Corporate taxation in the United States is a complex system that encompasses federal, state, and local taxes, as well as numerous regulations and compliance requirements, and thus, cannot be covered in an article. However, this brief article breaks down the key components of corporate taxation, providing a clear understanding of tax rates, laws, and recent changes to help taxpayers navigate this essential aspect of doing business in the USA.

What Is the Corporate Tax Rate? [Federal & State Guide] 

In the sections below, we will highlight the federal corporate tax rate as well as discuss taxes that may apply in various states.

Overview 

Corporate tax in the United States is levied at both federal and state levels, with varying rates and regulations depending on the jurisdiction. Businesses must account for not only the federal corporate income tax but also state and local taxes that can significantly impact overall tax liability.

Federal corporate income tax rate 

As of 2024, the federal corporate income tax rate levied on net income is a flat 21%, established by the Tax Cuts and Jobs Act (TCJA) in 2018, which was a major tax reform. This rate applies to all taxable income earned by C corporations. While this represents a significant reduction from the previous 35% rate, corporate taxpayers must still navigate additional taxes and compliance requirements.

Federal Corporate tax rate example

The U.S. federal corporate tax rate is a flat 21%, which applies to the taxable income of C corporations. For example, if a corporation earns $1,000,000 in taxable income during a tax year, it would owe:

Tax Liability=1,000,000×21%=210,000\text{Tax Liability} = 1,000,000 \times 21\% = 210,000Tax Liability=1,000,000×21%=210,000

This means the corporation would pay $210,000 in federal corporate income taxes, leaving $790,000 as post-tax income. Additional state and local corporate taxes may apply, depending on the corporation’s location and operations.

State C Corp tax rates 

State corporate tax rates vary widely, ranging from 0% in states like Wyoming and South Dakota to over 10% in states such as New Jersey. Some states, like Texas, impose a franchise tax instead of a traditional income tax. Businesses operating in multiple states must carefully apportion income to determine their state tax liability.

Legal system 

The U.S. legal system provides a framework for corporate taxation, with businesses subject to both federal and state laws. Tax disputes are typically handled by the Internal Revenue Service (IRS) at the federal level or state taxation authorities.

Taxation authorities 

Corporate taxes are primarily administered by:

  • Federal: The Internal Revenue Service (IRS)
  • State and Local: State Departments of Revenue and local tax authorities. These bodies oversee tax collection, audits, and enforcement.

Alternative minimum tax (AMT) 

Although the corporate AMT was repealed by the TCJA, certain international provisions, such as the Base Erosion and Anti-Abuse Tax (BEAT), serve a similar purpose by ensuring that large multinational corporations pay a minimum level of tax. BEAT will be discussed in more detail, below.

S corporations 

Unlike C corporations, S corporations are pass-through entities, meaning their income is not taxed at the corporate level. Instead, profits are taxed at the shareholder level, avoiding double taxation but requiring compliance with strict eligibility criteria, such as, a cap to the number of shareholders, and other requirements. Stated another way, S corporations are taxed the same way as partnerships.

Gross transportation income taxes 

U.S. tax law imposes taxes on certain gross transportation income earned by non-resident corporations from shipping and air transportation services involving U.S. ports.

Base erosion and anti-abuse tax (BEAT) 

BEAT is designed to prevent multinational corporations from eroding the U.S. tax base by shifting profits overseas. This provision imposes a minimum tax on certain deductible payments made to foreign affiliates.

State and local income taxes 

In addition to federal taxes, corporations must comply with state and local income taxes, which vary widely in rates and rules. Businesses must consider nexus, apportionment, and allocation rules to determine their tax obligations in different jurisdictions.

Corporate Tax Laws and Regulations USA 

The U.S. corporate tax system is governed by the Internal Revenue Code (IRC) and state-specific regulations. Businesses must comply with these rules to avoid penalties and ensure accurate tax reporting.

Tax Treaties and Residence 

The U.S. has tax treaties with many countries to prevent double taxation and provide clarity on tax residency rules. These treaties often include provisions for reduced withholding rates on cross-border payments.

