Corporate Tax Law: Everything You Need to Know
Corporate tax law outlines several important factors, including the tax rate that applies to corporations and what deductions companies can claim.3 min read
Corporate tax law outlines several important factors, including the tax rate that applies to corporations and what deductions companies can claim. Every corporation needs to understand these laws so that they can correctly pay their required taxes.
New Corporate Rate and Repeal of the Alternative Minimum Tax
Recently, there have been some important changes to corporate tax law. For instance, the corporate tax rate, which was once 35 percent, has been reduced to a flat 21 percent. Prior to this change in the law, there were four distinct corporate tax rates, and the top rate applied to corporations with income over $10 million. Corporations now benefit from a flat tax system.
This new tax rate is especially beneficial to personal service corporations, which are companies in fields such as:
Historically, personal service corporations were charged at the highest corporate tax rate. After the reduction in the tax rate, these companies pay the same rate as traditional C corporations. Now that the corporate tax rate is 21 percent, it's likely that more and more businesses will choose the C corporation structure.
In the past, corporations also had to deal with something known as the alternative minimum tax, which reduced deduction and incentives in certain circumstances. In the tax bill proposed by the House of Representatives, this tax was completely repealed. The Senate tax bill did not eliminate this tax. In the end, it was decided that the alternative minimum tax would be repealed based on the idea that this tax disincentivized corporations from investing in research and development.
The repeal of the alternative minimum tax became effective on Dec. 31, 2017. After this date, corporations can offset their normal tax liability using alternative minimum tax credit.
Dividends and Capital Contributions
Under the new corporate tax rules, some types of capital contributions that originate from local and state governments are now considered income. You can find the specific contributions that now count as income in Section 118 of the corporate tax law. Section 108(e)(6) has not been changed, meaning debt income cancellations for some contributions can be calculated in the same manner.
The new law has also reduced the corporate percentages for dividend received deductions. The new percentages are now 50 percent and 65 percent. The former percentages were 70 percent and 80 percent.
Limits on Interest Expense Deductions
Section 163 of the new corporate tax code has received an update to further limit deductions for business interests. Under these rules, business interest deductions are limited to the sum of:
- Income of the business interest.
- Thirty percent of the taxpayer's adjusted taxable income.
- The taxpayer's floor plan financing interest for a given tax year.
There is a 30 percent deduction limit on taxable income for net interest expense deductions. For this deduction, adjusted taxable income does not include:
- Gains, losses, income, and deductions not related to business.
- Business interest income and business interest.
- Deductions for a net operating loss.
- Deductions allowed for amortization, depletion, and depreciation.
Based on this limitation, disallowed amounts will be either accrued or considered as paid business interest in the following tax year. Disallowed interest can be carried forward indefinitely. In certain cases, this disallowed interest will be carried over during a corporate acquisition.
The corporate tax law also includes specific rules for shareholders of S corporations and partners that hold business interests. For instance, partnerships must determine the business interest expense limitation at the level of the partnership. Interest that exceeds this limitation should get distributed among the partners. After receiving allocation of the excess interest, partners can choose to carry forward the interest if they wish. There are limits, however, on the extent that the partners will be able to deduct this excess interest.
This limitation on interest does not apply to certain taxpayers:
- Taxpayers with less than $25 million in gross receipts.
- Utilities regulated by the public.
- A business or trade electing real property.
- Certain farming operations.
As with many of these new tax rules, the limitations on interest deductions are applicable to tax years that take place after Dec. 31, 2017. It is possible that these limitations on interest may cause a repeal of the regulations in Section 385 of the law.
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