Corporate tax

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Page written by Ashlyn Brooks. Last reviewed on July 29, 2024. Next review due October 1, 2025.

Corporate tax, like many other tax types, is a critical consideration for businesses operating in today’s economic landscape, especially for small to medium-sized enterprises (SMEs). While not every business needs to be concerned with corporate tax, those who do must navigate complex regulations and rates.

At Swoop Funding, we aren’t tax experts, but we are your partner in finding funding opportunities and optimizing your financial strategies to be prepared for managing corporate tax liabilities effectively.

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What is corporate tax?

Corporate tax is calculated on the company’s net income, which is revenue minus expenses. Essentially, it is the business equivalent of an individual’s income tax. Corporate tax rates and regulations vary by country and can influence a company’s financial decisions and strategies.

Think of corporate tax as the maintenance fee a business pays for operating within a well-maintained industrial park. Just as the fee ensures the park has the necessary infrastructure, security, and services, corporate tax contributes to the public services and economic stability that support the business environment. While the fee might feel like an added expense, it ultimately helps maintain the ecosystem in which businesses can thrive and prosper.

Who pays corporate tax?

Any business structured as a corporation is subject to corporate taxes. This includes businesses registered as another business type, such as an LLC, but structured as a corporation for tax purposes.

C Corporations: Traditional corporations that are separate tax entities and pay tax on their profits.
S Corporations: While S Corporations pass profits through to shareholders who then pay individual taxes, the corporation itself may still be subject to certain state and local taxes.
Limited Liability Companies (LLCs): If structured as a corporation for tax purposes, LLCs must also pay corporate tax.

Non-corporate business structures such as sole proprietorships and partnerships generally do not pay corporate tax, as their profits are taxed individually. If you are unsure about your company structure, speaking with a tax professional is the best course of action.

What is subject to corporate tax?

Corporate taxes are places again multiple business activities, including;

Revenue from sales: the primary income from selling goods or services.
Interest and dividends: earnings from investments and other financial activities.
Capital gains: profits from selling business assets.
Rent and royalties: income from leasing property or licensing intellectual property.

What is a corporate tax rate?

A corporate tax rate is the portion of a company’s taxable income that it must pay in taxes to the government. This rate can vary significantly depending on the location in which the company operates.

Federal corporate tax rate

Since the ‘Tax Cuts and Jobs Act of 2017,’ the federal corporate tax rate in the United States has been a flat 21%. Before 2017, it was 35%, but to encourage economic growth and investment, a reduction was made to 21%.

State corporate tax rate

State corporate tax rates vary widely across the U.S. Some states, like Iowa and New Jersey, have rates that can exceed 10%. Companies operating in multiple states must navigate these different tax environments to ensure compliance.

On another note, some states, such as Nevada, Ohio, Texas, and Washington, do not have a corporate income tax but do have gross receipts taxes. Delaware, Oregon, and Tennessee have gross receipts taxes in addition to corporate income taxes.

Here’s a list of the variations. To confirm your rate check with your state department or your accountant.

State	Rate(s)
Alabama	6.5%
Alaska	0.0%, 2.0%, 3.0%, 4.0%, 5.0%, 6.0%, 7.0%, 8.0%, 9.0%, 9.4%
Arizona	4.9%
Arkansas	1.0%, 2.0%, 3.0%, 4.8%
California	8.84%
Colorado	4.40%
Connecticut	7.5%
Delaware	8.7%
Florida	5.5%
Georgia	5.75%
Hawaii	4.4%, 5.4%, 6.4%
Idaho	5.8%
Illinois	9.5%
Indiana	4.9%
Iowa	5.5%, 7.1%
Kansas	3.5%, 6.5%
Kentucky	5.0%
Louisiana	3.5%, 5.5%, 7.5%
Maine	3.50%, 7.93%, 8.33%, 8.93%
Maryland	8.25%
Massachusetts	8.0%
Michigan	6.0%
Minnesota	9.8%
Mississippi	4.0%, 5.0%
Missouri	4.0%
Montana	6.75%
Nebraska	5.58%, 5.84%
New Hampshire	7.5%
New Jersey	6.5%, 7.5%, 9.0%
New Mexico	4.8%, 5.9%
New York	6.50%, 7.25%
North Carolina	2.5%
North Dakota	1.41%, 3.55%, 4.31%
Oklahoma	4.0%
Oregon	6.6%, 7.6%
Pennsylvania	8.49%
Rhode Island	7.0%
South Carolina	5.0%
South Dakota	None
Tennessee	6.5%
Utah	4.65%
Vermont	6.0%, 7.0%, 8.5%
Virginia	6.0%
Washington	None
West Virginia	6.5%
Wisconsin	7.9%
Wyoming	None
Washington, D.C.	8.25%

What is a high corporate tax rate?

