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. 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 $459,750, the capital gains tax rate is 15% or less for tax year 2022. That income limit is $517,200 if you’re married and filing jointly. Some or all of your net capital gain may be taxed at 0% if taxable income is less than $41,675 if you’re sinlge, and $83,350 if you’re married filing jointly, in tax year 2022. For tax year 2023, the 15% rate applies to singles with incomes from $44,625 to $492,300, and to married joint filers with incomes from $89,250 to $553,850.
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.
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.
