USA Taxation and CASE
C.A.S.E (the Council of American States in Europe) realize that taxation is one of the key areas that interest a European company when looking at expansion to the USA. That is why each member state works with their own network of Certified Public Accountants (CPA's) who have both the language skills and expertise to advise you on how to structure your subsidiary. By working through C.A.S.E you can be sure that the CPAs we recommend understand the needs of European companies and specialize in assisting them with tax planning in the most efficient way in the USA.
The U.S. tax system is set up on both a federal and state level. There are several types of taxes: income, sales, capital gains, etc. Federal and state taxes are completely separate and both has its own authority to charge taxes. Each state has its own tax system that is separate from the other states. (see individual state home page to see the taxation rates that apply). Within the state there may be several jurisdictions that also charge taxes. For example, counties or towns may charge their own school taxes that are in addition to state taxes.
In almost all cases every individual in the U.S. pays income tax on both the federal and state level. Federal taxes include social security and Federal insurance contributions. Each state also has its own form of income tax employers withhold from a paycheck. If you earn over a certain amount, you must file both federal and state taxes before April 15th of each year.
This is the tax that is charged on purchases. Sales tax is a state tax and varies from state to state as well as within the state. Within the state, municipalities have the right to raise the sales tax above the state limit. There are also other rules surrounding sales tax, such as which items are taxed and which are not.
An overview of United States federal taxation including Corporation taxation is published by the Joint Committee on Taxation for 2012. Their corporate income tax information is shown below. (To see the full report click here)
Corporate Income Tax 2012
Corporations organized under the laws of any of the 50 States (and the District of Columbia) generally are subject to the U.S. corporate income tax on their worldwide taxable income (1). The taxable income of a corporation generally is comprised of gross income less allowable deductions. Gross income generally is income derived from any source, including gross profit from the sale of goods and services to customers, rents, royalties, interest (other than interest from certain indebtedness issued by State and local governments), dividends, gains from the sale of business and investment assets, and other income. Allowable deductions include ordinary and necessary business expenditures, such as salaries, wages, contributions to profit-sharing and pension plans and other employee benefit programs, repairs, bad debts, taxes (other than Federal income taxes), contributions to charitable organizations (subject to an income limitation), advertising, interest expense, certain losses, selling expenses, and other expenses.
Links to further information
Internal Revenue Service (IRS) - www.irs.gov
Provides service to taxpayers to understand and meet their tax liabilities.
Federation of Tax Administrators – www.taxadmin.org
Founded in 1937 to improve the quality of state tax administration. They provide services to State tax authorities including research, information exchange training and intergovernmental coordination.
American Institute of Certified Public Accountants (AICPA) - www.aicpa.org
The National professional organization of Certified Public Accountants (CPAs) in the United States, with nearly 386,000 CPA members
Expenditures that produce benefits in future taxable years to a taxpayer's business or income-producing activities (such as the purchase of plant and equipment) generally are capitalized and recovered over time through depreciation, amortization or depletion allowances. A net operating loss incurred in one taxable year may be carried back two years or carried forward 20 years and allowed as a deduction in another taxable year. Deductions are also allowed for certain amounts despite the lack of a direct expenditure by the taxpayer. For example, a deduction is allowed for all or a portion of the amount of dividends received by a corporation from another corporation (provided certain ownership requirements are satisfied). Moreover, a deduction is allowed for a portion of the amount of income attributable to certain manufacturing activities.
The Code also specifies certain expenditures that may not be deducted, such as dividends paid to shareholders, expenses associated with earning tax-exempt income,(2) certain entertainment expenditures, certain executive compensation in excess of $1,000,000 per year, a portion of the interest on certain high-yield debt obligations that resemble equity, and fines, penalties, bribes, kickbacks and illegal payments.
A corporation's regular income tax liability generally is determined by applying the following tax rate schedule to its taxable income.
Table 2.–Federal Corporate Income Tax Rates
If taxable income is: Then the income tax rate is:
$0-$50,000 ................................................................ 15 percent of taxable income
$50,001-$75,000 ...................................................... 25 percent of taxable income
$75,001-$10,000,000 .............................................. 34 percent of taxable income
Over $10,000,000 .................................................... 35 percent of taxable income
The first two graduated rates described above are phased out for corporations with taxable income between $100,000 and $335,000. As a result, a corporation with taxable income between $335,000 and $10,000,000 effectively is subject to a flat tax rate of 34 percent. Also, the application of the 34-percent rate is gradually phased out for corporations with taxable income between $15,000,000 and $18,333,333, such that a corporation with taxable income of $18,333,333 or more effectively is subject to a flat rate of 35 percent.
In contrast to the treatment of capital gains in the individual income tax, no separate rate structure exists for corporate capital gains. Thus, the maximum rate of tax on the net capital gains of a corporation is 35 percent. A corporation may not deduct the amount of capital losses in excess of capital gains for any taxable year. Disallowed capital losses may be carried back three years or carried forward five years.
