Corporate Tax

Corporate Tax: Definition, Deductions, and How It Works

What is corporate tax?

Corporate tax is a tax on a corporation’s profits—its taxable income after allowable business expenses are deducted from revenue. In the United States, the federal statutory corporate tax rate is a flat 21%, a level set by the Tax Cuts and Jobs Act of 2017. The effective tax rate a company actually pays is often lower than the statutory rate because of deductions, credits, subsidies, and other tax planning strategies.

How corporate tax works (U.S. overview)

• Tax base: Corporate taxable income = revenue − deductible business expenses.
• Federal filing: U.S. corporations report corporate taxes on Form 1120.
• Filing deadlines: Corporate tax returns are generally due on the 15th day of the fourth month after the corporation’s tax year ends. Corporations may request a six-month extension. Estimated tax payments are generally due in mid-April, June, September, and December.
• State taxes: Many states impose separate corporate income taxes; state rates vary widely.
• International variation: Corporate tax rates differ by country; some jurisdictions have much lower rates and are considered tax-friendly.

Common deductions

Corporations may reduce taxable income using ordinary and necessary business expenses, including:
* Cost of goods sold (COGS)
* Salaries, wages, bonuses, and employee benefits (health insurance, retirement plans, tuition reimbursement)
* Rent, utilities, and general & administrative expenses
* Research and development (R&D) expenses
* Depreciation and amortization for qualifying assets
* Insurance premiums, travel, and business-related transportation
* Legal, accounting, and tax-preparation fees
* Advertising and marketing costs
* Interest expenses, bad debts, and certain business taxes and excise taxes

Investments and income-producing real estate purchased for the business may also be deductible or depreciable under applicable rules.

Special considerations

Double taxation

C corporations are taxed at the corporate level on their profits. If those after-tax profits are distributed as dividends, shareholders pay individual income tax on the dividends—resulting in double taxation of the same economic income.

Pass-through alternatives

Many businesses avoid corporate-level tax by electing pass-through status (for example, S corporations in the U.S.), where income, deductions, and credits pass through to owners’ personal tax returns. Pass-through entities are subject to individual income tax rules rather than corporate tax.

Advantages of corporate taxation (and of being a corporation)

• Certain fringe benefits (e.g., employer-paid medical insurance, retirement plans, tax-deferred trusts) are deductible at the corporate level.
• Corporations can typically deduct losses more straightforwardly than sole proprietors, and may retain earnings to manage tax timing and business needs.
• Corporations offer clearer separation of business and personal liability and can provide tax planning flexibility through deductions, depreciation, and entity structuring.

Who ultimately bears the burden?

While corporations remit corporate income tax, economic incidence can be shared. Economists generally find that tax burdens can be passed to:
* Shareholders (through lower returns)
* Customers (through higher prices)
* Employees (through lower wages)

Frequently asked questions

Q: What exactly is corporate taxable income?
A: Taxable income for a corporation is revenue minus allowable business deductions and adjustments under tax law.

Q: Is the 21% federal corporate tax rate permanent?
A: The 21% rate is the current statutory federal rate established by 2017 tax legislation. Tax rates can be changed by new legislation.

Q: How can a business avoid corporate tax?
A: Some businesses elect pass-through status (e.g., S corporation, LLC taxed as a partnership), so income is taxed on owners’ individual returns rather than at the corporate level. Other tax avoidance approaches involve legal deductions, credits, and international tax planning.

Bottom line

Corporate tax is a tax on business profits that plays a major role in corporate finance and tax planning. While the U.S. federal statutory rate is 21%, the actual effective rate varies because of deductions, credits, and entity choices. Businesses should evaluate entity structure, available deductions, and state/local tax obligations to manage overall tax exposure.