- Every so often, you will see headlines highlighting large companies that pay little or no corporate income tax. While these stories may seem shocking, the reality is much more mundane.
- Typically, businesses don’t use “loopholes” to reduce their income tax bill, they follow legitimate rules enacted by Congress.
- As individuals, we don’t pay taxes on every dollar we earn and businesses are the same. Congress gives companies credits and deductions that lower their taxable income when they engage in economically beneficial behavior.
- For example, many of these credits and deductions are only available to businesses that invest in the U.S. in things like research and development or new factories that create jobs.
- Some other policies, like net operating loss carrybacks and carryforwards, are designed specifically to smooth out erratic businesses cycles over many years, ensuring that businesses are taxed on average profitability and that innovation isn’t penalized
- These policies are important because they keep the U.S. competitive, create jobs, and encourage advancements that make our lives better.
- Without these policies, we would live in a very different world—one with fewer medical breakthroughs, less life-changing technology, fewer conveniences, and less investment in things like clean energy and broadband.
Every year we see new headlines about seemingly profitable major corporations paying zero income tax.
But as outrageous as the headlines sound, the truth is almost always much more complicated, and much less shocking.
As individuals, we don’t pay taxes on every dollar we earn.
Tax laws allow us to reduce our taxable income through the standard deductions and even benefits for investing in our retirement, while tax credits further reduce the taxes we owe.
In the same way, Congress gives businesses legitimate deductions towards their taxable income, as well as credits towards the taxes they owe.
This includes credits for investing in research and development, and deductions for writing off physical investments like machinery or factories.
When businesses suffer losses or erratic business cycles, Congress also allows them to offset their taxable income, to ensure they’re being taxed on average profitability.
These policies are important because they help protect employment and job creation, and they encourage advancements that make our lives better and help the economy.
We would live in a very different world without these policies—one with fewer medical breakthroughs, less life-changing technology, fewer conveniences, and less investment in clean energy.
These deductions and credits enable companies to make investments in the future that we all benefit from.