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Annette Nellen
Annette Nellen
Data-Driven Corporate Tax Reform Perspectives

What can we learn from facts and figures on corporate taxes?

March 25, 2010
by Annette Nellen, CPA, Esq.

Much data is collected by government agencies and organizations on various aspects of corporate and business taxation. This article summarizes some of this federal data to draw conclusions relevant to tax reform. Included are highlights from the 2009 IRS Data Book released March 11, 2010 (IR-2010-30).

Tax Filings
Every year, there are far more individual tax forms (Form 1040 series) filed than corporate tax returns. In fact, there are even more Forms 1041 for income taxation of trusts filed than Forms 1120 for C corporations. Internal Revenue Service (IRS) data for fiscal year (FY) 2009 shows (IRS Data Book 2009 (PDF), p. 4):

Form
Number filings (000)
 percent of total
Form 1120 series, Form 1066 2,476 1.6
Form 1120S 4,496 2.8
Form 1065 (partnerships) 3,565 2.3
Form 1040 series 144,103 91.3
Form 1041 (trusts and estates) 3,143 2.0
   Total 157,783 100.0

Corporate Income Tax Collected
Despite being only 1.6 percent of returns filed, for FY 2009, corporations (Forms 1120, 1120-C and tax on unrelated business income (Form 990-T)) represented 15.9 percent of gross income tax collected and 9.6 percent of gross tax revenues collected. In contrast, for FY 1960, the figures were 33 percent and 24 percent, respectively (IRS Data Book Table 6). A leading cause for the change in corporate income tax collections over this almost 50-year timeframe is the growth in the numbers of S corporations and partnerships. From 1960 to 2004, the number of S corporations increased almost 40 times, while the number of partnerships more than doubled (IRS, Celebrating Ninety Years of SOI: Selected Corporate Data, 1916-2004 (PDF), Table 2 data).

Compliance and Examinations
Schedule M-3, Net Income (Loss) Reconciliation for Corporations With Total Assets of $10 Million or More, was added in 2004 to replace Schedule M-1 for corporations with assets of $10 million or more. The filing requirement was subsequently extended to S corporations and partnerships. The form provides additional data collection and audit information for the IRS. Data on corporations filing Schedule M-3 also provides information on the numbers of entities at various asset levels of $10 million or more. The following IRS data is for tax year 2007 (Tables 1 and 3).

Size by Total Assets
1120
1120S
Zero assets 1,443 408
Under $10 million 3,422 1,429
$10 to $25 million 18,511 24,711
$25 to $50 million 7,905 7,493
$50 to $100 million 5,519 3,544
$100 to $250 million 5,140 2,119
$250 to $500 million 2,595 659
$500 to $2,500 million 3,202 383
$2,500 million or more 1,440 33
Total filing M-3 49,179 40,779

Data on examination coverage indicates, for most taxpayers, a fairly low chance of being audited. The taxpayer group with the highest audit coverage is C corporations with assets of $10 million or more. For FY 2009, examination coverage was 14.5 percent for this group as a whole. For the largest of corporations in this group, the examination coverage was much higher. All returns examined in FY 2009 represented just 0.9 percent of all returns (IRS, Table 9a). Thus, large corporations are examined at a much higher rate than most other entities.

The following table shows examination coverage for FY 2009 for various types of returns (Table 9a). The IRS determines the percentage based on returns filed in calendar year 2008 and returns examined in FY 2009. A percentage can be greater than 100 percent where examinations included returns filed in years prior to 2008.

Type of Return
Examination Coverage Percentage
Individual income tax 1.0
Estate and trust income tax 0.2
Partnership 0.4
S corporation 0.4
Estate tax, gross estate under $5 million 6.2
Estate tax, gross estate $5 million or more 21.6
Gift tax 0.6
Employment tax 0.2
Small corporations, under $10 million of assets 0.9
Large corporations (based on asset size):
  • $10 million, under $50 million
  • $50 million, under $100 million
  • $100 million, under $250 million
  • $250 million, under $500 million
  • $500 million, under $1 billion
  • $1 billion, under $5 billion
  • $5 billion, under $20 billion
  • $20 billion or more
  • $10 million or more of assets (combined)
 

10.1
14.3
13.6
15.8
18.1
27.3
48.7
 114.4
14.5

All returns

0.9

Tax Rates
It has been widely publicized that the corporate tax rate in the United States is higher than in most other industrialized countries. The data typically looks at the statutory tax rates although some studies analyze effective tax rates.

