Corporations in the United States are required to pay income tax at a federal level. Depending on their location, they may also be required to pay income tax at the state and local levels. State income tax applies to corporations in 47 states as well as in the District of Columbia.

The rate at which a corporation has to pay income tax depends upon the size of their income. It is usually the gross income of the corporation that is used as the basis of their tax rate, after any deductions that apply have been subtracted from it. However, the exact definition is determined by the state or federal law that applies to the tax.

Corporations based in the United States are taxed on their worldwide income, while foreign corporation are subject to income tax on the income that they generate in the US. US based corporations that also operate overseas can benefit from a foreign tax credit if they are paying income tax in a foreign country. This prevents corporations from having to pay tax on the same income in two different countries.

Federal income tax for corporations ranges from 15 percent for the lowest income brackets to 35 percent for the highest income bracket. State and local income tax rates are set by the authority that is raising the tax, which means that they vary between different locations. The lowest state income tax rates for corporations begin at just 1 percent, but they can be up to 16 percent. Corporations that pay state or local income tax cannot usually deduct this amount against their federal income tax payments.

Franchise taxes are also charge in some states. A franchise tax applies to corporations that have a nexus or filing obligation within the state. Unlike income taxes, franchise taxes are not based on income . Instead, they are usually based upon net worth. The net worth on which the corporation will be taxed in usually measured by the number of shares that are issued, although in some cases it is the size of the corporation's assets that are used to determine the amount of franchise tax that should be paid. Some states do not implement a franchise tax, and the rates at which they are collected vary a great deal between the states that do raise them. The highest franchise tax rates apply in Delaware.

Taxes that are implemented at a state level are used to raise important revenue for use by the state. Taxation of corporations is one way in which the states can raise money, but the exact way in which they obtain their tax revenues varies between states. There is usually a relationship between the rates at which corporations are charged income and franchise taxes in each state. Typically, when the corporate income tax is higher in a state, the franchise tax will be lower, and vice versa. This is because a state that is raising large amounts of revenue through one of these taxes does not need to raise much more revenue through the other tax.

Understanding the US tax system is vital for businesses that are operating or hoping to operate in the country. More information is available at Net4Tax.com in order to help businesses to cope with taxes in the US.