flag United States United States: Tax system

In this page: Corporate Taxes | Accounting Rules | Consumption Taxes | Individual Taxes | Double Taxation Treaties | Sources of Fiscal Information

 

Corporate Taxes

Tax Base For Resident and Foreign Companies
A corporation organised or created in the United States under U.S. law or under the law of any state is considered to any extent a domestic corporation, even in the case that it does no business or owns no property in the United States. For U.S. law, a fixed place of business is considered as a permanent establishment in the country.
 

Tax Rate

Corporate Income Tax Federal corporate income tax is applied with a flat rate of 21% to the effectively connected income (ECI). State and local governments may also impose income taxes (generally ranging between 1% and 12%), thus the effective tax rate in each state. Click here for more information about corporate tax rates.
S Corporations Tax Corporations with up to 100 eligible shareholders (none of whom may be corporations) that meet certain specific requirements are generally not subject to U.S. federal income tax.
”Base Erosion and Anti-Abuse Tax” (BEAT)
Applies only if the U.S. corporation or branch has (I) a “base erosion percentage” of 3% or more (2% for certain banks and securities dealers), and (II) average annual gross receipts of at least USD 500 million for the three-year period ending with the preceding taxable year.

equal to the excess of (I) a fixed percentage of modified taxable income (5% for taxable years beginning in 2018, increased to 10% as from taxable years beginning in 2019), over (II) the regular tax liability reduced by certain tax credits.

From tax years after December 31, 2025, the percentage of modified taxable income compared to the regular tax liability increases to 12.5% (13.5% for certain banks and securities dealers). This allows all credits to be used in calculating the U.S. corporation's regular tax liability. Specific regulations apply to banks, insurance companies, and "expatriated entities."

Minimum tax
(effective for taxable years beginning after 31 December 2022)
15% minimum tax on adjusted financial statement income (AFSI) of C corporations. The book minimum tax increases a taxpayer’s tax to the extent that the tentative minimum tax exceeds regular tax plus base erosion and anti-abuse tax (BEAT).
Click here for further info.
 
Tax Rate For Foreign Companies
With the tax reform legislation enacted on 22 December 2017 (P.L. 115-97), the U.S. 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 the sale of U.S. real property or inventory by a foreign entity. ECI tax exemption can also be applied through a tax treaty.
U.S. taxation of income earned by non-U.S. 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.

In general, foreign corporations are not subject to taxation on capital gains, except when the gains arise from selling U.S. real estate assets or are related to conducting business activities in the US.

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, rent, or royalties paid on certain transactions.
For tax years beginning after 2017 and before 1 January 2026, the law provides a deduction equal to 37.5% of a domestic corporation's foreign-derived intangible income (FDII) plus 50% of the global intangible low-taxed income (GILTI) included in the corporation's gross income under new Section 951A. From tax years after December 31, 2025, the deduction is reduced to 21.875% for FDII and 37.5% for GILTI. If, in any tax year, the domestic corporation's taxable income is lower than the combined amount of its FDII and GILTI, the 37.5% FDII deduction and the 50% GILTI deduction are proportionally reduced by the difference.
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. Net operating losses (NOLs) generated in tax years ending after December 31, 2017, typically cannot be carried back and must instead be carried forward indefinitely. Nonetheless, the deduction for these NOLs is restricted to 80% of taxable income, which is calculated without considering the deduction.
Incentives are granted in the form of tax credits for R&D, energy-efficient appliances and "clean" motor vehicles.
Visit the IRS site for detailed information about available deductions in the U.S.
Other Corporate Taxes
Social security taxes comprise old age, survivors, and disability insurance (OASDI), and "Medicare". 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. For 2023, social security tax is imposed on the first USD 160,200 of wages paid to employees. The different States can impose further contributions. The federal unemployment insurance rate is 6% on the first USD 7,000 of each employee’s wages. State unemployment insurance, mandatory in all 50 states and the District of Columbia, varies according to the State.

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.
U.S. corporations and foreign corporations meeting specific criteria of receiving significant "passive income" and being "closely held" may be liable for the personal holding company tax, levied at 20% of undistributed personal holding company income, which is imposed in addition to the regular 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)
 

Country Comparison For Corporate Taxation

  United States OECD Germany
Number of Payments of Taxes per Year 10.6 10.1 9.0
Time Taken For Administrative Formalities (Hours) 175.0 163.6 218.0
Total Share of Taxes (% of Profit) 36.6 41.6 48.8

Source: The World Bank - Doing Business, Latest data available.

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Accounting Rules

 

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
 
 

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Consumption Taxes

Nature of the Tax
Sales Tax is levied by individual states at various rates. Forty-five states, the District of Columbia and Puerto Rico collect statewide sales taxes, while only 38 states collect local sales taxes and in some cases may rival or even exceed state rates. Consult the Tax Foundation website for more information.
Standard Rate
Sales and use tax rates vary from state to state and generally range from 2.9% (Colorado) to 7.25% (California) at the state level. Most states also allow a "local option" that permits local jurisdictions, such as cities and counties, to impose an additional percentage on top of the state-level tax and to keep the related revenues. Such a system may induce consumers to make cross-border purchases (for example through e-commerce).

