Corporate Tax Overview
There are many corporate tax benefits when organizing one’s business under a corporation. Once incorporated, a business becomes its own legal entity. This unique form of business offers legal protection to its owners and shareholders. The downside for corporations is the fact that they have to pay their own corporate income tax, in addition to any taxes paid on dividends to shareholders. This situation is often referred to as double taxation for corporations.
Any corporation that fails to meet the requirements of an S-corporation is required to pay federal corporate income taxes.
Computing taxable corporate income
Tax is paid on net income. The computations used to arrive at net income, can be very complicated for some businesses. In a most basic model, however, net income is equal to a company’s total revenue, minus its expenses. Many claim corporations have very high tax rates, but this is not always the case. The tax rates on the federal corporate tax schedule roughly follow those imposed on individuals. The first $50,000 of net income earned in a year by a corporation, for example, is only taxed at a rate of 25%. Many corporations, however, due to their sometimes enormous size and large revenues, are typically taxed at the highest tax brackets (35-38%).
The benefits of corporate taxation
Corporations also have a distinct tax advantage over other types of business entities like sole-proprietorships, and partnerships.
Corporations are able to deduct capital losses
Like all companies, corporations are able to deduct expenses from revenues to arrive at net income. While tax rates can be higher for businesses, these entities often have considerably less taxable income as a percentage of total revenues – than do individuals. There are also other methods to avoid paing excessive corporate income taxes. Carefully planned salaries, fringe benefits, and use of independent contractors can greatly reduce the overall amount of income tax paid by a corporation and its employees.
Moreover, corporations have the ability to carry losses forward into the future. Capital losses, for example, can be claimed up to $3000 per year. Additional losses carry forward, and can be claimed in future years.
Filing a corporate tax return
Corporate tax returns are usually fairly complicated affairs. It is necessary to hire an experienced accounting firm to handle your company’s corporate taxes. With the introduction of the Sarbanes-Oxley act earlier in the decade, the filing requirements have grown exponentially. It is now a requirement to have an outside firm go over your corporate taxes, and head executives need to sign a corporation’s tax return, personally guaranteeing the correctness of corporate tax returns.
The corporate tax overview is intended to help see the benefits of organizing one’s business under a corporation.