Corporate income tax: the basics at a glance (2022)

Corporate income tax: the basics at a glance (1)

Most people have a decent understanding of what sales tax is, who pays it, and why. But what about corporation tax? Who is affected, how high is the corporate tax rate, and how can corporate income tax be calculated? Here, you can read the most important basics of corporate income tax, i.e. tax on the income of legal entities.

Contents

  1. What is corporate income tax?
  2. Who pays corporation tax?
  3. Who doesn’t need to pay corporate income tax?
  4. Corporate tax rate
  5. How do you calculate your corporation tax?
  6. Rules for calculating corporate income tax
    1. Graduated corporate income
    2. Deductible and non-deductible expenses
    3. Controlled foreign corporation income deferral
    4. Research tax credit
    5. Excluding interest on state and local bonds
  7. Corporate income tax returns: deadlines and more

What is corporate income tax?

Corporate income tax, or corporation tax, is a tax that “C corporation” legal entities must pay. Be sure to take full consideration when incorporating your business to ensure that you are properly classified – different classifications of corporation have different taxation rules. In general, if the term “corporation” is used, it can be presumed that it is a C corporation since other types are often identified specifically as such.

Corporations are taxed at both federal and state level. According to statistics from the US Treasury, $444 billion was paid in corporate taxes in the USA in 2017. That comes to one fifth of the $2.2 trillion gained in total taxes. Corporation tax in America is currently regulated by the Tax Cut and Jobs Act, part of the controversial GOP tax reform bill. This act was passed in December 2017, and has been in effect since January 1, 2018.

Definition: Corporate tax

Corporate tax is special income tax levied on all entities registered as corporations in the USA. The taxable amount is the income received by the association within the tax year.

Unusually, corporations in the USA have the right to set the parameters of their own tax year, providing it lasts for 12 months or 54 weeks. It is up to their discretion to decide when this begins. If a corporation wants to change the parameters of their taxation period, they can only do so with written consent from the Internal Revenue Service (IRS).

(Video) Corporate tax in 5 1/2 minutes

Who pays corporation tax?

The following groups are subject to pay corporate income tax in the USA:

  • C corporations
  • Foreign corporations
  • Some nonprofits
  • Cooperatives (when registered as corporations for tax purposes)
  • Public or state funded or operated corporations

Companies and businesses in the USA have the option to become corporations when they decide to undergo the incorporation process. They register their classification election by filling out the Internal Revenue Service Form 8832. If you fail to fill out this form when undergoing the incorporation process, your business will automatically be classified as a corporation provided it is a business that can be publicly traded. Any foreign companies operating in the USA must also be classified as a corporation. Corporation tax is paid on their domestic income.

Who doesn’t need to pay corporate income tax?

A wide range of governmental and non-profit organizations are exempt from corporation tax. These include state-owned companies and assets – including federal and state banks to lottery companies. Corporation tax is also waived for:

  • S corporations
  • Insurance and health insurance funds
  • Most non-profits
  • Port operators (unless classified as a corporation)
  • Political parties

OF course there are always exceptions to these rules, usually depending again on the classification of the business whether corporation, S corporation, or sole proprietor. It is also worth noting that many of these US businesses are classified as “flow-through” entities and are subsequently not required to pay corporate income tax. Instead of paying an entity-level tax, the owners of the company instead pay tax on their share of the business’s profits when filing their individual income tax returns.

Note

Entrepreneurs, sole proprietors, and farmers do not pay corporation tax. They are subject to income tax instead.

Corporate tax rate

As previously mentioned, the federal corporate tax rate in the USA stands at 21% flat since December 2017. Prior to this, the rate was 35%. In addition to federal corporate tax, corporations are also liable to pay state corporation taxes. These rates vary from state to state, and it is worth finding out more information to ensure that you are legally complying with all necessary taxes.

Note

Corporate tax is not the only tax that corporations are liable to pay. There may also be income tax and other kinds of tax on business or investment income.

