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How Corporate Income Tax Works

        Money | Taxes

Trimming Corporate Tax Bills

Unlike individual taxes, corporate income taxes are levied on net, not gross, income. In other words, the tax man gets a piece of a business' profits -- and not a piece of the total amount of money that the business brought in -- during a current year. The tax is also limited to actual corporations and doesn't include other business entities like partnerships, sole proprietorships and some closely held companies [sources: Norton, Bartlett].

Those companies that do pay the corporate income tax pay it only on money "made" in the United States. A wide range of some of the best-known businesses in the country -- a group that includes Apple, Microsoft and GE -- reportedly skirt that responsibility by dumping money into offshore havens where it's taxed at a lesser rate. This scheme is commonly referred to as tax inversion [sources: Dizard, Norton, Bartlett].

The whole system revolves around some pretty fuzzy accounting. Companies use a method called transfer pricing to essentially create transactions between the company and subsidiaries around the globe for the sole purpose of moving profits to more favorable tax environments. Their business operates in the same place and their workers and customers stay where they are. For tax purposes, however, much of the business' profit is treated as coming from outside the United States [sources: Drucker, Dizard].

Apple, for example, reportedly shifted $30 billion in income to an operation in Ireland over the course of four years. Just how many workers did the iGiant employ over on the Emerald Isle during that time? Zero. The money was taxed by Irish authorities at a rate of 2 percent [sources: Drucker, Dizard].

Some might call that fraud. Others may liken it to an expensive game of three-card monte. Whatever you call it, just keep your voice down. Corporations are just like people: They have feelings too.