Summary: The USA corporate tax rate remains at 21% for C corporations, applicable to all taxable income, including capital gains. State-level corporate income tax (CIT) varies from 1% to 10%, with some states imposing no tax. Companies must make quarterly estimated tax payments by April 15, June 15, September 15, and December 15, with penalties for late payments. An Employer Identification Number (EIN) is required for businesses, facilitating tax reporting and financial transactions. Corporations must file Form 1120, which includes schedules for income, deductions, and tax computations. Electronic filing is available for tax returns, extensions, and employment tax forms. Form 7004 allows for an automatic filing extension, but taxes must be paid on time to avoid interest and penalties. S corporations, which pass income to shareholders, file Form 1120-S, with profits and losses reported on Schedule K-1. Other variants like 1120-F (foreign corporations), 1120-H (homeowners associations), and 1120-REIT (real estate investment trusts) exist. Failure to comply with IRS regulations results in penalties and interest charges, with businesses required to respond promptly to IRS notices. The evolving corporate tax environment, influenced by economic and political changes, continues to impact reporting and compliance standards.
With 21% as the corporate income tax after December 31, 2017, U.S.A. today ranks among the magnet for investment of industrial production, return of many industries to avail a huge tax deduction promised by the new government installed in Washington D.C., let us learn the details of corporate tax which has evolved over the centuries. A C corporation earns the income, incurs the expenses resulting in profit/loss and pays the income tax. Profits available after the payment of tax is distributed normally in the form of dividends. Yes, with double taxation, once at corporate level and later at the shareholder level, corporate tax has been a discussion point over the centuries. All taxable income of a C corporation attracts a flat tax rate of 21% and no maximum tax rate of net capital gains.
CIT rates vary from state to state and generally range from 1% to 10% (although some states impose no income tax). The most common taxable base is federal taxable income, which is modified by state provisions and generally is apportioned to a state on the basis of an apportionment formula consisting of one or more of the following: tangible assets and rental expense, sales and other receipts, and payroll. Many states are moving away from a three-factor formula in favour of a one-factor receipts apportionment methodology.
C corporation pays quarterly estimated tax payments and naturally attracts penalty if tax due is $ 500 or more and not paid on time.
What is Employer Identity Number?
- An employer identification number is a unique nine-digit number that is assigned to a business entity.
- EINs allow the IRS to easily identify businesses for tax reporting purposes.
- All businesses that meet certain criteria must have an EIN before they can begin operating.
- Applying for one is free and applications are available on the IRS website.
- Along with tax reporting, EINs allow businesses to open bank accounts and apply for credit.
Quarterly estimated payments
Then, what are the due dates, naturally for timely payment of corporation tax?
Instalments for due by the 15th day of April 15, June 15, September 15, and December 15 for a calendar year corporation. Obviously, the current instalment equals the minimum of 25% of the income tax to be shown on the tax return for the current year unless previous income tax return was submitted last year which was for a 12 months period and contained a positive tax liability and not a zero.
Form 1120-W shows the details, the instructions or format for corporations using a standard or annualized method to compute the required quarterly instalments.
Depositing taxes
Electronic Filing Corporations can generally electronically file (e-file) Form 1120, related forms, schedules, and attachments; Form 7004 (automatic extension of time to file); and Forms 940, 941, and 944 (employment tax returns). If there is a balance due, the corporation can authorize an electronic funds withdrawal while e-filing. Form 1099 and other information returns can also be electronically filed.
If the corporate wants extension of time to file the tax returns?
Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns, to request an extension of time to file. Generally, the corporation must file Form 7004 by the regular due date of the return.
Who must sign?
The return must be signed and dated by: • The president, vice president, treasurer, assistant treasurer, chief accounting officer; or • Any other corporate officer (such as tax officer) authorized to sign.
Assembling the tax returns
Let me quote from IRS website in this regard.
To ensure that the corporation’s tax return is correctly processed, attach all schedules and other forms after page 6 of Form 1120 in the following order.
1. Schedule N (Form 1120). 2. Schedule D (Form 1120). 3. Form 4797. 4. Form 8949. 5. Form 8996. 6. Schedule O (Form 1120).
