Corporate Tax

A corporate tax, also known as a corporation or company tax, is a type of fee imposed by the federal government on a business's profits. According to the Federal Tax Cuts and Jobs Act of 2017, the current federal corporate tax rate is twenty-one percent. This means that after all business expenses have been deducted, a corporation will be required to pay the federal government twenty-one percent of its total revenue when filing a federal corporate tax return.

For example, suppose that after deducting all legitimate business expenses your corporation made $1 million dollars in revenue. At the time you file your business's federal corporate tax return, you will owe twenty-one percent of that $1 million dollars in taxes to the federal government (i.e., $210,000).

It is important to keep in mind that the federal corporate tax rate is subject to change. Also, states may impose their own separate corporate income tax rates in addition to the federal corporate tax.

Not every state applies a state corporate income tax rate, however, and those that do tend to have rates that vary widely based on jurisdiction. The standard range for state corporate income tax rates is between one and twelve percent, with most state rates averaging in the middle.

In continuing with the above example, if you live in a state that applies its own separate corporate income tax rate, such as Kentucky (i.e., five percent rate), you will need to deduct both the federal (i.e., $210,000) and state (i.e., $50,000) tax amounts from your total revenue. Thus, you will owe $260,000 in federal and state taxes, which means you will be left with $740,000 of your total profits.

What Are Some Examples Of Corporate Taxes?

In addition to federal and corporate taxes, a corporation may also be required to pay taxes that are specific to certain divisions of a business. Some examples of common types of corporate taxes that a business may be required to pay include:

Employment or Payroll Taxes: These taxes refer to the percentage that is taken out of an employee's paycheck. They may be used to pay off taxes, such as those for social security benefits and Medicare, or unemployment;
Real Estate Taxes: Some businesses may be required to pay real estate taxes on property that it owns. An example of this would be if a corporation owns the building in which it operates;
Estimated Taxes: In some cases, a business may need to make installment payments on taxes, such as periodically throughout a given tax year. This is generally required when a business expects to owe $500 or more in federal income taxes;
Franchise Taxes: Some states place a special kind of tax on businesses that want to operate or remain open in their specific state, which is known as a franchise tax; and/or
Excise Taxes: Excise taxes are only applied to specific goods such as alcohol, gasoline, cigarettes, some luxury goods, and other items that are regulated by various tax laws.

What Is The Corporate Accumulated Earnings Tax?

When a corporation accumulates earnings without a reasonable business need, and does not distribute out dividends to its shareholders, the corporation may be held liable for the accumulated earnings tax. This would be in addition to its regular corporate income tax as was previously discussed.

However, not all corporations will be subject to the accumulated earnings tax. The following types of corporations are generally not subject to the accumulated earnings tax:

Personal holding companies;
Foreign personal holding companies;
Tax-exempt organizations;
Foreign passive investment companies; and
S corporations

Essentially, the accumulated earnings tax is a 15% tax on the corporation's “accumulated taxable income” for the tax year. Generally speaking, a corporation's “accumulated taxable income” is calculated as follows:

The corporation's regular taxable income;
Minus certain federal taxes;
Minus excess charitable deductions;
Plus dividends received deductions;
Plus net operating losses;
Minus certain capital gains and losses;
Minus dividends paid to shareholders; and
Minus accumulated earnings credit

Accumulated earnings credit is the greater of the following two amounts:

$250,000 or $150,000 for personal service corporations, less the amount of accumulated earnings and profits at the end of last tax year; or
The amount of current year earnings and profits that are retained for reasonable business needs, in excess of dividends paid to the shareholders, less the net capital gains deducted in calculating accumulated taxable income.

“Earnings and profits” is not the same as a corporation's taxable income. Rather it resembles more of the corporation's “book” or accounting income. “Accumulated earnings and profits” is a running total of the corporation's earnings and profits over the years, less the amount of dividends paid to shareholders during the current tax year; but, no later than 2 months and 15 days after the close of the tax year.

