Corporate Tax in The United States - Taxable Income

Taxable Income

Determinations of what is taxable and at what rate are made at the federal level based on U.S. tax law. Many but not all states incorporate federal law principles in their tax laws to some extent. Federal taxable income equals gross income (gross receipts and other income less cost of goods sold) less tax deductions. Gross income of a corporation and business deductions are determined in much the same manner as for individuals. All income of a corporation is subject to the same federal tax rate. However, corporations may reduce other federal taxable income by a net capital loss and certain deductions are more limited. Certain deductions are available only to corporations. These include deductions for dividends received and amortization of organization expenses. Some states tax business income of a corporation differently than nonbusiness income.

Principles for recognizing income and deductions may differ from financial accounting principles. Key areas of difference include differences in the timing of income or deduction, tax exemption for certain income, and disallowance or limitation of certain tax deductions. IRS rules require that these differences be disclosed in considerable detail for non-small corporations on Schedule M-3 to Form 1120.