(Video) Introduction to Corporate Taxation | Corporate Income Tax | Tax Cuts and Jobs Act 2017 |CPA Exam REG

How do you calculate your corporation tax?

The financial relationship between companies and their shareholders, as well as between companies themselves, can be quite diverse. This means that calculating your corporation tax bill can be just as complex.

Corporate income tax is generally based on net taxable income. This is the gross income minus any applicable tax deductions. In any case, you should begin with determining your corporation’s annual income.

Rules for calculating corporate income tax

When it comes to the final assessment of corporation tax, however, there are special rules that apply under certain conditions. Here are some of the most important ones:

Graduated corporate income

The federal government taxes corporation profits at a range of graduated rates from 15 to 35%. The first $50,000 of profitable earnings by a corporation is set at 15%, with profits and graduated rates increasing until they reach the maximum 21%. This rule means that small corporation owners pay less taxes on their initial profits, resulting in more money left over to stimulate growth and increase next year’s graduated rate. The primary beneficiary of this rule are small corporation owners.

Deductible and non-deductible expenses

Since corporate income tax is levied on the profit of a corporation, it’s up to the corporation owner to make sure they have carefully documented their deductible and non-deductible expenses from their profit. After all, the more legitimate deductibles you have, the less corporate income tax you have to pay. Please consult the IRS website for more information on what constitutes a deductible or non-deductible expense.

Controlled foreign corporation income deferral

US corporations (and individuals) are liable to pay income tax on any earnings made anywhere in the world. However, they do not have to pay corporation tax on these earnings until the money is brought back into the USA. This results in many corporations leaving their profits in offshore accounts indefinitely, to avoid paying double income tax in their location country and in the USA. This is a very common practice among corporations, which has gained a lot of notoriety in the press in recent years.

(Video) Tax Foundation University 2022, Session 1: The Corporate Income Tax

Research tax credit

The research and experimentation tax credit is granted under IRS code section 41 to assist corporations that carry out research and development in the USA. Having been renewed numerous times since it was first introduced in 1981, the tax credit was made permanently available in 2015. Intended to help stimulate excellent research within the USA, the tax credit is also controversial, since many detractors claim that the research would be carried out with or without the tax credit, effectively having the government pay a corporation to do its normal work.

Excluding interest on state and local bonds

Corporations and individuals who choose to invest in state and/or municipal bonds are not liable to be taxed on any interest redeemed from them. In addition to this, corporations may sometimes issue tax-free bonds for any project or undertaking of theirs that is beneficial to the wider public. This tax exclusion is designed to stimulate investment in your community and country, and is legally authorized under U.S Code § 103.

Corporate income tax returns: deadlines and more

Just like individual income tax, corporate income tax is levied annually, at the end of the financial year.

2019 tax deadlines for filing 2018 business returns

Partnership tax deadlines

(Video) Basics of Corporation Tax Summarised

Due Date

Original tax deadline for partnerships

March 15, 2019

Original tax deadline for S Corporations

March 15, 2019

Original tax deadline for C Corporations

April 15, 2019

Original tax deadline for sole proprietors

April 15, 2019

Original tax deadline for exempt organizations

May 15, 2019

Tip

You can apply to the IRS for a corporate tax extension. If approved, you will have 6 more months to file your corporate income tax return.

In order to file your corporate tax report, you will need to fill out Form 1120 either electronically online or through the mail. This form is submitted along with all other tax return forms, and based on the forms and supporting documents submitted, you will receive a bill for tax to be paid and any additional surcharges. You can then choose either to pay or dispute this tax assessment.

Click here for important legal disclaimers.

(Video) How does corporate income tax work? | VIEWPOINT
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FAQs

How do I tell HMRC I don't need self Assessment? ›

How to tell HMRC I'm no longer self-employed?
  1. Call HMRC on 0300 200 3310.
  2. If you were working in construction (CIS), call 0300 200 3210.
  3. Fill out this online form.
  4. Mention it in your Self Assessment tax return (simply tick a box)
9 Aug 2022

Can I ask HMRC a question online? ›

You'll usually have the option to contact HMRC through an online form, webchat, by phone or by post. You can get extra support if your health condition or personal circumstances make it difficult when you contact HMRC.

