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How Corporate Income Tax Works

        Money | Taxes

A protestor wears stickers on his face during a Tax Day demonstration in New York City. Dozens of protesters demonstrated against loopholes that allow banks and corporations to pay lower income taxes than most individual filers.
A protestor wears stickers on his face during a Tax Day demonstration in New York City. Dozens of protesters demonstrated against loopholes that allow banks and corporations to pay lower income taxes than most individual filers.
Justin Sullivan/Getty Images

In a series of semi-recent decisions, the U.S. Supreme Court has come to the grand conclusion that corporations are more or less people in the eyes of the law. As such, they have certain legal rights and protections. Just like you and me, they also have taxes to pay. It appears, however, that companies may be a little better than us regular folks at finding ways to cut down what they owe Uncle Sam at the end of the year.

The corporate income tax has been in place in the United States since 1909, the same year that the government decided once and for all to keep taking a piece of taxpayers' income for the public coffers. The tax derives from the power that was granted to Congress when the 16th Amendment was ratified four years later. It states that "Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration." In those early days, individual and business taxes were used largely to fund U.S. involvement in wars.

Today, the federal tax rate for businesses is the highest in the developed world, at as much as 35 percent. But not all income is considered "taxable" under the law. This is a shadowy, grey area that businesses often take advantage of to reduce their bills [sources: Tax Analysts, KPMG].


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