US Business Tax Rate: Everything You Need to Know
The US business tax rate, which is also known as the U.S. corporate tax rate, varies depending on the amount of taxable corporate income for the year.4 min read
The US business tax rate, which is also known as the U.S. corporate tax rate, varies depending on the amount of taxable corporate income for the year. While American businesses are subject to higher corporate tax rates than businesses in other developed countries, they are entitled to a variety of tax breaks that can significantly lighten their overall tax burdens.
Corporate Tax Rates in the U.S.
Following the passing of the Tax Cuts and Job Acts of 2017, the corporate tax rate in the U.S. has fallen from 35 percent to 21 percent. This new rate is a permanent change, and it will apply to corporations with a tax year that commences after January 1, 2018.
C corporations and limited liability companies (LLCs) that have chosen to pay taxes as corporations will be subject to the revised tax rate. The rate, however, will not apply to S corporations. An S corporation pays taxes differently from a regular corporation. Its shareholders pay taxes on their share of its taxable income through their personal tax returns.
Calculating Corporate Taxes
While many people are of the opinion that the U.S. corporate tax rate is 35 percent, it actually varies from 15 to 35 percent, depending how much corporate income is taxable for the year. In order to calculate your corporate tax, you need to have an accurate estimate of your taxable income. There are two ways to estimate your taxable income: completing Form 1120 and taking taxable income for the previous year as a starting point. Below is a list of corporate tax rates based on different taxable incomes:
- 15 percent of the amount over $0 for income ranging from over $0 to $50,000.
- $7,500 plus 25 percent of the amount over $50,000 for income ranging from over $50,000 to $75,000.
- $13,750 plus 34 percent of the amount over $75,000 for income ranging from over $75,000 to $100,000.
- $22,250 plus 39 percent of the amount over $100,000 for income ranging from over $100,000 to $335,000.
- $113,900 plus 34 percent of the amount over $335,000 for income ranging from over $335,000 to $10,000,000.
- $3,400,000 plus 35 percent of the amount over $10,000,000 for income ranging from over $10,000,000 to $15,000,000.
- $5,150,000 plus 38 percent of the amount over $15,000,000 for income ranging from over $15,000,000 to $18,333,333.
- 35 percent of the amount over $0 for income over $18,333,333.
C corporations are required to file a tax return once a year and pay estimated taxes on a quarterly basis. Although their shareholders are not individually subject to corporate tax, they will be taxed on the dividends they receive.
If your corporation earned an income of $300,000 for the year, you need to look at the fourth line in the tax table above. The tax rate is $22,500 plus 39 percent of the amount over $100,000. Since 39 percent of $200,000 is $78,000, your corporate tax will be $78,000 plus $22,500, which is equal to $100,500. So, your effective corporate tax rate is 33.5 percent, which is lower than the 39 percent in the schedule.
Comparing Tax Rates in the U.S. and Other Developed Countries
According to the Treasury Office of Tax Analysis, the average business tax rate on profits generated from new investments in the U.S. is estimated at 24 percent. The same type of corporate tax rate in other industrialized and democratic G7 countries is 21 percent, after factoring in the size of their economies. It is useful to calculate these tax rates when considering the impact that corporate taxes can have on companies' choices of locations for making new investments.
The rate for domestic and foreign income tax on the worldwide profits of U.S. multinational companies is about 28 percent, while the average tax rate for corporations with headquarters in other G7 countries is 29 percent, after taking the size of their economies into consideration. This measure of corporate tax rates is useful for understanding how corporate taxes may affect multinationals' choices of locations for setting up their headquarters.
When comparing corporate tax rates in different countries, the focus should be on what the corporations actually pay, rather than the highest statutory rate. While some businesses complain that the U.S. has the highest statutory tax rate among developed countries, American corporations can use tax breaks and take advantage of loopholes to significantly reduce their taxes.
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