How Corporations Are Taxed
Corporations are the separate individual legal entities apart from the owners, and the taxes are imposed on the company on every profit which cannot be deducted as business expenses.These taxable profits comprise of the money which is kept aside for covering the companies expenses or retained earnings. The shareholders distribute the profits or money as dividends.
The corporate taxations are different as the shareholders may deduct many of their trade expenses. It is that money which is spent by the corporation confirming to the law followed by the profits.The corporation may deduct the employee’s bonus and salaries. Not only this, corporations can deduct the start-up costs, advertising outlays, operating expenses and the other ones associated with the retirement and medical plans which are intended for the employees.
The corporation has to file IRS Form 1120. It is a corporate tax return, and whenever makes any profit, the corporation pay taxes at a corporate income tax rate.
While paying the taxes, corporations have to calculate the estimated tax amount which could be due for that year. The IRS collects the payments by the corporations. Paying quarterly is also permissible like tax payments on the 15th day of April, June, September, and December, if the corporations consider the calendar year as the taxable year, the quarterly payments.
Shareholder Tax Payments
The corporation’s owner also has to pay taxes on their salaries and bonuses like the other employees of the company if they work for the corporation. The corporation itself does not pay any taxes as Salaries and bonuses are considered to be deductible business expenses.
Tax on Dividends
As per the corporate taxation rules, if the dividends are distributed between the owners. Based on the amount of their share, individuals has to pay personal income tax.Since dividends are not tax-deductible, the corporation also has to pay the taxes for the same. Hence, the dividends are taxed twice, to the corporations as well as to the shareholders.
If you are a smaller corporation and working as the regular employee for your corporation, you can pay the taxes regardless of the taxable dividends. The taxes can be paid in the form of tax-deductible bonuses and salaries.
S Corporation Taxes
S corporations are the small business corporation unlike the one we have already mentioned above(C corporations). These corporations elected S corporations to pass through the deductions, corporate income, credits and losses for federal tax purposes. To make it simpler, consider it to be like a limited liability company (LLC) or partnership company.
No Pass-through Tax Deduction
For reducing the double taxation, there is a unique business structure available which is known as the pass-through entity. The taxes collection is done at the owner’s level, after the distribution of the corporate income between the owners, but never at the corporate level. For the pass-through entities, this is a new income tax deduction method, and it falls under the Tax Cuts and Jobs Act. The deduction of about 20% of the net income is made for the income tax purposes for the LLC’s, sole proprietorships, S corporations, and partnerships but it does not include C corporations as it is not the pass-through entity.
Benefits of the Separate Corporate Income Tax
There are certain benefits to have a separate taxation level but reporting and paying taxes on a separate corporate tax return can be time-consuming. To know the pros and cons of corporate taxation, you must see a tax expert. Corporate taxes are not advantageous when are involved in investing or sooner that could be sold.
Lower Corporate Tax Rate
The federal corporate income tax rate, now, has been lowered from 37% to flat 21% on all their profits. A reduced corporate taxation will lead to higher productivity and growth, because of the new investments.Because of the double taxation, the lower rates benefits are mostly lost as the shareholders distribute the corporate profits. For such dividends, they pay income tax individually.
However, for funding the future growth and expansion, at the end of the year, the corporations tend to retain some profits in the business. Hence, corporate taxation or income tax rate is flat at 21%, and it is taxed only once. The owner of the corporations saves the money for future benefits of the company.
But, owners of sole partnerships, LLCs, and proprietorships pay the taxes on every business profits. The taxes are paid at their individual income tax rates, regardless of any benefits they make from the company.As per the IRS guidelines the corporations keeps up to $250,000 of profit. For this profit, the corporations even do not have to bother the tax penalties.
Tax-Free Fringe Benefits
Usually, the employees do not have to pay the taxes for the fringe benefits like medical health insurance, expenses reimbursement, daycare assistance, dental insurance and so on. Based on the corporate taxations, the company deducts the cost of the employees and as well as the owners fringe benefits. So,the owners, as well as the employees, do not have to pay the taxes on these benefits and if they receive any such fringe benefit, they will be taxed accordingly to its value.
How can IncParadise help you?
Now that you have understood the corporate taxation and got your business plan ready, IncParadise can assist you in registering and incorporating your dream business. In case you want any other services like mail-forwarding or so, you can check out the details on the website and choose the package that is best suitable for you. You can also customize the package depending on your requirements and needs.