United States

Last modified: 19/05/2023 13:27

Corporate taxation

	Rate
Corporate income tax rate	21%
Branch tax rate	21%
Capital gains tax rate	21%

Residence: A company is generally resident in the United States if it has been created or organized in the United States or under the law of the United States or of any State, including the District of Columbia.

Basis: Domestic companies are generally taxed on their actual and deemed income arising from both domestic and foreign sources. Foreign companies are generally taxed on their income that is actually or deemed to be effectively connected with a United States trade or business, which amount may be modified by a relevant bilateral income tax treaty.

Taxable income: Corporation income tax is imposed on a domestic company’s net taxable income, as determined under United States income tax principles. Net taxable income is generally determined by starting with the company’s net book income, as determined under United States Generally Accepted Accounting Principles, to which adjustments are made in order to arrive at net taxable income. Taxable income includes both active and passive income, as well as capital gains. Expenses incurred in the conduct of a trade or business are deductible subject to various limitations. Additionally, due to anti-deferral rules described below, taxable income of a domestic company may also include deemed income inclusions of various types from foreign entities in which the domestic company is a direct or indirect shareholder.

Significant local taxes on income: Most states levy corporate income or similar taxes at rates that range between 2% and 12% and that are generally based on federal taxable income with state-specific adjustments. Cities and other local jurisdictions may also impose similar taxes. States apply varying allocation, apportionment and sourcing methodologies to determine the portion of a company’s income that is subject to tax in the respective jurisdiction.

Alternative minimum tax: Alternative Minimum Tax (AMT), Base Erosion and Anti-Abuse Tax (BEAT)

Taxation of dividends: Domestic companies are generally subject to tax at the corporation income tax rate on dividend income received, although the amount subject to tax may be reduced depending on the amount of ownership of the payor of the dividend and other considerations.

Capital gains: Domestic companies are generally subject to tax at the corporation income tax rate on capital gain income recognized. Capital losses can only be netted against any capital gain. Net capital losses are generally not deductible. Instead, a net capital loss may be carried back to each of the 3 taxable years preceding the loss year and then carried forward to each of the 5 taxable years succeeding the loss year, subject to limitation, to offset any capital gains in those preceding or subsequent years.

Losses: Subject to special rules and limitations, (i) in the case of a net operating loss arising in a taxable year beginning before January 1, 2018, such net operating loss may be carried back to each of the two taxable years preceding the year of the loss, and then carried forward to each of the 20 taxable years following the year of the loss, and (ii) in the case of a net operating loss arising in a taxable year beginning after December 31, 2017, such net operating loss may be carried forward indefinitely. Net operating loss carry forwards may be subject to additional limitation in the event of a change control of the company.

Foreign tax relief: Foreign source income is included in the taxable income of a domestic company. However, subject to limitations and restrictions, taxes paid to a foreign jurisdiction in connection with the item of foreign source income may qualify as a foreign tax credit.

Participation exemption: See above under ‘Taxation of dividends’ and ‘Capital gains’

Holding-company regime: There is no holding company regime.

Tax-based incentives: Incentives include: • Accelerated depreciation deduction for certain capital improvements • Research & Development credit for R&D performed in the US • Enhanced deduction for foreign derived intangible income of a US corporation • General business credit comprised of over 40 separate credits for various activities, including but not limited to investment credit, work opportunity credit, orphan drug credit, and energy credit.

Group relief/fiscal unity: An affiliated group of domestic corporations can elect to file a consolidated US corporation income tax return.

Corporate taxation: compliance

Tax year: Generally conforms to the company’s financial accounting period and cannot exceed 12 months expect for certain corporations that elect to have a 52/53 week tax year. Initial year and final year tax periods may short tax periods.

Consolidated returns: Yes

Filing and payment: Federal, state, and local income and/or franchise taxes each have separate filing requirements and deadlines. Taxes are self-assessed and subject to review by the relevant taxing authority.

Penalties: Several federal penalty provisions may apply where there is inter alia a failure to file required tax returns and related forms, underpayment of estimated taxes, late payment of the tax liability, underreporting of income. Notable statutory penalties may apply where there is a failure to file various required foreign informational reporting forms. In addition to statutory penalties and interest, other consequences may arise, including the potential loss of federal tax attributes and the prevention of the running of the statute of limitations to assess tax. Most states imposing a corporate income or similar tax have adopted a penalty structure that is similar to the federal penalty regimes.

