unless they specifically elect to be treated as an S corporation. Make sure you’re not being treated as a C corporation at the time of your tax due date.

If you haven’t become recognized as an S corporation, you’ll need to pay taxes on corporate income as per the requirements for C corporations.

Corporate Tax FAQs

Corporate tax laws and requirements are heavily detailed and are sometimes difficult to understand. You may have a few questions when you’re reviewing tax requirements and attempting to calculate your federal taxable income and your total tax due.

Here are some frequently asked questions:

Do I Have to Pay Corporate Tax as a Sole Proprietorship?

Corporate tax isn’t the same as paying taxes as a sole proprietorship. Sole proprietorships don’t have corporate profits because all of the profit goes to one person. Sole proprietorships and independent contractors are treated as individual taxpayers for federal income tax purposes.

You have the ability to take deductions for your work-related expenditures just like you would with any other type of business tax situation, but you’re always filing as an individual.

What Is the Minimum Tax a Corporation Can Pay?

The minimum tax is 21 percent of net income on paper, but this figure is just an estimation. Some corporations are able to successfully and legally whittle their tax liability down to bare bones with the help of a corporate tax expert.

Your effective tax rate will likely differ from the tax code specifications. Plan to earmark 21 percent of your net income for tax purposes and be satisfied if you have some earmarked funds left over.

What Is Net Income?

Net income is business income after all qualifying business expenses are deducted. The amount of money a business generates over the course of a fiscal year isn’t all profit because businesses need to spend a lot of money on operating expenses.

Gross income is the total amount of money that came in during the year, and net income is what’s left over when all expenses are accounted for.

Does Corporate Tax Include Sales Tax?

Sales tax is different from corporate tax. Federal U.S. corporate tax is a tax payment on your income that you send to the IRS as an electronic or check-by-mail tax payment. Sales tax is money you collect from your customers and remit to the state government. Sales tax isn’t directly your financial burden. You may need a permit to collect sales tax in your state.

What Is the Difference Between an LLC and a C Corp?

C corporations are the primary business entities around which tax laws are designed. LLCs (limited liability corporations) can be treated as pass-through businesses, meaning single-owner LLCs can choose to file a personal tax report that details their business income rather than a corporate tax return subject to corporate tax laws.

It’s best to speak with a tax professional when making a decision regarding which type of business entity will work best for you.

Is It Better To Establish a Corporation in Another Country?

People with significant startup capital sometimes contemplate establishing their corporations in a country with no corporate tax, like the Bahamas. This isn’t an easy decision to make.

Some business owners may find that it’s worth the advantage to establish their corporations elsewhere, but it’s important to note that you’re trading the protections and convenience unique to establishing your corporation in the United States.

Like with any major business decision, it’s best to consult with professionals who understand the specifics of your situation.

Automating Tax Compliance With Mosey

Massive corporations have huge teams, special departments, and hired experts to ensure compliance with tax laws. If you’re a smaller business, your dedicated team likely works overtime to help keep things on track. Let Mosey ease the workload.

Our automated business compliance systems run in the background while your team focuses on innovating, serving, and paving new pathways to success. Mosey can send you state-specific alerts and help you manage tax filing requirements, compliance, and deadlines.

Schedule a demo with us to learn how Mosey can make it easier to run your small business.

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