For corporations in the middle of tax season, this filing year looks much like always—but that’s about to change. One of the biggest changes in legislation during 2017 was the overhaul of corporate taxes. Next year, corporations will pay a flat 21% in tax, a massive shift from the old tax code, which had variable rates depending on profits.
So what does that mean for businesses that are in the process of filing for 2017? Essentially, that you still need to be familiar with the old tax rates, and make sure you’re covering all your bases when you file. Those variable rates are still in effect until next year. So how much tax do you owe, and what do you need to know about filing this year?
Simple Calculations for Tax Owed
Even though corporations should typically have an accountant preparing the IRS forms, it’s good to have an understanding of how taxes are calculated under the current code. First, tax rates are different for each type of business. Corporations are divided into three main categories:
- C Corporations, which pay taxes based on their profits.
- S Corporations, which are taxed through the individual shareholder filings.
- LLCs (Limited Liability Corporations), pass-through entities that are taxed via the members’ individual filings.
C corporations are taxed anywhere from 15% to 39%, an amount that’s paid out quarterly. The table showing what each profit level owes is simple to use and will help you get an idea of what you can expect to owe.
Here are a couple of examples:
A corporation making $140,000 dollars in profit, will need to pay a flat tax on corporations making $100,000-$300,000 per year. That number is $22,250 in 2017. In addition, the company will have to pay 39% of any profits above that initial $100,000. The tax on that $40,000 is $15,600. Added up, the corporation will pay $37,850 in taxes on its total profits of $140,000.
A very small corporation making $38,000 per year after expenses is subject to a flat tax rate of 15%. This company will owe just $5700 in federal taxes.
Each profit level has its own rules, and it’s simple to estimate how much tax you’ll owe once you know what your profits were for 2017.
It’s important to note that if your corporation pays out dividends to shareholders, those funds will be taxed again on the shareholders’ individual returns. If dividends aren’t distributed, the IRS can impose another tax called Accumulated Earnings Tax of 20%, to discourage corporations from holding onto funds to avoid taxation.
Don’t Forget to Deduct Those Surprising Expenses
Because corporations are taxed based on their profits, it’s important to make sure you’re deducting all applicable business expenses. Some, you may not have even thought of, but it all adds up when you’re trying to minimize what your corporation owes.
For example, marketing expenses are part of the cost of doing business. This can include social media too—since 65% of adults use social media, it’s an important part of any digital marketing strategy. You can deduct expenses like paying freelancers, subscriptions to automation software, and social media ads.
Anything you use that is an essential part of running your business is a potential deduction, so don’t be afraid to look through your receipts and see what you might be missing. Just because something may be surprising doesn’t mean it’s not a legitimate expense that should be deducted. Not sure if something should be deducted? Ask your accountant for guidance.
Choose the Right Accountants
Individuals with simple returns can get away with using tax preparation software. However, there are so many intricacies involved with corporate taxes that it’s important to have a certified accountant help you with your taxes, no matter how small your corporation is. Tax preparation fees are also deductible, and you’ll be able to report them on your return in 2019.
Choosing an accountant can be a tricky process. Depending on the size of your business, you may want to hire an accountant during tax season only, work with a firm, or hire a full-time accountant to help with long-term planning. No matter which option makes sense for your corporation, it’s extremely important to vet candidates thoroughly. Your accountant should solve your tax headaches—not make them worse.