Rulings: Private Letter Rulings and other rulings may be obtained from the Internal Revenue Service in connection with various US tax matters. Most states also provide procedures to apply for rulings in connection with various state tax matters.

Taxation of individuals

	Rate
	Federal Income Tax
Federal	Graduated based on filing status and level of income.  Top marginal rate for 2023 is 37%
State (43 of the 50 states impose personal income tax)	Varies, highest marginal rate is 12% for California and for some income in Massachusetts
Federal Capital Gains Rate	20% if holding period of 1 year or more
Net Investment Income Tax	3.8% applied to certain net investment income
State Capital Gains Rate	Relief and rates vary by state

Residence: US citizens are taxed on worldwide income regardless of country of residence. Foreign individuals who spend at least 31 days in the US in a given tax year must test for residency under the substantial presence test by reviewing days of US presence over the last 3 most recent tax years. For the current year being tested all days of presence are included, for the 1st preceding year 1/3 of days are included, and for the 2nd preceding tax year 1/6 of days are included. If the sum of the days within the 3 years tested is at least 183 days, then the individual is considered a US resident for the year being tested. There is an exception available to the substantial presence test if the individual can establish a closer connection to a foreign country.

Basis: US citizens (regardless of residence) and foreign resident alien individuals are taxed on their worldwide income. Nonresident alien individuals are generally subject to tax on their US source income unless otherwise exempted by treaty or a relevant tax provision.

Taxable income: Subject to certain exceptions, taxable income generally includes income derived from any source.

Capital gains: Capital gains from the sale or other disposition of capital assets are generally subject to tax with limited exceptions. Capital gains are generally subject to tax at ordinary income tax rates unless the capital asset disposed has a holding period of 1 year or more (i.e., long-term capital gain). The maximum long term capital gains rate is 20 percent.

Deductions and allowances: Various expenses may be deducted in computing taxable income, including but not limited to interest on mortgage loans, interest on loans used to make investments, charitable contributions, state and local income and real estate taxes (subject to a maximum deduction of $10,000 annually) and alimony. Personal allowances and standard deductions are granted to taxpayers, their spouses, and dependent children, although the deduction of personal allowances is currently suspended for tax years 2018 through 2025.

Foreign tax relief: Foreign taxes levied on foreign source income may be eligible foreign income taxes that may be utilized to reduce US tax on the same item of income through a foreign tax credit, subject to limitations. Additionally, in certain circumstances, a portion of foreign earned income may be excludable from taxable income of a US individual.is included in taxable income of US citizens and residents (see above under “Basis”), but relief is granted for taxes paid to foreign jurisdictions in the form of a foreign tax credit. Generally, the credit is limited to the lower of the actual foreign taxes paid or the percentage of foreign source income times the US tax liability.

Taxation of individuals: compliance

Tax year: Calendar year

Filing and payment: Self-assessment. Spouses can elect to file joint or separate tax returns. Tax on wages are withheld by the employer. The taxpayer is responsible for making estimated tax payments for other sources of income. Withholding taxes and any estimated payments made throughout the year are applied against the tax liability shown on the tax return. The federal tax return filing deadline is generally April 15th of the following year. Most US states have adopted the federal deadline or a later date. A 6-month extension to file an annual income tax return may be requested for federal and most state purposes. However, the extension of time to file a tax return does not extend the date by which the individual’s tax liability must be paid. Taxpayers not present in the US are generally allowed an additional two months to file their individual tax returns beyond the applicable original or extended due date.

Penalties: Several federal penalty provisions may apply where there is inter alia a failure to file required tax returns and related forms, underpayment of estimated taxes, late payment of the tax liability, underreporting of income. Notable statutory penalties may apply where there is a failure to file various required foreign informational reporting forms. In addition to statutory penalties and interest, other consequences may arise, including the potential loss of federal tax attributes and the prevention of the running of the statute of limitations to assess tax. Most states imposing an individual income or similar tax have adopted a penalty structure that is similar to the federal penalty regimes.

Rulings: Private Letter Rulings and other rulings may be obtained from the Internal Revenue Service in connection with various US tax matters. Most states also provide procedures to apply for rulings in connection with various state tax matters.

Withholding taxes

Withholding tax is generally imposed at a statutory rate of 30 percent on U.S. source fixed and determinable periodic income (“FDAP”) paid to foreign persons.  FDAP includes but is not limited to interest, dividends, royalties, pensions, and alimony. The 30 percent statutory rate may be reduced pursuant to the provisions of a relevant income tax treaty and where the foreign beneficial owner of the payment qualifies for benefits of such income tax treaty.

