The US Corporate Tax Rate: A Comprehensive Guide

The US Corporate Tax Rate is a complex topic, but don't worry, I've got you covered.

The federal corporate tax rate in the US is a flat rate of 21%, which was reduced from 35% in 2017 as part of the Tax Cuts and Jobs Act. This change was intended to make the US a more competitive business environment.

The corporate tax rate is applied to a company's taxable income, which is calculated by deducting business expenses from gross income. The resulting tax liability is then paid to the IRS.

As a result of the tax reform, many large corporations saw significant reductions in their tax bills, with some even paying zero federal income tax in certain years.

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The federal corporate tax rate has undergone significant changes in recent years. The current federal corporate tax rate is 21%, a reduction from the previous maximum tax rate of 35% before the 2017 Tax Cuts and Jobs Act.

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The Tax Cuts and Jobs Act slashed the tax rate from 35% to 21%, resulting in substantial tax savings for many corporations. For example, Verizon Communications saved $10.7 billion in taxes, while Walmart saved $9.0 billion.

The corporate tax rate applies to a company's taxable income, which is revenue minus expenses. The effective tax rate, or the actual tax rate paid, varies by industry and company. As of 2018-2021, the average effective tax rate for all 296 companies surveyed was 12.8%.

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If you're looking to start a business in the United States, it's essential to consider the corporate tax rates in each state. This can significantly impact your company's bottom line.

Alabama has a corporate tax rate of 6.5%. Alaska's rate ranges from 0% to 9.4%. Arizona's rate is 4.9%. Arkansas' rate is between 1% and 4.8%. California's rate is a flat 8.84%.

Colorado's corporate tax rate is 4.40%. Connecticut's rate is 7.5%. D.C.'s rate is 8.25%. Delaware's rate is 8.7%. Florida's rate is 5.5%. Georgia's rate is 5.75%.

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Hawaii's rate is between 4.4% and 6.4%. Idaho's rate is 5.8%. Illinois' rate is 9.5% (7% + 2.5% Personal Property Replacement Tax). Indiana's rate is 4.9%. Iowa's rate is between 5.5% and 7.1%.

Kansas' rate is between 3.5% and 6.5%. Kentucky's rate is 5.0%. Louisiana's rate is between 3.5% and 7.5%. Maine's rate is between 3.5% and 8.93%. Maryland's rate is 8.25%. Massachusetts' rate is 8.0%.

Michigan's rate is 6.0%. Minnesota's rate is 9.8%. Mississippi's rate is between 4.0% and 5.0%. Missouri's rate is 4.0%. Montana's rate is 6.75%.

Nebraska's rate is between 5.58% and 6.5%. Nevada has no corporate tax rate. New Hampshire's rate is 7.5%. New Jersey's rate is between 6.5% and 9.0%. New Mexico's rate is between 4.8% and 5.9%.

New York's rate is between 6.5% and 7.25%. North Carolina's rate is 2.5%. North Dakota's rate is between 1.41% and 4.31%. Ohio has no corporate tax rate.

Oklahoma's rate is 4.0%. Oregon's rate is between 6.6% and 7.6%. Pennsylvania's rate is 8.49%. Rhode Island's rate is 7.0%. South Carolina's rate is 5.0%.

South Dakota has no corporate tax rate. Tennessee's rate is 6.5%. Texas has no corporate tax rate. Utah's rate is 4.65%. Vermont's rate is between 6.0% and 8.5%.

Virginia's rate is 6.0%. Washington has no corporate tax rate. West Virginia's rate is 6.5%. Wisconsin's rate is 7.9%. Wyoming has no corporate tax rate.

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Let's take a closer look at how 16 prominent corporations were affected by the Trump tax law. Verizon Communications saw its effective tax rate drop from 21% to a mere 8%, resulting in a whopping $10.7 billion in saved taxes.

