What does corporation tax mean? A corporation(or corporate) tax is a tax levied on the earnings of a business. The taxable income of a company is determined by subtracting costs from revenue. It is subject to the federal corporate tax rate of 21% in the United States. These costs can include:
- Cost of goods sold (COGS)
- Administrative expenses
- Marketing expenses
- Research and development
- Depreciation expenses
- Other operational costs
L&Y Tax Advisor further explains ‘What does corporation tax mean?’. Different countries have different corporate tax rates. Some have lower rates than others. It makes them desirable as tax havens.
Businesses can lower their corporation tax obligation by taking advantage of:
- Several tax breaks
- Government subsidies
- Deductions
Because of this, businesses’ accurate tax rates, or the effective corporate tax rate, are frequently lower than the statutory rate.
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What is Corporate Tax?
The Tax Cuts and Jobs Act (TCJA) was enacted in 2017. It set the current federal corporation tax rate in the United States at 21%. In the past, 35% was the highest corporation tax rate. Corporations must file their tax returns by the 15th day of the fourth month after the end of their tax year. However, they can ask for a six-month extension.
Corporations must also pay expected taxes in April, June, September, and December. They report these taxes on Form 1120.
Some states also levy additional corporate income taxes. Rates in places like New Jersey range from a few percentage points to double digits.
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Corporate Tax Deductions
Through several deductions, corporations can lower their taxable revenue. Ordinary business costs are required to run the business. These are entirely deductible. If a company’s real estate and investment costs are meant to produce revenue, they can also be written off. The following are some additional deductible costs:
- Bonuses
- Tuition reimbursement
- Health benefits
- Staff pay
Corporations can also reduce their tax liability by deducting:
- Insurance premiums
- Travel expenditures
- Bad debts
- Interest payments
- Sales and fuel taxes
- Excise taxes
- Tax preparation fees
- Legal fees
- Accounting expenses
- Advertising expenditures
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Special Considerations
Double taxation is a significant problem in business taxation. Ordinary businesses pay taxes on their net income, and shareholders who receive dividends are also required to pay income tax on their profits.
To prevent double corporate tax, some companies register as S corporations and directly distribute profits to the owners. S firms avoid double taxation by taxing their income individually rather than paying corporate tax.
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Benefits of Corporate Taxation
Paying corporate taxes instead of extra individual income taxes is frequently advantageous for corporations. They can deduct:
- Retirement plans
- Tax-deferred trusts
- Family health insurance
Furthermore, companies have an easier time deducting losses than single owners, who must demonstrate a profit motivation to do so.
Another benefit is that businesses strategically plan for their tax liabilities by keeping their profits. Over time, this flexibility enables organizations to manage their financial health better.
What Does Corporation Tax Mean?
The tax that companies pay on their profits is known as corporate tax.
Is the 21% Corporation Tax Rate Permanent?
As demonstrated by previous legislative changes, the corporation tax rate is now fixed at 21%. However, it is subject to change based on governmental policy.
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Who Pays Corporate Income Tax?
Many economists contend that although firms must pay taxes, the cost is eventually transferred to:
- Shareholders in the form of lower returns
- Consumers in the form of higher prices
- Employees in the form of lower salaries
The Bottom Line
To manage their tax responsibilities, businesses must comprehend ‘What does corporation tax mean?’. The federal corporation tax rate in the United States is 21%. However, extra state taxes may apply. Through careful financial planning, subsidies, and deductions, corporations aim to reduce their tax liability. By managing their corporate tax responsibilities well, businesses can maximize their financial performance and maintain tax compliance.
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