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Corporate Taxes

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There are many forms of business presence to choose from when starting a business in the United States. It is important to bear in mind that each of the different forms of business have different tax implications as well as different levels of liability.

C Corporations are the most common form of business entity. A C Corporation is allowed an unlimited amount of shareholders, whom are all protected from personal liability pertaining to business debts or lawsuits. The C Corp status means that a business is subject to doubt taxation. The earnings of the business, as well as dividends paid to the stockholders, are all taxed.

S Corporations are what most small businesses prefer. For a corporation to be allowed S Corp status they must have been first a C Corp, so the structures are similar. One major difference is that with an S Corp status, shareholders profits are not taxed to the business. There are certain specifications that need to be met before a business can be eligible for S Corp status, including:
there can be no more than 100 shareholders
shareholders must be individuals
shareholders must be residents of the U.S.
banks, insurances companies, and international sales corporations cannot be S Corporations
there can only be one class of stock in the company

In the United States, C Corporations are required to pay taxes on taxable income. C corporations are taxed under Sub-chapter C of the Internal Revenue Services code.

Corporate taxes are based upon the marginal tax rate system. Using the marginal tax rate system, higher taxable income levels incur a higher tax rate. Corporations may incur additional taxes based on the Alternative Minimum Tax (AMT) or accumulated earnings tax. If a corporation's taxes based upon the marginal tax rate system are lower than the AMT, the corporation may have to pay the alternative minimum tax amount depending on the corporation's tax preferences. Accumulated taxes may have to be paid as well, if the corporation has not distributed dividends to their shareholders.

A corporation is known as a completely separate entity from its shareholders. In other words, not only is a corporation required to pay taxes on its taxable income, but a corporation's shareholders are also taxed on dividends they may receive from the corporation.

To report income, a corporation must file a Form 1120 in the United States . According to the Internal Revenue Service, within the Form 1120 corporations are required to identify any individual that owns 50 percent or more of the corporation. Also, corporations must identify those entities that own 10 percent or more of the corporation. The Form 1120 also requires corporations with more than $10 million in assets to address questions pertaining to ownership, allocations, transfers of interest, cost sharing, and methods of accounting.

State governments as well as local governments levy their own corporate income taxes. State corporate income taxes vary greatly depending on the state in which the corporation is located.

Salaries for those running a corporation are often tax-deductible on the corporate level. Occasionally, these salaries offset the corporation's profits. In this case, the tax owed by the corporation will be decreased.

A Qualified Personal Service Corporation, or QPSC, is required by the Internal Revenue Service to pay a 35% flat tax rate. According to the Internal Revenue Service, a Qualified Personal Service Corporation's activities involve services in different fields including health, law, architecture, engineering, accounting, consulting, actuarial science, and performing arts. According to the Internal Revenue Service, 95% of a Qualified Personal Service Corporation's stock is owned by the employees performing services for the corporation, retired employees, the estates of the employees, or other persons acquiring stock in the corporation by reason of death of employees.