Corporate Tax

Loading the player...

What is a 'Corporate Tax'

A corporate tax is a levy placed on the profit of a firm to raise taxes. After operating earnings is calculated by deducting expenses including the cost of goods sold (COGS) and depreciation from revenues, enacted tax rates are applied to generate a legal obligation the business owes the government. Rules surrounding corporate taxation vary greatly around the world and must be voted upon and approved by the government to be enacted.

BREAKING DOWN 'Corporate Tax'

U.S. corporate tax returns are typically due March 15. Corporations may request a six-month extension to have corporate tax returns due in September. Installment payment due dates for estimate tax returns occur in the middle of April, June, September and December. Corporate taxes are reported using Form 1120 for U.S. corporations. If the corporation has more than $10 million in assets, it is required to file online.

Corporate Tax Deductions

Corporations are permitted to reduce taxable income by certain necessary and ordinary business expenditures. All current expenses required for the operation of the business are fully tax deductible. Investments and real estate purchased for the intent on generating income for the business are also deductible. A corporation can deduct employee salaries, health benefits, tuition reimbursement and bonuses. In addition, a corporation can reduce its taxable income by insurance premiums, travel expenses, bad debts, interest payments, sales taxes, fuel taxes and excise taxes. Tax preparation fees, legal services, bookkeeping and advertising costs are also used to reduce business income.

Double Taxation and S Corporations

A central issue relating to corporate taxation relates to the concept of double taxation. Certain corporations are taxed on the taxable income of the company. If this net income is distributed to shareholders, these individuals are forced to pay individual income taxes on the dividends received. To work around this issue, a business may register as an S corporation and have all income pass-through to business owners. An S corporation does not pay corporate tax as all taxes are paid through individual tax returns.

Advantages of Corporate Taxation

Paying corporate taxes can be more beneficial for business owners when compared to paying additional individual income tax. Corporate tax returns deduct medical insurance for families as well as fringe benefits including retirement plans and tax-deferred trusts. It is easier for a corporation to deduct losses. A corporation may deduct the entire amount of losses, while a sole proprietor must provide evidence regarding the intent to earn a profit before the losses can be deducted. Finally, profit earned by a corporation may be left within the corporation allowing for tax planning and potential future tax advantages.

RELATED TERMS
  1. IRS Publication 542

    A document published by the Internal Revenue Service (IRS) that ...
  2. Effective Tax Rate

    The average rate at which an individual or corporation is taxed. ...
  3. Tax Rate

    The percentage at which an individual or corporation is taxed. ...
  4. Taxes

    An involuntary fee levied on corporations or individuals that ...
  5. Income Tax

    A tax that governments impose on financial income generated by ...
  6. Tax Base

    The assessed value of a set of assets, investments or income ...
Related Articles
  1. Personal Finance

    Explaining Corporate Tax

    A corporate tax is a tax levied on the profits a corporation generates.
  2. Personal Finance

    The Impact Of U.S. Corporate Taxation On Investment Decisions And CFC Transfer Pricing

    To avoid taxation, businesses do careful tax planning, taking into consideration more than one country's taxation system.
  3. Personal Finance

    Taxes in New York for Small Business: The Basics

    Learn how small businesses are taxed in New York, and understand how tax rates vary based on whether the business is an S corporation, LLC or partnership.
  4. Personal Finance

    Taxes in California for Small Business: The Basics

    Understand the tax implications of running a small business in California, and learn which state taxes apply based on business type.
  5. Personal Finance

    Is Multinational Tax Avoidance at an End?

    Are governments doing enough to end corporate tax avoidance?
  6. Personal Finance

    Understanding Taxes

    Taxes are mandatory fees that individuals and corporations must pay to their governments.
  7. Personal Finance

    The Benefits Of Corporate Inversion

    Many U.S. companies have found it advantageous to relocate their headquarters rather than face the highest corporate tax rates in the world regardless of whether income was earned domestically ...
  8. Personal Finance

    Explaining Double Taxation

    Double taxation refers to income taxes being imposed twice on the same source of earned income.
  9. Investing

    What is Profit Before Tax?

    Profit before tax measures a company’s profits before it pays corporate income tax.
  10. Personal Finance

    Corporate Inversion: How It Works

    Large corporations are making all kinds of moves to decrease expenses and increase profits in an increasingly competitive global market.
RELATED FAQS
  1. How does the effective tax rate for an individual differ from that of a corporation?

    Read about the effective tax rate for individuals when compared with the effective tax rate for corporations, including how ... Read Answer >>
  2. How can I avoid corporate taxes if most of my assets are in real estate and owned ...

    I am 62 years old and currently make a living renting the real estate I own. All of my assets are in real estate. I don't ... Read Answer >>
  3. How can I lower my effective tax rate without lowering my income?

    Discover how to reduce your effective tax rate without losing income by maximizing adjustments and deductions, earning tax-free ... Read Answer >>
  4. What is the difference between a write-off and a deduction?

    Understand the differences between a tax write-off and a tax deduction. Learn how each one works to reduce income taxes and ... Read Answer >>
  5. What is the difference between a state income tax and a federal income tax?

    Learn the difference between state income tax and federal income tax based on tax rates, deductions, tax credits and taxable ... Read Answer >>
  6. If you have a house that is under your company name and you want to sell it back ...

    The answer to this question really depends on the type of legal entity your business is operated through. Businesses may ... Read Answer >>
Trading Center