Corporate Tax

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A corporate tax is imposed by the government on a business’s profit. The amount that is collected from corporate taxes is used as a source of income spent on the nation. The operating earnings of an entity are calculated by deducting expenses which include the cost of goods sold and depreciation from revenues. Afterward, tax rates are applied to generate a business’s legal obligation that it owes the government.

Corporate taxation rules vary around the world, and they are approved by a country’s government to be enacted. The federal corporate tax rate in the United States was previously 35%, which now reduced to a flat 21%, signed into law by President Donald Trump in 2017 in the Tax Cuts and Jobs Act (TCJA).

Tax returns in the U.S. are typically due on March 15. However, in September, a six-month extension can be requested by corporations to file their corporate tax returns. Corporate taxes are reported on Form 1120 for U.S. corporations. Filing an online tax return is a must for corporations that has more than $10 million in assets.

The IRS extended the April 15, 2020 tax filing deadline to July 15, 2020, for individuals and businesses due to the COVID-19 pandemic. Form 7004 is used by businesses that need an extension to file beyond the due date. The tax filing deadlines for individuals and businesses were also extended by most states, e.g. Idaho set the filing date of June 15. The deadlines for tax filing were extended without penalty due to the coronavirus pandemic.

Corporations may choose their tax year. It must be 52/53 weeks or 12 months. The tax year should not be the same as the financial reporting year or the calendar year, provided books are kept for the selected tax year. Tax year can be changed by businesses with the consent of the IRS (Internal Revenue Service). Most state income taxes are determined on the same tax year as the federal tax year.

Corporate Tax Deductions

The IRS allows businesses to reduce taxable income by certain ordinary and necessary business expenses. Current expenses, that includes those expenses that are needed to keep the business running, are fully tax-deductible. Investments and real estate purchased to generate income for the business are also deductible. Salaries of employees, tuition reimbursement, health benefits, and bonuses can be deducted by a corporation. Taxable income can be reduced by a corporation by deducting travel expenses, bad debts, interest payments, sales taxes, fuel and excise taxes, and insurance premiums. Tax preparation fees, legal services, bookkeeping, and advertising costs can also be used to reduce business income. Some corporate transactions are not taxable. These include most formations and some types of mergers, acquisitions, and liquidations. IRS tax codes determine deductions that a business qualifies for or do not qualify for.

Advantages of Corporate Taxation

There are more tax advantages to corporations or business owners than paying additional individual income tax.

  • Medical insurance for families and fringe benefits are fully deductible for the corporation.
  • Losses can be fully deductible for a corporation. 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.
  • Profits earned by a corporation can be left within the corporation for expansion of the business in the future, allowing for corporate tax planning and potential future tax advantages.

Special Considerations

Double taxation is often an unintended consequence of tax legislation. It occurs because corporations are considered a separate legal entity from its shareholders. Corporations pay taxes on their annual earnings. When it pays dividends to its shareholders, these individuals have to pay individual income taxes on the dividends received. Though the earnings that provided the cash to pay the dividends were already taxed at the corporate level, the dividend payments incur income-tax liabilities for the shareholders who receive them. It is generally seen as a negative element of a tax system, and tax authorities attempt to avoid it whenever possible. Business may register as an S corporation and have all income pass-through to the business owners. In an S corporation, all taxes are paid through individual tax returns and not by corporate tax.

Corporate tax planning by companies is a highly important activity as one of many tools used to manage companies’ tax affairs. It helps businesses to relieve the tax burden and operate more smoothly and efficiently. The reduction of a company’s Effective Tax Rate (ETR) is the basic objective of corporate tax planning to achieve tax efficiency and remain competitive in its industry. Effective corporate tax planning is a better alternative for companies rather than paying huge amounts in corporate tax annually. As discussed above, businesses can enjoy higher gains for shareholders or reinvestment by reducing tax costs through effective corporate tax planning. Higher capital gains attract potential investors and improve the company’s financial position.