Corporate Income Tax: A Short Guide for Small Business Owners

Michael Pignatelli
Mar 10, 2022

Disclaimer: Please note this article is not financial advice. The purpose of our blog is purely educational, so please consult a professional accountant or financial advisor before making any financial decision.

As a small business owner, you may have heard about a corporation. You may have been told it's a good structure for legalizing your business. Benefits such as limited risks of investment losses and relative safety from prosecution seem attractive. But did you know that you get taxed twice when you own a corporation?

Knowing about corporate tax is easy. What's difficult is finding out how much you or your business has to pay. Wrong tax return filing may lead to unfavorable consequences and penalties that can hurt your business. 

Before you incorporate your business, let Unloop help you become more informed about corporate taxes and the business structure of a corporation.

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Corporate Income Tax Explained

Income tax must be imposed on a business that's organized as a corporation. The rationale behind this is due to a corporation's nature. In most commercial laws of many countries, a corporation is treated as a separate entity from the ones who own or manage it. Given such treatment, it also means that it shall be responsible for paying tax just like every other person.

Corporate income tax (CIT), however, has a different rate than what is imposed on your personal income. In most cases, the rate is lower. The deduction is taken from the corporation's taxable income, which is the money left after production and administrative expenses have been accounted for.

To explain further, let's say the nature of your business is making tacos. If your business is organized as a corporation, the taco business will be treated as another person doing business with others. After a year, the taco business earns gross receipts of 1 million, but before a business tax is levied on this amount, a deduction must be made first. 

Accountants must deduct the cost of making the tacos that were sold, as well as other expenses related to operating, marketing, and managing the business. Once all production and business-related activities have been accounted for, what is left would be the business net profit. This amount is what is subject to CIT.

Different rules apply to different countries in terms of forming a corporation. But for Canada and United States, here's what you can expect.

Canada

Types of corporations in Canada vary. But the most advantageous among them is what is called a Canadian-controlled private corporation (CCPC).

The CCPC is given tax advantages, such as small business tax deductions, tax exemptions for capital gains, and tax credits for investing in other businesses and contributing to research and development.

Tax advantages are bestowed for CCPC because this corporation type favors Canadian business owners. If you do business in Canada as a Canadian citizen or a long-time resident, it will be best to organize it as a CCPC.

United States of America

In the USA, CIT is imposed on C-type corporations. This business entity is similar to what is common in most countries. The corporation is recognized as an entity and is taxed accordingly under the federal income tax law.

Owners of a C corporation are also taxed separately from their business. This is also known as "double taxation," wherein the corporation's profits are subject to federal tax before they are divided amongst shareholders. The owners who earned the profits also have to file individual income tax.

To curb double taxation, US business owners opt for an S-type corporation. This corporation is organized under the governing rules of subchapter S of Chapter 1 of the US Internal Revenue Code. This removes taxation on the business level. S Corporations are treated as a partnership, and the individual shareholders pay taxes through their personal incomes.

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Corporate Income Tax Rate

Before organizing your business as a corporation in Canada or US, it's important to know the CIT rates. Knowing these can help you decide whether a corporate entity is a good business strategy for you and your business in the long run.

Below are the different income tax rates for Canada and US.

Canada

The baseline CIT rate for Canada is 38%. But if the corporation is paying a provincial or territorial income tax, it will receive a 10% reduction on the baseline rate to 28%.

CCPCs that are considered small businesses can enjoy certain corporate income tax reductions as a way for the government to help them sustain business activities and grow. In a nutshell:

Capitalization below $10 million - 9% tax on first $500,000 of profit.

Capitalization of $10 - $15 million - $1 for each $10 of the taxable capital that exceeds $10 million.

Capitalization of above $15 million  - Not qualified for small business tax reductions.

United States

On December 22, 2017, US taxation moved its tax system into the territory level. Thus, the universal CIT of 35% has been reduced to 21% come the tax year of 2018 and along with it the tax exemption of the corporation's investment.

The C-type corporations now get to enjoy a more straightforward taxation system as the graduation of corporate taxes has been eliminated.

Corporate Income Tax Accounting With Unloop

Taxes can be a lot of headache for any business, especially without help. That's why hiring a team of professionals to give you stellar financial statements will be a tremendous help. These people know how to crunch the numbers to make sure you get the reports your business needs when filing your corporate income taxes.

Whether you're an e-commerce founder or a traditional small business owner with an online presence, Unloop can help you. We will ensure your reports come in with accurate numbers when you need them. If you do business in Canada and US, you can check out our income tax services or call 877-421-7270 and learn more about how we can help take that corporate tax burden off your back today.

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About unloop
Unloop is the first and only accounting firm exclusively servicing ecommerce and inventory businesses in the US and Canada. With the power of people and technology, our team dives deep into COGS and inventory accounting.. You are paired with a dedicated bookkeeping team that prepares accurate financial statements, financial forecasts, and can also pay bills or run payroll for you. Come tax time, everything is organized and ready to go, so you don't need to worry. Book a call with an ecommerce accountant today to learn more.
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