Corporations are taxed at lower rates on income from certain domestic production activities. This rate reduction is effected by the allowance of a deduction equal to a percentage of qualifying domestic production activities income. For taxable years beginning in 2012, the deduction is equal to nine percent of the income from manufacturing, construction, and certain
other activities specified in the Code.(3)
Like individuals, corporations may reduce their tax liability by any applicable tax credits. Tax credits applicable to businesses include credits for producing fuels from nonconventional sources, investment tax credits (applicable to investment in certain renewable energy property and the rehabilitation of certain real property), the alcohol fuels credit (applicable to production of certain alcohol fuels), the research credit, the low-income housing credit (applicable to investment in certain low-income housing projects), the enhanced oil recovery credit (applicable to the recovery of certain difficult-to-extract oil reserves), the empowerment zone employment credit (applicable to wages paid to certain residents of or employees in empowerment zones), the work opportunity credit (applicable to wages paid to individuals from certain targeted groups), and the disabled access credit (applicable to expenditures by certain small businesses to make the businesses accessible to disabled individuals). The credits generally are determined based on a percentage of the cost associated with the underlying activity and generally are subject to certain limitations.
Domestic corporations that are affiliated through 80 percent or more corporate ownership may elect to file a consolidated return in lieu of filing separate returns. Corporations filing a consolidated return generally are treated as a single corporation; thus, the losses (and credits) of one corporation can offset the income (and thus reduce the otherwise applicable tax) of other affiliated corporations.
A corporation is subject to an alternative minimum tax that is payable, in addition to all other tax liabilities, to the extent that it exceeds the corporation's regular income tax liability. The tax is imposed at a flat rate of 20 percent on alternative minimum taxable income in excess of a $40,000 exemption amount.(4). Credits that are allowed to offset a corporation's regular tax liability generally are not allowed to offset its minimum tax liability. If a corporation pays the alternative minimum tax, the amount of the tax paid is allowed as a credit against the regular tax in future years. Alternative minimum taxable income is the corporation's taxable income increased by the corporation's tax preferences and adjusted by determining the tax treatment of certain items in a manner that negates the deferral of income resulting from the regular tax treatment of those items. Among the preferences and adjustments applicable to the corporate alternative minimum tax are accelerated depreciation on certain property, certain expenses and allowances related to oil and gas and mining exploration and development, certain amortization expenses related to pollution control facilities, and certain tax-exempt interest income. In addition, corporate alternative minimum taxable income is increased by 75 percent of the amount by which the corporation's "adjusted current earnings" exceed its alternative minimum taxable income (determined without regard to this adjustment). Adjusted current earnings generally are determined with reference to the rules that apply in determining a corporation's earnings and profits.
Treatment of corporate distributions
The taxation of a corporation generally is separate and distinct from the taxation of its shareholders. A distribution by a corporation to one of its shareholders generally is taxable as a dividend to the shareholder to the extent of the corporation's current or accumulated earnings and profits.(5) Thus, the amount of a corporate dividend generally is taxed twice: once when the income is earned by the corporation and again when the dividend is distributed to the shareholder.(6) Conversely, amounts paid as interest to the debt holders of a corporation generally are subject to only one level of tax (at the recipient level) since the corporation generally is allowed a deduction for the amount of interest expense paid or accrued. Amounts received by a shareholder in complete liquidation of a corporation generally are treated as full payment in exchange for the shareholder's stock. A liquidating corporation recognizes gain or loss on the distributed property as if such property were sold to the distributee for its fair market value. However, if a corporation liquidates a subsidiary corporation of which it has 80 percent or more control, no gain or loss generally is recognized by either the parent corporation or the subsidiary corporation.
Accumulated earnings and personal holding company taxes
Taxes at a rate of 15 percent (the top rate generally applicable to dividend income of individuals) may be imposed upon the accumulated earnings or personal holding company income of a corporation. The accumulated earnings tax may be imposed if a corporation retains earnings in excess of reasonable business needs. The personal holding company tax may be imposed upon the excessive passive income of a closely held corporation. The accumulated earnings tax and the personal holding company tax, when they apply, in effect impose the shareholder level tax in addition to the corporate level tax on accumulated earnings or undistributed personal holding company income.
(1) Foreign tax credits generally are available against U.S. income tax imposed on foreign source income to
the extent of foreign income taxes paid on that income. A foreign corporation generally is subject to the U.S.
corporate income tax only on income with a sufficient nexus to the United States.
A qualified small business corporation may elect, under subchapter S of the Code, not to be subject to the
corporate income tax. If an S corporation election is made, the income of the corporation will flow through to the
shareholders and be taxable directly to the shareholders.
(2) For example, the carrying costs of tax-exempt State and local obligations and the premiums on certain
life insurance policies are not deductible.
(3) With a nine percent deduction, a corporation is taxed at a rate of 35 percent on only 91 percent of
qualifying income, resulting in an effective tax rate of 0.91 * 35, or 31.85 percent. A similar reduction applies to the
graduated rates applicable to individuals with qualifying domestic production activities income.
(4) The exemption amount is phased out for corporations with income above certain thresholds, and is
completely phased out for corporations with alternative minimum taxable income of $310,000 or more.
(5) A distribution in excess of the earnings and profits of a corporation generally is a tax-free return of
capital to the shareholder to the extent of the shareholder's adjusted basis (generally, cost) in the stock of the
corporation; such distribution is a capital gain if in excess of basis. A distribution of property other than cash
generally is treated as a taxable sale of such property by the corporation and is taken into account by the
shareholder at the property's fair market value. A distribution of stock of the corporation generally is not a taxable
event to either the corporation or the shareholder.
(6) This double taxation is mitigated by a reduced maximum tax rate of 15 percent generally applicable to
dividend income of individuals.