Tax Brackets & Rates for Corporations

A corporation is considered to be a legal person with an existence that is separate and distinct from those who have created it. Using a corporation as a vehicle to conduct a business has several advantages. The corporation, and your business, will live on when you die, since it has perpetual existence and it will, typically, protect your personal assets, e.g., your home, from any debts it occurs in the course of transacting business.

 

The Internal Revenue Service (IRS) classifies corporations into C corporations and S corporations. A C corporation is the traditional corporation created expressly as a separate legal entity. An S corporation, on the other hand, is a corporation that elects to pass corporate income, losses, deductions, and credits through to its shareholders for federal tax purposes.

 

Forming an S corporation avoids the double taxation that shareholders of regular C corporations are subjected to. In C corporations, both the corporation income and shareholder income (dividends) are taxed. S corporations avoid corporate tax by ‘paying’ the income directly to shareholders.

 

A Limited Liability Company (LLC) is a business entity created by various state laws. For federal tax purposes, the members of an LLC can choose to have it treated as a corporation.

 

The tax rate schedule for corporations is like the ones for individuals, with tax rates and brackets operating in similar fashion. See Tax Rate Schedule below. The tax rates and brackets are, however, different. There are eight (8) tax brackets and eight (8) tax rates.

 

Tax Rate Schedule            
from 2016 Instructions for Form 1120 U.S. Corporation Income Tax Return  
               
Over But not Over Tax is   Rate Of Amount Over
$0 $50,000   $0.00   15% $0  
$50,000 $75,000   $7,500.00 + 25% $50,000  
$75,000 $100,000   $13,750.00 + 34% $75,000  
$100,000 $335,000   $22,250.00 + 39% $100,000  
$335,000 $10,000,000   $113,900.00 + 34% $335,000  
$10,000,000 $15,000,000   $3,400,000.00 + 35% $10,000,000  
$15,000,000 $18,333,333   $5,150,000.00 + 38% $15,000,000  
$18,333,333 …..     + 35% $0  

 

The first bracket covers the first $50,000 of taxable income and is taxed at 15%. The second bracket covers the next $25,000 of taxable income and is taxed at 25%. The third bracket covers a further $25,000 and is taxed at 34%. The fourth tax bracket covers the next $235,000 of taxable income, and is taxed at 39%. The fifth bracket applies to the next $9,665,000, with the tax rate falling to 34%. The sixth bracket, which covers the next $5,000,000, raises the rate again, to 35%. The seventh bracket, taxed at 38%, covers the next $3,333,333 of taxable income. Any taxable income above $18,333,333 is taxed at 35%.

 

For example, a corporation with taxable income of $10,000,000 would have a tax liability as follows: The first $50,000 at 15% = $7,500; the $25,000 after that at 25% = $6,250; the $25,000 after that at 34% = $8,500; the $235,000 after that at 39% = $91,650; and the last $9,665,000 at 34% = $3,400,000, to give a total tax liability of $3,400,000.