July 26, 2018
For new business owners or anyone entering the corporate world for the first time, corporate income tax can seem like a minefield. Let’s look at it in a little more detail:
What is Corporate Income Tax?
Corporate income tax is an entity-level tax applying only to C corporations. Corporate profits can also be subject to another, second degree of taxation at individual shareholder level, on dividends when distributed and on capital gains from the sale of shares. The highest tax rate on dividends and capital gains is at 23.8% now, which includes the 3.8% tax on net investment income.
There are many businesses based in the U.S. who are not subjected to this income tax, and instead are taxed as what are called ‘flow-through’ entities. These businesses don’t face entity level taxes, but the owners of these businesses are required by law to include their allocated share of the profits in their taxable income under the individual income tax.
‘Flow-through’ entities can be sole proprietorships, partnerships and corporations that are eligible and choose to be taxed under subchapter S of the Internal Revenue Code (S corporations).
Taxable corporate profits explained:
The profits of US resident corporations are subject to taxes at rates that are graduated, from 15% up to 35%, and most corporate income falls into the maximum rate.
Taxable corporate profits are those that are equal to the receipts less allowable deductions of a corporation, and can include anything from sold goods, to wages, employee compensation, depreciation and advertising.
Residents of the U.S. who are multinationals are required to pay tax on their profits made worldwide, but the taxable profit from their controlled foreign subsidiaries is deferred until those profits are paid back as dividends to the parent corporation in the U.S. Double taxation can be avoided by U.S. multinationals being able to claim a credit for taxes paid to foreign governments on income that was earned overseas, but only up to their U.S. tax liability on that income.
Corporations that are based in the United States but are owned by foreign multinational companies are subject to the same U.S. corporate tax rules on their profits from business undertaken in the U.S. as U.S. owned corporations.
Corporate income tax in the U.S. is the third largest source of federal revenue after income taxes applying to individuals and payroll taxes, and in recent years has brought in revenues equal to around 2% of GDP with minor fluctuations.