How to reduce your corporation's tax liability

Every corporation can benefit from reducing its tax burden. After all, the less your business pays in taxes, the more profit you get to keep, and the more attractive your company becomes to potential investors.

Most corporate tax strategies require a long-term approach to tax planning and work best with the help of a specialized finance professional who knows the tax code. But there are several things you can do to reduce your corporation’s tax liability, such as making smarter spending and expense management decisions.

What are corporate tax liabilities?

Corporate tax liabilities are the taxes your business owes the government on the profits you earn in a given period. Corporation tax is paid locally, at the state level (in most states), and to the federal government.

Understanding tax liability allows business owners and finance teams to budget for tax expenses accurately, maintain sufficient cash flow to meet payment obligations, and make informed strategic decisions that optimize the company's overall financial performance.

The main factors that affect your corporation's tax bill are its structure, the amount of income it generates, the deductions you take, and the tax credits you claim.

How are corporations taxed?

C corporations face a flat federal tax rate of 21% on their taxable income. This rate was permanently implemented by the Tax Cuts and Jobs Act (TCJA) of 2017, which reduced it from the previous 35% rate.

For context, two other business structures handle taxes quite differently. S corporations get special treatment, where the business doesn't pay federal income tax. Instead, all tax items, such as income and deductions, flow through to the entity's owners, who then report their share on their personal tax returns.

Limited liability companies (LLCs) can choose how they're taxed. They might want the government to treat them as corporations, or they can have their income flow through to the owners' personal returns, similar to S corporations.

How corporations calculate taxable income

Calculating taxable income for corporations works much like it does for individuals, but with business-specific rules. Taxable income is a business's revenue minus legitimate business expenses. The corporate tax applies only to what's left over after these deductions: the corporation's actual profit.

State taxes add another layer to consider. Forty-four states levy a corporate income tax, ranging from 2.25% to 11.5%. These states calculate their taxes separately from federal taxes, and each state has its own rules and rates. Some states also levy gross receipts taxes instead of, or in addition to, corporate income taxes.

The calculation itself is straightforward once you know your taxable income. If a corporation has $100,000 in revenue and $20,000 in legitimate business expenses, the taxable income would be $80,000. At the 21% federal rate, the federal corporate tax would be $16,800, plus whatever state taxes apply based on where the business operates.

C corp vs. S corp taxation

The choice between C corporation and S corporation status creates dramatically different tax outcomes for business owners.

C corporation tax features include:

• Double taxation: The corporation pays 21% federal tax on profits, then shareholders pay personal income tax on any dividends received from those after-tax profits
• Retained earnings flexibility: Companies can keep profits in the business and pay only the corporate tax rate rather than forcing distribution to owners
• Unlimited ownership: There are no restrictions on the number or type of shareholders, including foreign investors and other corporations
• Enhanced benefit deductions: The corporation gets more generous tax treatment for employee benefits, including health insurance for owner-employees

S corporation tax features include:

• Pass-through taxation: The business pays no federal income tax, with all profits and losses flowing directly to owners' personal tax returns
• Immediate tax liability: Owners pay personal income tax on their share of profits, whether they actually receive distributions or not
• Ownership restrictions: The S corp is limited to 100 shareholders, all of whom must be US citizens or residents
• Limited benefit deductions: There are restrictions on certain employee benefit deductions for owners who work in the business

Key corporate tax deadlines

Corporate tax filing deadlines depend on whether the company follows a calendar or a fiscal year. For a calendar year business, taxes are due on the 15th day of the fourth month after the close of the tax year (April 15). If that falls on a weekend or holiday, they're due on the next business day.

For a fiscal year business, taxes are due on the 15th of the fourth month after the end of the fiscal year. For example, if the company's fiscal year ends on September 30, the taxes are due by January 15, or the next business day if that day falls on a weekend or holiday.

If you can't make the deadline, you can file for a 6-month extension with IRS Form 7004. In 2025, the calendar year extension deadline is October 15. For fiscal year businesses, it's the 15th of the month, 6 months after the original deadline.

Penalties for late filing or payment

If you fail to file your taxes on time, the penalty is 5% of the unpaid taxes for each month or part of a month the return is late, up to 25% of the unpaid tax. For returns over 60 days late, the minimum penalty is the lesser of the tax due or $510.

If you don’t pay your taxes on time, the penalty is 0.5% of the unpaid tax for each month or part of a month you don’t pay the tax, up to 25%. If both failure-to-file and failure-to-pay penalties apply, the failure-to-file penalty drops by the amount of the failure-to-pay penalty (0.5% for each month). After 5 months, the failure-to-file penalty will max out, but the failure-to-pay penalty will continue.

The IRS also charges interest when you don't pay your tax, penalties, additions to tax, or interest by the due date. Interest rates vary and may change on a quarterly basis.

Understanding double taxation

Double taxation is one of the most significant drawbacks of operating as a C corporation. This occurs when business profits face taxation twice: first at the corporate level when the company earns income, and again at the personal level when shareholders receive distributions as dividends.

Here's how it works in practice. Your C corporation pays corporate income tax on its annual profits at a rate of at least 21%. When you later distribute those after-tax profits to shareholders as dividends, those same dollars get taxed again on individual tax returns at capital gains rates.