Reasonable business needs may include any of the following:

Expansions of planned facilities and activities;
Acquisitions of related businesses;
Loans intended to help customers and suppliers of the corporation;
Reserves to meet competition; and
Contingent liabilities that are considered to be realistically foreseeable.

How Do I Determine the Amount of Income Tax My Business Owes?

The amount of income tax that a business owes will be based on various state and federal laws as well as the type of business structure that was chosen when the company was initially formed or registered. Each kind of business organization is taxed differently.

For example, corporations are usually taxed in one of two ways: as a C corporation or an S corporation. Consider the following discrepancies:

C Corporation: C corporations have what many refer to as a “double-taxation” issue. C corporations are first taxed at the corporate level. If the business has enough revenue left over to distribute dividends to its owner or shareholders, then those dividends will be taxed again both on the corporate level and at the shareholder or personal level. Hence, the term “double-taxation” because the entity and owners are taxed twice for the corporation's dividends.
S Corporation: Unlike C corporations, S corporations are a form of pass-through entities. Under this type of business organization, the business itself will not be required to pay federal income taxes. The corporate shareholders or owners, however, will need to claim the portion of income they receive from a business's profits on their personal income tax returns.

Businesses may also be able to change their elected tax status, which can help to lower the amount of taxes they owe on company revenue.

For instance, a C corporation may want to switch their elected tax status to an S corporation. S corporations are not subject to the double-taxation issue found in C corporations. Thus, this may reduce the amount of income taxes that business owners have to pay since they will only need to report it a single time on their personal tax returns.

How Can I Avoid Paying The Accumulated Earnings Tax?

There are several ways in which a corporation can avoid paying this additional tax:

Pay dividends to shareholders during the tax year, or within 2 ½ months after the close of the tax year, as was previously mentioned;
Issue consent dividends to shareholders, which are treated just like regular dividends to the recipient for income tax purposes, but they do not need to be actually paid out by the corporation;
Retain earnings for reasonable business needs and document them in a “specific, definite, and feasible ”plan; and/or
Do not keep an accumulated earnings balance that exceeds $250,000, or $150,000 for personal service corporations.

How Do I Determine The Amount Of Income Tax That My Business Owes?

The amount of income tax that a business owes will be based on various state and federal laws, as well as the type of business structure that was chosen when the company was initially formed or registered. Each kind of business organization is taxed differently.

Corporations are generally taxed in one of two ways:

C Corporation: C corporations have what is known as a “double-taxation” issue. C corporations are first taxed at the corporate level. If the business has enough revenue left over to distribute dividends to its owner or shareholders, those dividends will be taxed again both on the corporate level and at the shareholder or personal level; or
S Corporation: Unlike C corporations, S corporations are a form of pass-through entities. The business itself will not be required to pay federal income taxes; however, the corporate shareholders or owners will need to claim the portion of income that they receive from a business's profits on their personal income tax returns.

Businesses may also be able to change their elected tax status, in an effort to lower the amount of taxes they owe on company revenue. An example of this would be if a C corporation wanted to switch their elected tax status to an S corporation because S corporations are not subject to the double-taxation issue found in C corporations. Doing so could reduce the amount of income taxes that business owners must pay, because they will only need to report it one single time on their personal tax returns.

How Are Partnerships and LLCs Taxed?

In general, partnerships and LLCs have similar tax arrangements. Depending on the number of LLC members and how those members elect to be taxed, the IRS may treat the business as either a corporation, partnership, or as a disregarded (i.e., pass-through) entity.

For instance, the IRS typically treats LLCs that are owned by multiple members as partnerships. Although a partnership does not have to pay any taxes itself, its members will be taxed in accordance with their share of profits from the company.

This is true even if the company funds remain in a business's bank account for the purposes of covering future expenses and are never actually distributed to individual members. Regardless, members must still pay taxes on that income.

Despite this fact, however, the company must file a business tax return with the IRS. This entails a separate form and process than what is required of individual members or partners of the business who are taxed separately. Individual members and/or partners will still need to pay taxes on a business's profits and file certain forms with the IRS.