The five states with the highest average combined state and local sales tax rates are Louisiana (9.55%), Tennessee (9.548%), Arkansas (9.46%), Alabama (9.25%), and Oklahoma (8.98%). For the full list of applicable rates, click here.

Reduced Tax Rate
Varies by state and city (generally ranging from 2.9% to 7.25% at the state level). Click here for more information.
Exclusion From Taxation
Varies from state to state. Generally, groceries, energy utilities, prescription drugs and medical supplies as well as certain alternative energy devices and supplies are exempt from sales tax.
Click here for further info.
Method of Calculation, Declaration and Settlement
There is no federal VAT or sales tax across the US. Sales tax is calculated differently across states. 45 states, the District of Columbia and Puerto Rico apply a sales and use taxes (generally between 2.9% and 7.25%). Only Alaska, Delaware, Montana, New Hampshire and Oregon do not impose such taxes. Local sales taxes are collected in 38 states.
Other Consumption Taxes
Various consumption taxes may be levied at the local level. Click here for more information about other consumption taxes by states.

Excise duties are levied at federal and state levels on a wide range of goods and activities, including gasoline and diesel fuel used for transportation, air transportation, wagering, foreign insurance, certain sporting goods, firearms and ammunition, alcohol, tobacco, and selling certain goods at retail (e.g. heavy vehicles, trailers, bodies, and chassis).

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Individual Taxes

Tax Base For Residents and Non-Residents
Resident taxpayers incur federal tax on worldwide income, with credits for foreign income taxes. Non-resident taxpayers are subject to federal tax on Effectively Connected Income (ECI) and US-source non-ECI. Most state taxes apply to resident and non-resident individuals who reside in their territory.

Individuals who meet a “substantial presence test” are considered residents for taxation purposes. Such a test requires either physical presence in the country for 183 days or more during a calendar year, or presence of at least 31 days during a calendar year and a cumulative presence of 183 days or more based on a weighted number of days during the calendar year (taken at whole value) and the two immediately preceding calendar years (taken at one-third value for the first preceding calendar year and at one-sixth for the second).

 

Tax Rate

Different scales depending on the family status (married couples under a joint system, married couples under a separate assets system, single and head of the family), limited to seven rates. 2023 Federal Income Tax Rates: 10%, 12%, 22%, 24%, 32%, 35% and 37%
Single payers (USD) Tax Rate
0 to 11,000 10%
11,001 to 44,725 12%
44,726 to 95,375 22%
95,3776 to 182,100 24%
182,101 to  231,250 32%
231,251 to 578,125 35%
578,125 or more 37%
Married Filing Jointly (USD) Tax Rate
0 to 22,000 10%
22,001 to 89,450 12%
89,451 to 190,750 22%
190,751 to 364,200 24%
364,201 to 462,500 32%
462,501 to 693,750 35%
693,750 or more 37%
Head of Household (USD) Tax Rate
0 to 15,700 10%
15,701 to 59,850 12%
59,851 to 95,350 22%
95,351 to 182,100 24%
182,101 to 231,250 32%
231,251 to 578,100 35%
578,100 or more 37%
Alternative Minimum Tax (AMT)
(applies if an individual’s tentative AMT liability exceeds that individual’s regular income tax liability.)
26% up to a taxable income of USD 220,700
28% on the amount in excess

The AMT exemption amount for 2023 is USD 81,300 for singles and USD 126,500 for married couples filing jointly. AMT exemptions phase out at 25 cents per dollar earned once AMT income reaches USD 578,150 for single filers and USD 1,156,300 for married taxpayers filing jointly

State and local income taxes Most states, and a number of municipal authorities, impose income taxes on individuals working or residing within their jurisdictions. For more information, visit the IRS website.
 
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 2023 is USD 13,850 for individuals, USD 27,700 for married couples filing a joint return, and USD 20,800 for heads of households. Individuals, including resident aliens, who are blind or age 65 or over are entitled to an extra standard deduction of USD 1,850.

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 U.S. 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 U.S. 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 2023 social security tax (old-age, survivors, and disability) is levied at a rate of 6.2% on the first USD 160,200 of wages paid, whereas the Medicare hospital insurance tax is levied at 1.45% (not subject to an earnings cap).

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. In 2023, the federal estate tax ranges from rates of 18% to 40% and generally only applies to assets over USD 12.92 million.

Individuals must pay a 3.8% tax on net investment income over a threshold amount (USD 250,000 as of 2023 for married filing jointly or USD 200,000 for singles) and a 0.9% Medicare tax on wages, compensation, or self-employment income that exceeds a threshold amount (USD 250,000 if married filing jointly, USD 125,000 if married filing separately, and USD 200,000 if single).

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

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Double Taxation Treaties

Countries With Whom a Double Taxation Treaty Have Been Signed
Double taxation treaty signed by the U.S.
Withholding Taxes
Dividends: 0% (paid to a resident)/30% (paid to a non-resident), Interest: 0% (paid to a resident)30% (paid to a non-resident), Royalties: 0% (paid to a resident)/30% (paid to a non-resident)
Different rates apply based on the treaties signed by the U.S. with other countries to avoid double taxation.
Bilateral Agreement
The United Kingdom and the United States are bound by a double taxation treaty.

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Latest Update: April 2024