Corporate taxes are also known as either corporation tax or company tax. The purpose of this tax is essentially for the U.S government to collect on the earnings of corporations. Although many countries impose such taxes at the national level, there is also a similar tax that can often be imposed at state or local levels. The New Mexico corporate tax ranges, with up to $500,000 of net income being taxed at 4.8%, anything over $500,000 is taxed at 5.9%, and above $1 million at 7.6%.
Before paying, a corporate tax is a levy placed on a firm's profit by the government. Although there are not always state taxes in all states of the United States, there are always federal taxes on corporate income.
Since the 2017 Tax Cuts and Jobs Act was implemented, The United States imposes a 21% tax on the profits of all United State resident corporations.
In 2019 the United States corporate tax raised $230.2 billion which accounted for 6.6 percent of total federal revenue. Before the 2017 act was put into place, the corporate tax was at 35 percent, accounting for 9 percent of total overall revenue.
There are various taxes that must be paid by corporations. Although federal corporation taxes must be paid by residents of all states, there are also local state taxes. In New Mexico, the corporate tax structure is made up of three brackets. The top rate of 7.6 percent only occurs at $1,000,000 of net income. Corporations in New Mexico must also pay an annual franchise tax of $50. New Mexico is the 20th most expensive state for corporation taxes.
As a corporation, you must file a corporate tax return, IRS Form 1120. This requires you to then pay taxes at the corporate income tax rate of 21% on any profits. If you still owe taxes, you will estimate the amount of tax due for the year and then make quarterly payments. This will be required on the 15th day of the 4th, 6th, 9th, and 12th months of the tax year.
If as a corporation owner you also work for the corporation, then you will be required to pay individual income taxes on your own salaries and bonuses. This is similar to any other regular employees of any company. Salaries and bonuses are deductible business expenses, so the corporation does not pay taxes on them.
The profits from a corporation that are distributed are called dividends. These dividends must be reported on the personal income tax records of the owners. Unlike salaries and bonuses, dividends are not tax-deductible. This means that the normal C corporations must also pay taxes on them, leading to double taxation. Smaller corporations rarely face this problem because typically the owners also work for the corporation as employees.
Another way to avoid double taxation is by forming an S corporation. When a corporation elects S corp status, they can pay taxes like a partnership or limited liability company (LLC). This means that all corporate profits or losses will then "pass-through" the business and be reported on the personal income tax return of the owners.
To reduce taxable profits, a corporation is able to deduct many of its business expenses. This means that money that a corporation spends in order to run the business or pursue a profit, will be deductible.
Tax-deductible expenses include:
There are many advantages of having a separate income tax statement for your business. Although this might be time-consuming, it can be extremely beneficial.
Since the 2017 tax act, corporations pay a flat tax of 21% on all their profits. This is lower than the top five individual income tax rates, which range from 22% to 37%. If your corporation is a c corp, then you will lose a lot of profits due to double taxation, which may end up pushing you into a lower tax bracket anyway.
Another tax benefit of forming a corporation is that the corporation is able to deduct full cost fringe benefits. There are also other types of business entities that can deduct the cost of fringe benefits as a business expense, but owners who receive these benefits will typically ordinarily be taxed on their value.
Contact us to learn more about what taxes are required for your company, and to learn about avoiding double taxation as an s corp.