7. Form 4626. 8. Form 8050. 9. Form 1125-A. 10. Form 4136. 11. Form 8978. 12. Form 965-B. 13. Form 8941.
14. Form 3800. 15. Form 8997. 16. Form 6252. 17. Schedule A (Form 8936). 18. Form 4255. 19. Additional schedules in alphabetical order. 20. Additional forms in numerical order. 21. Supporting statements and attachments.
Let us talk of penalties for late filing of tax returns, late payments of tax due or giving replies to IRS notices.
Interest and Penalties
If one receives a letter from IRS asking certain explanations, penalties, interest et., it is essential to reply separately rather than attaching an explanatory letter with the tax return.
I have quoted certain actual statements from IRS website since no simplification from my side does help. Let us face the bare truth.
Interest. Interest is charged on taxes paid late even if an extension of time to file is granted. Interest is also charged on penalties imposed for failure to file, negligence, fraud, substantial valuation misstatements, substantial understatements of tax, and reportable transaction understatements from the due date (including extensions) to the date of payment.
Late filing of return. A corporation that does not file its tax return by the due date, including extensions, may be penalized 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. The minimum penalty for a tax return required to be filed in 2025 that is more than 60 days late is the smaller of the tax due or $510.
Late payment of tax. A corporation that does not pay the tax when due may generally be penalized 1/2 of 1% of the unpaid tax for each month or part of a month the tax is not paid, up to a maximum of 25% of the unpaid tax.
Though the bare information from IRS website do indicate some facts, invariably IRS will send a detailed letter containing full information and asking the tax payer either to justify the payments or send the required penalties/interest or other fees on a timely schedule and it is clearly understood that any delay does attract more penalties.
Accounting methods
Figure taxable income using the method of accounting regularly used in keeping the corporation’s books and records. In all cases, the method used must clearly show taxable income. Permissible methods include cash, accrual, or any other method authorized by the Internal Revenue Code.
Accounting period
A corporation must figure its taxable income on the basis of a tax year. A tax year is the annual accounting period a corporation uses to keep its records and report its income and expenses.
Generally, corporations can use a calendar year or a fiscal year. One can get the consent of the IRS before changing its tax year by filing Form 1128, Application to Adopt, Change, or Retain a Tax Year, however.
Amended return. Use Form 1120-X, Amended U.S. Corporation Income Tax Return, to correct a previously filed form 1120.
Analysis of Form 2120
1. First 11 columns speak of income like gross receipts or sales, returns and allowances, cost of goods sold, gross profit, dividends and inclusions, (schedule C), interest, gross rents, gross royalties, capital gains, and other income etc.
2. Columns 12 to 27 consist of deductions like Compensation of officers, salaries and wages, bad debts, rents, taxes and licenses, interest, depreciation, depletion, advertising, pension, profit sharing etc., plans, employee benefit programs, Energy efficient commercial buildings deduction, and other deductions etc.
3. Item 30 is the taxable income while item 37 is Credited to 2025 estimated tax /Refunded.
4. Page 2 with Schedule C (Dividends, Inclusions, and Special Deductions) consists of 24 items ending with total special deductions.
5. Page 3 with Schedule J (Tax Computation and Payment) contains 23 items ending with Total payments and credits.
6. Page 4/5 with Schedule K (Other Information) contains 31 items ending with the statement “Is this a consolidated return with gross receipts or sales of $1 billion or more and a subchapter K basis adjustment, as described in the instructions, of $10 million or more?”
7. Page 6 with Schedule L (Balance Sheets per Books) ends with 28 items with the title” Total liabilities and shareholders’ equity”
8. Schedule M-1 titled with “Reconciliation of Income (Loss) per Books With Income per Return” contains 6 items.
9. Schedule M-2 Analysis of Unappropriated Retained Earnings per Books (Schedule L, Line 25) contains 4 items.
What are other forms with 1120 number with information of various types of entities?
Yes, there are other forms.
1120-S, S-Corporation, 1120-F, Foreign corporation, 1120-H, Homeowners Association, 1120-C, Titled Cooperative Association, 1120-W, Estimated tax for corporation, 1120-L, Life insurance company, 1120-PC, Property and casualty insurance, 1120-IRC, Regulated investment company, 1120-REIT, Real estate investment trust.
