Corporate Taxation

Because Corporations are recognized as separate legal entities from their owner-shareholders, Corporations themselves are taxed on all business profits that cannot be deducted as business expenses.  Generally, Corporations are only taxed on their "retained earnings" which are the taxable profits kept in the business to cover expenses or expansion.  Profits distributed to the shareholders are called dividends, and those profits must be claimed and on the personal tax returns of the individual shareholders and assessed income tax.

To reduce the taxable profits of Corporations, the shareholders can deduct many of the Corporation’s legitimate business expenses, or money that has been spent during the year in the legitimate pursuit of Corporate profit.  For example, Corporations can deduct the salaries, bonuses, and all of the costs associated with the medical and retirement plans for the Corporate employees.  In addition, all Corporate start-up costs, operating expenses, and advertising expenditures can also be deducted.

All of the Corporations profits and expenses must be accounted for on The U.S. Corporate Tax Return, IRS Form 1120.  Any profits claimed on Form 1120 are taxed at a corporate income tax rate which can range from 15% to 35% depending on the total taxable income.  If it is estimated that a Corporation will owe taxes at the end of the year, it must estimate the amount of tax due for that year and make quarterly payments to the IRS in April, June, September, and January.