How Does Corporate Tax Work in the USA? and Check Out Strategies to Reduce Corporate Tax in the USA

The first decision that most businesses make is to choose the type of business entity that suits the goals of the company. In the USA different laws and regulations are made separately for every business entity. 

Mainly, there are two types of Business incorporation in USA : C corporations and S corporations. Every entity has different advantages and disadvantages, especially in terms of Corporate taxation and tax slabs in the USA. Below in the article strategies, and deductions are shared to save tax with the timeline to file the corporate income tax in the USA.

What is Corporate Tax?

Corporate tax is a tax payable on a corporation’s profit. The tax is paid on the company’s taxable income and there is a formula which is used to calculate the payable tax. First, find the adjusted gross income after deducting the allowed deductions. Now use the formula to find taxable income:

Taxable Income = Adjusted Gross Income - All Applicable Deductions

Also, multiply the corporation tax percentage with taxable income to check the corporation tax liability. Corporate Tax = Taxable Income × Corporation Tax Rate. To reduce corporate taxes, corporations take advantage of various deductions and use strategies to save the tax.

In the United States, the current federal corporate tax rate is 21%. It is implemented by the Tax Cuts and Jobs Act (TCJA), which was signed into law by President Donald Trump in 2017 and came into effect in 2018. Prior to this, the maximum U.S. corporation tax rate was 35%. 

Deductions in Corporate Tax of USA

The following are the deductions that are allowed to companies in the USA to save taxes:

1. Depreciation deductions for capital outlays on tangible property.
2. Section 179 deduction is limited to the taxable income of the business. 
3. A 100% special first-year depreciation allowance, known as bonus depreciation, is applied on certain types of property. The deduction will be calculated on a cost or percentage basis for natural resource properties, excluding timber and certain oil and gas properties.
4. Bad debt from a trade or business is deducted in the year it becomes worthless, but determining this date can be difficult. 
5. Deductions for charitable contributions cannot exceed 10% of taxable income.
6. Employers are allowed for deduction for providing retirement benefits to workers, and the employee's tax liability is deferred until the benefit is paid.

Strategies to Reduce Corporate Tax in the USA

For corporations, there are several ways to lower their taxable income. First, they need to calculate a total income by adding up all sources of revenue, including sales, investments, rent, and capital gains. Now, deduct business expenses and special deductions like salaries, depreciation, advertising costs, and charitable contributions. After following all the steps now use the below strategies to save more tax:

Net Operating Loss

The net operating loss occurs when a corporation's deductions exceed its taxable income. In this, corporations can carry forward the net operating losses from previous years to reduce the taxable income of the current year. However, the Inflation Reduction Act of 2022 limits the amount that can be carried over to 80%.

Accelerated Depreciation

In this, the companies are allowed to deduct a maximum percentage of an asset's value in the early years of the investment. For example, if a firm buys a machine with a life of six years. Here they can deduct the cost of the machine in the initial year of investment from their taxable income instead of deducting it over six years.

Tax Credits

The most significant tax credit is the research and development credit. This allows companies to deduct the cost of research and development activities from their tax liability. However, it is estimated that these credits cost the government billions of dollars in lost tax revenue each year.

Profit Shifting

This strategy is used by US-headquartered corporations to move profits to foreign subsidiaries in countries with lower income tax rate in USA. Now this can lower the tax liability, but the US still taxes some of these earnings to prevent companies from completely avoiding their tax obligations.

Timeline to File Corporate Taxes in USA

In the USA different companies file corporation tax as per their type. Below the last date to file the corporate income tax for companies are mentioned:

• For domestic companies, the deadline to submit federal income tax returns is the 15th day of the fourth month following the end of the tax year which is April 15 for calendar-year corporations. 
• C corporations whose fiscal years end on June 30 are required to file the corporation tax in the USA by the 3rd month’s 15th day for all taxpayers.
• The foreign corporations other than FSCs (Foreign Sales Corporations) and all former FSCs that don’t have a physical office in the USA have to file the taxes before:
  • 15th June if they follow the calendar year.
  • 15th day of the 6th month of their tax year.

If a company’s fiscal year ends on March 31, it must submit its tax return for the first year by July 15 of the second year. Which is the 15th day of the fourth month after the end of its fiscal year. In case the corporate income tax filing date falls on a non-business day. Then the date will shift to the next business working day. 

Advantages of Corporate Tax

Below are some of the advantages that come with corporation tax in USA:

• All registered corporations, whether publicly traded or privately held, are subject to the same corporation tax rate in the USA.
• The revenue generated from the business tax in the USA is used to fund public works, the military, and public transportation.
• The taxable income can be decreased by deducting bad debts and losses.
• Tax deductions are offered to companies so that they invest in different schemes. Some countries create "special economic zones" (SEZs) within their borders, which have competitive infrastructure and specialized legal frameworks.

Conclusion

To conclude, as a part of their legal obligations, corporations should annually submit corporation tax returns. To both the federal government and each state where they conduct business. Every registered corporation must pay the tax to the government to ensure the smooth processing of business activities. At Registratiowala, we assist businesses with business registration in the USA. If you want to set up a company in the USA or need help regarding the tax filing reach out to us.  

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Author: Dushyant Sharma

Hey there, I'm Dushyant Sharma. With the extensive knowledge I've gained in past 8 years, I have been creating content on various subjects such as banking, insurance, telecom, and all the important registration and licensing processes for various companies. I'm here to help everyone with my expertise in these areas through my articles.