Overview: The corporate income tax is designed as a tax on corporate profits which are equal to gross corporate revenue minus deductible business expenses. A corporation’s tax liability can be calculated as follows:
Taxes = [(Total Corporate Revenue minus Deductible Expenses) × the 21% Corporate Tax Rate] minus Tax Credits.
(Portions of this page excerpted from a nonpartisan Congressional Research Service report.)
Businesses are taxed based on whether they are Regular “C” Corporations or Pass-Throughs
- The income of regular corporations (generally known as subchapter C corporations) is taxed once at the corporate level, and a second time as individual income at the shareholder level when dividend payments are made or capital gains are realized.
- Businesses that choose other forms of organization — sole proprietorships, partnerships, subchapter S corporations, and limited liability companies (LLCs) — are not subject to the corporate income tax. Instead, their income “passes through” to their owners’ individual tax returns and is taxed according to individual income tax rates.
Deductible business expenses include:
- employee compensation;
- general supplies and materials;
- interest payments are partially deductible (generally limited to 30% of adjusted taxable income except for small businesses and public utilities); and
- depreciation in the value of machines, equipment, and structures over time (although some businesses are allowed 100% depreciation in the first year for certain types of equipment — known as “expensing”).
The Net Operating Loss (NOL) deduction:
- Some corporations experience net operating losses (NOLs), which occur when expenses exceed income. Losses arising after 2017 can generally be “carried forward” indefinitely, and used to offset future tax liability.
- The NOL deduction is generally limited to 80% of taxable income, however there are special rules for farming and insurance company losses.
Corporate Income Tax Rate:
- As of 2018, the corporate income tax rate is a flat 21%.
Corporate Tax Credits: The corporate income tax allows for a number of credits that reduce taxes paid by corporations in order to promote particular policy goals, as follows:
- research credit; (background on R&E credit)
- low-income housing tax credit; (background on LIHTC)
- energy credits; (background on energy tax incentives)
- new markets tax credit; (background on NMTC)
- work opportunity tax credit; (background on WOTC)
- an employer credit for paid family and medical leave, expiring in 2019 (background paid family leave in the U.S.).
Corporate income earned abroad (quasiterritorial tax system):
- The United States has a quasiterritorial tax system. Dividends received by U.S. corporate shareholders from their controlled foreign corporations (CFCs) are generally eligible for a 100% deduction.
- However, certain forms of passive or easily shifted income are taxed in the year earned—under subpart F.
- In addition, global intangible low-taxed income (GILTI) is taxed at 10.5%, however, after 2025, the GILTI tax rate is scheduled to increase to 13.125%.
- A deduction is allowed for foreign derived intangible income (FDII)—roughly the share of intangible income that is attributed to foreign activity.
- Base erosion and antiavoidance tax (BEAT): aimed at disallowing deductions for certain “base erosion” payments made by U.S. parents to their foreign subsidiaries that historically have been used to shift profits out of the United States. BEAT imposes a minimum tax which is equal to 5%, in 2018, of the sum of taxable income and base erosion payments on corporations with average annual gross receipts of at least $500 million over the past three tax years and with deductions attributable to outbound payments exceeding 3% of overall deductions.