How do I appeal against HMRC decision? ›

If you disagree with an HMRC decision and you have a right of appeal, you can appeal in writing to HMRC. You must normally make an appeal within 30 days of HMRC's notice of their decision. HMRC will consider your appeal. They will either agree with you and amend their decision, or confirm their original decision.

Why have I received a tax self Assessment form? ›

Self Assessment is not a tax – it is a way of paying tax. The idea of Self Assessment is that you are responsible for completing a tax return each year if you need to, and for paying any tax due for that tax year.

Can HMRC see your bank accounts? ›

HMRC can check your bank account and/or work with other agencies to verify compliance with the tax law; At present, HMRC can gauge your payments and income from looking at VAT bills, but they can equally work with other UK agencies to determine if HMRC has broad rights to obtain the information they need to collect tax ...

Can I opt out of self assessment? ›

If you are issued with a notice to file a tax return and you do not consider you need to complete one, because, for example, your tax affairs are no longer complicated, you can phone HMRC and ask for the tax return to be withdrawn and to be removed from Self Assessment in the future.

Where can I get an answer to a tax question? ›

IRS.gov is always available and has tools to help people file and pay taxes, find information about their account, and get answers to tax questions. Here are a few things that people can do with a visit to IRS.gov.

Can I speak to HMRC in person? ›

How do I speak to a real person at HMRC? You can call HMRC direct Monday to Friday, 8am to 8pm, and Saturday, 8am to 4pm. They currently offer no service on Sundays or on Bank Holidays.

Is the HMRC 0300 number free? ›

Callers will only pay the same amount as a landline call to a 01 or a 02 number and the price is the same for calls from mobiles. 0300 numbers are generally included in any discount schemes or inclusive call minutes that claimants may already have with landline or mobile phone operators.

What happens if HMRC make a mistake? ›

HMRC have limited authority to cancel tax you owe, even if the tax arrears are due to their mistakes. You can ask HMRC to write off the tax you owe if all of the following apply: HMRC have not used information provided to them, for example about a change of job.

What is a reasonable excuse HMRC? ›

A reasonable excuse is something that stopped you meeting a tax obligation that you took reasonable care to meet, for example: your partner or another close relative died shortly before the tax return or payment deadline. you had an unexpected stay in hospital that prevented you from dealing with your tax affairs.

How far back can tax credits investigate? ›

HMRC will investigate in detail and retrospectively based on the case and how serious it is. If they suspect deliberate tax evasion, they can investigate as far as 20 years. Investigations into careless tax returns can go back 6 years and investigations into innocent errors can go backup up to 4 years.

Do HMRC remind you about self assessment? ›

HMRC will send you a reminder letter telling you to complete a Self-Assessment tax return before your return is due.

Is self assessment easy? ›

If you've never filled in a self assessment tax return before, it can look daunting. But when you understand the process, it's relatively simple – as long as you have all the information you need. Before you start, make sure you have: your ten-digit Unique Taxpayer Reference (UTR)

How do HMRC know about undeclared income? ›

Information can come from a variety of sources: on-line search, door to door enquiries, reports from members of the public or from relatives, information from other government departments, investigations into other businesses, among others. HMRC uses very sophisticated software called Connect.

How much money can you transfer without being reported UK? ›

As a payment service provider, you must verify the complete information of a payer or a payee if either: the transfer value is €1,000 or more. any part of the transfer is funded by cash or anonymous e-money.

How do I know if HMRC are investigating me? ›

How do I know if HMRC is investigating me? Every tax investigation starts with a brown envelope marked 'HMRC' falling through your letterbox. Your company records will face varying degrees of scrutiny, depending on the reason the investigation has been launched.

