Calculating Your Corporate Tax Rate

Learn About Income Taxes for Corporations and S Corporations

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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 States
  • Most states have a corporate income tax
  • Corporations 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 corporationsS 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%.

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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.
  1. Tax Policy Center. "How Does the Corporate Income Tax Work?"

  2. Tax Foundation. "Tax Trends at the Dawn of 2020," Page 7.

  3. PWC. "New York budget increases tax rates and makes other changes."

  4. Internal Revenue Service. "Topic No. 409 Capital Gains and Losses."

  5. Internal Revenue Service. "S Corporation Stock and Debt Basis."

  6. Internal Revenue Service. "2018 Fiscal Year: Blended Tax Rates for Corporations." Accessed Nov. 14, 2021.

  7. Tax Foundation. "State Corporate Income Tax Rates and Brackets for 2021."

  8. Internal Revenue Service. "Publication 542 Corporation," Page 17.

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