Corporate tax is imposed in the United States at the federal, most state, and some local levels on the income of entities treated for tax purposes as corporations. Federal tax rates on corporate taxable income vary from 15% to 35%. ... Shareholders of a corporation are taxed on dividends distributed by the corporation.
Corporate tax is imposed in the United States at the federal, most state, and some local levels on the income of entities treated for tax purposes as corporations. Since January 1st, 2018, the effective corporate tax rate in the United States of America is a flat 21 percent due to the passage of the "Tax Cuts and Jobs Act" on December 20th, 2017. State and local taxes and rules vary by jurisdiction, though many are based on federal concepts and definitions. Taxable income may differ from book income both as to timing of income and tax deductions and as to what is taxable. Corporations are also subject to a federal Alternative Minimum Tax and alternative state taxes. Like individuals, corporations must file tax returns every year. They must make quarterly estimated tax payments. Controlled groups of corporations may file a consolidated return.
Some corporate transactions are not taxable. These include most formations and some types of mergers, acquisitions, and liquidations. Shareholders of a corporation are taxed on dividends distributed by the corporation. Corporations may be subject to foreign income taxes, and may be granted a foreign tax credit for such taxes.
Shareholders of most corporations are not taxed directly on corporate income, but must pay tax on dividends paid by the corporation. However, shareholders of S corporations and mutual funds are taxed currently on corporate income, and do not pay tax on dividends.
On December 20th, 2017, the US Senate and House of Representatives passed the Tax Cut and Jobs Act, setting a flat and effective corporate tax rate of 21% on all businesses that was implemented on January 1st, 2018.
Corporate income taxes are levied by the U.S. federal government and by states on business profits. Understandably, companies try to use everything in the tax code to lower the cost of taxes paid by reducing taxable income.
The Effective Tax Rate Is 18 Percent
The 2017 U.S. tax rate is around 40 percent. That includes:
Federal tax rate of 35 percent for the highest income brackets. Beginning in 2018, Trump's tax cut lowers that to 21 percent.
State and local tax rates ranging from 0 percent to 12 percent. It averages out to 7.5 percent.
Companies deduct state and local tax expenses. That averages out to around 40 percent.
But corporations don't actually pay the top federal tax rate. The effective rate is around 18 percent. In 2015, the Treasury Department collected $390 billion. That's just 18 percent of U.S. corporate profits of $2.1 trillion, according to Table 1.12 of the National Income and Products Accounts.
That's about half the effective rate the government received in 2007, the year before the recession. Corporate taxes were $395 billion on a profit of $1.5 trillion.
How Corporations Avoid Paying Taxes
How do corporations avoid paying taxes? First, almost half of all corporations are "S" Corporations. These pass-through firms pay no corporate taxes. Instead, they pass corporate income, losses, deductions, and credits through to their shareholders.
The shareholders are then taxed on these profits or losses at their income tax rates.
A second reason is that companies reinvest profits earned overseas into those markets. They might prefer to bring the cash home, but are deliberately avoiding U.S. taxes. It's actually cheaper for them to borrow at current low interest rates in the United States than to bring earnings home.
As a result, corporations are debt-heavy in the United States, and cash-rich in overseas operations.
The Tax Cut and Jobs Act seeks to change this by adopting a "territorial" system. Corporations will no longer be taxed on that foreign profit. It also allows companies to repatriate the $2.6 trillion they hold in foreign cash stockpiles. They would just pay a one-time tax rate of 15.5 percent on cash and 8 percent on equipment.
Some corporations won't welcome the change. They've become so adept at avoiding U.S. taxes that it's become a competitive advantage. They can make more money in U.S. markets than foreign competitors because of their knowledge of the tax code and how to get around it.
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