When Does Corporation Tax Need To Be Paid: Everything You Need to Know
When does corporation tax need to be paid? The answer to that question is not as simple as it may seem. For one thing, each state has its own tax rates and rules. 3 min read
When does corporation tax need to be paid? The answer to that question is not as simple as it may seem. For one thing, each state has its own tax rates and rules. Businesses use different accounting strategies to avoid paying taxes or to decrease the amount they pay, and in response, the IRS has created rules they must follow.
Since 1969, corporations have been subject to an alternative minimum tax of 20% of net income. Corporations' accountants, therefore, must figure out both the AMT taxes and the taxes they would pay the conventional way. The higher figure of the two is the one they must pay.
Despite this, there are ways around paying taxes for corporations, such as depreciation of assets, expense allowances, write-offs, and miscellaneous tax credits. IRS rules govern which expenses are allowable, and which income and tax credits are exempt.
Corporations' tax structure determines how it pays taxes. Most small business owners prefer to structure their businesses as LLCs or S corporations so they can pay taxes on their individual returns instead of at the corporate level. This allows them to avoid some of the regulations and restrictions that apply to corporations.
How Corporations Reduce Their Taxes
- Corporations are considered separate from their owners, or shareholders. Therefore, all of the company's profits are taxed, unless it can find a way to reduce the net total.
- Business expenses, which are money spent in the pursuit of profit, may be deducted.
- Operating expenses, advertising expenses, start-up costs, and product outlays may be deducted.
- Corporations can deduct employees' salaries, bonuses, and benefits such as retirement plans and medical insurance.
- Multinational corporations can claim a credit on taxes that they paid to a foreign government.
- Companies with a large amount of patents, trademarks, and intellectual property can claim deductions for their research and development.
Why Corporations Pay High Taxes
Corporations that owe taxes must estimate the yearly amount and make payments to the IRS each quarter. All profits that cannot be deducted as expenses or credits are subject to tax rates that, with today's regulations, are relatively high. These taxable amounts include money that is reinvested in the company, as well as profits that are distributed to shareholders.
For this reason, corporation profits are said to face “double taxation.” The corporation pays taxes on its profits, and shareholders pay personal taxes on the same profits when they are received as dividends.
Salaries and bonuses are deductible business expenses, so the corporation does not pay taxes on them.
If a corporation distributes dividends to the owners, they must report and pay personal income tax on these amounts. When the shareholders are also employees, essentially, they are paying tax twice on the same income.
State Corporation Taxes
The IRS isn't the only agency that collects taxes from corporations. States also have corporate tax rates, with wide variations. These range from zero to about 12 percent. Other states have designed alternatives to income tax. These include gross receipts taxes, franchise taxes, license fees, and fees for various types of regulations. Gross receipts tax does not allow for deductions of any kind and applies to both goods and services.
Why Pay Corporation Tax?
With all of these steep taxes corporations pay, you might wonder why any business would choose a C-corp structure as a tax entity. After all, there are many alternatives, such as the LLC and S-corp. Not only are corporation taxes expensive, the paperwork and documentation is time-consuming.
There are, however, benefits to C-corporation tax structures. For one thing, profits that are retained by the corporation and reinvested are subject to a lower tax rate than those issued to shareholders as distributions. Sole proprietorships, partnerships, and LLCs are required to pay taxes on all profits even if they are not taken out of the business's bank accounts.
It's a complicated issue, so you would be best served by visiting a professional tax attorney or CPA who can help you see the big picture and weigh every possible advantage and disadvantage. Some of these advantages may be separate from the tax issue, resulting in potential growth and profit that offsets any additional expense the tax structure might cause.
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