Corporation Tax

Corporation Tax Definition

This is a tax which has to be paid by the corporations or organization on the profits generated by them. The tax is levied as a normal income tax which is charged on an individual.

The tax amount levied varies by the place where the company is located. In the case of United States corporate tax is levied at federal and state levels.

Taxing of Corporations

Corporation is a business run by individuals who provide various products and facilities to a country. They provide them in the form of employment, manufacturing various products and there by enhancing the growth of a country. They are required to pay taxes to the government like any individual who pays income tax. They are charged differently than other businesses. It pays income tax on its profits contrary to partnerships, sole proprietorships and limited liability companies which pass on the profits to their owners and report losses or profits to their personal tax returns.

If a person’s business is not incorporated then the profits which the individual gets are taxed on his personal income tax. So the company which he owns should be incorporated in order to avoid the taxation on his personal income.

Example, if a business run by a person is incorporated then the first $75,000 he earns as profits is taxed at a lower rate than the taxation on his personal income.

Corporations can deduct employee as well as the owner’s benefits such as health insurance, disability and $50,000 life insurance.

The taxable amount consists of money kept for enhancing the firm or to cover its expenditure or profits which are distributed to its shareholders.

Corporate Tax Rates in India

The companies which are incorporated in India are considered to be domestic companies for tax purposes even if they are owned by foreign companies.

Table

Domestic Corporate and LLP Income Tax Rates

 

Tax rate

Effective tax rate with surcharge and education cess

Domestic corporations/private limited companies 30% 33.99%
Domestic corporations/public limited companies 30% 33.99%
Limited liability partnerships 30% 30.9%

 

Foreign Corporate Income Taxes
  Withholding tax rate for non-treaty foreign companies Withholding tax rate for US companies doing business in India under the India US Tax treaty
Dividends 20% 15%
Interest income 20% 15%
Royalties 30% 20%
Technical services 30% 20%
Other income 55% 55%

Withholding tax as indicated in the column is taxed on the estimated income approved by the tax authorities.

Corporate tax rates around the world are as follows as in the table

Country

Corporate Tax Rates

Japan 40.69%
U.S. 40%
Brazil 34%
Belgium 33.9%
India 33.9%
France 33.33%
Canada 33%
Italy 31.4%
Spain 30%
Australia 30%
Newzealand 30%
Germany 29.44%
Luxembourg 28.59%
U.K. 28%
China 25%
Denmark 25%
South Korea 24.2%
Switzerland 21.17%
Czech Republic 20%
Russia 20%
Turkey 20%
Poland 19%
Slovak Republic 19%
Hungary 16%
Iceland 15%
Ireland 12.5%

Types of Corporations

Normally corporations are two types according to U.S. tax law. One is S Corporation and the other C Corporation.

S Corporations do not pay income taxes. The profits or losses of the company are divided and passed on to its shareholders and these shareholders then report the gain or lose on their own income tax returns. This concept is called as single taxation.

For a C Corporation the company’s benefits and the shareholder’s dividends both will be taxed. It is like the double taxation.

The S Corporation is not eligible for a dividends received deductions.

Corporate Income Tax Calculation

The below given chart explains how corporate income taxes are calculated. The tax rates for C corporations are:

Taxable Income From and Over To The Tax is Of the Amount Over
$0 $50,000 15% $0
$50,000 $75,000 $7500 +25% $50,000
$75,000 $1,00,000 $13,750+34% $75,000
$1,00,000 $3,35,000 $22,250+39% $1,00,000
$3,35,000 $1,00,00,000 $1,13,900+34% $3,35,000
$1,00,00,000 $1,50,00,000 $34,00,000+35% $1,00,00,000
$1,50,00,000 $1,83,33,333 $51,50,000+38% $1,50,00,000
$1,83,33,333        ---- $64,16,667+35% $1,83,33,333

The above table shows that corporate taxes are progressive in nature.
The tax to be paid by a company is calculated in the example shown below.

Corporation Tax Example

Suppose a company X has a turn over of $14, 00,000. Then its tax is calculated as
$14,00,000 - $3,35,000 = $10,65,000
$10,65,000*34%  = $3,62,100
$3,62,100 + $113900 = $4,76,000
$ 4,76,000 is the taxable amount.

But for a person having an annual turnover of $60,000 the taxation is, the first $50,000 is calculated at 15%  and the remaining $10,000 is calculated at 25%. This facility is not available for individuals whose annual turn over is $6,00,00,000. They are taxed at a flat rate of 35%.
But a corporation which is a qualified personal service is taxed at a flat rate of 35%.

The areas which come under qualified personal service corporations are

  • Health
  • Law
  • Engineering
  • Architecture
  • Accounting
  • Arts
  • Consultation firms

Alternative Minimum Tax Role in Corporate Taxation

Corporations are also subjected to alternative minimum tax flat at 20% tax rate. These minimum taxes are used to increase payments from tax payers who earn a large amount as their income and pay taxes on that income. Earlier minimum tax was treated like the excise tax and the individuals were required to pay tax on specified items only. But after the tax reform in U.S. it is applied to a broad range of preferences and being termed as alternative minimum tax.

For C corporations, they are required to pay both regular income tax and alternative minimum tax. The tax which is comparatively higher is the tax required to be paid by the corporation.

The main aim of introducing this is economic assistance to small business and reduce tax burden on them.
Alternative minimum tax does not cover S corporations. The company which comes under S corporation should not have average annual gross receipts for the preceding 3 tax years of $ 5,000,000 or less.

Corporate Tax Deductions

The deductions for corporations are considered as business deductions. They do not have itemized or standard deductions or personal exemptions.

Long term and short term capital gains are treated as ordinary income and they are taxed at regular rates. Corporations are not allowed to deduct capital losses against regular income.

Corporations are allowed dividend received deduction. This is based on the percentage of their ownership in a domestic corporation which is paying the dividend.

The deduction percentages are given below:

Dividends Received Deduction

Percentage Ownership

Dividends Received Deduction Percentage

Less than 20% 70%
20% or more but less than 80% 80%
80% more 100%

Corporations are also allowed charitable contribution deduction.  But it is limited to 10% of taxable income which is computed before net operating loss carrybacks, capital loss carrybacks, and dividend received deductions.

Note: (the definition of loss carryback mentioned in the above line is given below)

Loss Carryback : a loss carryback is an accounting technique with which a company applies net operating loss to the preceding year’s  income to reduce tax in that previous year.