How much can I earn without declaring it UK? ›

Your personal allowance is how much you can earn before you start paying Income Tax. If you earn over £100,000, the standard Personal Allowance of £12,570 is reduced by £1 for every £2 of income you earn over the £100,000 limit for the 2021-22 tax year.

How do I stop doing self assessment? ›

How to stop being self-employed. When you are trading as a sole trader, or you are ending or leaving a business partnership, you must: Inform HM Revenue and Customs (HMRC) and deregister for self-assessment. Send a final tax return.

Do I have to do a self assessment If I earn over 100k? ›

HMRC requires anyone who earns over £100,000 during one tax year to fill in a self-assessment tax return (SA100). One of the reasons the requirement is in place is so that HMRC can check how people are making an income and confirm that higher earners are repaying their personal allowance.

Can my employer see my tax return? ›

In general, the IRS can't contact third parties such as your employer, neighbors or bank, to get information to adjust or collect the tax you owe unless it gives you reasonable notice in advance.

Can CPA answer tax questions? ›

CPAs answer a host of tax questions every day about tax returns, deductions, personal finances, and more.

Can I ask IRS a question? ›

Taxpayers may ask tax questions by calling the toll-free customer service line at 1-800-829-1040 for individual tax issues or 1-800-829-4933 for business-related tax issues. TTY/TDD users may call 1-800-829- 4059 to ask tax questions or to order forms and publications.

Can TurboTax answer tax questions? ›

TurboTax Live Offers Tax Experts to Answer Your Tax Questions and File Your Taxes.

Why do HMRC take so long to answer the phone? ›

Contacting HMRC: call times increasing

Kevin Sefton, CEO at Untied, said: “The beginning of the year will always be a busy time for the HMRC phone lines because millions of people wait until the deadline to file their taxes and then find they need assistance.

How do I ring HMRC for free? ›

The 'Income Tax: general enquiries' helpline is 0300 200 3300. Dial 18001 0300 200 3300 to contact the 'Income Tax: general enquiries' helpline by text relay.

How long do HMRC take to answer the phone? ›

to answer customer calls within an average of 5 minutes for the year. to ensure that no more than 15% of customer calls are waiting more than 10 minutes to speak to an adviser for the year.

How much do 0300 calls cost from a mobile? ›

The cost of calling 0300 numbers is the same as calling a standard landline number, be it from a landline or mobile.

How much does a 0333 number cost? ›

Information on calling 0333 numbers

0333 numbers are charged at the same rate as to any landline. This is the same for all 03 numbers, as regulated by Ofcom – and is true regardless of whatever method you use to call up.

How can I call 0300 numbers for free? ›

It doesn't cost you any more to call an 0300 number than an 01 or 02 number. Phone companies have to include calls to 0300 numbers in any deals, packages, or bundles that also include calls to local landline numbers.

What happens if you make an honest mistake on your taxes? ›

If you realize there was a mistake on your return, you can amend it using Form 1040-X, Amended U.S. Individual Income Tax Return. For example, a change to your filing status, income, deductions, credits, or tax liability means you need to amend your return.

Can I amend a tax return from 5 years ago? ›

Don't wait. The IRS will only accept an amended return within three years of the date you filed the original return or within two years of the date you paid the tax for that year, whichever is later. You can't e-file your amended return. You can prepare amended returns online, but you can't electronically file them.

Can I sue the HMRC? ›

The Court of Appeal has found that HM Revenue and Customs do owe a duty of care to a taxpayer if it makes mistakes and as a consequence, the taxpayer can sue HMRC for damages.

What are reasonable excuses? ›

The meaning of the term reasonable excuse is not defined in legislation, but the excuse must be one that an ordinary member of the community would accept as reasonable in the circumstances.

How can I reduce my HMRC penalty? ›

Penalties can be reduced by: telling HMRC about the errors. helping HMRC work out what extra tax is due. giving HMRC access to check the figures.

