How Are Corporations Taxed In The US

How Are Corporations Taxed?

Corporations are taxed based on business profits. Other business structures, however, operate differently. For example, for those entities operating as a partnership or limited liability company (LLC), business taxes are reported on the income and losses on the partners’ personal tax returns. Since a corporation stands as a separate legal entity from its owners, the business itself must pay its own taxes based on the company’s profits.

Corporation Tax: An Overview

Corporate tax rules in the U.S. are the same for all US-based corporations and no different for multi-national corporations that are based in the U.S. However, some US businesses are taxed as flow-through entities, including sole proprietorships, partnerships,

In this case, PSCs are taxed at a fixed rate of 35%.

After the profits are taxed using the above chart, any distributions/dividends made to shareholders are then taxed again at the shareholder’s tax rates. Therefore, as previously noted, corporations are taxed twice. However, while this may seem to be quite the disadvantage, the advantage to the corporate income tax rates is that corporations don’t have to deal with inflation since the tax thresholds only change if Congress passes corporate tax legislation.

Another key point to keep in mind is that only income paid as dividends are taxed twice. Income distributed as salary or even deferred compensation is a deduction that the corporation can claim on its income tax return.

Corporation Tax Deductions

A corporation can deduct all “necessary and ordinary” business expenses. This can include the following types of

If operating a corporation, the Internal Revenue Service allows certain profitable amounts to be non-taxed, generally $250,000.

However, as noted above, a corporation that pays dividends to its shareholders is subject to corporate income tax on such distributions. This amount will be taxed at the capital gains rate and not the person’s top marginal tax rate, which is based on the individual’s income. Therefore, the tax penalties will be less.

Lastly, the shareholder dividends are not subject to the 0.9% Medicare surtax on earnings or the 3.8% tax on net investment income that is forced on those making a higher income.

While you may decide not to distribute dividends to shareholders in order to save on taxes, it is likely that the IRS will assume that some or all of the owners’ salaries are in fact dividends disguised as salary. This will result in tax penalties. To avoid such penalties, make sure that all employees, including those with a share in the corporation, receive reasonable salaries. Salaries are considered deferred compensation and are therefore deducted from corporate income taxes. However, salaries that are unusually and suspiciously high may be looked into by the IRS, and concluded that a portion of the salary is a disguised