Taxation

Business Structure and Tax Rates

A company's or an investor's tax rate depends on the way an organization is structured.
In addition to the tax base, tax liability is determined by the tax rate. Taxes are relative to the individual taxpayer. For each business structure, the tax liability addresses the flow of taxable money to the individual taxpayer. Starting with individual reporting, the tax rate will be a function of taxable income. This information comes from the tax table, a list of marginal tax rates published by the Internal Revenue Service (IRS) or the tax authority of the applicable country, that shows all of the tax brackets and their related tax rates. As the tax brackets for the income limits increase, the tax rates increase. This is not a flat rate. Instead, the individual pays a certain percentage for the first tax bracket and then another percentage for the next tax bracket. This continues until the individual is paying at the highest tax rate, called the marginal tax rate. The marginal tax rate is the rate an individual will pay in each of the applicable tax brackets.

Sample Tax Table

On a tax table, the overall tax brackets show percentages, but the IRS divides the amounts due into precise marginal tax amounts.
Business structure, in turn, affects taxation. There is no distinction between a business that is a sole proprietorship and the individual that owns the business. The tax rate of the individual applies, and the individual is the one who is responsible for the tax liability. The income from a partnership flows to the individual partners, and this becomes the taxable income on which the individual pays taxes. There are two forms of corporations, each with different tax implications. An S corporation is a "pass-through" business, meaning that the income is passed directly to the shareholders who will pay the taxes. A C corporation pays taxes at the company level. Tracking money from the business revenue all the way to the individual means that a C corporation's income, from the individual's perspective, will be taxed twice. Once shareholders receive dividends (distribution of a corporation's earnings in the form of cash, stock, or property) from C corporations, those dividends are taxed again, resulting in the two layers of tax.

The corporate tax rate is the flat rate a C corporation pays from its tax base. Corporate tax rates are set by Congress through legislation. For example, in 2017, the Tax Cuts and Jobs Act established a corporate tax rate to be 21 percent.

After the tax rate is applied and the tax liability is calculated, a taxpayer may be able to lower the amount of taxes owed through one or more tax credits. A tax credit is a dollar-per-dollar allowance against the tax liability. Unlike a tax deduction, which appears similar to an expense, a tax credit functions like a payment against the tax liability. For example, an individual taxpayer can reduce their taxes by approximately $6,250 by using the earned income tax credit. Industry Corp. can lower its tax liability by 40 percent of an employee's first-year wages using the work opportunity tax credit.