Building Your Business Becoming an Owner Business Types Calculating Your Corporate Tax Rate Learn About Income Taxes for Corporations and S Corporations By Jean Murray Jean Murray Facebook Twitter Jean Murray, MBA, Ph.D., is an experienced business writer and teacher who has been writing for The Balance on U.S. business law and taxes since 2008. She has taught accounting, business law, and business finance at business and professional schools for over 35 years, has authored several books on saving money and simplifying your business, and was the owner of startup-focused company Emence Enterprises, LLC. learn about our editorial policies Updated on September 13, 2022 Fact checked by Emily Ernsberger Fact checked by Emily Ernsberger Twitter Emily Ernsberger is a fact-checker and award-winning former newspaper reporter with experience covering local government and court cases. She also served as an editor for a weekly print publication. Her stint as a legal assistant at a law firm equipped her to track down legal, policy and financial information. learn about our editorial policies In This Article View All In This Article Federal and State Business Income Tax Rates Capital Gains Taxes for Corporate Shareholders Taxes for S Corporations Blended Tax Calculation for 2018 Filing State Taxes for Corporations Accumulated Earnings Tax Corporations and the Double Tax Dilemma Frequently Asked Questions Photo: filadendron / Getty Images Income taxes for corporations and corporate owners, also known as shareholders, changed after the Tax Cuts and Jobs Act (TCJA) of 2017. States have also changed their corporate tax rates. Most states who adjusted their corporate tax rates lowered the tax rate. Key Takeaways Corporate tax rates have generally gone down in the United StatesMost states have a corporate income taxCorporations may need to pay additional taxes other than federal and state income taxes Federal and State Business Income Tax Rates The TCJA reduced the federal corporate tax rate from a progressive tax rate that went up to 35% to one flat tax of 21%. This rate applies to corporations whose tax year began after Jan. 1, 2018. Note Corporate tax rates also apply to LLCs who have elected to be taxed as corporations. S corporations and LLCs that elect to be taxed as S corporations pay corporate income taxes through the shareholders' personal tax returns. State corporate tax rates have also changed. Fifteen states and the District of Columbia cut corporate taxes between 2012 and the beginning of 2020. However, New York state actually increased corporate taxes for businesses making more than $5 million. That bill was signed into law in 2021. 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 partly depends on how long you've owned the shares. If you've owned them for a year or less, they're taxed as short-term gains, or regular income. If you've owned them for more than a year, they're taxed as long-term gains. For single filers who make less than $445,851, the capital gains tax rate is 15% or less. Some or all of your net capital gain may be taxed at 0% if taxable income is less than $40,400 as of 2022. 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. The tax is passed through to the shareholders (owners) instead, who report the income and pay the tax on their personal tax returns. 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. The gain is a long-term capital gain if the stock has been held longer than a year. Note 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. You can 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 would 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 to help you with this calculation. State Taxes for Corporations Most corporations must pay state income tax. 44 states have a corporate income tax, but South Dakota and Wyoming are the only states that do not have a corporate income tax or a gross receipts tax. For the 2022 tax year, state tax rates for corporations range from 2.5% in North Carolina to 11.5% in New Jersey. Accumulated Earnings Tax Corporations may have to pay an additional accumulated earnings tax of 20%, if they make more than what the reasonable needs of the business are. The IRS typically looks at an accumulation of $150,000 to $250,000 as reasonable, depending on the business. The corporation needs a bona fide business reason for accumulating earnings, such as actual moves to expand the business. 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, then it's again taxed to the shareholders when it's distributed as dividends. This creates a double tax. The individual shareholders must report this income on their individual tax returns if the corporation distributes all or part of its income to shareholders as dividends. The stock basis discussed above is considered a return of capital investment if the corporation pays a shareholder back for investment in the company. Only amounts over the stock basis are taxable to the shareholders. Frequently Asked Questions What Is the Corporate Tax Rate? After the Tax Cuts and Jobs Act was passed, the federal corporate tax rate was reduced to 21%. This rate applies to corporations whose tax year began after Jan. 1, 2018. How Do I Calculate the Effective Tax Rate for My Corporation? You can figure out the effective tax rate for your corporation by dividing the cost of taxes by the pre-tax earnings of your corporation. For example, if the corporation made $100,000 before taxes and was taxed $10,000, the effective tax rate would be 10%. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning! Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Tax Policy Center. "How Does the Corporate Income Tax Work?" Tax Foundation. "Tax Trends at the Dawn of 2020," Page 7. PWC. "New York budget increases tax rates and makes other changes." Internal Revenue Service. "Topic No. 409 Capital Gains and Losses." Internal Revenue Service. "S Corporation Stock and Debt Basis." Internal Revenue Service. "2018 Fiscal Year: Blended Tax Rates for Corporations." Accessed Nov. 14, 2021. Tax Foundation. "State Corporate Income Tax Rates and Brackets for 2021." Internal Revenue Service. "Publication 542 Corporation," Page 17.