Withholding of tax from amounts paid to a foreign person may also be required in instances of the sale, exchange or other disposition of a US real property interest, an interest in a domestic corporation that is a US Real Property Holding Company, or a partnership with an effectively connected trade or business.

Branch remittance tax: 30 percent branch profits tax on a foreign corporation’s US branch dividend equivalent amount for the taxable year. The applicable branch profits tax rate may be reduced pursuant to the provisions of a relevant income tax treaty and where the foreign beneficial owner of the payment qualifies for benefits of such income tax treaty.

Anti-avoidance legislation

Transfer pricing: Federal transfer pricing regulations are in place. The regulations govern the application of the arm’s length standard to controlled transactions and contemporaneous documentation requirements. Where contemporaneous transfer documentation that conforms to federal transfer pricing principles and requirements is not in place, there is no protection from addition-to-tax penalties that could be as high as 40 percent of the underpayment of tax resulting from a transfer pricing adjustment.

Interest restriction: Federal law provides various limitations on the deduction of interest, including an overall limitation on the deductibility of business interest, investment interest, personal interest, and mortgage interest.

Controlled foreign companies: Controlled foreign corporation anti-deferral rules are complex, including the subpart F and Global Intangible Low-Taxed Income regimes that may cause a U.S. Shareholder to have deemed income inclusions as part of the U.S. Shareholder’s taxable income. In addition to the controlled foreign corporation rules, there are anti-deferral rules that apply to Passive Foreign Investment Companies (PFICs”).

Hybrid mismatches: Rules may disallow deduction of disqualified related party amounts that are paid to a hybrid entity.

Disclosure requirements: Calculations and related U.S. foreign informational reporting is complex and extensive, including reporting of foreign financial assets, informational reporting for interests in foreign corporations, partnerships, trusts, and gifts. Failure to substantially comply with disclosure and reporting requirements can result in substantial civil penalties and other adverse consequences.

Exit taxes: For individuals and businesses.

General anti-avoidance rule: Although the federal tax rules do not expressly provide for a GAAR, the Internal Revenue Service can apply a “substance over form” doctrine, in addition to other notable accepted doctrines and principles, to re-characterize transactions that are determined to be abusive or having a principal purpose of tax avoidance.

Value-added tax/Goods and services tax

Type of tax: There is no US federal value-added tax. Most states impose a sales and use tax on the sale of goods, and, in some cases, provision of services in the respective jurisdiction.

Standard rate: Varies by state. Combined state and local sales tax rates range from 1.43% to 9.5%.

Reduced rates: Varies by state.

Registration: States each have their own registration process and requirements.

Filing and payment: Generally monthly, quarterly, or annually, varying by amount of tax collected.

Social security contributions

The annual assessment for the social security tax is 12.4% of wages up to a specified indexed ceiling (i.e., $160,200 for 2023).  In addition to this, Medicare hospital insurance taxes are assessed at a rate of 2.9% of all wages.  For wage income, one-half of the social security tax and Medicare tax is borne by the employee and the other half by the employer.

Self-employed

Self-employed individuals are responsible for the full 12.4% social security tax on self-employment income up to a specified ceiling ($160,200 for 2023, as an example). Additionally, self-employed individuals are responsible for the full 2.9% Medicare tax on all self-employment income. Self employed individuals report their self-employment income and pay the self employment taxes as part of their annual income tax returns. Estimates of self-employment tax are also required, as part of the payment of estimated income tax mentioned above.

Other taxes

Capital duty: No.

Immovable property taxes: No federal tax. Some states and localities impose a tax on the value of real and/or personal property.

Transfer tax: None at the federal level. Most states impose a transfer tax on real estate transactions at rates which vary by state.

Stamp duty: Not generally relevant at the federal level except for certain firearms transfers under the National Firearms Act. Most states and localities impose stamp taxes for the recording of transactions involving real estate. Rates vary by state.

Net wealth/worth tax: No federal corporate net wealth tax. Some states impose taxes based on net worth of the company.

Inheritance/gift taxes: There is an estate and gift tax at the federal level. There is a lifetime exemption for federal, which for 2023 is the first 1$2.92 million. Some states (currently about 17) have either an estate tax or an inheritance tax.

Other: None notable

Tax treaties

The Unites States has concluded over 60 taxation treaties on income and capital gains. The full list of treaty countries is provided on the IRS website at: https://www.irs.gov/businesses/international-businesses/united-states-income-tax-treaties-a-to-z