Offering the highest level of personal liability protection to business owners, a corporation comes with its own set of perks. However, there are some other elements that should be taken into consideration. One of those being corporate taxes.
Corporations are often best for moderate to high-risk businesses and those that want to benefit from raising capital. If your business has a lot of growth potential, a corporate business structure may suit your needs best – regardless of corporate taxes.
What is corporate tax? Who pays them and how do you file them? Let’s work out the details to see if this is the right fit for your business.
What are Corporation Taxes?
A corporation tax is the tax on taxable profits of your business. This taxable income can include items like investment profits, trading profits, and capital gains.
Each state has different regulations when it comes to taxation. Many states don’t impose state or local taxes, but they do require federal taxes on corporate income.
How Corporate Taxes Work
One thing you’ll notice about corporations is that they're taxed differently than other entities. It must pay its own income tax on profits because it’s considered a separate legal entity from its owners.
In 2017, when the Tax Cuts and Jobs Act was adopted, corporate tax rates were reduced from 35% to 21% on profits. This tax rate is in place to help generate revenue for the government. In 2019, corporate tax accounted for 6.6% of total federal revenue with approximately $230 billion raised by corporate tax alone.
Corporate Taxes: What Taxes are Arizona Corporations Required to Pay?
Arizona corporate income tax is currently set at a rate of 4.9%. And while this is one of the lower corporate tax rates across states, Arizona also offers another tax benefit to business owners – the state does not have any privilege or franchise tax. Unless you corporate as a C-Corp, your business is not subject to state tax on income.
Corporate Tax Payments
As a corporation, it’s required that you file a federal corporate tax return (IRS form 1120) on all profits. Generally, the amounts owed are estimated and paid in quarterly payments to the IRS. These payments are due by the 15th day of April, June, September, and December of the tax year.
Shareholder Tax Payments
Owners can work in a corporation and own stock. If this occurs, then they will pay individual income taxes on their bonuses and salaries. These are considered business expenses, so the corporation doesn’t pay taxes on them.
Tax on Dividends
Dividends are not the same as bonuses and salaries. Dividends are profits given to shareholders – they are not tax-deductible, so the corporation must pay taxes on them. This where double taxation occurs because dividends are taxed by the corporation and then by the shareholders.
S Corporation Taxes
All corporate profits or losses in an S-corp pass through the business and are reported on the owner’s tax return – not the business. This helps avoid double-taxation.
What Expenses are Tax-Deductible?
To help reduce the taxable profits of a corporation, corporations have the benefit of deducting business expenses. This means when money is spent solely on business purposes and will make the business profitable, then it’s not considered taxable income. Common tax-deductible expenses for corporation include:
- Operating Expenses
- Travel Expenses
- Fuel Taxes
- Real Estate Taxes (on business property)
- Interest Payments
- Employee Salaries/ Bonuses
- Advertising and Marketing costs
- Benefits to Employees (medical, retirement, etc.)
Any expense that is required to keep the corporation up and running is fully tax-deductible. These include capital expenses as well as employee expenses and benefits.
How Business Owners Benefit
from Corporate Taxation
There are benefits of having a separate income tax statement for your business. With low federal corporate tax rates, corporations are at an advantage and can actually save money by retaining profits in the company.
Another benefit is taxes – while C-corps are subject to double-taxation, the company can deduct full cost business expenses such as employee salaries, employee benefits, operating costs, and more. Dealing with taxes can be tricky for many corporations, that’s why it’s best to consult with an experienced professional to learn more about the advantages of starting a corporation in your unique situation.