The term 'Corporate Taxes' is included in the Accounting edition of the Financial Dictionary. Get your copy on Amazon in Kindle, Paperback or Audio edition. Choose your edition here...
Corporate Taxes refer to the United States’ based taxes on corporations. These are not the same for every business structured entity. Corporations receive completely different tax treatment from other business entity structures. In fact such corporations are the only kinds of firms in the U.S. which have to pay in their own profit-based income taxes. With LLC limited liability companies, sole proprietorships, and partnerships, these business structures do not receive business profit tax assessment. Instead, all profits literally pass through on to the owners of the businesses in question. These individuals then report their own personal losses or income via their own individual tax returns.
The reasoning for singling out corporations for special (and some would say punitive) tax treatment like this results from their being a completely separate legal entity that has no connection with its owners. Taxable profits will be those that remain after all business expenses have been deducted. Those profits which remain in the firm accounts in order to pay for expansion or cover other ongoing expenses (sometimes called retained earnings) and profits parsed out to the stake holders (or shareholders) in the form of dividends will be the taxable profits.
Corporations employ all sorts of tactics in order to reduce their amounts of taxable profits. Among these will be a dizzying array of deductions for business expenses incurred throughout the course of the operating year. Besides operating expenses, startup expenses, advertising budgets, and product outlays, such corporations may also deduct out the salaries, payroll, and bonuses plus all expenses pertaining to retirement and health care plans for all of their staff and management.
Corporations do have to file their corporate tax return and pay their applicable corporate income taxes on any and all profits utilizing the Form 1120 from the IRS. When corporations know they will owe the government taxes, the Internal Revenue Service requires them to engage in good faith estimates for the tax dollars they will owe so that they can make quarterly payments. The IRS expects to receive these each April, June, September, and January, the months following the ends of the various four quarters.
When corporations pay out dividends to their various stake holding owners, these recipients will be required to report and then pay their own personal income taxes on such sums. Corporations will similarly have to pay taxes on all money they distribute as dividends as these are not deductible from corporate taxes. It causes dividends to be double taxed, once by the corporate income tax rate and a second time by the receiving stake holders. Smaller-sized corporations do not have such problems. Since their stake holders generally are employees of the corporation, they can receive their cuts of the profits in the form of bonuses and salaries which are in fact tax deductible instead of giving them out as dividends that are taxable.
A great number of corporations will decide that they should in fact keep some of their profits as retained earnings at the conclusion of the year. They will need this money to pay for potential future growth, expansion, or even acquisition targets. Such retained earnings become taxable at the company’s corporate income tax rates.
This is a strategy for owners of a smaller corporation to reduce taxes. They can keep a portion of the profits within the corporation to avoid having to pay the higher personal income tax rates, as the first $75,000 in corporate profits assess at lower rates of from 15 percent to 25 percent. This accounting trick does now work for owners of the LLCs, partnerships, and sole proprietorships whose profits are all passed through to the individual personal level every year. This happens regardless of if they choose to take out profits from the business or instead leave them.
There is a limit to the largess of the Internal Revenue Service. They will permit the majority of such corporations to keep as much as $250,000 in the firm at any point before the government begins to assess tax penalties.