How are Corporations Taxed in Texas?
If you want to form a corporation in Texas, you need to know how they are taxed. Knowing your state’s tax laws can help you stay in good standing with the state as well as save you money in tax deductions.
In this article, you’ll learn which taxes Texas corporations are required to pay and what expenses are tax-deductible.
Let’s get to it!
What are Corporate Taxes?
Corporate tax is also known as corporation tax or company tax. This is a direct tax that is imposed by the jurisdiction on all income that corporations bring in. Most countries have these taxes at both national, and state levels.
This tax is placed on corporations and must be paid annually. In the United States, there are not always state taxes. Specifically in Texas, there are no income taxes, rather an annual franchise tax for corporations earning over $1,000,000.
In 2017 the Tax Cuts and Jobs Act was implemented. This changed the Corporate tax rate to 21% on the profits of all United State resident corporations. The purpose of this tax rate is to garnish revenue for the government. In 2019 alone, the United States corporate tax raised $230.2 billion. This was 6.6 percent of total federal revenue.
4 Taxes Texas Corporations are Required to Pay
Corporations are required to pay a variety of federal and state taxes. In Texas, the corporate tax structure is a bit different. Rather than tax brackets or a specific income tax, Texas calls its business tax a franchise tax. Most businesses are taxed at around 1%.
Corporate Tax Payments
Otherwise, as a corporation, you must file a federal corporate tax return, IRS Form 1120. These taxes are at a rate of 21% on all profits. Typically businesses estimate the amount of tax due for the year and then make quarterly payments. These are due the 15th day of the 4th, 6th, 9th, and 12th months of the tax year.
Shareholder Tax Payments
In some cases, owners might work for the corporation as well as hold stock in it. When this occurs, there are federal individual income taxes imposed on salaries and bonuses. This is similar to any other regular employee of any company. Salaries and bonuses are considered deductible business expenses, so the corporation itself does not pay taxes on them.
Tax on Dividends
Any profits given to the shareholders of a corporation are called dividends. These dividends are reported on the personal income tax records of the owners. Although salaries and bonuses are tax deductible, dividends are not. This leads to double taxation in C-corporations. Smaller corporations typically do not face this issue because the owners often work for the corporation as well.
S Corporation Taxes
One reason why a corporation may elect S corp status is to avoid double taxation. When a corporation elects S corp status, it can tax like a partnership or limited liability company (LLC). The s corp will avoid double taxation, meaning that the corporate profits or losses will be "passed-through" to be reported on the personal income tax return of the owners.
What Expenses are Tax-Deductible
In order to reduce the taxable profits of a corporation, it is possible to deduct business expenses. These are also known as “write-offs” When this money is spent to pursue a profit for the business, it is not considered taxable income.
Common tax-deductible expenses include:
- Start-up costs
- Operating expenses
- Product and advertising outlays
- Employee salaries and bonuses
- Benefits, such as medical and retirement plans for employees
How Business Owners Benefit from Corporate Taxation
Although you might think that paying taxes is always a loss, corporate taxation can actually benefit business owners. Federal corporate tax rates are at an all-time low. Since the 2017 tax act, corporations only pay a flat tax of 21% on all profits. For anyone in the top five income tax brackets, this is much lower, as they range from 22-37%.
Corporations do lose profits due to double taxation, but this might push you into a lower tax bracket anyway. You need to make this decision for yourself. Another benefit is having the ability to deduct full-cost fringe benefits. Although there are also other types of business entities that can deduct this cost, typically owners will be taxed on the value of the benefits, where corporations are not.