How to calculate corporation tax

Understanding your taxes is an important part of running a business. Taxable income has to be calculated and paid to enable your business to continue operating.

The main tax that a limited company must pay is corporation tax. This is a tax on your business profits, so any money your business makes after overheads and expenses have been deducted.

Here, we cover everything you need to know about calculating how much you owe.

What is small business corporation tax?

All corporations registered in the US must pay corporate tax, no matter their size. Companies must register for corporate tax when they set up as a corporation. 

Corporate tax is paid annually to IRS and must be paid both on your company’s profits and on any gains from selling assets such as land or shares that have increased in value. You must pay your tax by the 15th day of the fourth month after the end of your fiscal year. 

Crucially, it’s your company’s responsibility to calculate how much tax is owed and pay it to IRS before filing your company tax return. Your tax return must be filed within three months and 15 days of the end of your fiscal year, so you’ll need to prepare it well ahead of the deadline to know how much tax you owe.

Sole proprietors and partnerships don’t need to pay corporation tax as they must pay income tax through self-assessment instead. 

How to calculate corporation tax for small businesses and startups

To work out your corporate income tax bill you’ll need a few accounting skills and understand what tax deductions your business can take advantage of. It’s generally best to speak to a business accountant and seek professional advice to help you complete your corporate tax return.

Calculate sales and income

First up, you need to create an income statement to be able to work out how much you owe. You’ll need to add up all sales income your business generates, along with any interest you’ve earned, such as on a business savings account.

Calculate overheads

Your next step is to calculate your overheads and other business expenses. These can be deducted from your trading income to work out the profit your business makes. 

It’s important to claim all allowable deductions and expenses from the trading income to ensure you don’t pay more tax than you should. Allowable expenses are those that have been incurred solely for the purposes of running the business and won’t have a personal use. They could include:

• Accounting fees
• Salaries of employees
• Training fees
• Office supplies
• Software costs
• Business insurance
• Travel expenses
• Marketing costs. 

Capital allowances & depreciation

Capital expenditure refers to money spent on fixed assets that you will keep in the business for several years. This can include computing equipment, plant equipment and furniture. 

The value of these assets will depreciate over time. So rather than being expensed in your accounts straight away, the cost of the items will be written off in the accounts over a number of years. 

For example, if you’ve bought a new laptop for $600, it won’t appear as a cost in your profit and loss account. Instead, it will appear on your balance sheet as a fixed asset. If you feel the depreciation will last for three years, a cost of $200 per year will be included in your profit and loss account for the following three years. After this point, the laptop will be included on your balance sheet with a cost of $600 and accumulated depreciation of $600, giving it a net book value of $0.

However, depreciation is not an allowable expense so you need to add it back into your taxable profit calculation. 

In most cases, capital asset purchases will qualify for investment allowance tax relief. The Section 179 deduction allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. The allowance currently stands at $1,080,000. It can only be claimed in the year the asset is purchased. 

Entertaining costs

You will not be able to claim tax deductions for the costs associated with entertaining clients and suppliers. This includes business lunches, trips to events, and gifts. 

Make the calculation even easier with our handy corporation tax calculator.

Example corporation tax calculation

Let’s say your business has spent $1,200 on capital equipment over the past year and this will depreciate at $400 a year over three years. You’ve also spent $500 on entertainment costs. 

To carry out your calculation, you need to add back any depreciation and entertaining costs to the profit before accounts total. Then you must subtract any capital allowances so that you end up with the profit value that is liable to tax.

Total income = $100,000 (total sales plus interest income)

Total overheads = $50,000

Profit before accounts = $50,000

Add back:

Depreciation = $400

Client entertaining = $500

Less: 

Capital allowances = $1,200

Profit liable to corporation tax = $49,700

Tax due = 21% of $49,700 = $10,437

In this example, we’ve used the 21% rate that applies to most businesses. Note that this rate can vary depending on specific circumstances, and it’s best to consult with a tax professional. The current federal corporate tax rate in the U.S. is a flat 21% for all corporations, regardless of the amount of profit. This rate was established by the Tax Cuts and Jobs Act of 2017 and has remained in effect since then. There have been discussions and proposals to increase the corporate tax rate, but as of now, no changes have been implemented to create a marginal rate system or different brackets for corporate taxes​. You can find out more on the https://www.irs.gov/.

If you do not file your return by the due date, the penalty is usually 5% of the unpaid taxes for each month or part of a month that a return is late. This penalty starts accruing the day after the tax filing due date and can go up to a maximum of 25% of your unpaid taxes. If you do not pay the taxes you owe by the due date, the penalty is typically 0.5% of the unpaid taxes for each month or part of a month that the tax remains unpaid. This penalty can also accumulate to a maximum of 25% of the unpaid taxes.

The IRS also charges interest on penalties that are not paid in full. This interest is calculated based on the federal short-term rate plus 3% and is compounded daily​.