Some facts about the other most popular 1120-S entity.
- Form 1120-S is the annual tax return for businesses who registered as S corporations.
- The form is used to report income, gains, losses, credits, deductions, and other information for S corporations.
- Form 1120-S must be accompanied by Schedule K-1, which lists individual shareholders and the amount of profit and loss allotted to each.
- Form 1120-S can be filed electronically or by mail.
- The entity 1120-S can have less than 100 members who consent to be a 1120-S corporation.
- Use Form 1120-S to report the income, gains, losses, deductions, credits, and other information of a domestic corporation or other entity for any tax year covered by an election to be an S corporation.
How To Make the Election
For details about the election, let us learn about Form 2553, Election by a Small Business Corporation.
A corporation or other entity eligible to elect to be treated as a corporation may elect to be an S corporation only if it meets all the following tests.
- It is (a) a domestic corporation, or (b) a domestic entity eligible to elect to be treated as a corporation, that timely files Form 2553 and meets all the other tests listed below. If Form 2553 isn’t timely filed, see Relief for Late Elections, later.
- It has no more than 100 shareholders. You can treat an individual and his or her spouse (and their estates) as one shareholder for this test. You can also treat all members of a family (as defined in section 1361(c)(1)(B)) and their estates as one shareholder for this test.
- Its only shareholders are individuals, estates, exempt organizations described in section 401(a) or 501(c)(3), or certain trusts described in section 1361(c)(2)(A).
- It has no non-resident alien shareholders (other than as potential current beneficiaries of an ESBT).
- It has only one class of stock (disregarding differences in voting rights). Generally, a corporation is treated as having only one class of stock if all outstanding shares of the corporation’s stock confer identical rights to distribution and liquidation proceeds. See Regulations section 1.1361-1(l) for details.
- It isn’t one of the following ineligible corporations.
- A bank or thrift institution that uses the reserve method of accounting for bad debts under section 585.
- An insurance company subject to tax under subchapter L of the Code.
- A domestic international sales corporation (DISC) or former DISC.
- It has or will adopt or change to one of the following tax years.
- A tax year ending December 31.
- A natural business year.
- An ownership tax year.
- A tax year elected under section 444.
- A 52-53-week tax year ending with reference to a year listed above.
- Any other tax year (including a 52-53-week tax year) for which the corporation (entity) establishes a business purpose.
Who Must File
- A corporation or other entity must file Form 1120-S if (a) it elected to be an S corporation by filing Form 2553, (b) the IRS accepted the election, and (c) the election remains in effect. After filing Form 2553, the entity should have received confirmation that Form 2553 was accepted.
When To File
- Generally, an S corporation must file Form 1120-S by the 15th day of the 3rd month after the end of its tax year. For calendar year corporations, the due date is March 17, 2025 (March 15th falls on Saturday). A corporation that has dissolved must generally file by the 15th day of the 3rd month after the date it dissolved.
- If the due date falls on a Saturday, Sunday, or legal holiday, the corporation can file on the next day that isn’t a Saturday, Sunday, or legal holiday.
Flow through to S – Corporation shareholders
Ordinary business income/loss
The ordinary business loss/income for above corporation is netted and reported on line 21, page 1 of form 1120-S. The ordinary income/loss is then allocated to shareholders based on their percentage of stock ownership. The same is passed through to shareholders on Schedule K-1(Form 1120-S), the amounts are reported to the shareholders to be incorporated in their tax returns.
My views and conclusions
The fast-evolving economic scenarios have changed and newly arrived at agreements on corporate reporting of income/loss have come under discussions again among the nations due to the newly elected/electing political entities across the nations. I have projected the available information which has taken centuries of evolution of economic decisions resulting in the growth of C corporations, the giants who have spread across the nations and torch bearers of mutually accepted accounting standards like GAAP or IFRS. The future with awe inspiring moments is waiting for more economic growth with technologies like AI or others.
A friendly request
The above article is a collection of my ideas taken from IRS or other respectable web sites with years of information on corporate taxes. Obviously, this is neither a tax advice nor a consultation for you to arrive at tax matters. Yes, you must consult a top CPA from USA to solve your individual situations and adequately pay for their consultation.
Reference; IRS website: https://www.irs.gov/
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