The federal corporate tax rate is a flat 21 percent on business profits

The federal corporate income tax rate is 21 percent. This rate applies to the taxable income of corporations — the money left after they subtract business expenses, depreciation, and other deductions from their revenue. A corporation pays this tax once a year when it files its federal tax return with the IRS.

This 21 percent rate has been in place since 2018, when it was lowered from 35 percent. Before that change, the rate had been 35 percent for many years. The rate applies to all C corporations, which is the standard legal structure for most large and medium-sized businesses.

States also impose their own corporate income taxes on top of the federal rate. State rates range from zero percent (in states like Nevada, South Dakota, and Wyoming) to over 12 percent in some states. A corporation operating in multiple states may owe tax to each state where it does business.

Key Takeaways

  • The federal corporate tax rate is 21 percent of taxable income, set by federal law and applied uniformly to all C corporations.
  • State corporate tax rates vary widely and stack on top of the federal rate, so the total tax burden depends on where the business operates.
  • The 21 percent rate replaced a 35 percent rate in 2018 and applies only to corporations, not to sole proprietorships or partnerships.
  • Corporations reduce their taxable income through deductions for business expenses, salaries, interest, and depreciation before the tax is calculated.

How corporations calculate what they owe

A corporation does not pay 21 percent of all its revenue. Instead, it pays 21 percent of its taxable income — the amount left after subtracting allowable business expenses. These deductions include salaries paid to employees, rent or mortgage on business property, cost of goods sold, utilities, equipment depreciation, and interest on business loans.

The IRS publishes rules about which expenses count as deductible. For example, a manufacturing company can deduct the cost of raw materials and factory wages. A retail business can deduct inventory costs and store rent. Both can deduct reasonable salaries paid to officers and employees, but not excessive compensation that the IRS views as a way to hide profits.

A corporation files Form 1120 (U.S. Corporation Income Tax Return) with the IRS each year. This form lists revenue, subtracts all deductions, and calculates taxable income. The corporation then multiplies taxable income by 21 percent to find the federal tax owed. Corporations must make estimated tax payments throughout the year, usually in four quarterly installments.

State and local taxes add to the federal rate

The 21 percent federal rate is only part of the total tax a corporation pays. Most states impose their own corporate income tax, and a few cities do as well. State rates vary significantly and do not follow the federal rate.

Nine states have no corporate income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and (as of 2024) Iowa. Other states tax corporate income at rates ranging from under 3 percent to over 12 percent. Some states use a flat rate; others use a graduated scale based on income level. A few states tax corporations based on gross receipts or capital stock rather than net income.

A corporation operating in multiple states may owe tax to each one. Most states use apportionment — a formula that allocates a portion of the corporation's total income to each state based on where sales occur, where property is located, or where employees work. The corporation calculates its apportioned income for each state and applies that state's tax rate.

Different business structures pay tax differently

The 21 percent corporate tax rate applies only to C corporations. Other business structures are taxed differently. A sole proprietorship or partnership does not pay corporate income tax at all. Instead, the business income passes through to the owner's or partners' personal tax returns, and they pay individual income tax on it.

An S corporation or LLC (limited liability company) can choose to be taxed as a corporation or as a pass-through entity. If an S corp or LLC elects to be taxed as a corporation, it pays the 21 percent federal rate. If it chooses pass-through taxation, the income flows to the owners' personal returns instead.

This difference matters for business planning. A profitable C corporation pays 21 percent federal tax on its earnings. If the corporation then distributes those after-tax earnings to shareholders as dividends, the shareholders pay individual income tax on the dividends as well — creating what some call "double taxation." Pass-through entities avoid this because the income is taxed only once, at the owner level.

How the 21 percent rate compares to other countries

The U.S. federal corporate tax rate of 21 percent is in the middle range globally. Many developed countries tax corporate income at rates between 15 and 30 percent. Some countries have lower rates: Ireland taxes corporate income at 12.5 percent, and some jurisdictions offer even lower rates to attract business investment.

When comparing tax burdens across countries, the federal rate alone does not tell the full story. State and local taxes in the United States add to the federal rate, and other countries' national taxes may be higher or lower than their stated rate depending on deductions, credits, and how they define taxable income. A corporation's actual tax burden depends on the specific country and state where it operates, its business structure, and the deductions it can claim.

Deductions and credits that reduce the tax owed

Corporations can reduce their taxable income through deductions and lower their tax bill through credits. A deduction reduces taxable income before the tax rate is applied. A credit reduces the tax owed dollar-for-dollar after the rate is applied. Credits are generally more valuable because they reduce the final tax bill directly.

Common deductions include business expenses (rent, utilities, supplies), employee salaries and benefits, depreciation of equipment and buildings, and interest paid on business debt. The IRS has detailed rules about which expenses may have access to and how to calculate depreciation.

Common credits include the research and development credit (for companies that invest in R&D), the work opportunity credit (for hiring from certain groups), and energy credits (for investments in renewable energy or efficiency). Corporations claim deductions on Form 1120 and credits on the appropriate IRS forms. The IRS publishes detailed guidance on which deductions and credits apply to different types of business activity.

Frequently Asked Questions

Do small businesses pay the 21 percent corporate tax rate?

Only if they are structured as C corporations. Most small businesses are sole proprietorships, partnerships, or LLCs taxed as pass-through entities, so they do not pay the 21 percent rate. Their owners pay individual income tax on business profits instead. A small business that is a C corporation does pay the 21 percent federal rate on its taxable income.

Can a corporation reduce its taxable income to zero?

A corporation can reduce its taxable income through legitimate deductions and credits, but the IRS scrutinizes unusually low or zero taxable income. The corporation must document that deductions are for real business expenses and that credits are claimed correctly. The IRS can audit and disallow deductions or credits it views as improper or excessive.

What happens if a corporation operates in a state with no corporate income tax?

It still owes the 21 percent federal tax. It does not owe that state's corporate income tax, but it may owe other state taxes such as sales tax, payroll tax, or gross receipts tax. If the corporation also operates in states that do have corporate income tax, it owes tax to those states as well based on the income apportioned to them.

Is the 21 percent rate the same for all corporations?

The federal rate of 21 percent applies uniformly to all C corporations. However, the actual tax a corporation pays depends on its deductions, credits, and state taxes. Two corporations with the same revenue can owe very different amounts of tax if one has higher deductible expenses or claims more credits than the other.