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 are 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.

Federal Corporate Tax Rate 

The federal corporate tax rate in the United States is currently 21 percent. This was put into law under the Tax Cuts and Jobs Act (TCJA) under President Donald Trump and went into effect as of 2018. This consolidated corporate tax brackets with a maximum rate of 35 percent. Any other corporate taxes are levied at the state and local levels. 

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 of 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. Taxes

    An involuntary fee levied on corporations or individuals that ...
  2. Foreign Tax Deduction

    The foreign tax deduction is a deduction that may be taken for ...
  3. Total Tax

    The composite total of all taxes owed by a taxpayer for the year, ...
  4. Tax Rate

    A tax rate is the percentage at which an individual or corporation ...
  5. Tax Return

    A tax return is a form(s) filed with a taxing authority on which ...
  6. Direct Tax

    A direct tax is a tax paid directly by an individual or organization. ...
Related Articles
  1. Taxes

    How the GOP Tax Bill Affects You

    Here's how the new tax bill changes the taxes you file in 2018.
  2. Taxes

    Making Sense of the 2017 Tax Changes

    Here is a brief overview of some of the changes introduced by the Tax Cuts and Jobs Act of 2017, and how they may affect your taxes.
  3. Taxes

    Trump Signs Tax Reform Bill

    The president signed the GOP's overhaul of the federal tax code into law.
  4. Taxes

    9 Ways the New Tax Law Affects Millennials

    The new tax bill, the Tax Cuts and Jobs Act, includes some important changes for Millennials.
  5. Taxes

    Who Loses Under the New Tax Provisions? Homeowners

    The tax code overhaul reduces the tax advantages of owning a home.
  6. Taxes

    Why You Should Itemize Your Tax Deductions

    This strategy of moving your tax deductable payments and donations to the following year could mean hundreds more on your return.
  7. Taxes

    Is Multinational Tax Avoidance at an End?

    Are governments doing enough to end corporate tax avoidance?
  8. Taxes

    Highest Corporate Taxes By Sector

    The amount a U.S. company pays in tax depends upon the sector it is in.
  9. Taxes

    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 ...
  10. Taxes

    Preparing for Potential Tax Policy Changes

    Here is a comprehensive guide to tax planning in an environment where policies could dramatically change under new leadership in Washington.
RELATED FAQS
  1. 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 >>
Hot Definitions
  1. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  2. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  3. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  4. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  5. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  6. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
Trading Center