Business Owner's Guide to C Corporation Tax Rates

C corporations, which are the largest of U.S. businesses, can be taxed in several different ways. Specifically, different tax rates are applied to capital gains on the sale of shares of C corporations and dividends. Additionally, federal and state taxes may be charged on earnings held by the corporation. These tax rates are not standard across the board in regard to state tax and there are ways C corporations can minimize and lower tax rates.

Federal taxation of C corporations

The taxation of income generated by C corporations is taxed on a sliding scale at the federal level. The tax rates according to the United States Internal Revenue Service are as described below. Generally, the tax rate rises with income but at certain saturation points the tax rate is highest and then drops a few percentage points before rising and then dropping again.

The lowest tax rate being 0% or negative amounts and the highest tax rate being 38% for profit between $15,000,000-$18,333,333. The tax rates adjust to 15% for income between $0-$50,000.00 then move up to 25% for taxable income between $50,000-75,000 and up again to 34% for taxable income between $75, 000-$100,000, and then up to 39% for profit between $100,000 and $335,000. An interesting drop occurs in the tax rate for incomes above $335,000-$15,000,000 at which the rate is either 34% if below 10 million and 35% if below fifteen million. Taxable income over $18,333,333 drops back to 35%

If a C-corporation operates offshore on the Island of Puerto Rico and U.S. territory, the maximum corporate tax is currently 7% and lower for corporations in certain industries subject to tax exemption. Additionally, there are several favorable tax credits and deductions that can be compute a lower adjusted gross income and taxable income. Deductions can includes up to 200% or double deduction for training expenses, and research and development. Additionally corporate activities that make use of local goods, workers and re institute struggling businesses may also receive credit to further lower taxable income and total taxation.

State taxation of C Corporations

Unlike Federal taxation, state taxation can be avoided altogether depending on the State of operation. States such as Delaware and Nevada have favorable state tax rates but annual franchise fees in the State of Delaware may offset the tax savings. State corporate tax rates range from 0%-10%, and thus have significant influence on a companies total income potential. Some of the more expensive states to operate a C Corporation in, in terms of State taxation are Massachusetts 9.5%, Minnesota 9.8% and Pennsylvania 9.9% and some of the lower taxed States include Kansas 4%, Colorado 4.5% and Utah 5%.

Investor tax rates on capital gains from C corporations

Owners of C Corporations are only subject to capital gains tax if the shares of the company are sold within the fiscal tax year ending December 31 of any given year. Many advocates of lower corporate taxation proclaim the capital gains tax to be a double taxation because as owners of the company, the shareholders have already been subject to one tax through the corporate income tax. Nevertheless, capital gains tax continues to exist and comes in two types, short term and long term capital gains tax.

Short term capital gains tax is higher and applies to profit on the sale of businesses owned for less than one year. The short term capital gains tax is the same as one's normal income tax rate. For example, if an individual has a taxable income of $31,000, is filing single and the tax rate is 15% , then that individual will be taxed 15% on short term capital gains. This rate rises with income making short term capital gains on par with long term capital gains only while incomes remain in the 15% bracket. That is to say, long term capital gains tax rates are fixed at 15% whereas short term are variable and can range from 10-35% depending on income levels.

Tax rate on C Corporation dividends

Federal taxation of dividends is currently set at a maximum of 15% and a minimum of 5% for individuals at or below the 15% income tax bracket. This tax rate is a result of Jobs and Growth Tax Relief Reconciliation Act of 2003. For this reasons, dividends with fixed payouts may be advantageous to certain corporate officers and investors instead of stock options because the difference in taxation could cost more than the extra yield between the two investments and those yields influence on overall income.

Strategies for C Corporations to lower tax rates

There are several methods by which C Corporations can lower taxation. These strategies may include geographical location, restricted and/or heavy insider ownership of the corporation, roll over of negative earnings from previous years, and legal manipulation of earnings so as to place the corporations taxable income in a lower tax bracket. For example, if a C corporation's taxable income is near the border of the 25% and 34% tax rates, that company may make a charitable contribution just large enough to lower taxable income to the 25% bracket thereby saving 9% in taxes. That 9% savings can far outweigh the cost of the charitable contribution in some cases.

Taxation of C Corporations is subject to various tax rates and regulations depending on what kind if income is being taxed, i.e. C Corporation earnings, capital gains from the sale of C corporations, dividend income etc. Additionally, tax rates vary based on geographical location and state of incorporation and operation. Financially strategic use of deductions and tax credits can also have significant bearing on the total taxable income a C Corporation incurs for a given tax year.

Sources:

1. http://www.nysscpa.org/cpajournal/2004/1004/essentials/p40.htm
2. http://www.irs.gov
3. http://www.pridco.gobierno.pr/english/tax_and_business_incentives/tax_incentives/3.12corp_tax_incentives.htl
4. http://www.taxadmin.org/fta/rate/corp_inc.html