Fortunately, a couple of strategies can help minimize this tax burden. Retaining earnings within the company avoids the second layer of taxation entirely, though some shareholders may object to this. Also, paying reasonable salaries to shareholder-employees creates tax-deductible expenses for the corporation while providing ordinary income to recipients.

Common corporate tax strategies

C corporations have several legitimate ways to reduce tax liability without crossing any legal lines. These time-tested corporate tax strategies can help your business keep more of its earnings while staying compliant with federal tax regulations.

Accelerated depreciation

Accelerated depreciation allows corporations to write off the cost of business assets faster than traditional straight-line depreciation methods. Instead of evenly spreading an asset's cost over its useful life, you can claim larger deductions in the earlier years of ownership.

This timing shift means lower taxable income up front, which translates to immediate tax savings. While the total depreciation amount remains the same over the asset's lifetime, getting those deductions sooner improves your cash flow and provides more working capital for operations.

Section 179

Section 179 offers one of the most powerful examples of accelerated depreciation. Under this provision, businesses can deduct the full purchase price of qualifying equipment in the year they buy it, rather than depreciating it over several years. For 2025, companies can deduct up to $1.25 million in qualifying purchases.

Here's how it works in practice: Say your corporation buys $100,000 worth of new manufacturing equipment in January. With Section 179, you can deduct the entire $100,000 from your taxable income that same year.

Without it, you might only deduct $20,000 annually over 5 years using standard depreciation. That up-front deduction could save you $21,000 in corporate taxes (assuming a 21% tax rate), giving you more cash to reinvest in your business right away.

Net operating losses (NOL)

A net operating loss occurs when your corporation's allowable tax deductions exceed its annual gross income. While losing money is never the goal, the tax code provides relief by letting you use those losses to offset taxable income in profitable years.

Corporations can carry NOLs forward indefinitely to reduce future taxable income. The catch is that you can only use NOL carryforwards to offset up to 80% of your taxable income in any given year. This limitation applies to losses generated in tax years ending after December 31, 2017.

The carryback rules have evolved significantly. For losses in tax years 2018, 2019, and 2020, corporations can carry them back up to 5 years to claim refunds on previously paid taxes. However, they cannot carry back losses from 2021 and later years at all; they can only carry them forward.

Consider this scenario: Your corporation had a $200,000 NOL in 2024. In 2025, you generate $300,000 in taxable income. You can apply $240,000 of your NOL (80% of $300,000) to reduce your 2025 taxable income to $60,000. The remaining $60,000 of unused NOL carries forward to 2026 and beyond until fully used.

Deferring revenue and accelerating expenses

Smart timing of income and expenses can significantly affect your corporation's taxable income. By deferring revenue recognition to the following tax year while accelerating deductible expenses into the current year, you can reduce your immediate tax liability and improve cash flow.

Revenue deferral works best when you have control over billing timing. For example, if you complete a project in late December, consider delaying the invoice until January. This pushes that income into the next tax year while your current year expenses remain deductible, creating immediate savings.

Expense acceleration follows the opposite approach. Prepay deductible expenses such as insurance premiums, office supplies, or professional services before year-end. Purchase necessary equipment or pay outstanding bills in December rather than waiting until January. These timing adjustments can create tax reductions without any complex planning.

Leveraging tax credits

Federal tax credits provide dollar-for-dollar reductions in your tax liability, so they’re more valuable than deductions. The research and development (R&D) credit rewards you for qualifying research activities, while energy credits support renewable energy investments and efficient building improvements. Other credits include the work opportunity tax credit for hiring from targeted groups.

Eligibility varies by credit type but generally requires proper documentation and qualifying activities. For R&D credits, you need detailed records of wages, supplies, and contract research expenses. Energy credits require specific equipment certifications and installation timelines. Most credits have income limitations or phase-out thresholds that affect availability.

Claiming credits requires filing appropriate forms with your corporate tax return. The R&D credit uses IRS Form 6765, while energy credits use various forms depending on the specific credit type. You can carry some credits forward if they exceed your current tax liability, providing future benefits even when your immediate tax bill is low.

Profit shifting and transfer pricing

Multinational corporations can legally shift profits between subsidiaries in different countries through transfer pricing arrangements. Set prices for intercompany transactions such as licensing intellectual property, providing services, or selling goods between related entities. Proper transfer pricing helps optimize global tax obligations while complying with international tax laws.

Transfer pricing must follow the arm's length principle, where you price intercompany transactions as if they occurred between unrelated parties. The IRS requires extensive documentation, including economic analyses and comparable transaction data, to support this. Multinational companies must prepare detailed transfer pricing studies to justify their methodologies and pricing decisions.

The IRS examines transfer pricing during audits, particularly when significant profits shift to low-tax jurisdictions. Noncompliance penalties can be substantial, reaching up to 40% of underpaid taxes. To comply, companies engaged in transfer pricing need comprehensive documentation, regular updates to studies, and careful monitoring of international tax developments.

