Financial Word of the Day: Corporate Tax
If you own a business, invest in companies, or simply want to understand where company profits go, today’s financial term, Corporate Tax, is an important one.
What Is Corporate Tax?
A corporate tax is a tax imposed on the taxable profits earned by a corporation.
Think of it as income tax for a company.
A corporation earns revenue by selling products or services. It then subtracts allowable business expenses such as wages, rent, supplies, depreciation, and other deductions. What remains may become taxable corporate income.
For a traditional C corporation, the current federal corporate income tax rate is generally 21%.
For example, imagine a corporation has:
$1,000,000 in revenue
$700,000 in deductible expenses
$300,000 in taxable income
At a 21% federal corporate tax rate, the company could owe approximately $63,000 in federal corporate income tax, before considering other credits, adjustments, or taxes.
That leaves $237,000 after federal corporate income tax.
Here’s Where Corporate Taxes Get Interesting
Corporations can be taxed differently depending on how they are structured.
A C Corporation is considered a separate taxpaying entity. The corporation pays tax on its profits. If some of the remaining profits are later distributed to shareholders as dividends, shareholders may also owe tax on those dividends.
This is often referred to as double taxation.
An S corporation, on the other hand, generally does not pay regular federal income tax at the corporate level. Instead, profits and losses usually “pass through” to the owners, who report their share on their individual tax returns.
That difference is one reason choosing the right business structure can have such a big financial impact.
Why Should Corporate Taxes Matter to You?
You might think: “I don’t own a corporation, so why should I care?”
Because corporate taxes can affect much more than the company writing the check.
Taxes influence how much money companies have available to:
Reinvest in the business
Hire employees
Increase wages
Purchase equipment
Pay dividends
Buy back stock
Expand into new markets
If you are an investor, corporate taxes can ultimately affect company profits, and company profits are one of the major forces behind the long-term value of your investments.
Using "Corporate Taxes" in Conversation
You might hear someone say: “The company generated $10 million in pretax income, but we still need to account for corporate taxes before determining its net income.”
Now you know exactly what that means.
Revenue is not profit. Profit is not necessarily take-home money. And taxes are one of the expenses standing between the two.
The Bottom Line on Corporate Tax
Corporate tax is the tax corporations may pay on their taxable profits.
Understanding corporate taxes can help you better evaluate businesses, investments, and even your own options if you become a business owner.
The more you understand where money goes after it is earned, the better equipped you are to make decisions about where your own money should go.
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