Transaction Taxes 

In addition to income taxes, corporations may be subject to transaction taxes, such as sales taxes and use taxes, excise taxes, and transfer taxes, depending on the nature of their operations.

Cross-border Payments 

Cross-border payments, including royalties, interest, and dividends, are often subject to withholding taxes unless reduced by tax treaties. The withholding tax rate for payments to non-residents is typically 30%, unless a treaty specifies otherwise.

Tax on Business Operations: General 

Corporations must navigate a range of operational taxes, including payroll taxes, excise taxes, and industry-specific levies. Effective tax planning is crucial to minimize liabilities while remaining compliant.

Capital Gains 

Corporate capital gains are generally taxed at the standard income tax rate of 21%. However, specialized rules may apply to gains from the sale of certain assets or investments.

Local Branch or Subsidiary? 

When expanding into the U.S., businesses must decide whether to operate as a local branch or subsidiary. A subsidiary is a separate legal entity subject to U.S. taxation, while a branch is treated as part of the parent company, potentially triggering different tax implications.

Overseas Profits 

The Global Intangible Low-Taxed Income (GILTI) tax ensures U.S. corporations pay a minimum tax on certain profits earned overseas. The U.S. also offers a foreign tax credit to reduce double taxation on these earnings.

Taxation of Commercial Real Estate 

Income from commercial real estate is subject to federal and state taxes. Depreciation deductions and Section 1031 exchanges can help reduce taxable income from real estate operations.

Anti-avoidance and Compliance 

The U.S. corporate tax system incorporates a range of anti-avoidance measures and compliance requirements to ensure that corporations pay their fair share of taxes and adhere to tax laws. These measures are designed to prevent tax evasion and aggressive tax planning while maintaining transparency and fairness.

BEPS, Tax Competition and the Digital Economy 

The U.S. participates in global initiatives, such as the OECD’s Base Erosion and Profit Shifting (BEPS) project, to address tax avoidance and ensure fair taxation of multinational corporations in the digital economy.

Global tax guide to doing business in the United States 

The United States is one of the world’s largest and most dynamic markets, making it a key destination for businesses looking to expand globally. However, navigating the U.S. tax system can be complex due to its multi-tiered structure, which includes federal, state, and local taxes, as well as specific rules for foreign businesses. This sub-sections below outline the key aspects of doing business in the U.S. from a tax perspective.

Business vehicles 

U.S. businesses can operate as corporations, partnerships, LLCs, or sole proprietorships. Each vehicle has distinct tax and legal implications.

Partnerships

In U.S. tax law, a partnership is a business entity where two or more individuals or entities come together to conduct business and share profits. Partnerships are considered pass-through entities, meaning the partnership itself does not pay federal income tax. Instead, the profits, losses, deductions, and credits “pass through” to the individual partners, who report them on their personal tax returns.

Each partner is taxed based on their share of the partnership’s income, as specified in the partnership agreement. Partnerships file an informational tax return (Form 1065) with the IRS, detailing the business’s financial activity, and provide each partner with a Schedule K-1 that outlines their share of income, deductions, and credits.

Corporations

In U.S. tax law, a C Corporation (C Corp) is a legal entity that is taxed separately from its owners. It is the standard corporate structure and is subject to federal corporate income tax at a flat rate of 21%, as well as applicable state and local taxes.

C Corporations file a corporate tax return using Form 1120 and can retain earnings for reinvestment without immediate distributions to shareholders. This structure is often chosen by large companies or businesses seeking to attract investors.

Limited Liability Companies

In U.S. tax law, a Limited Liability Company (LLC) is a flexible business entity that provides its owners, known as members, with limited liability protection, similar to a corporation, while allowing for pass-through taxation, similar to a partnership.

Foreign Corporations

In U.S. tax law, a foreign corporation is a business entity that is incorporated or organized under the laws of a foreign country rather than the United States. Foreign corporations may be subject to U.S. taxes if they conduct business in the U.S. or earn income connected to the U.S.

Financing a company subsidiary 

Corporations must carefully structure debt and equity when financing a subsidiary to comply with thin capitalization rules and avoid excess interest deductions.

