Corporate Tax Rates and What You Owe
Learn About Income Taxes for Corporations and S Corporations
Income taxes for corporations and corporate owners (shareholders) have changed in the past few years, in part due to the Tax Cuts and Jobs Act of 2017 and also from changes in state tax laws.
Federal and State Business Income Tax Rates
Effective for the 2018 year and beyond, the federal corporate tax rate has been reduced from a stepped rate up to 35 % to one flat rate of 21%. This rate will be effective for corporations whose tax year begins after Jan. 1, 2018, and it is a permanent change.
State corporate tax rates have also changed. Fifteen states and the District of Columbia have cut corporate taxes since 2012 and several more have made tax rate cut in 2020. See this list of states that have lowered their state corporate tax rate.
Capital Gains Taxes for Corporate Shareholders
Corporate shareholders don't pay taxes on corporate income. They receive dividends, which are taxed as capital gains. The capital gains tax rate depends on whether the gain is short-term (on assets owned for one year or less) or long-term (owned for more than a year).
The capital gains tax rate is no more than 15% for most individuals, and some or all of net capital gain may be taxed at 0% if taxable income is less than $78,750. Higher-income individuals may pay capital gains tax at 20% if their taxable income exceeds a threshold, depending on tax status.
Taxes for S Corporations
The tax rate for S corporations is the tax rate for the owners. An S corporation doesn't pay tax as a corporation. Instead, the tax is passed through to the shareholders (owners), who pay the tax through their personal tax return.
Each shareholder receives a Schedule K-1 showing the owner's share of distribution (not including dividends).
The taxable amount of the shareholder's distributions is set based on the shareholder's stock basis (what the person paid for the stock originally).
S corporation shareholder distributions (not including dividends) are taxed as capital gains on the owner's personal tax return. If the stock has been held longer than a year, the gain is a long-term capital gain.
Shareholders of corporations and S corporations receive a 1099-DIV form each year showing the dividend income for a tax year. This income is taxed as a capital gain. Report capital gains or losses from corporation dividends or S corporation distributions and dividends on Schedule D — Capital Gains and Losses.
Blended Tax Calculation for 2018 Filing
If your corporation's tax year began before Jan. 1, 2018, and it ended after Dec. 31, 2017, you will need to figure and apportion your tax amount by blending the rates in effect before Jan. 1, 2018, with the rate in effect after Dec. 31, 2017. The IRS has a worksheet (on page 18) to help you with this calculation.
State Taxes for Corporations
Most corporations must pay state income tax. State tax rates for corporations average 6.3%. Ohio, South Dakota, Texas, Washington, and Wyoming, have no corporate income tax. Alabama, Iowa, Louisiana, and Missouri allow a deduction against taxable income for federal liability.
Accumulated Earnings Tax
In addition to the regular corporate taxes, corporations must pay an additional accumulated earnings tax of 20% percent if the corporation doesn't distribute or pay dividends. 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.
The IRS looks at an accumulation of $250,000 or less as reasonable, ($150,000 for a business that performs professional services). The corporation needs a bona fide business reason for accumulating earnings, such as actual moves to expand the business. In other words, the burden is on the corporation to justify the need to accumulate earnings.
Corporations and the Double Tax Dilemma
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. For example, a might pay $100,000 in tax for a year. 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.
If the corporation pays a sharholder back for investment in the company, this is considered a return of capital investment (the stock basis discussed above). Only amounts over the stock basis are taxable to the shareholders.
Some corporations attempt to avoid the shareholder dividend tax by not distributing dividends. But the IRS can impose the accumulated earnings tax discussed above if the corporation attempts to avoid dividend taxes for shareholders.
IRS. "Publication 542 Corporations." Tax Rates. Page 16. Accessed Mar. 6, 2020.
Tax Foundation. "Tax Trends at the Dawn of 2020." Corporate Income Tax Reductions. Page 7. Accessed Mar. 11, 2020.
IRS. "Topic No. 409 Capital Gains and Losses." Accessed Mar. 7, 2020.
IRS. "S Corporation Stock and Debt Basis." Accessed Mar. 7, 2020.
IRS. "2018 Fiscal Year: Blended Tax Rates for Corporations." Accessed Mar. 6, 2020.
Tax Foundation. "The United States' Corporate Income Tax Rate is Now More in Line with Those Levied by Other Major Nations." Accessed Mar. 7, 2020.
IRS. "Publication 542 Corporation." Accumulated Earnings Tax. Page 17. Accessed Mar. 7, 2020.