Business and Corporate Taxation

Corporate taxes are taxes levied on Corporations by the Federal Government. Businesses that are filed as corporate entities are responsible to pay business taxes through the net profits of the corporation. The federal government established generous or lenient standard deductions to be deducted from net profits thereby reducing net gains that are taxable. The opposite is true for the public paying income tax which is that gross income is taxed. In theory, the intent was to allow more profit gains in the corporate coffers to expand operations, acquire new assets or increase employment opportunities. In practice, however, this created the question as to who in fact pays the corporate tax.

People pay taxes, not corporations. The owners would ultimately pay taxes on capital while taxes on net profits were reduced due to generous deduction and depreciation schedules. There was however, over time, a shift occurring as the owners of corporations did not agree that the burden of paying taxes should fall strictly on their own or their stockholders shoulders. Corporations began to turn the tables by reducing capital expenditures thereby limiting expansion and asset growth. The shift slowly and eventually passed the tax burden on to the consumer by reducing supply, due to capital inefficiencies and reduced labor force and a reduction in real wages and increasing the prices of goods and services produced. This produced a supply and demand curve which favored the corporation and ultimately not in the favor of the consumer. The misnomer when the public prefers corporate taxes be raised instead of personal income, is in actuality, a vote for taxes to be raised on the consumer as corporate taxes are offset in part by increased costs of goods and services to the consumer.

The current corporate tax rate is approximately 21 percent and that translates to corporate taxes currently making up to 7 percent of total revenue collected in taxes by the United States Federal Government.  However, that does not take into consideration deductions and depreciations taken by corporations. The effective rate collected by the federal government is closer to 11 percent. The contribution by corporations to the United States gross domestic production, or GDP, is currently about 1 percent. That is well below the average contributions of corporations in other countries. Because of special tax code provisions, lowered taxes on income made from foreign capital investments and increased domestic investment tax incentives, the rate of corporate tax expenditures exceeds corporate tax revenue collected by the Federal Government. This differences in expenditures to revenue collected due to current tax code provisions directly correlate to the national debt.

There are opportunities for corporations to avoid taxation. One opportunity is to contract with smaller companies who are still able to depreciate all capital 100 percent the year that capital was purchased, and pass the savings on to their larger corporate investors – outsourcing, if you will. Most larger corporations, when investing in capital, are subject to a depreciation schedule over several years, thereby losing the 100 percent of immediate depreciated deductions. Another is to consider corporations under their “business preferences” or how corporations identify themselves. Some examples of business preferences are minority owned corporations, low income housing corporations, experimenting and research corporations such as those in the biotech industry and energy development corporations such as wind and solar research and application and electric car research and application.

There has been a proposal by the Biden administration to impose a minimum 15 percent flat tax on “booked” income after adjustments as reported on their financial statements as opposed to the 21 percent reported to the IRS as taxable income. The key term here is financial statements as much can happen between what is reported to their stakeholders through a financial statement and what is actually “booked” or reported to the IRS after tax credits, business preference deductions and depreciation schedules. Also included in this proposal is that foreign investments and profits would be taxed at the 15 percent rate thereby limiting deductions of foreign investments and profits by multinational corporations and typically exceeding a tax rate after deductions and depreciations. It has also built in an opportunity to reduce taxable income closer to the minimum 15 percent if a corporation well exceeds that minimum. Another opportunity is that the corporation can deduct up to 80 percent of previous operating cost losses, in addition to special tax credits and qualifying business preferences. Also, those corporations exceeding 1 billion in adjusted (taxable) income over the past 3 years would qualify for the 15 percent tax if the corporation did not exceed what was paid in regular income.

Overall, there is an effort to force corporations to pay their “fair share”. There are pros and cons to all proposals, and not all legislatures can agree on what exactly is a “fair share”. Corporations have been taxed since 1909, and to present, there have been many changes and adjustments to corporate tax law. There will be more changes and adjustments to come as time passes and corporate structure changes.