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The corporate tax rate has been lowered for 2018

On Behalf of | Jul 18, 2018 | IRS Updates |

It is important for business owners to know that the federal corporate tax rate has dropped for 2018. It used to sit at a full 35 percent. Thanks to the new Tax Cuts and Jobs Act, also known as the TCJA, the government cut that down to 21 percent.

Worth noting is the fact that this decrease is just at the federal level. Corporations still have to pay state taxes. However, such a significant tax decrease is sure to save companies money compared to prior years.

Why were taxes so high?

It is interesting to look at that old 35 percent tax rate, as experts noted in Forbes magazine that it was a focus of the new administration to get that rate down. The reason for that, they said, was that 35 percent was “far above” that of similar countries that, like the United States, count as leading industrialized nations.

The drop to 21 percent does get the U.S. more in line with other countries that have lower tax rates.

What impact should reduced taxes have?

One potential impact of the drop in federal taxes is that more people may get hired. New projects may start. Companies may undertake things they would have written off in the past.

This is not likely to come in the form of direct hiring simply because of the extra money from lower taxes. The companies will just be happy to make a larger profit and make more money for their shareholders.

However, taxes do factor in when companies are deciding how to expand or what projects to take on. In some cases, projects are right up to the line: They’re not quite affordable based on what they’re projected to bring in. A factory may not get built, for instance, because it is just too close to that line.

As taxes drop and companies have more money to work with, that line moves. A project that would never have gotten approved before now goes through. The company builds a new plant. It hires workers for that construction project and new workers for the plant itself. In that way, reduced taxes may create jobs.

What are the state taxes?

The state corporate tax rate in Maryland is set at 8.25 percent. As noted, that still needs to get paid even though the federal taxes have dropped.

Even so, with the federal tax dropping by 14 percent, that more than washes out what corporations owe at the state level. This keeps a larger percentage of money in the state or in the hands of the corporation running out of that state.

Changing laws

As the laws change, it is important for business owners to understand exactly what legal options they have and how these changes will impact their companies.