What is Corporation Tax?
A corporation tax is a direct tax on a company’s profits taken at the state and federal level. This is different from an LLC or S Corp which are taxed as pass-through entities, and the members declare the company's profits on their personal returns.
All corporations are taxed in some way, but there are a number of deductions they can exclude from their profits such as research and development, routine business expenses, cost of goods, general administration expenses, depreciation, and operating expenses. For those who dislike this complexity, an LLC should be considered given it's tax flexibility and other benefits.
How Corporation Taxes work?
In the United States since 2018, the flat rate for corporate tax is 21%, but this can fluctuate depending on the administration. Previously the tax rate was at 35%. This doesn’t, however, mean that all corporations pay a flat 21% across the board as there are deductions, loopholes, and subsidies that different businesses are allowed to take which effectively lower this rate. This happens at both the federal and state level, though each state’s tax rate will vary based on their laws and the size of the corporation.
Though most individuals are required to have their taxes filed by April 15, the deadline for corporations is one month earlier, March 15. It’s possible to request an extension, or to break up corporate tax payments on a quarterly or monthly basis to better accommodate the business. All corporations are required to file IRS Form 1120 each year to remain in compliance.
What is the Purpose of Corporate Tax?
Since corporations are treated like individuals in the eyes of the law, their income is taxed in a similar manner as individuals. It is an important way for the US and state governments to generate income, making up around a third of the federal revenue.
New Mexico Corporate Taxes
that Businesses need to Pay
There are two federal taxes that have to be paid by corporations, though some of these will not be applicable due to the nature or size of the business.
All corporations must pay tax on the salaries and bonuses they pay out to their employees or shareholders. There are many deductions available to lower the standard rate on corporate income tax.
Tax on Dividends
Dividends are viewed separately from salary and bonuses for tax purposes and are subject to being taxed by the corporation who pays them out, and the shareholders who receive them. This makes dividends subject to double taxation. There are no deductions available for dividends.
State Franchise Tax
This is sometimes called a privilege tax and not all states levy it. In New Mexico this is a flat $50 fee paid by all corporations while in other states the fee is based on the net worth of the company.
Gross Receipts Tax (Sales Tax)
This tax doesn’t apply to all corporations, but in some cases you are given the choice to pay a gross receipts tax instead of a state income tax if you sell taxable consumer goods. If a company meets certain criteria they can elect to pay .75% of their gross receipts in lieu of a state income tax.
State Income Tax
New Mexico requires its own state income tax which is taxed at marginal rates. Currently if your corporation’s net income is under $500,000 you will be charged a 4.8% rate, and if your net income is over $500,000 you will be charged a flat fee of $24,000, plus a 4.8% rate on all income over $500,000.
One important thing to consider when forming a corporation is the taxes that you will have to pay each year. We often get the question:
Are corporate taxes the same in every state?
There are some corporate taxes which are the same in every state, though each state will have its own corporate taxes it imposes. In the state of New Mexico, corporations are required to pay the following additional taxes.
Tax-Deductible Expenses in New Mexico
It may seem that the tax rates for corporations are so high that it wouldn’t be worth doing business. However, there are a number of deductions that corporations can take to reduce their taxable profits, significantly reducing the net income they have to pay taxes on. By reducing this number, and reducing the amount of dividend distributions, corporations can lower their effective tax rate.
Many corporations work with skilled financial and tax law professionals to structure their business in such a way to maximize these deductions.
Tax Deductions in New Mexico:
- Operating Expenses: All businesses can write off (deduct) all costs that are considered “operating expenses.” These include but are not limited to rent, utilities, property taxes, legal services, travel, administrative expenses, interest, etc.
- Employee Salaries: Employee salaries are considered an operating expense as well, but they take up a considerably larger portion of most corporate spending.
- Advertising and Marketing Costs: Considered a “cost of doing business,” these are expenses like advertising and marketing to attract and retain customers and investors.
- Benefits to Employees: These can be health benefits, life insurance, bonuses, tuition reimbursement, disability benefits, etc.
- Investments: Some investments or real estate purchases can be deductible if they are done with the intent of increasing or improving the business.
Are there any Advantages of Corporate Taxation?
Forming your business as a corporation offers numerous advantages to the shareholders, primary among them is the limited liability nature of the structure. This means that the individual members are shielded from any lawsuits, liabilities, or losses that the corporation may face.
They will not be held personally responsible for these and thereby protect their individual assets. This allows the members to share in the profits without fear of severe losses. Having a corporation also adds validity to your business and sets you up for success in competitive markets.