The table below shows the effective tax rates and savings for these 16 corporations:

The average effective tax rate for these 16 corporations dropped from 24.6% to 13.3% between 2013-2016 and 2018-2021.

The relationship between statutory corporate tax rate and economic growth is complex, but the data shows that a higher tax rate is not always associated with slower growth. In fact, some years with high tax rates, such as 1954, saw economic growth rates of 3.4 and 4.5.

The effective marginal tax rate on capital income between 1954 and 2006 also shows no clear relationship with economic growth, with an estimated correlation of -0.064. This suggests that higher tax rates may not necessarily retard economic growth.

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A closer look at the data from 1948-2010 reveals that there is no consistent pattern between tax rates and economic growth. In some years, high tax rates were followed by slow growth, while in others, high tax rates were followed by rapid growth.

Note: The table shows a few examples of years with high tax rates and corresponding economic growth rates.

Not all companies have experienced lower earnings, and that's a crucial point to understand when discussing tax rate impacts. In fact, 50 out of 296 companies saw their tax rates increase, which is a significant number.

These companies tended to be those that were already starting with low effective tax rates. Whirlpool's taxes went from 5 to 8 percent, and General Motors' taxes went from -1 to 0 percent. Netflix's taxes even went from -5 to 0 percent, which is a remarkable turnaround.

The companies that saw tax increases had an average effective tax rate of 4.2 percent before the tax law changes, and it jumped to 9.9 percent afterwards. That's a significant increase, and it highlights the fact that not all companies have benefited equally from tax law changes.

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Corporate profitability has reached an all-time high, with before-tax corporate profits averaging 10.5 percent of national income since the end of World War II.

Before-tax profits have displayed a U-shaped pattern over this 65-year period, falling from 13.4 percent in 1950 to a low of less than 7 percent in the early 1980s and then increasing over the next three decades.

In 2012, before-tax profits were equal to 13.6 percent of national income, and even in the depths of the Great Recession, corporate profits (9.6 percent of national income in 2008) were not far from their historical average.

After-tax corporate profits as a percentage of national income have also shown a U-shape, but with a much shallower trend than before-tax profits. Between 1947 and 2012, the average value was 7.4 percent.

In 2012, after-tax profits were equal to 11.4 percent of national income, and since 2000, after-tax profits have generally been higher than after-tax profits in the 1950s.

The gap between before-tax and after-tax corporate profits has narrowed considerably since the early 1980s and was at a low of 1.3 percentage points in 2009.

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Tax avoidance and evasion are complex issues that affect the corporate tax rate in the US. The government loses a significant amount of revenue due to tax subsidies given to companies.

From 2013 to 2016, the US government gave out $248 billion in tax subsidies to 296 companies, which is a staggering amount. This is equivalent to 37% of the profits of these companies being sheltered from tax.

The numbers don't change much in the following years, with the government giving out $225.6 billion in tax subsidies to these companies from 2018 to 2021, which is again 39% of their profits being sheltered from tax.

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We need a corporate income tax because it raises a significant amount of revenue for the federal government, $242.3 billion in fiscal 2012 to be exact.

The corporate income tax also contributes to the overall progressivity of the tax system, with many tax policy analysts and government agencies estimating that the majority of the corporate tax burden falls on capital, between 75 percent and 82 percent.

The corporate income tax serves as a backstop to the individual income tax, preventing high-income taxpayers from using corporations as tax shelters by retaining earnings and obtaining lower tax rates.

In fact, if there were no corporate tax, high-income individuals could channel funds into corporations and get lower tax rates than if they operated in partnership or proprietorship form, as noted by Gravelle and Hungerford in 2008.

You can reduce your corporate tax liability by deducting qualifying business expenses from your taxable earnings. This can include expenses like bad debt, charitable donations, and miles driven for business purposes.

For example, Verizon Communications was able to deduct $10.7 billion in qualifying expenses from their taxable earnings, resulting in a tax savings of $10.7 billion.

