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(Continued from previous article) Now that we’ve finished talking about transfer taxes, we can move on to talk about the last item in our list of federal means of generating revenue. This last means is technically a type of income taxation – because it taxes the income of corporations. The reason, however, why this was not discussed earlier as PART of income taxation is because while a corporation can be regarded as a singular entity, it is still not an individual PERSON. It was much easier to follow the progression of individual income tax to things like excise taxes, payroll taxes and transfer taxes simply because those things are immediately of concern to a normal individual person. Corporate income tax is a little more difficult to take up in this sense, since it is related to a non-human entity that is made up of several individual persons – and not everyone concerns themselves with corporate taxation. That being said, we will now move on to discuss federal taxation in the form of corporate income tax.

Corporate income tax, obviously, is a tax levied on the taxable income of a corporation. But it must be pointed out that corporate income tax in America applies only to C corporation, or any entity that has been designated as a C corporation. So it is best that before we move on with this discussion, we try and explain what a C corporation it and how it is different from any other type of corporation.

The C corporation, also known as a C corp is a legal business entity in the United States of America that is defined as one that is federally taxed according to Federal income tax laws. That is to say, most of the major companies as well as the regular companies in the United States are defined as C corporations, and are thus subject to the federal corporate income tax. The other type of corporation, the S corporation, is a legal business entity that is NOT taxed under the federal income tax laws. In order to become an S corporation (or to be eligible to be an S corporation) the said corporation must meet a number of requirements including being a domestic or limited liability company, having one hundred or less shareholders who are American citizens or residents, having only one class of stock, and having dedication to the fair allocation of profits and losses to shareholders according to their interest in the business. C corporations, on the other hand, have no limit to the number of shareholders – and it doesn’t matter if the shareholders are domestic or foreign either. Needless to say, S corporations are taxed differently compared to C corporations.

Now that that has been established, let’s get back to the subject: again, corporate income tax is essentially a tax levied on a C corporation by default according to the current internal revenue code. This is pretty much like the regular income tax levied on individual taxpayer; it falls under a marginal tax rate system – that is to say, a marginal tax rate is the basis of this tax. A marginal tax rate, in case it isn’t quite clear, is “a tax rate that applies to the last dollar of the tax base” (including the taxable income or spending), and this pretty much applies to changes in one’s obligation to tax according to the rise in income. All in all it’s like another way of saying “progressive taxation”, with a very slight difference. Of course, this marginal tax rate system is just the base of this tax – there is the possibility of other taxes being applied to the corporation based on other systems. Such taxes include the alternative minimum tax (to be discussed in more detail later) and the accumulated earnings tax. The alternative minimum tax is only levied upon the C corporation, however, if their tax under their marginal tax base is smaller than the alternative minimum tax. The accumulated earnings tax, on the other hand, is applicable to corporations that fail to pay out to shareholders (in dividends) any accumulated excess earning – this is a fifteen percent tax rate.

For reference purposes, the marginal tax rates applied to C corporations (should you be part of such an entity) are as follows: corporations that generate a taxable income worth fifty thousand dollars or less for the fiscal year are subject to a fifteen percent tax rate. Taxable income worth more than that and up to seventy-five thousand US dollars are subject to twenty-five percent tax, while seventy-five to one hundred thousand dollars worth of taxable income for a fiscal year are subjected to a thirty-four percent tax rate. One hundred thousand to three hundred and thirty-five thousand dollars are hit with a thirty-nine percent tax rate, while three hundred and thirty-five thousand to ten million dollars worth of taxable income are taxed thirty-four percent (strangely enough). Ten million to fifteen million dollars worth of taxable income has a tax rate of thirty five percent while fifteen million to eighteen million three hundred and thirty three thousand three hundred and thirty three dollars are to pay thirty eight percent tax rate; any taxable income above that is to pay thirty-five percent.

Incidentally, not all these rates have allowable deductions: only the third, fourth, sixth and seventh brackets have proper deduction values in dollars. These are the deductions, respectively: eleven thousand seven hundred and fifty dollars, sixteen thousand seven hundred and fifty dollars, one hundred thousand dollars and five hundred fifty dollars.

Another thing that should be taken note of is the fact that the tax rates referenced above do not apply to what we call “qualified personal service corporations”. So what is a qualified service corporation and what is its tax rates? Well, a qualified personal service corporation, as the name suggests, is a corporation whose activities are focused (mostly if not totally) on services that involve accounting, actuarial science, architecture, consultation, engineering, health, law, and performing arts. In order for a corporation to be classified as a qualified personal service corporation, ninety-five percent of its stock should belong (whether directly or indirectly) to the employees (retired or otherwise) who are performing (or have performed) the above-mentioned services, or to persons who inherited the stocks in the event of said employees’ passing, or to the estate of the corporations employees. Once these parameters are met, a corporation will be considered a qualified personal service corporation, and will thus be subject only to a flat tax rate of thirty-five percent.

It should also be noted that unlike the standard income tax paid out by the regular population – that is, the individual person – the corporate income tax is paid in installments, quarterly. The payments are for their EXPECTED tax liability for that year. There is also something called the “check the box system” that corporations are now allowed to engage in which the entities may choose to let all income pass though the shareholders and thus lowering the income tax rate to be paid – obviously one of the many, many loopholes that corporations can use in order to pay less to the federal government.

That being said, we have come to the conclusion of this particular discussion of taxation in the United States of America. Again, federal taxation in the US is there to generate revenue and encourage (or discourage) certain statuses and actions among the general populace of this great nation. There may be many ways to circumvent some of these levies, but the means by which they are LEGALLY circumvented, for the most part, are definitely there to ensure that in some way, we are all doing something good for someone else. It may seem to be frightening when you’re new to it, or even bothersome once you’ve been a taxpayer for years. You may feel like all you’ve been paying for is not even going anywhere it should be going, or you may feel like you’d rather spend your money on something else. But what this all comes down to is that taxation – especially FEDERAL taxation, whose positive effects are not so readily apparent – is way more than just about the money that you give to the government, and if you like to be positive, it is more than just an obligation to the country you call home. It’s a social exercise, and, as with most social exercises, it is subject to evolution when it comes into contact with its elements.

While it may not seem like it, taxation gives the people power, if we only knew how to use it.