Corporate Tax: Definition, Deductions, How It Works

What Is Corporate Tax?

A corporate tax is a tax on the profits of a corporation. The taxes are paid on a company's taxable income, which includes revenue minus cost of goods sold (COGS), general and administrative (G&A) expenses, selling and marketing, research and development, depreciation, and other operating costs.

Corporate tax rates vary widely by country, with some countries considered to be tax havens due to their low rates. Corporate taxes can be lowered by various deductions, government subsidies, and tax loopholes, and so the effective corporate tax rate, the rate a corporation actually pays, is usually lower than the statutory rate; the stated rate before any deductions.

Understanding Corporate Tax

The federal corporate tax rate in the United States is currently a flat 21%, as a result of the Tax Cuts and Jobs Act (TCJA), which President Donald Trump signed into law in 2017 and which went into effect in 2018. Previously, the maximum U.S. corporate income tax rate was 35%.

U.S. corporate tax returns are generally due by the 15th day of the fourth month following the end of the corporation's tax year. Corporations may request a six-month extension to file their corporate tax returns in September. Installment payment due dates for estimated tax returns occur in the middle of April, June, September, and December. Corporate taxes are reported on Form 1120 for U.S. corporations. If a corporation has more than $10 million in assets, it must 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 with 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 deducting insurance premiums, travel expenses, bad debts, interest payments, sales taxes, fuel taxes, and excise taxes. Tax preparation fees, legal services, bookkeeping, and advertising costs can also be used to reduce business income.

Special Considerations

A central issue relating to corporate taxation is 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. Instead, a business may register as an S corporation and have all income pass-through to the business owners. An S corporation does not pay corporate tax as all taxes are paid through individual tax returns.

Advantages of a Corporate Tax

Paying corporate taxes can be more beneficial for business owners than 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, too.

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.