Federal Corporate Tax Rate 2018-2025

The Tax Cuts and Jobs Act of 2017 (the “Act”) lowered the federal corporate tax rate to 21%.

  1. The Act reduced the “C” corporation tax rate from 35% to 21%. Many think this tax break is solely meant for America’s largest corporations-which is not so. But, before a small business jumps onto the “C” corporation “band wagon” consider the following: Are you willing to leave profits in the corporation indefinitely?

  1. Remember, in comparison, an “S” corporation has very lax rules as to distributing funds. These shareholders may usually simply take residual cash/profits without any tax consequences. But a “C” corporation has stringent rules. Taking residual cash/profits from the “C” corporation can create DOUBLE taxation. This is because the entity structure does not allow for tax free distributions like an “S” corporation. If the “C” corporation shareholder pays him/herself residual cash/profits there is generally no corresponding deduction to the “C” corporation (so you have not reduced the “C” corporation tax at all) but you likely will be fully taxed, individually, upon you personally receiving this distribution, as a dividend, usually.

  1. Many times, the tax on this distribution will be at ordinary individual tax rates but with some careful tax planning the tax on these distributions (dividends) can be taxed at individual capital gains rates (from 0% to 20%, albeit most people are in the 15% capital gains bracket). Presuming you have structured this distribution at the 15% capital gains bracket you have effectively, as a small business person, paid a 36% tax on these distributions (21% at the corporate level since there is no deduction to the “C” corporation, plus the 15% personal tax rate you pay as an individual). And if this distribution is not structured under capital gain rates you could easily pay a 22% (the rate many Americans will hover around, personally) personal tax plus the 21% corporate tax, yielding a 43% total tax on these distributions.

  1. Thus, any time funds are paid out of a “C” corporation you should try and be sure there is a corresponding deduction at the “C” corporation level. Paying out bonuses to the owners triggers personal taxes to the recipient, at that person’s individual tax rate but also allows for a deduction at the corporate level. Shareholders may also pay out rents to themselves if the owners use their property for the corporation’s business-again taxable income to the individual and a tax deduction to the Corporation. The key here is to try and balance the competing tax rates. So careful planning is required to try and stay within the personal tax bracket of 22% (up to $82,500 for single persons and $165,000 for a married couple). Once you exceed these personal limits it does not make sense to have more income individually as the corporate deduction is only 21%.

Supreme Court-sales tax

Photo attribution: David Dugan/Wikimedia Commons.

Due to a 2018 U.S. Supreme Court case (Wayfair v S. Dakota), internet retailers can now be required to collect sales tax. The tough part is interpreting what this all means; how states will apply the right to tax internet retailers (e-tailers).

1. Some important things for businesses. Registration. Before a business can collect sales tax they must officially register to seek permission to collect sales tax within the state(s) they conduct business within. If a business merely collects taxes prior to registration there is usually large penalties. NY State-as an example-can impose a $10,000 fine.

2. Acquire proper software if you sell via internet that will track sales in multiple locations. You must, however, research to be sure the product/service you are selling via the internet is subject to tax in various jurisdictions. Charging tax when not required could create problems with your customers and certainly put you at an economic disadvantage. So, do not presume all states treat all products/services the same regarding sales tax applicability.

3. Of course, do not jump into registering in all 50 states to collect sales tax, just because you are an e-tailer. The South Dakota law reviewed by the U.S. Supreme Court had a de minimis exemption in the law; under $100,000 in annual sales and less than 200 transactions in the state. Simply stated; if you did not meet those limits you are not required under the South Dakota law. to collect any sales tax. This does not mean other states must follow suit and exclude the same amounts but likely a drastic change of these exemptions would cause a state law to be unconstitutional because of the “burden on interstate commerce”, which the Courts are always concerned about.

4. An income tax requirement is now born in all these states. In addition to registering for sales tax in required states an internet e-tailer would need to register with that same state’s Department of State. This is required so the business has the legal authority to conduct business in that state. Consequently, if you are doing business in any state you are also required to file an income tax return, whether you are structured as a Corporation or Limited Liability Company. This of course truly increases the burden on internet companies not only in tax payments but in administrative costs for filing multiple income and sales tax returns.

5. So take a deep breath and conquer each item methodically. And hope that maybe Congress will intercede. Congress may be able to legislate this away and possibly create a uniform sales tax rate for e-trailers throughout the country and disburse the collections based on a formula of population or on the volume of sales from within each state. This would, however, not eliminate the need to file income tax returns in multiple states, but could eliminate the sales tax registration in the particular states.