Another way to reduce your corporate tax liability is by choosing a business structure that does not impose double taxation. This is where structuring as an S corporation comes in.

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An S corporation is a type of corporation that is taxed similarly to a partnership, meaning that all tax items flow through to the owners of the entity. This can be beneficial for small businesses with 100 or fewer eligible shareholders.

Here are some benefits of structuring as an S corporation:

As shown in the example of Verizon Communications, reducing your corporate tax liability can have a significant impact on your bottom line. By deducting qualifying expenses and choosing a business structure that doesn't impose double taxation, you can keep more of your hard-earned profits.

The staggering reality is that 296 companies received tax subsidies totaling $248.0 billion from 2013 to 2016, and $225.6 billion from 2018 to 2021.

These companies reported a combined U.S. income of $1.90 trillion from 2013 to 2016, and $2.75 trillion from 2018 to 2021. The table below breaks down the tax subsidies and profits sheltered from tax for these companies.

These companies managed to shelter 37% of their profits from tax from 2013 to 2016, and 39% from 2018 to 2021, resulting in significant tax subsidies.

The Alternative Minimum Tax, or AMT, is a complex topic that can be a real challenge for businesses to navigate.

The Inflation Reduction Act introduced a new corporate AMT, effective for tax years beginning after 2022, based on financial statement income. This new tax is a 15% minimum tax on adjusted financial statement income of C corporations.

A corporation's adjusted financial statement income determines whether it's subject to the corporate alternative minimum tax, or CAMT. This income is calculated by making numerous adjustments to financial statement income.

A taxpayer is an applicable corporation if its average annual AFSI over a three-tax-year period exceeds USD 1 billion. This rule also applies to corporations that are part of a foreign-parented multinational group.

A corporation that is a member of a foreign-parented multinational group must apply a two-part test to determine if it's an applicable corporation. The first test checks if the three-year average AFSI of all members of the group exceeds USD 1 billion. The second test checks if the three-year average AFSI of US members of the group exceeds USD 100 million.

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If a taxpayer pays CAMT because tentative minimum tax exceeds regular tax plus BEAT, it will generate a minimum tax credit. This credit can be carried forward indefinitely and claimed against regular tax in future years.

The CAMT does not limit the general business credit, which corporate taxpayers may fully utilise against both their regular tax liability and the CAMT.

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The Base Erosion and Anti-Abuse Tax (BEAT) was created to target US tax-base erosion. It imposes an additional corporate tax liability on corporations with average annual gross receipts of at least $500 million that make base-eroding payments to related foreign persons.

The BEAT is calculated to the extent that 10% of a taxpayer's modified taxable income exceeds their regular tax liability net of most tax credits. This percentage increases to 12.5% for tax years beginning after December 31, 2025.

A base-eroding payment is any amount paid or accrued by the taxpayer to a related foreign person that is deductible or to acquire property subject to depreciation or amortization. This includes reinsurance payments and certain payments by expatriated entities.

The BEAT provision is effective for base-erosion payments paid or accrued in tax years beginning after December 31, 2017.

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Corporate profits are at an all-time high, with before-tax profits averaging 10.5 percent of national income since the end of World War II.

The trend in before-tax profits has displayed a U-shaped pattern over this 65-year period, falling from 13.4 percent in 1950 to a low of less than 7 percent in the early 1980s, and then increasing over the next three decades.

In 2012, before-tax profits were equal to 13.6 percent of national income, and even in the depths of the Great Recession, corporate profits (9.6 percent of national income in 2008) were not far from their historical average.

Here's a breakdown of corporate profits as a percentage of national income from 1947 to 2012:

After-tax profits have generally been higher since 2000 than they were in the 1950s, with a gap between before-tax and after-tax corporate profits narrowing considerably since the early 1980s.

In 2009, this gap was at a low of 1.3 percentage points, indicating that a larger portion of corporate profits were being taxed.