In most cases, tax credits for corporations are more beneficial than deductions. The amount of tax credits remains constant regardless of the income level and tax bracket of a corporation. By contrast, the amount of money a taxpayer actually saves through deductions depends to a great extent on the taxpayer’s income level and tax bracket. For example, one company with the same amount or type of deduction as another corporation may end up with a larger or smaller deduction than the first corporation because of the relative tax brackets of the individual businesses. Additionally, tax credits reduce a taxpayer’s taxes more than a tax deduction of the same amount. Thus, tax credits are almost always more beneficial to taxpayers.
Some of the credits that may be available to corporations are as follows:
- Credit for federal tax on fuels used for certain purposes: Taxpayers may claim this credit when they have paid tax on nontaxable forms of aviation fuel or gasoline, diesel fuel, gasohol, gasoline, kerosene, and liquefied petroleum gas
- Credit for prior year minimum tax: Corporations can claim this credit to figure the minimum tax credit if any for the alternative minimum tax they incurred in previous tax years and to figure any minimum tax credit to carry forward
- Foreign tax credit: When a foreign country or a U.S. possession imposes a tax upon the income or profits of a U.S. domestic corporation, the corporation can claim a credit for those foreign taxes it paid
- Possessions tax credit: Corporations may take this credit when the corporation uses the profit split method or the cost sharing method of computing taxable income for a particular product
- Qualified electric vehicle credit: Corporations may claim a tax credit for a qualified electric vehicle it places in service during the tax year. The corporation can make this choice regardless of whether the vehicle is used in a trade or a business
In conclusion, reporting and paying taxes on a separate corporate tax return can be time consuming. However, it is clear that there are some real benefits to having a separate level of taxation. Taxpayers should consult a tax expert for a complete explanation of corporate taxation as it applies to their situations.