Corporate Tax Rates and What You Owe
Learn About Income Taxes for Corporations and S Corporations
The Tax Cuts and Jobs Act of 2017 changed the top corporate tax rate from 35% to one flat rate of 21%. This rate will be effective for corporations whose tax year begins after January 1, 2018, and it is a permanent change.
Blended Tax Calculation for 2018 Filing
If your corporation's tax year began before January 1, 2018 and it ended after December 31, 2017, you will need to figure and apportion your tax amount by blending the rates in effect before January 1, 2018, with the rate in effect after December 31, 2017. The IRS has a worksheet (on page 18) to help you with this calculation.
U.S. Corporation Tax Rate through 2017
This information is for corporate tax rates through the 2017 tax year. It is common to say that the U.S. corporate tax rate through 2017 was 35%, but the rate varied from 15% to 35%, depending on the amount of corporate income subject to tax for the year.
Corporate Tax Rate Schedule (2005 through 2017)
If taxable income (line 30, Form 1120) on page 1 is:
|Over||But not over||Tax is||Of amount over|
|50,000||75,000||$7,500 + 25%||50,000|
|75,000||100,000||13,750 + 34%||75,000|
|100,000||335,000||22,250 + 39%||100,000|
|335,000||10,000,000||113,900 + 34%||335,000|
|10,000,000||15,000,000||3,400,000 + 35%||10,000,000|
|15,000,000||18,333,333||5,150,000 + 38%||15,000,000|
Corporations file a tax return each year and pay quarterly estimated taxes.
Corporate Taxes on Dividends
Shareholders are not taxed individually for this corporate tax, but they pay tax on dividends they receive. Dividends are taxed only when they are received. The tax on dividends is determined by the number of shares owned and the type of dividends. Dividend income for a tax year is reported on the shareholder's personal tax return on Schedule D - Capital Gains and Losses, and this income is included with other income.
The profit of a corporation is taxed to the corporation when it is earned and then is taxed to the shareholders when distributed as dividends. This creates a double tax. In the example above, the corporation itself pays $100,500 in tax on $300,000 in earnings. If the corporation distributes all or part of that income to shareholders as dividends, the individual shareholders must report this income on their individual tax returns. By the way, dividends are taxed at a special dividend tax rate. (If the corporation pays an owner back for an investment in the company, this is considered a return of capital investment, and it's not considered a dividend and is not taxable.)
As you can see, the earnings are taxed to the corporation and the individual shareholders. For this reason, some corporations attempt to avoid the shareholder dividend tax by not distributing dividends. But the IRS can impose an additional tax called the accumulated earnings tax.
Accumulated Earnings Tax
In addition to the regular corporate taxes, corporations must pay an additional accumulated earnings tax of 20% if the corporation doesn't distribute or pay dividends.
The IRS Tax Code says this tax is for corporations:
formed or availed of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed.
This tax doesn't apply to personal holding companies, non-profits, or passive foreign investment companies.
This tax is imposed by the IRS to prevent corporations from piling up earnings and not distributing them to shareholders in the form of dividends, thus avoiding the tax on the dividends.
S Corporations - Not Taxed as Corporations
S corporations are taxed in a different way from corporations. The shareholders of an S corporation are taxed on their percentage share of the taxable income (called a distributive share), passed through to them on their personal tax returns. S corporations don't pay dividends to their shareholders as such, but they may pay shareholders part of that distributive share.