Organization for Economic Co-Operation and Development (OECD) data on corporate income tax rates for various countries based on a combination of central and sub-central levels of government includes the following (OECD, Table II.1):

Australia  30.00 percent
     
Click to enlarge Canada

31.32 percent

     
Click to enlarge Germany

30.18 percent

     
Click to enlarge Ireland   12.50 percent
     
Click to enlarge Japan   

39.54 percent

     
Click to enlarge Mexico 

28.00 percent

     
Click to enlarge United Kingdom

28.00 percent

     
Click to enlarge United States 39.10 percent

Various reports and articles have noted that for many corporations, their effective tax rate is lower than the statutory rate due to special tax provisions. For example, Business Week calculated average four-year tax rates based on cash taxes paid and pretax income (Byrnes, "What U.S. Companies Really Pay in Taxes," April 23, 2009). Examining companies in the S&P 500 index, they found that the average tax rates ranged from a low of 0.4 percent to a high of 391.3 percent, with most having a rate below 35 percent.

A 2008 report by the Government Accountability Office (GAO) reported:

"We estimate that the weighted average U.S. effective tax rate on the domestic income of large corporations with positive domestic income in 2004 was 25.2 percent. There was considerable variation in tax rates across corporate taxpayers, with about one-third of the taxpayers having effective rates of 10 percent or less and a quarter of the taxpayers having rates over 50 percent. U.S. tax credits had a relatively small effect on these effective rates. ... the average U.S. effective tax rate on the foreign-source income of large corporations was around four percent in 2004." (GAO, U.S. Multinational Corporations: Effective Tax Rates Are Correlated with Where Income Is Reported, GAO-08-950, August 12, 2008, pages 3 – 4.)

Measures of effective tax rates vary due to complications of various ways businesses are classified and efforts to consider owner tax rates and double taxation of C corporation income. A 2009 report issued by the Small Business Administration (SBA) explains many of these complications. It also notes variations in identifying business entities in terms of quantity, revenues and assets. For example, the SBA notes that in 2004 while 97 percent of the approximate 2 million returns filed by C corporations were "small" per SBA standards (receipts under $10 million), such entities represented only 16 percent of total receipts. (SBA, Effective Federal Income Tax Rates Faced By Small Businesses in the United States, (PDF) by Quantria Strategies, LLC, April 2009, p. 30.)

The SBA report estimates effective tax rates for 2004 for small C corporations as ranging from 10.6 percent for those with assets under $500,000 to 25.8 percent for those with assets from $5,000,001 to $10 million. The effective tax rate estimated for all C corporations with assets up to $10 million was 17.5 percent. (SBA, Table 26, p. 56.)

Tax Expenditures
"Tax expenditures" refers to the "revenue losses" of special provisions in the tax law. Listed below are the largest tax expenditures for corporations for FY 2009 and 2010 that exceed $5 billion in either year (temporary provisions omitted). [Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2009-2013, January 11, 2011, pages 3, 27 — 47.]

Tax Expenditure
2009
(billions)
2010 (billions)

Deferral of active income of controlled foreign corporations $10.5 $11.3
Credit for low-income housing $8.0 $4.7
Exclusion of interest on public purpose State and local government bonds $7.8 $8.1
Credits for alcohol fuels $6.5 $10.1
Deduction for income attributable to domestic production activities (§199) $5.0 $7.0

Relevance
The data provided above is a relatively small sample all of the information available to describe and understand C corporations. The intent of the above summary is to illustrate a few of the issues and challenges in tax-reform activities. For example, given that the vast majority of taxpayers are not C corporations, why not focus reform efforts on individuals rather than corporations? Also, given that the group of C corporations that is largest in terms of number of entities is not the same as the group representing the largest in terms of taxes paid or complexity, can reform be effective if it looks at all C corporations as a single group?

Should the corporate tax rate be reduced and if yes, how would revenue neutrality be achieved? Suggestions for tax changes often include ones, such as elimination of LIFO or changing depreciable lives. Why make changes to timing items when some of the largest tax expenditures are permanent items, such as credits and the §199 manufacturing deduction?

The bulk of business entities do not operate as C corporations. Should corporate tax reform be scrapped and business tax reform be the focal point instead?

Will new proposed examination approaches, such as obtaining information on uncertain tax positions (Announcement 2010-9), enable the IRS to reduce time devoted to very large corporations in order to increase audit coverage for pass-through entities and individuals?

Not only is the tax law complicated, but analyzing the data available from tax returns and business demographics, can also be complex. However, for effective tax reform discussions and activities to take place, it is crucial to mine the data in order to be sure problems and solutions are properly identified.

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Annette Nellen, CPA, Esq., is a tax professor and director of the MST Program at San José State University. Nellen is an active member of the tax sections of the ABA and AICPA. She serves on the AICPA’s Individual Income Taxation Technical Resource Panel. She has several reports on tax reform and a blog.