Corporate Income Tax Definition

What is corporate income tax?

The corporate income tax definition is that it’s a tax on the profits of corporations. Federal and state governments levy this tax on corporations, and it’s due annually. The federal tax rate is currently 21%, which is a significant reduction from the 35% before the Tax Cuts and Jobs Act (TCJA). State corporate income tax rates vary greatly. Technically, a handful of states don’t have a corporate income tax but rather a gross receipts tax, which is essentially the same thing. 

Corporations are subject to “double taxation.” This means that the corporation pays income taxes at the corporate level, and then the shareholders pay income taxes again on their distributions from the company. Thus, taxes are paid twice on the same income. 

The corporate income tax benefits federal and state governments because it funds their operations and services. 

Do all corporations have to pay corporate income tax?

No, not technically. A corporation can qualify and register as an S corporation as long as the business meets the IRS’s requirements. S corporations pass all income through to the shareholders, who report the income on their personal tax returns. The income is taxed at their individual return rather than at the corporate level or at the corporate rate.  

That said, a limited number of corporations will qualify as S corporations, so many corporations will still be subject to corporate income tax.

Corporate Income Tax Advantages

Corporate income taxes aren’t entirely bad. In fact, for certain business owners, it’s more beneficial to pay corporate income taxes than report corporate income on their individual return (like with an S corporation). Corporations can also take numerous deductions to reduce their taxable income. 

How does a business owner calculate corporate income tax?

A corporation’s income tax is calculated by taking the company’s taxable income and multiplying it by the current corporate income tax rate. 

Corporations can reduce their taxable income by taking tax deductions for a variety of different things, such as:

• Necessary and ordinary business expenditures
• All current expenses
• Certain investment and real estate purchases
• Employee salaries
• Bonuses
• Health benefits
• Tuition reimbursement
• Insurance premiums 
• Travel expenses
• Interest payments
• Sales and excise taxes
• Professional services for the corporation

Wise business owners will work with a licensed accountant or tax attorney to accurately calculate their company’s corporate income taxes. 

Summary

Certain corporations must pay corporate income tax on their profits. It’s possible to avoid this double taxation treatment by making an S Corporation election, but the requirements to qualify as an S Corporation are strict. 

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Other Helpful Terms :

• Income Tax Definition
• Corporation Definition
• Corporate Charter Definition
• What is a C Corporation?
• Franchise Tax Definition
• Sales Tax Definition