Corporate Income Tax: How It Works and Why It Matters

Virginia’s tax code should be structured toward fairness. Those with the most should pay their fair share toward the public services and investments that help communities thrive. However, both state and federal choices can allow corporations to structure their finances to reduce or eliminate the income taxes they owe. 

Virginia has the opportunity to improve fairness and raise revenue to invest in communities by closing loopholes and ending giveaways to corporations with multi-million-dollar profits. Understanding how the corporate income tax works can help explain why those choices matter.

What is a Corporation?

A corporation is a specific type of business structure. “C” corporations pay taxes separately from their owners. And in Virginia, only businesses organized as C corporations are subject to corporate income tax. 

Many other businesses, including S corporations, partnerships, and some limited liability companies, are known as “pass-through entities.” Instead of the business itself paying income tax, its income passes through to the owners, who report that income on their own tax returns and pay personal income tax on it. 

Not all pass-through entities are small businesses, but most small businesses are pass-through entities. That means most small businesses do not pay Virginia’s corporate income tax.

Why Do Corporate Tax Choices Matter?

Large corporations can operate across many states, or around the world, and their finances can be complicated. Tax rules determine how much of their income Virginia considers taxable and which deductions, exemptions, or other tax breaks can reduce that amount. 

When corporations reduce the amount of income subject to tax, they contribute less to public schools, health care, and other public services funded through Virginia’s budget.

Who Pays Virginia’s Corporate Income Tax?

In the 2023 tax year, 77,365 corporations filed corporate income tax returns in Virginia, with nearly $2 billion in corporate income tax assessed. Just 443 corporations reporting $10 million or more in Virginia taxable income accounted for more than two-thirds of that amount. 

C corporations, like other businesses, may also pay local business, professional, and occupation license (BPOL) taxes, sales taxes on some purchases, and local property taxes. In some cases,  corporations are given special or industry-specific exemptions beyond income taxes that reduce their taxes. For example, qualifying data centers do not have to pay sales and use taxes on certain equipment.

How is Corporate Income Treated in Our State Tax Code?

Virginia has a flat corporate income tax rate of 6% on taxable income. This rate has been the same since 1972. Some industries, like telecommunications companies, are subject to a minimum tax on their total revenue before expenses are subtracted instead. Calculating how much income is taxable can be more complicated when a corporation operates in multiple states or countries. 

Corporate income: Business income is generally the money a corporation or other business brings in minus expenses like rent, employee wages, and other business costs. What remains is its net profit. This is different from personal income. Individuals generally cannot subtract everyday living expenses from their income when calculating taxable individual income.

Calculating taxable corporate income in Virginia: Some corporations conduct all of their business in Virginia, while others span multiple states, or even operate globally. Virginia uses a calculation called “apportionment” to determine what share of a multistate corporation’s income is taxable in Virginia.  The standard formula considers how much property, payroll, and sales are in Virginia. Sales are counted twice.

Some corporations can use a different formula. For industries like manufacturing and enterprise data centers, corporations can calculate their taxable income in Virginia based only on sales if they meet certain standards related to employment and investment.

How Much Revenue Does the Corporate Income Tax Raise?

Corporate income tax makes up only a small portion of state revenues, about 6% in the budget year that ended June 30, 2026. While this share is higher than it was during much of the 2000s and 2010s, it is down from its peak of 7% in 2023 and is predicted to continue to decline.

What Choices Can Virginia Make?

Federal tax rules play an important role in Virginia’s corporate income tax because federal taxable income is the starting point for calculating how much corporations will pay in state taxes. That means federal choices can affect how much corporations owe in Virginia and how much revenue is available for public investments. But Virginia does not have to follow every federal tax change. State lawmakers can choose a different approach and have other tools available within Virginia’s tax code.

Federal law has allowed corporations with multi-million-dollar profits to use loopholes to help avoid paying federal income taxes. In 2025 alone, at least 88 profitable corporations paid no federal income tax despite reporting more than $105 billion in profits. Ten of these companies, reporting nearly $9 billion in profits, are headquartered in Virginia. Choices in the 2017 Tax Cuts and Jobs Act (TCJA) and in 2025 through H.R. 1 contribute to this massive tax avoidance. Tax breaks for corporations and their shareholders in H.R. 1 were paid for in part by cuts to health care and food access for our friends and neighbors, even as families face increasing financial pressures.

Because Virginia starts with federal taxable income, some of the tax breaks that enable tax avoidance can carry over to our state tax code. State lawmakers can choose not to follow certain federal changes. But Virginia also has its own loopholes built into state code.

In 2026, the General Assembly chose not to follow federal changes that would have resulted in a $430 million tax giveaway in the recently passed budget to corporations and their wealthy shareholders. 

Lawmakers should continue to examine both federal changes and Virginia’s own tax code, and use every available tool to make sure corporations pay more of their fair share toward the building blocks of thriving communities.