1. Basics of Corporate Taxation
2. Corporate Income Tax Benefits

Corporation tax expenses are generally much higher than other business entities, as the Internal Revenue Service taxes corporations directly. Other business entities, including limited liability companies (LLC) and S corporations are able to lower their tax burdens by passing profits to their owners.

Basics of Corporate Taxation

Corporations and their owners are legally distinct. In terms of taxes, this means that a corporation must pay taxes on all of its profits that are not deductible as a business expense. Corporate profits that are taxable usually fall into two categories. The first category, retained earnings, are profits used to expand the company or to pay for expenses. The second are profits allocated to corporate shareholders in the form of dividends.

Corporations have the ability to lower their taxable profits by deducting certain expenses, which is money that the corporation has used while pursuing profits. There are several types of deductible corporate expenses:

  • Operating expenses
  • Start-up costs
  • Expenses related to advertising and product outlays
  • Bonuses and salaries
  • Employee retirement and medical insurance plans

Traditional corporations must file IRS Form 1120 to pay their taxes. Any taxable profits earned by the corporation will be subject to the corporate tax rate. Corporations that will owe taxes have to make estimated tax payments four times a year. Corporations that base their tax year on the calendar year will make these payments on April 15, June 15, Sept. 15, and Dec. 15. Annual corporate taxes are due on March 15. Corporations can request a tax extension that will give them six extra months to pay their taxes, pushing the due date to Sept.15.

Form 1120 is used to report corporate taxes, and if the assets of a corporation exceed $10 million, this form must be filed online. Currently, the corporate tax rate at the federal level is 21 percent. The Tax Cuts and Jobs Act (TCIA) established this new corporate tax rate. In addition to this federal tax, corporations may also need to pay local and state taxes. Double taxation is a major concern when it comes to corporation tax expenses. Basically, double taxation means that the profits of a corporation are taxable on both the corporation's tax returns and on the tax returns of shareholders that have received dividends.

To prevent double taxation, a business can elect S corporation status instead of forming a traditional C corporation. In an S corporation, all of a business's profits pass to the owners, which means the corporation itself does not need to pay taxes on these profits.

Corporate Income Tax Benefits

Filing a corporate tax return can take a great deal of time and effort. Despite the time-consuming nature of corporate taxes, there are also certain benefits of taxing these businesses separately. Corporations, for instance, are subject to a flat tax rate, whereas individual income is taxed progressively. For instance, the tax rate for all traditional corporations is 21 percent. The top individual tax rate is 37 percent.

Unfortunately, double taxation counteracts the benefit of the lower corporate tax rate. So, the profits of a corporation could incur tax at both the corporate tax rate of 21 percent and the individual rate of 37 percent if the dividends received by a shareholder puts them in the top tax bracket for individual earners.

Only profits distributed to shareholders are at risk for double taxation. If a corporation chooses to keep some of its profits within the company, these profits will only be subject to corporate taxes. If the owners of a corporation are interested in saving money on taxes, they can retain a certain amount of profits in the business instead of distributing these profits.

The ability to shield company profits from individual income taxes by retaining profits within the company is a unique feature of corporations. Owners of other business entities will be taxed on business profits at the individual rates even if these profits are left in the company. The IRS restricts the amount of profits that a corporation can retain. Generally, corporations can retain $250,000 of profits without risking a tax penalty. Some types of corporations, however, may only retain $150,000.

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