Corporations Often Pay No Federal Taxes, WSJ Finds

There is a special structure built into the way companies pay taxes that allows the companies to avoid paying even one dollar in federal taxes, which a growing number of companies are taking advantage of, according to a report in Tuesday’s Wall Street Journal.

Passing the Profits Through

The companies are called “pass-throughs,” because the companies pass their profits along to their investors, who then pay the taxes. These companies have discovered that it is more cost effective to pass their profits onto their investors and avoid paying taxes rather than hiring an army of accountants to help them take advantage of tax loopholes.

Legal and Encouraged

According to the article in the WSJ pass-throughs have existed for decades, are perfectly legal, and are even encouraged by Congress and state governments. The goal of the pass-through option is to stimulate entrepreneurship.

The Journal reported that 69% of US corporations were organized as non-taxable businesses in 2008. In 1986 only 24% of corporations were organized this way. Because partnerships and sole proprietors were not included in the figures, the percentage of these corporations is actually higher.

More than Anywhere Else

It is common for large companies to be structured this way. An estimated 60% of all US businesses with at least $1 million in profits are pass-throughs, the largest percentage in the developed world.

This fact is a major reason that federal corporate tax collections comprised only 1.3% of the US GDP in 2010 despite the fact that the corporate tax rate in the US is 35%; that figure is down from 2.7% in 2006, and indication that a growing number of companies are taking advantage of this peculiarity of corporate taxation.

Michelle Grathers

About Michelle Grathers

Michelle Grathers is an international tax expert. She has consulted for a variety of firms and high net worth individuals on all tax- and legal-related issues. She also helps new companies develop payroll services, statutory audits and mergers and acquisitions. Contact Michelle at michelle[at]businessdistrict.com