Corporate tax in the United States

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Corporate tax in the United States is paid to the federal government and to many state and local governments on the income of businesses that are treated as corporations for tax purposes. The federal corporate tax rate has been a flat 21% since 2018. State and local taxes vary and are often based on federal rules but with their own tweaks.

Who pays and how
- C corporations pay tax at the corporate level. S corporations, mutual funds, and other flow-through entities usually don’t pay corporate tax themselves; the income passes to owners who pay personal taxes.
- Shareholders pay tax on the dividends they receive from a corporation. Some dividends for individuals are taxed at lower rates. Some special types of entities or distributions aren’t taxed at the corporate level.
- Some entities and transactions can be tax-exempt or tax-free in certain reorganizations, mergers, or liquidations.

Tax base and rules
- Taxable income for a corporation is generally gross income minus allowed deductions. Some income may be exempt, and some expenses (like interest) are limited.
- States also tax corporate income, usually using federal concepts but with state-specific adjustments. Most states do not allow a deduction for federal income taxes.

Territorial approach to foreign income
- The 2017 reform moved the federal system toward a territorial approach, focusing tax on income earned inside the United States. U.S. companies can still face taxes on foreign earnings through special rules, and foreign income taxes can often be credited against U.S. tax (foreign tax credit). There are additional taxes on foreign-source earnings, such as the branch profits tax and withholding on certain income.

Consolidated returns and transfer pricing
- Groups owned by the same people can file a consolidated federal return (and some states require or allow this) to combine income, deductions, and credits.
- When related companies deal with each other, tax authorities require “arm’s-length” pricing. The IRS can adjust profits between related parties under transfer pricing rules.

Dividends and distributions
- Dividends are taxable to shareholders. Corporate dividends may qualify for a dividends-received deduction in some cases. Individuals may pay lower rates on qualified dividends.
- Foreign shareholders may have withholding taxes on dividends, interest, and royalties.

State and local taxes
- Nearly every state taxes corporate income, with rates and rules that vary widely. Most states start from federal taxable income and modify it. Some states have minimum taxes or other business taxes, and some rely on apportionment formulas based on a company’s property, payroll, and sales in the state.

Credits and planning
- Corporations can reduce their tax by credits (for example, foreign taxes paid, research credits, and other incentives).
- Interest deductions have limits, and some related-party payments are scrutinized to prevent tax avoidance.
- Some companies use tax planning to influence when income is recognized or to reorganize in tax-friendly ways. The tax system includes rules to prevent abuse in reorganizations, mergers, and liquidations.

Filing and compliance
- Most corporations must file annual tax returns and make estimated quarterly payments. The common federal form is Form 1120; S corporations use Form 1120S, and there are other forms for foreign or special cases.
- Deadlines typically fall on the 15th day of the third month after the close of the tax year (March 15 for calendar-year filers), with extensions available. Penalties apply for late or incorrect filings.

Key points in plain language
- The federal rate is 21% for most corporations since 2018.
- State and local taxes add more, and rules differ by location.
- Some organizations pay taxes only on the owners’ sides (pass-through), while others pay at the corporate level.
- Income learned abroad can be taxed differently, but credits and special rules can reduce double taxation.
- Mergers, reorganizations, and certain transfers can sometimes be done without tax in the short term, with proper planning.
- Tax returns are filed annually, with quarterly estimated payments, and failures to file or pay can carry penalties.

In short, corporate taxation in the U.S. involves a federal rate of 21%, state/local variations, a mix of taxed-and-pass-through structures, international tax rules with credits for foreign taxes, and a set of complex rules for consolidation, transfer pricing, and compliance.