Question

What are the steps in the typical state formula used to calculate a corporation’s state income tax liability?

Answer 1

A.

Calculate business's total revenue. This includes revenue from its normal operations, as well as investment revenue. For instance, a restaurant chain should count the total amount of payment it receives for food it serves, as well as any money it has earned on sale of real estate / other investments. While the appreciation of an investment asset's value can be seen as income in some cases, such appreciation is not taxable until the business actually sells the asset.

B.

Calculate total non-capital business expenses for tax period. Such expenses may include any ordinary & necessary payments made for products / services necessary for business operations, such as employee wages, inventory purchases, interest payments & vehicle maintenance. You can directly deduct this amount from your business's gross revenue figure.

C.

Calculate total capital business expenses. Such expenses include items business has bought that have a useful life of a year / more. Some examples would be new business structures, vehicles, manufacturing machinery & operational equipment. While these are business expenses, you cannot deduct total cost from your taxable income. Rather, you must divide deductions over entire useful life of the item as a representation of depreciated value.

D.

Sum up capital and non-capital expenses & find difference between this number and total business revenue. If expenses exceed revenue, corporation has incurred a loss, and it does not have any tax liability for given period. After calculating expenses, subtract any other applicable deductions from corporation's taxable income as well, such as state taxes corporation has paid donations to qualifying charities.

E.

Calculate percentage of income that corporation must pay in taxes. As with personal income tax rates, corporate tax rates fall within brackets. For instance, corporations with a total taxable income of less than $50,000 must pay 15 percent of that in income tax, while corporations with a taxable income of $50,000 to $75,000 must pay an income tax of 25 percent.

F.

Subtract any applicable tax credits that corporation can claim. Unlike a deduction, which reduces taxable income, a tax credit is a flat amount that a tax payer can subtract from whatever he must pay in taxes. federal government allows tax credits for such things as the installation of energy-efficient materials in business structures.