How to reduce corporation tax

Reducing your corporation's tax burden is a legitimate and smart business practice when done properly. Here are some proven strategies to reduce corporation tax:

• Maximize deductible business expenses: Take full advantage of ordinary and necessary expenses. This includes office supplies, equipment, software subscriptions, professional development courses, travel expenses, marketing costs, and professional services such as accounting and legal fees. Keep detailed records and expense receipts for everything.
• Take advantage of accelerated depreciation: The Section 179 deduction and bonus depreciation allow you to deduct the full cost of qualifying equipment and property in the year of purchase rather than spreading it over several years. For 2025, Section 179 allows up to $1.25 million in immediate deductions for eligible property.
• Use net operating losses: If your corporation has losses from previous years, you can carry them forward to offset current profits. The TCJA allows indefinite carryforward of NOLs, though they're limited to 80% of taxable income in any given year.
• Defer revenue; accelerate expenses: Time your income and expenses strategically at year-end. Consider delaying invoicing until January or prepaying deductible expenses in December. This helps cash-basis taxpayers and can shift income to lower-tax years.
• Claim all eligible tax credits: Don't leave money on the table by missing available credits. The research and development credit, work opportunity tax credit, and various energy efficiency credits can significantly reduce your tax bill dollar-for-dollar, making them more valuable than deductions.
• Review compensation strategies for owners and executives: S corp owners can optimize the salary-distribution split to minimize payroll taxes while staying compliant with IRS reasonable compensation requirements. C corp owners might consider timing bonuses or implementing deferred compensation plans to manage tax brackets effectively.
• Stay current with tax law changes and proposals: Tax laws change frequently, and new opportunities or requirements emerge regularly. Subscribe to reputable tax publications, attend seminars, or work with professionals who monitor legislative developments that could affect your business.

The complexity of corporate tax law makes professional guidance invaluable. A skilled CPA or tax professional can identify opportunities you might miss, help you implement strategies correctly, and provide peace of mind that you're compliant with all requirements. The cost of professional tax help typically pays for itself through the savings and risk reduction it provides.

Tax strategies for different business entities

Knowing how to boost corporate tax deductions is a big part of learning how to do small business taxes. But not every small business has a C corporation business structure.

Here are some key tax strategies for small business owners with different corporate structures:

S corporations: Pass-through taxation

An S corporation is a pass-through entity, meaning you pass profits and losses directly to shareholders who pay taxes at their individual income tax rates. Here’s how you can reduce taxes as an S Corp:

• Section 199A deduction: S corporations can take advantage of the qualified business income (QBI) deduction to reduce income by up to 20%. However, this deduction may face limits for higher-income owners.
• Salary vs. distributions: S corp owners must pay themselves a reasonable salary, but they can also take distributions that are not subject to self-employment taxes

Example: The single-filer owner of a consulting firm set up as an S corporation can benefit from the QBI deduction if their adjusted gross income is below $191,950.

Limited liability companies (LLCs): Flexible tax options

LLC tax benefits are flexible. By default, LLCs pay taxes as pass-through entities, but they can also elect to pay taxes as C corporations.

• Pass-through taxation: LLC owners can benefit from pass-through taxation, avoiding double taxation
• Electing C corporation status: LLCs may choose to pay taxes as a C corporation to benefit from lower corporate tax rates on retained earnings

Example: An LLC running a real estate investment business may benefit from electing C corporation status to reinvest profits at a lower corporate tax rate.

Partnerships: Tax flexibility for multiple owners

Partnerships also benefit from pass-through taxation. Partnerships have flexibility in how they allocate profits and losses.

• Allocating profits and losses: Partnerships can allocate more losses to partners with higher personal income, reducing their overall tax obligations
• Section 704(b): Partnerships can use this section of the tax code to allocate income and deductions based on the partner’s contribution

Example: A law firm structured as a partnership might allocate income to partners with lower tax rates to minimize the overall tax liability.

At-a-glance summary

Here's a quick comparison of tax features for different business entities:

Selecting the optimal business entity depends on your growth plans, ownership structure, and distribution strategy. The most effective approach may involve strategically converting to a different entity as your business evolves.

Key tax deadlines and compliance tips

Remember that for calendar year businesses, taxes are due on the 15th day of the fourth month after the close of the tax year (April 15). For fiscal year businesses, taxes are due on the 15th of the fourth month after the end of the fiscal year. You can also file for a 6-month extension if necessary.

Consider setting calendar reminders to avoid missing these dates. The penalties for failing to file or failing to pay (or both) your taxes can be steep, reaching up to 25% of the unpaid tax.

Better yet, use accounting software with these reminders built in; you can use them to automatically gather all the financial information you need to file and pay your taxes on time, every time.

Use Ramp to start reducing your corporate tax liabilities

Maximizing tax deductions through smart expense management and solid spending policies is easy with Ramp’s finance operations platform.

Not only can you bump up corporate tax savings with cashback, but Ramp also automatically categorizes and syncs every expense transaction in real time, flags out-of-policy spend issues, and provides the receipts and accounting data needed to record and close your books faster.

By taking over many time-consuming tasks, Ramp makes it easier for you to focus on how to reduce your corporation tax. See a demo to learn how Ramp can save your business time and money.