Equity financing

Equity financing is the process of raising capital by selling ownership stakes in a business, typically in the form of shares. Investors who provide equity financing become part-owners of the company and may receive dividends and voting rights, depending on the type of equity issued. Unlike debt financing, equity financing does not require repayment, but it dilutes ownership among shareholders. It is commonly used by startups and growing businesses to fund operations or expansion.

Debt financing

Debt financing is the process of raising capital by borrowing funds, typically through loans or by issuing bonds. The borrower agrees to repay the principal amount with interest over a specified period. Unlike equity financing, debt financing does not dilute ownership, but it creates a repayment obligation, often secured by company assets. It is commonly used to fund operations, projects, or expansion.

Stamp tax

A stamp tax is a tax imposed on certain legal documents, transactions, or instruments, such as property deeds, contracts, or stock transfers. The tax is typically represented by a physical or electronic stamp affixed to the document as proof of payment. Stamp taxes are commonly applied to real estate transactions and other high-value agreements. Rates and applicability vary by jurisdiction.

Corporate income tax 

The 21% federal corporate tax rate applies to taxable income, with deductions for business expenses and credits for specific activities.

Income tax rate

As described previously, the income tax rate for corporations is 21%.

Capital gains and losses

Capital gains in a corporation are profits earned from the sale of capital assets, such as real estate, stocks, or equipment, when the selling price exceeds the asset’s purchase price. Capital losses occur when the sale price is lower than the purchase price.

Branch profits tax

In U.S. tax law, the branch profits tax is an additional tax imposed on foreign corporations operating in the United States through a branch, rather than a subsidiary. This tax aims to equalize the tax treatment between foreign corporations with U.S. branches and U.S. corporations owned by foreign entities.

Computation of taxable income

Computation of taxable income in a corporation involves calculating the total income subject to tax by:

  1. Starting with Gross Income: Include all revenue from business operations, investments, and other sources.
  2. Subtracting Allowable Deductions: Deduct business expenses such as operating costs, employee wages, depreciation, and interest.
  3. Adjusting for Tax Credits and Losses: Apply any available tax credits or carryforward losses.

The result is the corporation’s taxable income, which is then subject to the applicable corporate tax rate.

Income tax reporting

Income tax reporting in a corporation involves preparing and filing tax returns with the appropriate tax authorities to report taxable income, deductions, credits, and tax liabilities. Corporations in the U.S. typically use Form 1120 (C Corporations) or Form 1120-S (S Corporations) for federal tax filing. Accurate reporting ensures compliance with tax laws and helps avoid penalties or audits.

Corporate income tax rates table

The corporate income tax rates table lists the applicable tax rates for corporations based on their taxable income. In the U.S., the federal rate is a flat 21% for C corporations. However, state tax rates vary, with some states using graduated tables and others applying flat rates. Combined federal, state, and local rates depend on the corporation’s location.

Cross-border payments 

Withholding taxes on cross-border payments can significantly impact cash flow. Tax treaties often reduce withholding rates, easing the burden for foreign corporations.

Transfer pricing

Transfer pricing refers to the pricing of goods, services, or intangible assets exchanged between related entities within a multinational corporation. It ensures that transactions are conducted at arm’s length—the same prices unrelated parties would agree to—to prevent tax avoidance by shifting profits to low-tax jurisdictions. Transfer pricing rules are enforced by tax authorities to ensure fair allocation of income and compliance with local tax laws.

Withholding tax on non-resident income

Withholding tax on non-resident income is a tax that the payer (e.g., a U.S. company) must deduct and remit to the tax authorities on certain types of income paid to non-residents, such as dividends, interest, royalties, or rent. The default rate is 30% but may be reduced under applicable tax treaties. This tax ensures the U.S. collects revenue on income earned within its borders by foreign entities or individuals.

Multilateral Instrument

A Multilateral Instrument (MLI) is a treaty developed by the OECD to update and modify existing bilateral tax treaties to implement measures from the Base Erosion and Profit Shifting (BEPS) Project. It aims to prevent tax avoidance, enhance dispute resolution, and promote fairness in international taxation without renegotiating individual treaties.

