How Do Corporations Get Away With Paying No Taxes?

People are upset that large corporations like GE are not paying taxes. It doesn’t seem fair or right that a large company should “get away with free money.” Is this truly the case?

Do corporations really “get away” without paying taxes? Not surprisingly, there is more to the story.

First, let’s discuss corporations and different types of taxes.

Why Form a Corporation?

Every large corporation started as a small one. So why form a small corporation? The two primary reasons for incorporating are

1) to reduce risk of shareholders and
2) to qualify for some tax deductions not allowed to sole proprietors or partnerships

It’s important to realize that one of the reasons for forming a corporation is to get some tax advantages.

What Kind of Tax Advantages Do Corporations Get?

The tax advantages are not as great as might be expected. The majority of the tax breaks come in the form of allowed deductions and deferred taxes. Some of these are available to sole proprietors and partnerships but not all. One notable deduction is the interest paid on a credit card. The IRS does not want people to run up credit card bills so they do not allow personal credit card interest as a deduction. Corporations are granted some leeway in this area.

Why Don’t They Pay Income Tax?

Well this isn’t always the case. A corporation has ways to defer income and distribute profits in order to reduce the net income to zero, if the accounting firm is doing their job. In reality, if a corporation pays corporate income tax at all, it usually means something went wrong in the planning.

So How Does the IRS and Other Government Entities Get Money from Corporations?

There are several ways. Here are just a few.

1. Corporations match employee deductions on payroll taxes for social security, medicare, state and federal unemployment taxes and in some states there are additional taxes assessed. (Florida for example, assesses a “re-employment adjustment” of .9 percent of employee payrolls.) This tax is pretty high, 12-19% of payroll depending on the state.
2. All for profit corporations must eventually distribute money to shareholders and employees. This money is taxable income. Why should the corporation pay additional taxes when all income it makes is subject to personal income tax of the shareholders and employees? This would be double taxation.
3. Corporate filing fees are paid annually. These fees can range from $150 (in Florida) to $500 (in California for certain types of corporations)
4. Tangible and intangible taxes are assessed on corporate assets. These are based on inventory and capital equipment.
5. Impact fees are assessed whenever a building is constructed or a property improved.
6. Sales tax is assessed on every retail sale of taxable items.
7. Excise tax is assessed on all foreign transactions.

So GE DID Pay Taxes?

Oh yes they certainly did. Just not in Corporate Income Tax. In 2013, it is estimated that GE paid over $400 million in employee withholding taxes alone. This doesn’t include filing fees, tangibles, intangibles and impact fees.

So Why Are People Saying GE Didn’t Pay Taxes?

Ask yourself that question. Why does anyone say anything in the public arena? Usually they have some personal or political agenda to promote. But if you think GE didn’t pay taxes, then think again. Also, consider this: without corporations there would be very few non-government jobs. If all jobs were with the government, well wouldn’t that be communism? No? Then what else would you call it?