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What is Corporate Income Tax?
Corporate income tax is much the same as personal income tax. Corporate income tax is based on its profit. Business taxes are paid annually. Business taxes give money to the government. This money helps fund social programs and administration. Personal taxes fund the same. Business tax ranks third as a source of funds for our government.
How are corporate taxes calculated?
Businesses are taxed based on profit for the most part. Taxable profits are the total income of the business minus deductions. This formula sounds simple. Tax rules and laws muddy the water.
All businesses must file federal income tax. Some may have to file state and local tax as well. There are two kinds of business tax, C corporations and pass-throughs.
The best known kind is the C corporation. The Tax Cuts and Jobs Act of 2018 tried to simplify this category. It gives a flat rate of 21% to all C Corporations. A business that has chosen to be a C corporation has two separate types of tax. First, a corporation pays taxes as an entity on its profits. Second, the shareholders pay taxes on their dividends. There are two separate types of dividends, Qualified and Unqualified dividends. Qualified are taxed at the capital gains tax rate and unqualified are sometimes called ordinary because they are taxed at the regular income tax rate. A C Corporation can be a multi-billion dollar business or as small as a single lawyer.
The other kind of business tax is called a pass-through. The tax burden is “passed-through “ the corporation and to the shareholders. These businesses pay only shareholder taxes, not taxes on the business itself. Shareholders pay their share of the profits from the business on their personal taxes. This category includes Limited Liability Corporation (LLC) single or multi member and Limited Liability Partnership (LLP). An S Corporation is not listed as a business category. It is a tax election. An S Corporation is not an entity. An S Corp election can help lower your tax liability.
What are some corporate tax deductions?
Businesses deduct expenses to lower their tax liability. There are several deductions that can be taken. Some are start-up costs to the business. There are also general operating expenses. Expenses related to employees can be taken. Some include items like salaries, bonuses, and benefit packages as well as tuition reimbursement. Most businesses have insurance for their company as well. These premiums can be deducted. There are also others like travel expenses, bad debts, interest, equipment, and professional services such as bookkeeping and legal.
When do they need to be paid?
Businesses have to pay estimated quarterly taxes. Even if you are a sole proprietor, you need to pay quarterly taxes. If the business expects to earn at least $1000 it needs to pay estimated taxes quarterly. The IRS has deadline dates for these taxes to be paid. The taxes need to be correct and paid on time. Not paying, not paying the right amount or paying late will result in penalties and other problems. January 15th, April 15th, June 17th, September 16th are the deadline dates.
Yearly taxes are due to be filed for a C Corp the same day as personal income tax, April 15th. For businesses electing S Corp filing status and partnerships, the date is March 15th. This is the same date for extensions to be filed for these statuses as well.
There are on-line filing options for corporate income tax just like personal. There are advantages to seeing a professional. Not only can you get help with tax planning and preparation, but you can deduct the expense as well.