# Corporate Tax Rate: Definition & Formula

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• 0:05 Definition of Corporate Taxes
• 2:05 Corporate Tax Rate Calculation
• 3:59 Lesson Summary
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Lesson Transcript
Instructor: Tammy Galloway

Tammy teaches business courses at the post-secondary and secondary level and has a master's of business administration in finance.

In this lesson, we'll define corporate tax rates and explore how to calculate corporate tax based on a formula. You'll also learn about the United States' graduated tax system and look at examples to fully grasp the concepts discussed.

## Definition of Corporate Taxes

Julissa opened a candle company this year, and it's been hugely successful. Combined in-store and online sales have exceeded \$500,000! So, Julissa hires a well-known accountant, Pedro Hernandez, to handle her financials and prepare tax returns.

Mr. Hernandez and Julissa meet to discuss the returns. He shows her the total sales revenue of \$650,000 and expenses of \$550,000. That comes out to a net profit before tax (revenue minus expenses) of \$100,000 (\$650,000 - \$550,000). Julissa is so excited to see that she's profitable in the first year and tells Mr. Hernandez she'll use the \$100,000 to expand internationally.

However, Mr. Hernandez tells Julissa that, though the net profit before tax is \$100,000, that's not the amount of money available to her, because her candle company is a corporation, which is a legal entity owned by shareholders. For that reason, the company must pay corporate taxes, a percentage of a corporation's profits paid to the United States government to fund federal programs.

Mr. Hernandez explains to Julissa that the Internal Revenue Service, or the IRS as she probably knows it, manages the U.S. tax laws and collects all taxes. Tax liabilities differ based on a graduated system. A graduated tax system is based on the principle that the higher the profits, the higher the tax rate. Below is a table showing the U.S. corporate tax rates for 2015:

It's important to note that personal service corporations are taxed at a flat rate of 35%. Examples of personal service corporations include attorneys, accountants, and veterinarians. In our example, Julissa doesn't have to worry about the flat tax, since candles are not considered a personal service.

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