Every year entrepreneurs are responsible for properly managing the economic performance of their business to account for their corporate tax liability.
Calculating your yearly federal corporate tax liability, and completing the required filings should be handled by a professional tax accountant.
However, entrepreneurs can, and would be wise to calculate their estimated corporate tax liability in order to enhance their perspective and better plan for the future.
Here, we cover the basics on how to calculate your estimated corporate tax liability.
Step 1: Taxable Income
The first step is to calculate your business’s corporate taxable income. This is achieved by subtracting all of the relevant business expenses, plus local and state taxes your can deduct from your company’s revenue. More information on corporate tax deductions can be found in Tax Deductions.
Step 2: Applied Tax Rate
Then, entrepreneurs must calculate how their business’s corporate taxable income is impacted by the federal corporate income tax rates.
Entrepreneurs should make note of there reality that the corporate tax rates, of which there are 8, appear strange because the rate increases & decreases are not constant.
The rates increase, decrease, increase and then decrease again. There is no clear logic to the rate differences, they are just how the U.S Congress designed them.
Federal Corporate Income Tax Rates
Taxable Income Over
Taxable Income Not Over
To properly calculating your corporate tax liability, entrepreneurs must understanding how the income and rate structure actually works.
For instance, upon first observation an entrepreneur may likely assume that if their business’s taxable income is $ 80,000, then their corporate tax rate is 34% resulting in an estimated tax liability of $27,200 dollars.
However, this approach would be incorrect.
Using the same example, the way the corporate tax structure works is that the first $50,000 of the $80,000 taxable income is taxed at the 15% tax rate resulting in a tax liability of $7,500, then the following $25,000 of the $80,000 is taxed at a rate of 25% resulting in a tax liability of $6,250, and finally the remaining $5,000 of the $80,000 is taxed at a rate of 34% resulting in a tax liability of $1,700.
Adding the three calculations together results in an estimated tax liability of $15,450, with an effective tax rate of 19%.
The good news, the result applying the correct methodology is typically lower than the ‘at first glance’ or assumed method of calculating a business corporate income.
The bad news, the federal corporate income tax rates are subject to change. The U.S Congress periodically changes the corporate tax rates, and how they are calculated depending on the politics of the party in power, and the economic realities of the business community.
Therefore, it is imperative that entrepreneurs keep a close eye on the present and future federal tax regulations by visiting irs.gov.
All of the relevant corporate tax forms for business can be found on From 1120, U.S Corporation Income Tax Return.
Municipal & State Taxes
The last component entrepreneurs should keep in mind when calculating their estimated corporate tax liability is including any municipal, and state taxes.
State tax regulations vary and their corresponding corporate tax rates range from 0% to 12%. Some states also have their own corporate tax brackets business leaders should take into account. Thankfully, the same methodology that applies to the federal corporate tax brackets also apply to state tax brackets.
When calculating your business’s federal tax liability, it is important to subtract any and all municipal and state taxes from your businesses taxable income before applying the federal corporate tax rates.
For more information on specific state corporate income tax rates and brackets visit the dedicated webpage on taxfoundation.org.
Again, entrepreneurs should enlist the help of experienced tax accountants to accurate calcite their federal and state tax liabilities and complete the required filings. IRS forms are confusing to understand and full of legal jargon.
More importantly, experienced tax accountant professionals represent the best barrier to preventing a potential IRS audit, which can not only economically impact your business in negative ways, but also damage your business’s reputation.
Many banks, consulting companies and accounting firms provide valuable corporate tax services. Be sure to evaluate the best solution for your businesses needs and budget.
Take advantage of the Corporate Tax Calculator excel spreadsheet attached below.
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