How Does The Corporate Income Tax Work

by Enid Kathambi, Money Columnist


Published in Money and Finance on 30th November, -0001


One of the most common terms during the tax period is the corporate income tax. Most people do not know how the corporate income tax work, but we are not judging. Tax issues can be taxing for many people.

However, if you own a company, then you need to know what corporate tax is and how it works. We are here to save your company's tax filing and payment woes before the deadline.

tax issues

What is corporate income tax?

Corporate income tax is the tax levied by the IRS to a corporate based on its net profits for the year. You can calculate your firm's net profits by deducting company's expenses like COGS (Cost of Goods Sold), and depreciation from the total revenue.

The higher the net profits, the higher the corporate income tax liability. However, there are legal ways for corporates to reduce their tax liability.

Corporates use Form 1120 to file their corporate income taxes. Although the deadline is on 15 March, one can request for an extension of 6 months. With the extension, the corporate needs to file and pay its tax liability by September.

Additionally, corporates must make installment tax payment for estimated taxes every quarter, i.e., the 15th day of April, June, September, and January of the following year.

Estimated taxes are what you use to pay taxes for any income your corporation receives that is not subjected to withholding. It could be income from dividends, interest, rent, awards, or gains from the sale of assets. If you expect your corporation to owe more than $500 in taxes when you file, then you must file and pay estimated taxes during the year.

The current federal government income tax rate for corporates is 21%. The tax rate is a drop from 35% after the TCJA law (Tax Cuts and Jobs Act) of 2017.

Corporates income tax deductions

There are legal ways to reduce your corporation's tax liability. Not every expense is allowable and deductible. For an expense to qualify as allowable and deductible, it has to be necessary and ordinary.

income tax deductions

A necessary expense is one that helps the business to carry on, or allows the owner of the business to keep operating. An ordinary expense is one that is common within the industry of the corporation.

We highly recommend using tax planning software to help you keep track of your corporation's expenses. It is the only way that you can get to claim all your expenses. Some of the expenses that are deductible for corporations include:

  • Rent expenses
  • Bad debts
  • Charity contributions
  • Salaries and wages
  • Expenditures for repairs and maintenance
  • Depreciation and depletion
  • Employee benefit program
  • Advertising expenses
  • Interest payments
  • Insurance expenses
  • Bank and accounting charges
  • Utility expenses
  • Travel expenses
  • Prepaid taxes like sales taxes, excise taxes, and fuel taxes

Other than the corporate expenses, you can use some personal expenses to lower your corporate income tax liability. However, for these expenses to qualify, they must be related to the operations of the business. These include:

  • Mileage if you used your personal vehicle for business purposes
  • Cellphone bills if you use your persona; phone for business purposes
  • A portion of your rent, mortgage, and utilities if you operate your business from home
  • Cost of purchasing equipment's like computers, phones, and monitors
  • Costs for setting up and contributing to a retirement plan

Be smart about your investments and purchases

Deductions are not the only way to reduce your corporation's income tax liability. Making smart choices when it comes to your company's purchases and investments will also earn your company a lower income tax liability.

For example, if you are planning on making a major purchase within a few months and it is already October or November of the current year. You can accelerate this purchase to the current year, which will earn you a deduction in the current year.

taxes

Investments in oil and gas can also reduce your corporation's tax liability if they are passing through "intangible drilling costs." Also, initial investment costs in industries like real estate can qualify for a write-off, which lowers the company's tax liability.

S corporations and pass-through tax concept

If you own an S corporation, then you do not have to file and pay taxes for the corporation. However, the taxes, deductions, profits, and losses of the S corporation pass through the individual's or business owner's tax returns and payments.

If your corporation has more than one owner or shareholder, then each shareholder will claim their share of the profit and income in their individual tax returns. Pass-through taxes also apply to sole proprietorships, limited liability companies, and partnerships.

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