A high corporate tax rate is typically considered anything significantly above the global average, which hovers around 23%. High corporate tax rates can reduce a company’s net income, leaving less money available for reinvestment or distribution to shareholders. Companies in high-tax jurisdictions often seek strategies to minimize their tax liabilities.

How to reduce your corporate tax liability?

Reducing corporate tax liability involves legitimate strategies to lower taxable income, such as:

Tax deductions: Utilizing deductions for business expenses like salaries, rent, and utilities.
Tax credits: Taking advantage of credits for activities such as research and development.
Deferred income: Delaying recognition of income to future periods.
Depreciation: Accelerating depreciation on assets to reduce taxable income.
Expense management: Maximizing deductible expenses within the fiscal year.

How to avoid paying corporate taxes?

Avoiding corporate taxes illegally can lead to severe penalties. However, businesses can legally minimize taxes through strategies like:

Tax havens: Establishing operations in low-tax jurisdictions.
Transfer pricing: Setting prices for transactions between subsidiaries to shift profits to lower-tax regions.
Incorporation choices: Structuring the business in ways that minimize tax exposure, such as forming a limited liability company (LLC) instead of a corporation.

What are the advantages of corporate tax?

Corporate taxes, while often viewed as a financial burden, provide several benefits. They generate revenue for public services, funding essential areas such as infrastructure, education, and healthcare. Plus, corporate taxes contribute to the overall economic stability and growth of a country, and they encourage transparency and accountability in financial reporting.

Are corporate taxes deductible?

Corporate taxes themselves are not deductible. However, certain state and local taxes, as well as foreign income taxes, may be deductible on federal returns. Deductions reduce the overall taxable income, potentially lowering the effective tax rate for the corporation.

Are corporate taxes progressive?

Corporate taxes are generally not progressive, meaning they don’t increase as your income increases. They are typically flat rates, meaning all companies pay the same percentage of their taxable income regardless of their profit levels. However, some countries have implemented tiered tax rates for smaller businesses to promote growth and competitiveness.

How to file corporate tax

Filing corporate taxes involves several detailed steps to ensure compliance and accuracy. Here’s a breakdown of the process:

Gather financial records:
- Collect all necessary financial statements, including income statements, balance sheets, and cash flow statements.
- Gather documentation for all business expenses, revenues, and other financial activities.
Complete tax forms:
- For federal taxes, corporations must complete Form 1120, U.S. Corporation Income Tax Return. This form requires detailed information about the corporation’s income, deductions, credits, and other financial data.
- Depending on the state where the business operates, state-specific forms must also be filled out. Each state has its own requirements and forms, such as California’s Form 100 for state corporate tax returns or New York’s Form CT-3.
Calculate tax liability:
- Determine the total amount of tax owed by calculating the taxable income. This involves subtracting allowable deductions and credits from the gross income.
- Use IRS instructions and guidelines for Form 1120 to accurately calculate federal tax liability.
- Follow state-specific instructions to compute state tax liability, ensuring compliance with local regulations.
Submit forms:
- File the completed federal tax return (Form 1120) with the IRS by the annual deadline, usually March 15th for calendar year corporations, though extensions may be requested using Form 7004.
- Submit the appropriate state tax forms to the relevant state tax authorities by their respective deadlines, which may vary by state.
Make payments:
- Pay any federal taxes due by the specified deadline to avoid interest and penalties. Payment can be made electronically via the IRS Electronic Federal Tax Payment System (EFTPS) or by check or money order.
- Ensure state tax payments are made according to state-specific guidelines, which may also include electronic payment options.

How Swoop can help

Corporate taxes, like all taxes, are a significant part of operating a business, and navigating them can be complex and time-consuming.

While Swoop does not handle taxes, we provide valuable information and support to help you optimize your financial strategies. Explore our “Check available business loans” feature on the Swoop Funding platform to discover tailored funding solutions such as loans, grants, and alternative financing that can enhance your business growth and overall financial health.

Written by

Ashlyn Brooks

Ashlyn is a personal finance writer with experience in business and consumer taxes, retirement, and financial services to name a few. She has been published in USA Today, Kiplinger and Investopedia.

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