Will HMRC waive penalties? ›

HMRC penalties can be expensive and stressful – but, thankfully, sometimes they can be appealed. If you have a reasonable excuse, your penalty may be amended or waived after an appeal.

What triggers a tax investigation? ›

What triggers a tax investigation? Tax investigations and frequent tax audits are more likely if: you file tax returns late, pay tax late or make errors that need correcting. there are inconsistencies or substantial variations between different returns, such as a large fall in income or increase in costs.

How many years can the revenue go back? ›

Time limits. Income Tax Return submissions must be made within four years after the end of the tax year to which the return relates. From January 2022, you can submit an Income Tax Return for the years 2018-2021.

What happens in a tax investigation? ›

The tax investigators will review your business' accounts and records in detail, and may have questions to ask regarding your income and expenditure. These may be asked face-to-face or via telephone or email. You aren't legally obliged to meet face-to-face, but sometimes this can help the investigation to advance.

What happens if I don't submit self assessment? ›

If you don't file your return and pay any tax due on time, you'll face penalties – and there are potential extra penalties. So don't delay submitting before the deadline and pay any tax you owe with whatever information you have available – even if you need to subsequently amend your tax return.

What happens if you dont pay self assessment tax? ›

If you can't pay your Self Assessment tax bill on time

You won't usually have to pay a penalty, provided that you let HMRC know and set up a payment plan before the deadline has passed. However, you will have to pay interest on any tax that is paid late. If the deadline has recently passed, then don't panic.

How long does it take for HMRC to calculate tax? ›

The answer is usually somewhere between 5 days and 8 weeks. It will depend on a number of factors, including the system involved (for example by PAYE or Self Assessment), whether you applied online or by paper; and whether HMRC make any security checks during the process. Read our news article to find out more.

Can HMRC see my bank statements? ›

Can HMRC check your personal bank account? It's a question many people ask, worried that the taxman can freely browse their financial data. Until June 2021, the answer to the question was a qualified 'yes'.

Can I do my self assessment myself? ›

Self-assessment is simple enough to do yourself if your finances are relatively simple and you know what you are doing. However, it can be time-consuming, and you may end up paying more tax than necessary if you aren't sure about all the expenses and allowances you can claim.

Do you need an accountant to do self assessment? ›

If you are a director of a limited company or a sole trader and your financial situation is fairly straight forward you can most probably do your Self Assessment tax return yourself, without the need of an accountant.

Can you go to jail for tax evasion UK? ›

Tax Evasion Penalties UK

However, the maximum tax evasion penalties in the UK for income tax evasion and smuggling is up to seven years in prison, along with potentially unlimited fines being handed down and an order to repay the taxes that have been evaded.

Can HMRC check your Facebook? ›

The UK's HM Revenue & Customs (HMRC) will "observe, monitor, record and retain internet data" which is available to everyone, including blogs and social networking sites where no privacy settings have been applied, it has specifically confirmed in an update to its guidance on criminal investigations for tax offences.

Can HMRC take money from my bank account? ›

HMRC can take the money you owe directly from your bank or building society account. This is called 'direct recovery of debts'.

How do I cancel HMRC self assessment? ›

You can call HMRC on 0300 200 3310 and inform them you're no longer self-employed, or many have found the simplest way to do it is to de-register as self-employed online. You'll need the following to hand: Your National Insurance Number. Unique Tax Reference (UTR).

How do I deregister for a self assessment tax return? ›

Deregister as Self-Employed Online using HMRC's stopping self-employment form. To fill the form, you will need your UTR number and national insurance number. Remember that the deregistration form will require you to add the date you officially want to stop self-employment.

When can I stop doing a tax return? ›

There is no magic age at which you're allowed to stop filing taxes with the IRS. However, once you're over the age of 65, your income thresholds that determine if you're required to file will change.

Do I need to tell HMRC if I stop being self employed? ›

You must tell HM Revenue and Customs ( HMRC ) if you've stopped trading as a sole trader or you're ending or leaving a business partnership. You'll also need to send a final tax return.

