The statutory rate of tax on net corporate income  ranges from 15 to 35 percent, depending on the amount of income  earned. A Schedule M-3 filer is required to report the worldwide income of  the entity represented in its financial statements and then follow a well- defined series of steps—subtracting out income and losses of foreign and  U.S. entities that are included in the financial statements but not in  consolidated tax returns; adding in the income and losses of entities that  are included in consolidated tax returns but not in financial statements;  and making other adjustments to arrive at the book income of entities  included in the federal tax return. This report focuses  on average corporate effective tax rates, which are generally computed  as the ratio of taxes paid or tax liabilities accrued in a given year over the  net income the corporation earned that year. Average effective tax rates  attempt to measure taxes paid as a proportion of economic income. Meanwhile, statutory rates determine the amount  of tax liability (before any credits) relative to taxable income, which is  defined by tax law and reflects tax benefits and subsidies built into the  law. In Each Year from 2006 to 2012, Most Corporations Had No Federal Income Tax Liability, but a Majority of Large Corporations Did

In each tax year from 2006 to 2012 at least two-thirds of active U.S.  corporations had no federal income tax liability after credits (see figure 2). Among large corporations for 2012,  less than half—42.3 percent, or 17,882 returns—had no federal income  tax after accounting for tax credits. Corporations that did have a federal corporate income tax  liability for tax year 2012 owed $267.5 billion. Corporations may pay no federal income tax for a number of reasons. Average ETRs for Large Corporations, Which Differed Significantly from Their Statutory Rates, Increased Slightly from 2010 to 2012

		Average ETRs for Large Profitable Corporations Were Well Below Statutory Rates, Even When Deductions for Prior-Year Losses Were Excluded

For tax year 2012, the actual U.S. federal income taxes paid by profitable  large corporations amounted to 16.1 percent of the income that those  corporations reported in their financial statements (for those entities  included in their tax returns); this federal effective tax rate averaged 14  percent from tax years 2008 to 2012 (see the first panel of figure 3). The subject matter experts with whom we spoke suggested it would be of  interest to estimate what profitable large corporations would have paid in  the current year if one did not take into account the deductions that  corporations are allowed to take for losses carried forward from prior  years. The Inclusion of Large Corporations with Current- Year Losses Raises the Average Effective Tax Rates but Makes Those Rates Difficult to Interpret

In tax year 2012, all corporate returns with a Schedule M-3, including  those with current-year losses, paid actual U.S. federal income taxes  amounting to 21.2 percent of the income that they reported. On  average, over tax years 2008 to 2012, all large corporations actually paid  25.9 percent of their pretax net income in U.S. federal income taxes. Over those tax years, ETRs averaged 40  percent when foreign and state and local taxes are included. Agency Comments and Our Evaluation

We provided a draft of this report to the Commissioner of Internal  Revenue for review and comment. IRS provided technical comments,  which were incorporated, as appropriate. The  second set of estimates covers a more comprehensive population of  firms; however, an ETR is not meaningful for a corporation in a year in  which it has a net loss. This  results in U.S. corporations paying federal income tax on foreign-source  income only to the extent that the federal income tax on that income  exceeds the foreign tax credit. 1. Data  are presented for all active corporations as well as all and profitable large  corporations that filed a Schedule M-3.
Why GAO Did This Study

Congress and the administration continue to express interest in reforming the U.S. corporate income tax and the rate at which U.S. corporations' income is taxed. Currently, the top statutory corporate income tax rate is 35 percent. GAO's 2013 report on corporate ETRs found that in tax year 2010, whether for all large corporate filers or only profitable ones, the average ETRs were significantly below the statutory rate.
To provide an update, GAO was asked to assess the extent to which U.S. corporations pay federal income tax and the percentage that had no federal income tax liability. In this report, GAO estimates (1) the percentage of all and large corporations that had no federal income tax liability and (2) average ETRs based on financial statement reporting and tax reporting. To conduct this work, GAO reviewed economic literature, analyzed IRS data for tax years 2006 to 2012 (the most recent data available), including the financial and tax information that large corporations report on Schedule M-3, and interviewed Internal Revenue Service (IRS) officials and subject matter experts.

What GAO Found

In each year from 2006 to 2012, at least two-thirds of all active corporations had no federal income tax liability. Larger corporations were more likely to owe tax. Among large corporations (generally those with at least $10 million in assets) less than half—42.3 percent—paid no federal income tax in 2012. Of those large corporations whose financial statements reported a profit, 19.5 percent paid no federal income tax that year. Reasons why even profitable corporations may have paid no federal tax in a given year include the use of tax deductions for losses carried forward from prior years and tax incentives, such as depreciation allowances that are more generous in the federal tax code than those allowed for financial accounting purposes. Corporations that did have a federal corporate income tax liability for tax year 2012 owed $267.5 billion.
These reasons also explain why corporate effective tax rates (ETR) can differ substantially from statutory tax rates. ETRs attempt to measure taxes paid as a proportion of economic income, while statutory rates indicate the amount of tax liability (before any credits) relative to taxable income, which is defined by tax law and reflects tax benefits built into the law. The statutory tax rate on net corporate income ranges from 15 to 35 percent, depending on the amount of income earned. For tax years 2008 to 2012, profitable large U.S. corporations paid, on average, U.S. federal income taxes amounting to about 14 percent of the pretax net income that they reported in their financial statements (for those entities included in their tax returns).
When foreign and state and local income taxes are included, the average ETR across all of those years increases to just over 22 percent. GAO also computed ETRs that combine large profitable corporations and those large corporations with current year losses, which pay little if any actual tax. Over tax years 2008 to 2012, all large corporations—profitable and those that reported current year losses—paid 25.9 percent of their pretax net income in U.S. federal income taxes, and 40.1 percent when foreign and state and local taxes are included. Including corporations with losses results in a more comprehensive estimate, but makes the results difficult to interpret because ETR is not meaningful for a corporation in a year in which it has a net loss. GAO could not examine the variation in ETRs across corporations with the aggregated data available, although GAO's prior work suggests that ETRs are likely to vary considerably.

What GAO Recommends

GAO does not make recommendations in this report. GAO provided a draft of this report to IRS for review and comment. IRS provided technical comments, which were incorporated, as appropriate.