United States: Tax System

Tax Rate For Foreign Companies

With the tax reform legislation enacted on 22 December 2017 (P.L. 115-97), the US adopted a system of taxation based on territoriality (from the previously used worldwide system). Foreign companies are generally subject to the same corporate tax as domestic companies. However, taxable income is calculated on Effectively Connected Income (ECI) only, which is considered as all U.S.-source income derived from trade or business in the U.S. or sale of U.S. real property or inventory by a foreign entity. ECI tax exemption can also be applied through a tax treaty.
US taxation of income earned by non-US entities depends on whether the income has a nexus with the United States.

Foreign companies are however subject to a branch profits tax at 30% of ECI that is not invested in U.S. trade or business and a 30% withholding tax on non-ECI U.S.-source income (e.g. dividends, interests, rents and royalties). Other arrangements can be made through tax treaties. A 30% branch profits tax also will be imposed on interest payments by the U.S. branch to foreign lenders.

Capital Gains Taxation

Gains recognized by domestic corporations on capital assets (e.g., assets held for investment) are taxed at the same rate as ordinary income. Capital losses may be deducted against capital gains, but not against ordinary income. An excess of capital losses over capital gains in a tax year may be carried back three years and carried forward five years.

Foreign companies are generally exempt from capital gains tax unless the gain is U.S.-sourced (from U.S. real property or through U.S. trade or business).

Main Allowable Deductions and Tax Credits

Deductions are available for specific domestic production activities, qualifying business expenses and depreciation, amortisation and losses. Normally, start-up expenditures can be amortised over a 15-year period. The cost of goodwill generally is capitalised and amortised over 15 years. Bad debt resulting from a trade or business may be deducted in the year the debt becomes worthless. Certain charitable contributions may be deducted, up to a limit of 10% of taxable income, and may be carried over to the fifteen succeeding years. State and municipal taxes imposed on businesses are deductible expenses. Fines and penalties are not deductible, unless they are paid for restitution or to come into compliance with the law. Special rules limit or deny deductions for interest, rents, or royalties paid on certain transactions.
Generally, net operating losses generated in tax years ending before 1 January 2018 may be carried back two years and, if not fully used, carried forward 20 years. Under the COVID-related CARES Act, losses arising in tax years beginning after December 31, 2017, and before January 1, 2021 may be carried back to each of the five tax years preceding the tax year of such loss.
Incentives are granted in the form of tax credits for R&D, energy-efficient appliances and electric motor vehicles.
Visit the IRS site for detailed information about available deductions in the U.S.

Other Corporate Taxes

Employers are liable for social security tax of 6.2% on the first USD 142,800 of wages paid to employees and for Medicare tax of 1.45% on all wages. The different States can impose further contributions.
Certain companies are subject to an accumulated earnings tax equal to 20% of "accumulated taxable income" if they are deemed to be accumulating earnings and profits for the purpose of avoiding shareholder personal income tax.

Importers, manufacturers, and sellers of ozone-depleting chemicals, or imported products manufactured using such chemicals, are subject to environmental taxes calculated per weight of the ODC.

In addition to federal taxes, state and municipal taxes vary from one state or community to another, including property taxes on real property, stamp duties, franchise taxes and taxes on the capital of a corporation. For more details, consult the Tax Foundation website.

Other Domestic Resources

Internal Revenue Service (IRS)

Doing Business: U.S., to obtain a summary of taxes and mandatory contributions

Country Comparison For Corporate Taxation

Accounting System

Accounting Standards

Accounting in the U.S. is based on domestic standards defined by:
- The United States Securities and Exchange Commission (SEC)
- The Financial Accounting Standards Board (FASB)
- The Governmental Accounting Standards Board (GASB)
- The Federal Accounting Standards Advisory Board (FASAB)

Accounting Regulation Bodies

AICPA, The American Institute of Certified Public Accountants
GASB, The Governmental Accounting Standards Board

Accounting Law

The Sarbanes-Oxley Act of 2002 (Public Company Accounting Reform and Investor Protection Act of 2002).

Difference Between National and International Standards (IAS/IFRS)

Domestic public companies must use US GAAP. Foreign companies whose debt or equity securities trade in a public market in the U.S. can use IFRS Standards in their U.S. filings. SMEs have to option to file either by using US GAAP, IFRS Standard or other bases of accounting such as the US income tax basis of accounting.