What happens if you don't file a tax return UK? ›

You'll get a penalty if you need to send a tax return and you miss the deadline for submitting it or paying your bill. You'll pay a late filing penalty of £100 if your tax return is up to 3 months late. You'll have to pay more if it's later, or if you pay your tax bill late. You'll be charged interest on late payments.

Can I be employed and self-employed? ›

Yes. You can be employed and self-employed at the same time. This would usually be the case if you were doing two jobs. For example, if you work for yourself as a hairdresser during the day but in the evenings you work as a receptionist in a hotel, you will be both self-employed and employed.

How long does it take to get tax refund after self assessment? ›

Allow 4 weeks for your refund to be sent to your bank account. You may not get a refund if you have tax due in the next 35 days (for example for a payment on account).

How do I de register a company? ›

Deregister your company!

To de-register the members must write a letter to CIPC (On the company letterhead) stating that the company is dormant, and has no assets, no liabilities and all the members intend to de-register the company. All parties must be in agreement and sign this letter.

What is a UTR number? ›

​ Unique Taxpayer Reference numbers (or UTRs) are 10-digit codes that uniquely identify you or your business. They're used by HMRC whenever they're dealing with your tax. From claiming a tax refund to filing a Self Assessment tax return, your UTR will make sure the taxman always knows who he's talking to.

How do I find my UTR number? ›

If you cannot find your UTR

Call the Self Assessment helpline to request your UTR if you cannot find any documents from HMRC . If you have a limited company, you can request your Corporation Tax UTR online. HMRC will send it to the business address that's registered with Companies House.

Does a 75 year old have to file taxes? ›

Do seniors have to file federal taxes? For tax year 2020, for which the deadline to file in 15 April 2021, many seniors over the age of 65 do not have to file a tax return. If Social Security is your sole source of income, then you don't need to file a tax return, says Turbo Tax.

Do I have to file taxes after the age of 65? ›

If you are at least 65, unmarried, and receive $14,250 or more in non-exempt income in addition to your Social Security benefits, you typically must file a federal income tax return (tax year 2021).

How much money can a 70 year old make without paying taxes? ›

For retirees 65 and older, here's when you can stop filing taxes: Single retirees who earn less than $14,250. Married retirees filing jointly, who earn less than $26,450 if one spouse is 65 or older or who earn less than $27,800 if both spouses are age 65 or older.

Can HMRC take your house? ›

If your house is registered in the company's name, HMRC can force the company into a compulsory liquidation, so that the property's value can be realised and shared among the company's creditors, to repay. Likewise, if the house is registered this way, it can be taken and sold, at any point, if you live in it or not.

How can I reduce my self-employment tax UK? ›

How To Reduce Tax Bills If I'm Self-Employed
  1. Incorporate your business. ...
  2. Offset all allowable expenses. ...
  3. Claim on capital allowances. ...
  4. Contribute to a pension. ...
  5. Set up an ISA. ...
  6. Use tax return software.
2 Nov 2018

Do I have to pay tax in my first year of self-employment UK? ›

You do not pay tax on things like: the first £1,000 of income from self-employment - this is your 'trading allowance' the first £1,000 of income from property you rent (unless you're using the Rent a Room Scheme) income from tax-exempt accounts, like Individual Savings Accounts (ISAs) and National Savings Certificates.

Videos

1. Understanding the U.S. Tax System in 5 Minutes - Types of Taxes in the United States
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2. Schedule M 1 Form 1120 | Corporate Income Tax Course | CPA Exam Regulation | TCJA 2017
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3. Accumulated Adjustment Account AAA | Corporate Income Tax | CPA REG | Ch 22 P 3
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4. income tax 101, income taxes definition, basics, and best practices
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5. Taxes 101 (Tax Basics 1/3)
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6. Overview of USA Taxation and Tax Return Forms
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