Corporate Tax Meaning
Corporate Tax is the tax charged by the government on the profits earned by the company at a specified rate every year and is calculated as per specific tax norms.
Corporate Tax Formula
The formula of corporate tax is the total profits of the corporate body are multiplied with the tax rate to get the tax to be paid before the specified due date by them.
Here the federal taxable income of the net profit is the amount known as gross income of the corporation body, gross income deducted by the cost of goods sold and after adding other receipts
Example of the Corporate Tax
Let us take an example of a company XYZ Corporation. Suppose the company had earned a net profit of $50,000 during the current financial year which includes some income that is not taxable worth $10,000. Also, there are certain expenses which are not deductible from the net profit for taxation purpose worth $5,000. The tax rate applicable to the company is 21%. Calculate the corporate tax to be paid using the formula.
First, we will calculate the taxable profit.
- Taxable Profit = Net profit earned – Income not taxable but included in net profit + Income taxable not included in net profit
- = $50,000 – $10,000 + $5,000
- = $45,000
The calculation of corporation tax will be –
- = $45,000 * 21%
- = $9,450
The different advantages are as follows:
- It plays a very important role in the growth of a country in hands in the exchange of all the infrastructural and other services provided by the government including defense and transportation services, the government earns revenue from the corporate bodies earning huge amount of income as a small contribution to the country.
- The corporation tax rate has been reduced in the US to a great extent in the year 2017 thereby helping the corporate bodies to expand and to plow back their profit into the business.
- Various kinds of formations like a merger, amalgamation, demerger, acquisition, corporate restructuring are not being taxed by the government which gives huge relief in terms of administrative work.
- Relief is also provided by the government to the companies on double tax income, for example, double taxation relief is provided by the government to the companies doing transactions with a foreign government and foreign entities of many of the countries as per the treaty between them.
Though corporate tax is useful in the above-mentioned ways, there are certain disadvantages also which are as follows –
- The tax rate as applicable to the corporate bodies is a huge burden for every such Corporate. It is seen by the entrepreneurs that they can only take back their total income after deducting a great percentage even though they work very hard to on all the hundred percent of the profits.
- When the taxes are required to be paid by the entities, it increases administration cost which is very time consuming for the cooperation.
- As per the specified tax norms, companies need to file their income tax returns every year on a specific due date which increases the burden of every corporate body as they have to consult an accountant in order to comply with all the tax norms applicable to them.
- Companies have to make the quarterly estimation of their profits based upon which taxes are paid to buy them. So, it seems to be a tedious work to make an estimation of income which is practically very difficult.
- Tax norms of government are very weak and difficult to understand by small businesses. For example, there are certain norms related to a dividend paid by the corporate bodies which may be exempted by the government to the receiver of the dividend but the same might be double taxation if taxes are also levied on those dividends once it is taxed in the hands of corporate.
- Norms related to foreign tax credit are very critical and difficult to understand.
- It must be made clear that income by the shareholders of corporate profits is not taxed on them, however, the dividend earned by the shareholders of the corporate bodies is being taxed by the government. However, on the other hand, shareholders of mutual funds and other companies are taxed on the income while they are relieved from the tax on dividends.
- Some entities might not be corporations in a literal sense however they are taxed as corporations because they are being organized as a corporate body even though they do not fall under the category of the corporate body as per the definition under the law.
- For the corporations having all the shareholders being the citizen of the United States as per the definition under the law are termed as S corporations which are treated in the same way as mutual funds for the purpose of levy of corporate tax. This means that the income of the corporate body is not being taxed at the corporate level rather the shareholders are liable to pay the tax on the corporate income and on the other hand dividend income is being taxed in the level of corporate rather than shareholders level.
This has been a guide to what is Corporate Tax and its meaning. Here we discuss the formula to calculate the corporation tax along with the example. You can learn more from the following articles –