Corporate income taxes are levied by federal and state governments on business profits. Companies use everything in the tax code to lower the cost of taxes paid by reducing taxable income.

In 2018, the corporate tax rate is 21 percent. President Trump signed the Tax Cuts and Jobs Act on December 22, 2017.  Trump's tax  plan cut the corporate tax rate from 35 percent to the lowest rate since 1939.  

It raised the standard deduction to 20 percent for pass-through businesses. This deduction ends after 2025. Pass-through businesses include sole proprietorships, partnerships, limited liability companies, and S corporations. They also include real estate companies, hedge funds, and private equity funds. The deductions phase out for service professionals once their income reaches $157,500 for singles and $315,000 for joint filers. 

The Act limits corporations' ability to deduct interest expense to 30 percent of income. For the first four years, income is based on EBITDA. This acronym refers to earnings before interest, tax, depreciation, and amortization.Starting in the fifth year, it's based on earnings before interest and taxes. That makes it more expensive for financial firms to borrow. Companies would be less likely to issue bonds and buy back their stock.

It allows businesses to deduct the cost of depreciable assets in one year instead of amortizing them over several years.

It does not apply to structures. To qualify, the equipment must be purchased after September 27, 2017, and before January 1, 2023.

The Act stiffens the requirements on carried interest profits. Carried interest is taxed at 23.8 percent instead of the top 39.6 percent income rate. Firms must hold assets for a year to qualify for the lower rate.

The Act extends that requirement to three years. 

The Act eliminates the corporate AMT.  The corporate alternative minimum tax had a 20 percent tax rate that kicked in if tax credits pushed a firm's effective tax rate below 20 percent. Under the AMT, companies could not deduct research and development spending or investments in a low-income neighborhood. 

The Tax Cut and Jobs Act adopted a "territorial" system. Corporations aren't taxed on foreign profit.

It installed a "territorial" system for global corporations.  Under the territorial system, they aren't taxed on foreign profit. It encourages them to reinvest it in the United States. This benefits pharmaceutical and high tech companies the most.

Under the prior "worldwide" system, multinationals were taxed on foreign income earned. They didn't pay the tax until they brought the profits home. As a result, many corporations reinvested profits earned overseas into those markets. It was cheaper for them to borrow at low interest rates in the United States than to bring earnings home. As a result, corporations became debt-heavy in the United States, and cash-rich in overseas operations. 

The Act allows companies to repatriate the $2.6 trillion they held in foreign cash stockpiles.

They pay a one-time tax rate of 15.5 percent on cash and 8 percent on equipment. The Congressional Research Service found that a similar 2004 tax holiday didn't do much to boost the economy. Companies distributed repatriated cash to shareholders, not employees. 

The Effective Tax Rate Is 18 Percent

Before Trump's tax cut, the United States had one of the highest rates in the world. But most corporations don't pay the top rate. The 2017 effective rate was 40 percent. It included:

• Federal tax rate of 35 percent for the highest income brackets. 
• State and local tax rates ranging from 0 percent to 12 percent. It averaged out to 7.5 percent.
• Companies deducted state and local tax expenses. That averaged out to around 40 percent. 

But most large corporations never paid that much, thanks to tax attorneys who help them avoid paying more.

 On average, the effective rate was 18 percent. 

In 2015, the Treasury Department collected $390 billion. That's just 18 percent of U.S. corporate profits of $2.1 trillion, according to Table 1.12 of the National Income and Products Accounts. That's about half the effective rate the government received in 2007, the year before the recession. Corporate taxes were $395 billion on a profit of $1.5 trillion. 

How Corporations Avoid Paying Taxes

How do corporations avoid paying taxes? First, almost half of all corporations are "S" Corporations. These pass-through firms pay no corporate taxes. Instead, they pass corporate income, losses, deductions, and credits through to their shareholders. The shareholders are then taxed on these profits or losses at their income tax rates. 

That's why some global corporations won't welcome the tax change. They've became so adept at avoiding U.S. taxes that it was a competitive advantage. They made more money in U.S. markets than foreign competitors because of their knowledge of the tax code and how to get around it.

Historical Rates

Before the 1894 Revenue Act, taxes were levied on the individual owners of businesses, but not on the corporations themselves. Although the Act was ruled constitutional, it was replaced by a Tax Act in 1909, the first year that corporate taxes were levied.

The maximum tax rates below are the rates paid on the highest income levels. Please note that the definition of income changes frequently, so keep that in mind when comparing rates. 

Until 1936, all companies paid the same rate, regardless of income. The current system is more progressive.

Year Changed	Max Tax Rate	President	Comments
1909	1%	Taft	.
1916	2%	Wilson
1917	6%
1918	12%
1919	10%		WWI began.
1922	12.5%	Harding	Finance WWI.
1925	13%	Coolidge
1926	13.5%
1928	12%
1929	11%	Hoover	Tax cut triggered stock market crash.
1930	12%		Tax hikes to stop speculation worsened depression.
1932	13.8%
1936	15%	FDR	Hike revived depression.
1938	19%		Hike to finance WWII.
1940	24%
1941	31%		Pearl Harbor attack triggered more hikes.
1942	40%
1950	38%	Truman	Cut to fight recession.
1951	50.75%		Hike to fund Korean War.
1952	52%	Eisenhower	No cuts, despite 1953 and 1957 recessions.
1964	50%	LBJ	Implemented JFK's tax cut.
1965	48%		Cut boosted economy.
1968	52.8%		Hikes paid for Great Society and Vietnam War.
1970	49.2%	Nixon	Cut to fight recession.
1971	48%
1979	46%	Carter	Cut to offset high interest rates.
1987	40%	Reagan	Tax Reform Act.
1988	34%		Cut to fight recession.
1993	35%	Clinton	Omnibus Budget Reconciliation Act.
2018	21%	Trump	Cut goes into effect.

(Sources for Table: "Corporate Tax Rates 1909-2002," IRS.  "Corporate Tax Rate and Jobs," ProCon.org.)