# Corporate Tax: Definition, Deductions, and How It Works

![Corporate Tax: A tax on the profits of a corporation.](https://www.investopedia.com/thmb/_m_8KlgY1uFS7aB1EMJWqJN1LvQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/corporatetax.asp-Final-d392733724ee42ff9aab483fa71f77ba.png)

*— Investopedia / Theresa Chiechi*

## What Is a Corporate Tax Rate?

The federal corporate tax rate in the United States is 21%, and it applies to a corporation's profits. The taxes are paid on a company's taxable income, which includes revenue minus expenses. Expenses include cost of goods sold (COGS), general and administrative (G&A) expenses, selling and marketing, research and development, depreciation, and other operating costs.

Corporate tax rates vary widely by country, with some countries considered to be tax havens due to their low rates. Corporate taxes can be lowered by various deductions, government subsidies, and tax loopholes, and so the effective corporate tax rate, the rate a corporation actually pays, is usually lower than the statutory rate; the stated rate before any deductions.

### Key Takeaways

*   Corporate taxes are collected by the government as a source of income.
*   Taxes are based on taxable income after expenses have been deducted.
*   As of January 2025, the corporate tax rate in the United States is a flat rate of 21%. Before the Trump tax reforms of 2017, the corporate tax rate was 35%.
*   A company can register as an S corporation to avoid double taxation. An S corporation does not pay corporate tax as the income passes through to business owners who are taxed through their individual tax returns.

## Understanding Corporate Tax

The federal corporate tax rate in the United States is currently a flat 21% due to the [Tax Cuts and Jobs Act](https://www.investopedia.com/taxes/trumps-tax-reform-plan-explained/) (TCJA), which President Donald Trump signed into law in 2017 and which went into effect in 2018. Previously, the maximum U.S. corporate income tax rate was 35%.

U.S. corporate tax returns are generally due by the 15th day of the fourth month following the end of the corporation's tax year. Corporations may request a six-month extension to file their corporate [tax returns](https://www.investopedia.com/terms/t/taxreturn.asp) in September. Installment payment due dates for estimated tax returns occur in the middle of April, June, September, and December. Corporate taxes are reported on Form 1120 for U.S. corporations.

Some [states impose a corporate income tax](https://www.investopedia.com/articles/personal-finance/101315/taxes-florida-small-businesses-basics.asp), which can run from a few percentage points in North Carolina to double digits in New Jersey.

## Corporate Tax Deductions

Corporations are permitted to reduce taxable income by certain necessary and ordinary business expenditures. All current expenses required for the operation of the business are fully tax-deductible. Investments and real estate purchased with the intent of generating income for the business are also deductible.

A corporation can deduct employee salaries, health benefits, tuition reimbursement, and bonuses. In addition, it can reduce its taxable income by deducting [insurance premiums](https://www.investopedia.com/terms/i/insurance-premium.asp), travel expenses, bad debts, interest payments, sales taxes, fuel taxes, and excise taxes. Tax preparation fees, legal services, bookkeeping, and advertising costs can also be used to reduce corporate taxes.

## Special Considerations

A central issue relating to corporate taxation is the concept of [double taxation](https://www.investopedia.com/terms/d/double_taxation.asp). Certain corporations are taxed based on their taxable income. If this net income is distributed to shareholders, these individuals are forced to pay individual income taxes on the dividends received.

Instead, a business may register as an S corporation and have all income pass-through to the business owners. An S corporation does not pay corporate tax, as all taxes are paid through individual tax returns.

## Advantages of a Corporate Tax

Paying corporate taxes can be more beneficial for business owners than paying additional individual income tax. Corporate tax returns deduct medical insurance for families as well as fringe benefits, including retirement plans and [tax-deferred](https://www.investopedia.com/terms/t/taxdeferred.asp) trusts. It is easier for a corporation to deduct losses, too.

A corporation may deduct the entire amount of losses, while a [sole proprietor](https://www.investopedia.com/terms/s/soleproprietorship.asp) must provide evidence regarding the intent to earn a profit before the losses can be deducted. Finally, a corporation may choose to retain specific amounts of profit over time to use to pay taxes, allowing it to strategically plan for taxes.

## What Do You Mean by Corporate Tax?

Corporate taxes are taxes paid by businesses.

## Is the 21% Corporation Tax Rate Permanent?

Yes and no. The corporate tax rate is set at a specific percentage and does not fluctuate, but it can be and has been adjusted many times in the past.

## Who Actually Pays Corporate Income Tax?

While corporations do pay taxes, many economists believe most of the burden is passed on to shareholders through lower rates of return, customers through higher prices, and workers through low wages.

## The Bottom Line

The corporate tax rate is levied on a corporation's profits, collected by a government as a source of income. It applies to a company's income, which is revenue minus expenses. In the U.S., the federal corporate tax rate is a flat rate of 21%. States may also impose a separate corporate tax on companies. Companies often seek to lower their corporate tax obligations by taking advantage of deductions, loopholes, subsidies, and other practices.

> **Article Sources**
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> 1.  Internal Revenue Service. "[Publication 542 (01/2022), Corporations](https://www.irs.gov/publications/p542)."
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> 2.  Congress.gov. "[H.R. 1, 115th Congress](https://www.congress.gov/115/bills/hr1/BILLS-115hr1enr.pdf)."
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> 3.  Internal Revenue Service. "[Starting or Ending a Business 3](https://www.irs.gov/faqs/small-business-self-employed-other-business/starting-or-ending-a-business/starting-or-ending-a-business-3)."
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> 4.  Internal Revenue Service. "[Publication 542 (01/2022), Corporations](https://www.irs.gov/publications/p542)."
>     
> 5.  Internal Revenue Service. "[Instructions for Form 1120 (2024)](https://www.irs.gov/pub/irs-pdf/i1120.pdf)."
>     
> 6.  Tax Foundation. "[State Corporate Income Tax Rates and Brackets, 2025](https://taxfoundation.org/data/all/state/state-corporate-income-tax-rates-brackets/)."
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> 7.  Internal Revenue Service. "[Publication 535 (2024), Business Expenses](https://www.irs.gov/publications/p535)."
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