Internal Revenue Code Section 11: Corporate Income Tax

The United States imposes a tax on the profits of corporations under Section 11 of the Internal Revenue Code. This tax is a component of the federal revenue system that applies to the earnings of formally incorporated businesses. This article explains the current tax rate, which business structures are subject to the tax, and the general method for calculating the taxable amount.

The Corporate Income Tax Rate

The tax liability for corporations is calculated using a single, flat percentage. Under Internal Revenue Code Section 11, the tax imposed is 21 percent of a corporation’s taxable income. This flat rate applies to all taxable income, creating a straightforward calculation once the final income figure is determined.

This 21 percent rate was a change introduced by the Tax Cuts and Jobs Act of 2017 (TCJA). The TCJA altered the corporate tax landscape by moving away from the previous graduated rate structure. Before this change, corporate tax rates varied based on income levels, with a top marginal rate of 35 percent for the highest earners.

Entities Subject to the Tax

The corporate income tax specifically applies to businesses structured as C corporations. A C corporation is a legal entity that is taxed separately from its owners. This means the corporation itself files a tax return, Form 1120, and pays taxes on its profits at the corporate level.

This tax treatment contrasts with that of pass-through entities. Business structures such as S corporations, partnerships, sole proprietorships, and most limited liability companies (LLCs) are considered pass-throughs. For these businesses, profits and losses are not taxed at the company level but are instead “passed through” directly to the owners, who report this income on their personal tax returns.

This distinction can lead to what is known as double taxation for C corporations. Profits may be taxed once at the 21 percent corporate rate and then again at the individual level when those profits are distributed to shareholders as dividends.

Calculating Corporate Taxable Income

The 21 percent tax rate is applied to a corporation’s “taxable income.” Taxable income is determined by a specific formula: a corporation’s gross income minus its allowable business deductions. This calculation is performed annually on the corporation’s tax return.

Gross income for a corporation includes all income from whatever source derived, such as revenue from the sale of products or services, interest, and rent. From this amount, the corporation subtracts ordinary and necessary business expenses. Common examples of these allowable deductions include employee salaries, rent, the cost of goods sold, and depreciation on assets.

The result of this calculation is the corporation’s taxable income. For example, if a corporation has $1 million in gross income and $700,000 in allowable deductions, its taxable income is $300,000. The tax owed would be 21 percent of this amount, or $63,000. This process ensures that the tax is levied on net profits.

Special Considerations for Personal Service Corporations

A specific category of C corporation, the Qualified Personal Service Corporation (PSC), historically received different tax treatment. A PSC is a corporation where substantially all of its activities involve the performance of services in fields like health, law, engineering, accounting, architecture, actuarial science, or consulting.

Before the TCJA, PSCs were taxed at a flat rate of 35 percent, which was higher than the lower brackets applicable to other C corporations. This was intended to prevent high-income professionals from using the corporate structure to access lower tax rates. The TCJA eliminated this distinction as part of its broader reform.

Under current law, PSCs are no longer subject to a special rate. They are now taxed at the same 21 percent flat rate that applies to all other C corporations, simplifying the tax code by aligning the treatment of these professional firms.