Payroll taxes 

Employers must withhold Social Security, Medicare, and federal income tax from employees’ wages. Employers also pay unemployment taxes and other employment-related levies.

US employee withholding for income taxes and imposition of payroll taxes

In the U.S., employee withholding for income taxes involves employers deducting federal, state, and local income taxes from employees’ wages based on their earnings and withholding allowances. Employers must remit these amounts to tax authorities.

Payroll taxes include:

  • Social Security and Medicare (FICA): Shared by employers and employees.
  • Unemployment Taxes (FUTA/SUTA): Paid by employers to fund unemployment benefits.

Employment insurance

Employment insurance provides financial assistance to workers who lose their jobs through no fault of their own, such as layoffs. In the U.S., this is managed through unemployment insurance (UI) programs funded by employer-paid federal (FUTA) and state (SUTA) taxes. Eligible individuals receive temporary income support while they search for new employment.

State payroll taxes

State payroll taxes are taxes imposed by individual states on employers and employees. They typically include:

  1. State Unemployment Insurance (SUI): Paid by employers to fund unemployment benefits.
  2. State Income Tax Withholding: Deducted from employees’ wages based on state income tax laws (not applicable in states without income tax).
  3. Other State-Specific Taxes: Such as disability insurance or workforce training levies, in certain states.

Individual income tax 

Shareholders in pass-through entities like S corporations are taxed at the individual level, tying corporate profits to individual income tax rates.

Indirect taxes 

Indirect taxes, such as sales and use taxes, vary by state and require compliance with local regulations to avoid penalties.

Goods and service tax

Goods and Services Tax (GST) is a consumption-based indirect tax levied on the supply of goods and services. It is typically a value-added tax (VAT), meaning it is applied at each stage of the supply chain but ultimately borne by the end consumer. Businesses collect GST on sales, claim credits for GST paid on purchases, and remit the net amount to the tax authority. The U.S. does not have a federal GST but uses state-level sales taxes on expenditures instead.

Harmonized sales tax

Harmonized Sales Tax (HST) is a consumption tax used in some Canadian provinces, combining the federal Goods and Services Tax (GST) and the provincial sales tax (PST) into a single tax. It simplifies tax administration and applies to most goods and services, with rates varying by province. The U.S. does not have HST; it uses separate federal and state tax systems.

Land transfer tax

Land transfer tax is a tax imposed on the transfer of ownership of real estate property. It is typically calculated as a percentage of the property’s purchase price and is paid by the buyer at the time of closing. Rates and rules vary by jurisdiction, with some locations offering an exemption for first-time homebuyers.

Shareholder-Level Taxes 

Shareholders in C corporations face double taxation: first at the corporate level and again on dividends at the individual level.

Recent Changes to the Corporate Income Tax 

Recent reforms, such as the TCJA, have reduced corporate tax rates but introduced measures like BEAT and GILTI to combat profit shifting. Potential increases in the corporate tax rate remain a topic of legislative debate.

25 Percent Corporate Income Tax Rate Would Make U.S. Above Average Compared to Peers 

Proposals to raise the corporate tax rate to 25% would position the U.S. above the global average for developed nations, potentially impacting international competitiveness.

FAQs 

Below you will find answers to additional questions about business tax in the U.S.

What is the corporate tax rate in the USA? 

As discussed previously, for corporations, the federal income tax rate is 21%, with additional state and other taxes varying by jurisdiction.

What is the highest US corporate tax rate? 

When combined with state taxes, the highest corporate tax rate can exceed 30%, depending on the state. Therefore, your business tax may vary depending on the state in which the business is domiciled and conducts business in.

How to decrease your corporate income tax liability? 

Strategies include taking advantage of tax credits, deductions, and deferrals, as well as optimizing business structure and leveraging tax treaties for international operations. The team at Asena Family Office can assist your business with tax minimization strategies; please get in touch with us today to discuss what options your business has and how to legally decrease your corporate income tax owed.