Ways to Cut Corporate Taxes
Just as individual workers pay income taxes to fund government programs and activities, businesses also pay taxes on the money they earn. Corporate taxes vary from state to state and depend largely on a business's accounting methods and revenue. There are ways for business owners to cut their tax liabilities or for lawmakers to reduce corporate taxes to help businesses.
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Federal Credits
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Every for-profit business in the United States must file a tax return with the Internal Revenue Service. To reduce the amount corporate taxes businesses owe, the IRS offers a series of business tax credits. These credits apply only to eligible businesses that perform certain activities. Accountants subtract the credits from the corporation's total tax liability, providing credits for reducing taxes. Federal business tax credits include credits for hiring new employees, investing in renewable energy, starting pension plans and offering training to workers. A corporation's board of directors can choose to invest in one or more of these areas to earn credits.
State Credits
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Similar to federal business tax credits are state business credits. These credits reduce what a corporation owes the state in where it is incorporated. States use tax credits to encourage certain types of businesses to open or for making it easier for businesses to compete against corporations in other states. For example, California's Franchise Tax Board administers credits to corporations for investing in renewable energy, adding full-time employees to the staff, contributing to workers' child care costs and investing in a community development financial institution.
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Reducing Tax Rates
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State and federal lawmakers have the power to reduce corporate tax rates. Lower tax rates mean corporations owe less even without making use of tax credits. Lawmakers can reduce tax rates temporarily to help businesses grow or to encourage economic development and job creation. Lawmakers can also influence corporate growth by determining what kinds of businesses receive rate reductions, such as small businesses or startups. Corporate tax rate reductions mean less revenue for governments, but tax cuts can pay off in the long run if they foster general economic growth.
Impact
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One immediate effect of corporate tax cuts of any kind is that businesses have more money to spend elsewhere. Tax savings can go toward hiring more workers, paying dividends to stockholders and building up cash reserves to increase a business's access to credit. When the government lowers tax rates it has the same effect on a broad scale, offering far-reaching consequences. According to CNBC, as of 2010 the 35 percent corporate tax rate in the United States is among the highest in the world. Economists and lawmakers who support lowering rates cite enhanced global competitiveness and job creation as reasons for doing so. However, it is impossible to predict the short-term effects of a corporate tax rate cut, a move that would mean less revenue for the federal government at first.
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