On the other hand, single-member LLCs (i.e., companies not owned by multiple LLC members) are considered pass-through entities by the IRS. This means that the business itself will not be required to pay taxes, but rather its income will be reported on member-owners individual tax returns. LLC members must inform the IRS about any profits and/or losses when filing their personal income tax returns.

In addition, some states may also require owners or members who are actively involved in the day-to-day operations of a business to pay self-employment taxes. If it is necessary to pay self-employment taxes, then owners or members of the company will be permitted to deduct legitimate business expenses from company revenue on their tax returns.

Lastly, it should be noted that some changes have been made to the U.S. Federal Tax Code in regard to claiming deductions on income taxes. Thus, it is important to consult a corporate tax attorney or Certified Public Accountant (“CPA”) for questions about the law and certain tax deductions prior to filing a business or personal tax return.

What About Sole Proprietorships?

A sole proprietorship is also considered a type of pass-through entity. In other words, any income or profits earned by a sole proprietorship will “pass through” the business, and then must be claimed on the business owner's personal income tax returns instead.

Legitimate business expenses, such as costs for office supplies and/or services, may be deducted from a business's profit margins. Depending on the state, business owners who are responsible for overseeing the day-to-day operations of a company may have to pay self-employment taxes as well.

What Types of Corporations Get Tax Breaks?

Corporate tax laws can sometimes be very complicated, and can be confusing to understand. What's more, corporate tax laws are very different from state to state. Some corporations are associated with certain tax breaks or tax benefits. Some corporate forms that are associated with unique tax treatment may include:

Non-Profit Corporations: These may be eligible for certain tax breaks, deductions, and refunds based on charitable activities and charitable giving.
Foreign Corporations: A foreign corporation is a corporation that is incorporated in a different state from the state(s) of its business activity. Some states such as Delaware offer more lenient tax treatment. Such states are known as corporate haven states.

Lastly, while not specifically a “tax break”, there are major differences between C corporations and S corporations. In a C corporation, it is the corporation that pays taxes as an entity. With S corporations, it is the shareholders who pay taxes.

This can spell different results depending on the yearly profits for the corporation. Companies that file as S corporations need to beware of double taxation issues. On the other hand, members of C corporations often experience various tax-free benefits, since it is the corporation that handles the taxes.

What Happens if a Corporation Violates Tax Laws?

In most cases, the corporation needs to specifically request for the tax credit or deduction. On the other hand, altering tax information in order to make the company appear eligible for a tax break can be considered a violation.

If the company is found to be in violation of a corporate tax law, it may prompt an investigation by a government agency. This may involve a close examination of the company's tax documents to determine if there are any issues with fraud or other types of white collar crime. This can often be a complicated process.

What Are the Penalties for Corporate Tax Violations?

Penalties for corporate tax violations may include:

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Loss or suspension of business operating licenses
In some cases, criminal charges and criminal fines
Civil damages if other parties suffered losses due to the violation

Do I Need to Talk to a Corporate Tax Attorney?

Corporate tax laws are notoriously difficult to interpret and apply properly without enlisting the help of a corporate tax attorney. These laws are also constantly subject to changes each year, so you may need a legal or tax expert (e.g., a CPA) to inform you about any updates and whether they will affect your specific tax situation.

In addition, a corporate tax attorney can assist you in devising useful corporate tax strategies. For example, corporate taxes are based on the type of business you operate as well as on the tax laws enacted in a particular state.

A corporate tax attorney can counsel you on the different tax strategies you can employ to help you save money on business taxes. Your lawyer can also give you advice on how to handle your business taxes going forward.

Thus, if you have any questions on paying corporate taxes or are interested in learning more about corporate tax strategies to boost your business's chances of success, you should contact a qualified business lawyer for further information.

Hiring an attorney is especially necessary if you are being charged or sued for issues involving corporate taxes or need to settle a claim with the IRS. Your lawyer will be able to guide you through the different legal and governmental procedures for both.

Call our office today at 212-994-7777 or complete the convenient online contact form to set up a consultation.

Corporate Taxation