Here’s Why Corporations Don’t Pay Corporate Taxes
Hard to pick up a paper or turn on a news show and not hear someone railing about paying their fair share of taxes.
What if I told you that nearly 90 percent of all US corporations pay no corporate income tax? How would that make you feel?
Well before coming unglued and grabbing your picket sign to head down to Walmart or some other corporation there are a couple of things you need to know about taxes.
Four Kinds of Business Taxation
There are four types of business structure that the IRS looks at:
A sole proprietorship, also known as the sole trader or simply a proprietorship, is a type of business entity that is owned and run by one natural person and in which there is no legal distinction between the owner and the business. You don’t want to be this kind of business structure. There is no protection of your home or any other asset if you are sued. Lawyers can take it all.
A limited liability company (LLC) is the United States-specific form of a private limited company. It is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation.
A C corporation, under United States federal income tax law, refers to any corporation that is taxed separately from its owners. A C corporation is distinguished from an S corporation, which generally is not taxed separately.
An S corporation, for United States federal income tax purposes, is a closely held corporation (or, in some cases, a limited liability company or a partnership) that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code.
Definitions Are As Clear As Mud
I put the links to the above definitions in for those who are info junkies.
Here’s why 90 percent of all corporations pay no corporate income tax.
The vast majority declared themselves as S-Corp’s or the legal definition, a C-Corp with a sub chapter S declaration.
So Why No Taxes On The Business?
Because the profits that an S Corp generates are passed through the company to each stockholder, shareholder or investor based on their stake in the game.
The corporation pays no corporate taxes but the owners pay personal income taxes on the profits they make from their share of the company.
Nearly 90 percent of all businesses are S-Corps
C-Corps on the other hand do pay taxes on their profits and quite heavily I might add. So why aren’t all corporations S-Corps with the CEO’s paying their fair share?
Because you can only have 100 shareholders in a S-Corp and Apple and Exxon need millions of investors to make their huge companies run.
Keep in mind that no corporation actually pays taxes — they collect them from the customers who buy their products and services.
In addition to that the C-Corp dollars are taxed twice. How can you knock a corporation when every profitable dollar they earn is taxed twice?
Profits are taxed at the corporate level then taxed again when they are paid out to the stockholders in the form of dividend or other income to them.
Why Locate Overseas?
Why is the USA considering speed bumps to slow down all the corporations that seem to be making a mass exodus overseas?
Profits made in other countries are part of the companies total income base but legally they are not considered taxable if used to reinvest and grow those foreign markets.
I think it’s called free trade.
So it’s cheaper for a corporation to make washing machines in Europe and sell them there. They do have to pay taxes to the country they reside in but usually the corporate rate is lower than the US.
In the long run the company is more profitable, more competitive and more stable.
Some Final Thoughts
Corporate taxes are just one part of the equation. Corporations also pay property tax, payroll tax, excise taxes, state and local taxes.
In Montana they would also pay a business equipment tax.
So their pockets aren’t totally immune from picking. I would say they pay a pretty good portion of their fair share when all the chips are down.
It’s not the corporations don’t pay corporate taxes; it’s a matter of how they are collected that muddies the comprehensionalble (I made that word up) waters.