Accounting Practices

Tax Year

Corporations may adopt any 12 month fiscal year ending on the last day of the month. Individuals use the calendar year, unless a fiscal year is elected.

Accounting Reports

Annual report, including the income statement and the balance sheet, along with supporting CPA notes. The report must be filed on a quarterly basis (10 K) with the SEC.

Publication Requirements

According to the S-X rule of the SEC (Securities and Exchange Commission), all companies which make an initial public offering have to present an information file (called '10 K' for American companies and '20 F' for foreign companies) annually to the SEC. Companies quoted on the stock-exchange must publish their accounts.

Accountancy Profession

Accountants

Certified public accountants (CPA) and tax accountants are specialists providing accounting and tax support to companies operating in USA. CPA licenses are awarded by each of the 50 states for practice in that state.

Professional Accountancy Bodies

The American Institute of Certified Public Accountants
National Association of State Boards of Accountancy
American Accounting Association

Member of the International Federation of Accountants (IFAC)

The US is a member of the International Federation of Accountants (IFAC).

Member of Other Federation of Accountants

Member of the Confederation of Asian and Pacific Accountants (CAPA), the national accountancy organisation in the Asia-Pacific region.

Audit Bodies

Companies are required to seek a statutory auditor to conduct an annual audit of the financial health of their organisation. You can contact: Public Company Accounting Oversight Board, Deloitte, Ernst & Young, KPMG or PricewaterhouseCoopers

Allowable Deductions and Tax Credits

Allowable deductions depend on the state of residence. They may include credits for families and dependencies (e.g. child tax credit, elderly and disabled tax credit, adoption credit), healthcare, education, homeowners (e.g. mortgage interest credit, low-income housing credit), income and savings (e.g. foreign tax credit) and electrical vehicle credit, as well as deductions for work-related consumption (e.g. deductible business expenses, bad debt), healthcare, itemised deduction (e.g. real estate tax, gambling loss, charitable contributions), investments, education and others such as alimony and losses.

Citizens and resident aliens may also claim a standard deduction (instead of itemising deductions). The basic standard deduction for 2022 is USD 12,950 for individuals, USD 25,900 for married couples filing a joint return, and USD 19,400 for heads of households. Individuals, including resident aliens, who are blind or age 65 or over are entitled to an extra standard deduction, as follows: USD 1,400 if married, USD 1,750 if single.

Visit the IRS site for more detailed information.

Special Expatriate Tax Regime

The United States levies tax on its citizens and residents on their worldwide income. Non-resident aliens are taxed on their US-ECI-source income and income effectively connected with a US trade or business.
According to U.S. laws, a resident alien is an individual that is not a citizen or national of the United States and who meets either the green card test or the substantial presence test for the calendar year. The resident alien status often results in lower US tax than non-resident alien status, as it provides more allowable deductions and lower tax rates for certain married taxpayers.
If there is a tax treaty in effect between the United States and an individual's country of residence, the provisions of the treaty may override the US resident alien rules.
Expatriation tax applies differently depending on the date of expatriation. Individuals face a penalty of USD 10,000 if they fail to file the expatriation Form 8854. Visit the IRS website for more details.

Capital Tax Rate

Capital gains are taxed as ordinary income. The graduated rates of tax apply to capital gains from assets held for 12 months or less. The maximum federal tax rate on capital gains is 20% for assets held for more than 12 months.

For employees, in 2022 social security tax (old-age, survivors, and disability) is levied at a rate of 6.2% on the first USD 142,800 of wages paid, whereas the Medicare hospital insurance tax is levied at 1.45%.

A federal estate tax is levied on the fair market value of assets that an individual owns at death. For non-resident non-citizens, estate taxes are imposed only on property situated in the U.S. in excess of USD 60,000. Furthermore, for U.S. citizens and residents, a gift tax is imposed on gifts made during a person’s life, and it is unified with the estate tax. The top estate, gift, and generation-skipping transfer tax rate is 40%.

Individuals must pay a 3.8% tax on net investment income over a threshold amount and a 0.9% tax on wages, compensation, or self-employment income that exceeds a threshold amount (varying according to the taxpayer's status: single, married filing separately/jointly, etc.).

Documentary stamp taxes may be imposed at the state level, but there are no stamp duties at the federal level.