Taxes are tricky. Many preparers don’t fill out returns correctly, according to the IRS. But when you know what you’re doing, it’s amazing what can come about.
Government can have a big impact, often for the worse. So many business owners likely rejoiced on news that part of Donald Trump’s tax plan is reportedly to cut the top corporate tax rate to 15%, down from the current 35%.
Don’t get too excited because chances are good that this won’t help you at all.
Many startups are run as sole proprietorships or even partnerships. They don’t come under corporate taxes because everything is attributed directly to the owner or owners. If you don’t pay corporate taxes in the first place, top limits won’t matter.
But say your startup is a registered corporation. The chance that this will make much difference is still small, even though the U.S. has one of the highest top corporate tax rate in the world. (Only the United Arab Emirates and Puerto Rico have higher rates.)
For context, the average top corporate tax rate in the world is 22.5%. If you weight the results by country GDPs (more developed countries tend to charge more), the rate is 29%.
But top rate is just a number. The question is what corporations actually pay. What really counts are effective tax rates, or the percentage of their income corporations spend on taxes after deductions and allowable credits. When it comes to effective tax rates, companies in the U.S. do far better than you might think.
According to a U.S. Government Accountability Office study looking at the years 2006 through 2012, corporations on the average paid about 14 percent of the pre-tax net income reported in financial statements.
That’s not the limit to craziness. In each of those years, at least two-thirds of all active corporations reported had zero federal tax liability after applying available tax credits and using whatever strategies were open to them under U.S. law. And while the period of time includes the major years of the Great Recession — many losses, if you remember — it also starts before and continues after with no change.
Is the issue one of size? Maybe all the companies paying no federal taxes are small. Not a chance. Among “large” corporations — ones with at least $10 million in assets — more than 42% paid no federal income tax after credits. For all the crying about corporate taxes, there are a lot of companies for which that is a theoretical problem.
If your company is one that is getting nicked more than less, perhaps what you need isn’t a new government policy but a better accountant. It seems to work for a whole lot of other entrepreneurs.
The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.