It’s that time of the year again where businesses are preparing their end-of-year tax. Corporate income tax is the third largest source of revenue for the federal government. While the amount collected for corporate income tax pales when compared to individual income tax or payroll tax, it still accounts for 1.1 percent of the US GDP.
C-corporations are taxed at a rate of 21 percent by the United States government. In 2019, corporate income tax brought in $230.2 billion. This is about 6.6 percent of all federal revenue.
In 2017, the Tax Cuts and Jobs Act reduced the corporate tax rate from 35 percent down to its current rate. As a result, the 2019 fiscal year saw a nine percent decrease in federal revenue garnered from corporate income tax.
A corporation’s receipts minus its allowable deductions equals the corporate profits that are taxed. A US-based corporation that is owned by a foreign multinational company will typically pay the same US corporate tax as US owned corporations.
What is the Corporate Tax Filing Deadline in 2021?
The COVID-19 pandemic affected every aspect of life, including corporate income tax return due dates in 2020.
- C-corporation income tax returns (IRS Form 1120): These are due April 15, 2021, for C-corporations that operate on a calendar year. The extended deadline is October 15, 2021. If the corporation operates on a fiscal year, the deadline is the 15th day of the fourth month following the end of the corporation’s fiscal year.
- S-corporation returns (IRS Form 1120-S): These returns are due March 15, 2021 for corporations operating on a calendar year. The extended deadline is September 15, 2021. If they’re on a fiscal year, rather than a calendar year, the deadline is the 15th day of the third month following the end of the fiscal year.
As of this date, the IRS has announced no adjustments to filing deadlines for 2021 due to the pandemic as they did for the corporate tax filing deadline in 2020.
What is the Tax Rate for C Corporations?
The rate of corporate tax US corporations pay has changed recently. The Tax Cuts and Jobs Act reduced the top corporate income tax rate from 35 percent down to 21 percent.
The TCJA got rid of the graduated corporate rate schedule. It also eliminated the corporate alternative minimum tax.
Until the end of 2022, the law allows for complete expensing of most new investments. This benefit will be gradually phased out through 2026.
Another notable change to the rate of corporate tax US corporations pay is the adjusted limit of net interest expense deductions. Now, these deductions are limited to 30 percent of adjustable tax income.
What Is the Federal Corporate Tax Rate?
The federal corporate tax rate and the corporate tax rate are the same thing. They are just different terms that people use.
Let’s say your annual revenue for 2020 is $250,000 and your expenses are $55,000. How do you know the amount you owe in federal taxes?
First, deduct $55,000 from $250,000. This leaves you with $195,000 of taxable income. Now, multiply $195,000 by 21 percent. This gives you $40,950. This is how much you would owe in federal corporate tax.
State corporation tax rates are taxes in addition to federal rates. The rates are going to vary from state to state. In fact, Texas, Nevada, Ohio, and Washington have a gross receipt tax as opposed to a corporate tax. South Dakota and Wyoming have no state corporate income tax.
State corporate income tax can be as low as one percent in states like Alaska or North Dakota or as high as 10 percent in states like Pennsylvania. We’ve written an article before about tax compliance for small businesses that operate in multiple states.
Year-End Tax Planning Tips from CPAs
Autumn is here. Besides pumpkins and hayrides, it is time for year-end tax planning. Thinking ahead can protect you from waiting until December when there may be too little time to do things in a thought-out way. Here are some year-end tax planning tips that should be considered before the end of 2020. These can help you begin 2021 in the best position to plan for future wealth.
Delay Sending Fourth-Quarter Invoices until 2021
For “Cash basis” taxpayers, income is taxed when cash hits your bank account or when you obtain constructive receipt of payment in the form of a check. For this reason, it may be beneficial to delay some of your invoices to the following year. To get the greatest benefit from this technique, a corporation can also consider making large purchases before the year ends. Taxes on fourth-quarter income are delayed, and deductions against current income can be used as opposed to future income.
To get the most benefit from this strategy, an organization must consider their current income and projected income. Deferred income may help in some circumstances. However, organizations that expect to make more money in the future should collect their income for this year now.
Have Sufficient Cash
A big mistake we see is businesses not having sufficient cash in the bank to cover taxes when they are due. This could lead to penalties relating to your business owing more money than intentionally planned for. This could also limit future growth.
Track Reportable Income
If your organization uses independent contractors, send 1099s and request 1099s for vendors that you have done more than $600 in business with.
Keep Track of Deductions
You want to maximize your deductions without going overboard. The TCJA has made work-related entertainment and other fringe benefits nondeductible. Avoid claiming expenses that will be a red flag for the IRS.
Startup costs can be deducted up to $5,000. You can deduct $2,000 a year as a lifetime learning credit. You can deduct continuing education after high school up to $10,000 a year for any class related to your business. Business services – from PayPal to your Wi-Fi – plan can get deducted.
Understanding the Corporate Tax Rate Businesses Pay
Taxes in the United States are complicated. Trying to keep a handle on your taxes and accounting yourself can be risky and costly. It is wise to consider outsourcing and using professionals in tax planning.
As experienced CPAs, we are happy to help your organization create year-end tax planning strategies to minimize expenses and maximize deductions, while staying compliant with US tax regulations. We also offer CFO business advisory, general accounting, and software integration.
At Fusion CPA, we strive to take the confusion out taxes for our clients and we’re happy to break down complex topics like the corporate tax rate USA businesses pay.
Learn more about how our services or schedule a free discovery call.
This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.