Corporate Tax in The United States - Overview

Overview

Corporate income tax is imposed at the federal level on all entities treated as corporations (see Entity classification below), and by 47 states and the District of Columbia. Certain localities also impose corporate income tax. Corporate income tax is imposed on all domestic corporations and on foreign corporations having income or activities within the jurisdiction. For federal purposes, an entity treated as a corporation and organized under the laws of any state is a domestic corporation. For state purposes, entities organized in that state are treated as domestic, and entities organized outside that state are treated as foreign.

Some types of corporations (S corporations, mutual funds, etc.) are not taxed at the corporate level, and their shareholders are taxed on the corporation's income as it is recognized. Corporations which are not S Corporations are known as C Corporations.

Domestic corporations are taxed on their worldwide income at the federal and state levels. Corporate income tax is based on net taxable income as defined under federal or state law. Generally, taxable income for a corporation is gross income (business and possibly non-business receipts less cost of goods sold) less allowable tax deductions. Certain income, and some corporations, are subject to a tax exemption. Also, tax deductions for interest and certain other expenses paid to related parties are subject to limitations.

Corporations may choose their tax year. Generally, a tax year must be 12 months or 52/53 weeks long. The tax year need not conform to the financial reporting year, and need not coincide with the calendar year, provided books are kept for the selected tax year. Corporations may change their tax year, which may require Internal Revenue Service consent. Most state income taxes are determined on the same tax year as the federal tax year.

Federal corporate income tax is imposed at graduated rates. The lower rate brackets are phased out at higher rates of income. All taxable income is subject to tax at 34% or 35% where taxable income exceeds $335,000. Tax rates imposed below the federal level vary widely by jurisdiction, from under 1% to over 16%. State and local income taxes are allowed as tax deductions in computing federal taxable income.

Groups of companies are permitted to file single returns for the members of a controlled group or unitary group, known as consolidated returns, at the federal level, and are allowed or required to do so by certain states. The consolidated return reports the members' combined taxable incomes and computes a combined tax. Where related parties do not file a consolidated return in a jurisdiction, they are subject to transfer pricing rules. Under these rules, tax authorities may adjust prices charged between related parties.

Shareholders of corporations are taxed separately upon the distribution of corporate earnings and profits as a dividend. Tax rates on dividends are at present lower than on ordinary income for both corporate and individual shareholders. To insure that shareholders pay tax on dividends, two withholding tax provisions may apply: withholding tax on foreign shareholders, and “backup withholding” on certain domestic shareholders.

Corporations must file tax returns in all U.S. jurisdictions imposing an income tax. Such returns are a self-assessment of tax. Corporate income tax is payable in advance installments, or estimated payments, at the federal level and for many states.

Corporations may be subject to withholding tax obligations upon making certain varieties of payments to others, including wages and distributions treated as dividends. These obligations are generally not the tax of the corporation, but the system may impose penalties on the corporation or its officers or employees for failing to withhold and pay over such taxes.