What is Corporation Tax?

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Corporation tax is defined as a levy charged on profits earned by limited companies as well as organizations such as societies, clubs and unincorporated entities. The rate used to calculate corporate tax varies depending on the level of profit earned over a specified chargeable period. The amount of corporate tax is charged on a firm’s profit after deducting all expenses from its total revenue. Profits liable for corporate tax are those earned through trade and investment as well as capital or chargeable gains.

Basic Elements of Corporate Tax

Taxation for corporations varies from that of other forms of business. Unlike limited liability firms, sole proprietorships and partnerships whose profits are not taxed but are reported by business owners as part of personal tax returns; corporations pay taxes from their profits. This is because corporations are recognized legal entities, separate from their owners. A corporation’s profit consists of retained earnings, money held by the firm for expansion purposes, and dividends, which is money distributed to company owners or shareholders.

Advantages of Filing Corporate Tax Separately

Though filing corporate tax returns separately takes time, there are accrued benefits for the company. For instance, a company can take advantage of reducing the amount of tax charged on its owner’s income by retaining more profit in the firm. This is because the initial corporate tax rate is much lower than that of most firm owner’s income and a company can save money this way.  A company can also cut down on its corporate tax by deducting all running costs. These include salaries and fringe benefits such as retirement and medical costs paid to its staff.  Where a firm’s owners are part of employees, their income tax is charged on their salaries and benefits like other employees. These expenses can significantly reduce the amount of corporate tax that a company pays.