How to Calculate a Company's Average Income Tax Rate
To calculate a company's average income tax rate, the first thing to know is that income tax rates for businesses are tiered just as they are for individuals. In other words, the tax rate depends on how much taxable income a company makes. The lowest federal tax rate for corporations is 15 percent and the highest current rate is 39 percent. There are eight rate tiers, but the tax rate for each category does not continue to rise in a steady progression from the lowest rate to the highest, so calculations can be tricky.
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Instructions
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Understand the terminology of tax rates. The highest tax rate a company pays is called the marginal rate. The lowest marginal rate is 15 percent and covers taxable income from one dollar to $50,000. From $50,000 to $75.000, the marginal rate is 25 percent. From $75,000 to $100,000, the marginal rate is 34 percent. From $100,000 to $335,000, the marginal rate is 39 percent, the highest current rate.
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Recognize that the progression changes at this point. Above $335,000, the marginal rate drops back down to 34 percent until taxable income reaches $10 million. From $10 million to $15 million, the marginal rate is 35 percent. From $15 million to $18,333,333, the marginal rate is 38 percent. All taxable income above $18,333,333 has a marginal tax rate of 35 percent.
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Calculate the tax a company will pay at each tier. For example, a company with a taxable ordinary income of $78,000, pays tax on three tiers. The first $50,000 is taxed at 15 percent, or $7,500. The next $25,000 is taxed at 25 percent, or $6,250. The last $3,000 is taxed at 34 percent, or $1,020. In total, the company pays $14,770 in taxes on a taxable income of $78,000.
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Determine the company's average tax rate, called the effective rate, after calculating taxes at each tier. Divide the total tax (14,770) by the total taxable income (78,000).
The company's effective federal tax rate is 18.94 percent on all its taxable ordinary income. Notice that calculating a company's effective tax rate (18.94 percent) gives a very different picture of corporate taxes than simply stating the company's marginal rate as 34 percent.
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