Corporate taxes apply in the United States at the federal, state, and local level on the income of an entity that is treated for tax purposes as a corporation. From 1 January 2018, the effective corporate tax rate in the United States was 21 percent due to the "Withholding Tax and Employment Act" section of December 20, 2017. State and local taxes and rules vary by jurisdiction, although many are based on concepts and federal definitions. Taxable income may differ from book revenue for both income and tax deductions and for what is taxable. Corporations are also subject to Federal Alternative Minimum Tax and alternative state taxes. Like individuals, companies must file tax returns each year. They must make tax payments every three months. The controlled group of companies may file a combined return.
Some corporate transactions are not taxed. This includes most formations and some types of mergers, acquisitions, and liquidations. Shareholder of a company is taxable on dividends distributed by the company. Corporations may be taxed on foreign income, and may be given a foreign tax credit for such tax.
Most stockholders of the company are not taxed directly on corporate earnings, but must pay taxes on dividends paid by the company. However, shareholders of the S corporations and mutual funds are currently taxed on corporate earnings, and do not pay tax on dividends.
On December 20, 2017, the US Senate and the House of Representatives passed the Tax Cut and Employment Act, setting a flat and effective corporate tax rate of 21% on all businesses executed on 1 January 2018.
Video Corporate tax in the United States
Overview
Corporate income tax is levied at the federal level on all entities treated as corporations (see Entity classification below), and by 47 states and the District of Columbia. Certain locality also imposes corporate income tax. The Company's income tax is levied on all domestic and foreign companies having revenues or activities within the jurisdiction. For federal purposes, entities that are treated as corporations and organized under any state law are domestic companies. For the purposes of the state, the entity set forth in the country is treated as domestic, and entities organized outside the country are treated as foreigners.
Some types of corporations (company S, mutual funds, etc.) are not taxed at the enterprise level, and their shareholders are taxed on the company's earnings as recognized. Corporations that are not Corporate S are known as C.
Domestic companies are taxed on their worldwide income at the federal and state levels. Corporate income tax is based on net taxable income as defined under federal or state law. Generally, the taxable income for an enterprise is gross income (business and non-business revenue liabilities minus cost of goods sold) minus any allowable tax deductions. Certain earnings, and some companies, are subject to tax exemption. Also, withholding taxes on interest and certain other fees paid to the parties concerned are subject to limitations.
Corporations can choose their tax year. Generally, one tax year should be 12 months or 52/53 weeks. The tax year does not need to be in accordance with the financial reporting year, and does not necessarily coincide with the calendar year, the book provided is kept for the selected tax year. Corporations may change their tax year, which may require the approval of the Internal Revenue Service. Most state income taxes are determined in the same tax year as the federal tax year.
Group companies are permitted to apply single returns for members of the controlled group or unit group , known as consolidated returns, at the federal level, and are permitted or required to do so by certain countries. Consolidated returns report the combined taxable income of members and calculate the combined tax. If the parties concerned do not file a combined return within a jurisdiction, they are subject to the price transfer rule. Under this rule, the tax authority may adjust the price charged between the parties concerned.
The shareholders of the company are taxed separately on the distribution of income and profits of the company as dividends. The current dividend tax rate is lower than ordinary income for both corporate and individual shareholders. To ensure that shareholders pay tax on dividends, two terms of tax withholding may apply: tax deductions on foreign shareholders, and "withholding reserves" on certain domestic shareholders.
Corporations must file tax returns in all US jurisdictions that apply income taxes. The return is the tax self-assessment. Corporate income tax is payable in advance installments, or estimated payments, at the federal level and for many states.
Corporations may be subject to withholding tax liabilities after making certain varieties of payment to others, including wages and distributions treated as dividends. This obligation is generally not a corporation tax, but the system may impose sanctions on the company or its officers or employees for failing to withhold and pay the tax.
Maps Corporate tax in the United States
State and local revenue tax
Almost all states and some regions impose taxes on corporate earnings. The rules for determining this tax vary widely from state to state. Many countries calculate taxable income with reference to federal taxable income, with certain modifications. The states do not allow tax deductions for income taxes, either federal or state. Furthermore, most countries refuse tax exemption for interest income tax exempt at the federal level.
Most countries collect taxes on domestic and foreign companies on taxable income derived from business activities granted to countries based on formularies. Many countries apply the concept of "throwing back" to taxing domestic firms on non-taxable income by other countries. The tax agreement does not apply to state taxes.
According to the US Constitution, the state is prohibited from taxing the income of other citizens unless the relationship with the tax state reaches a certain level (called "nexus"). Most states do not impose non-business income taxes from overseas companies. Since taxes must be equitably shared, states and regions calculate revenues from state enterprises (including those in foreign countries) taxable in the state by applying formularies to total corporate taxable income. Many countries use formulas based on property, payroll, and in-state state-of-the-art ratios for items outside the state.
History
The first federal income tax came into effect in 1861, and ended in 1872, amid constitutional challenges. Corporate income tax was enacted in 1894, but a key aspect of it was immediately unconstitutional. In 1909, Congress imposed excise taxes on companies based on revenue. After the ratification of the Sixteenth Amendment to the US Constitution, this becomes the company's provision of federal income tax. Amendments to the various provisions affecting the company have become most or all of the income measures since then. The terms of the company tax are included in Title 26 of the United States Code, known as the Internal Revenue Code. Current tax rate on corporate earnings was adopted in the Tax Reform Act of 1986.
In 2010, corporate tax revenues represent about 9% of all federal income or 1.3% of GDP.
Entity classification
The entity may choose to be treated as a company that is taxed in the entity and the member level or as "flowing through" the entity taxing only at the member level. However, entities that are regulated as companies under US law and certain foreign entities are treated, per se , as companies, without optional election. The Internal Revenue Service issued a so-called "check-the-box" regulation in 1997 in which an entity may make such a choice by filing Form 8832. The absence of such election, the default classification for domestic and foreign business entities, combined with the selection of voluntary entities to opt out of the default classification (except in case of " per se company" (as defined below)). If an entity not treated as a company has more than one equity owner and at least one equity owner has no limited liability (for example, a public partner), it will be classified as a partnership (ie, pass-through), and if the entity has a sole equity owner and a sole proprietor has no limited liability protection, it will be considered a neglected entity (ie, pass-through).
Some entities treated as corporations may make other elections that allow corporate earnings to be taxed only at the shareholder level, and not at the enterprise level. Such entities are treated the same as partnerships. Income entities are not taxed at the enterprise level, and members must pay tax on their share of the income of the entity. These include:
- S Corporations, all shareholders must be US citizens or residents; other restrictions apply. Elections require the approval of all shareholders. If a company is not an S company of its formation, special rules apply to the taxation of income derived (or acquisition gained) before the election.
- Regulated investment firms (RICs), commonly referred to as mutual funds.
- Real Estate Investment Trust (REIT).
Taxable income
Determining what taxes are and what rates are made at the federal level under US tax laws. Many but not all countries incorporate federal legal principles in their tax laws to some extent. Federal taxable income equals gross revenue (gross revenue and other income minus cost of goods sold) less tax deductions. Gross revenues and business reductions are determined in the same way as individuals. All corporate earnings are subject to the same federal tax rate. However, companies may reduce other federal taxable income with certain net capital losses and certain deductions. Certain pieces are only available to companies. This includes deductions for dividends received and amortization of organizational costs. Some countries argue that a company's business income is different from non-business income.
The principle of recognizing income and abatement can be different from the principles of financial accounting. The main areas of difference include the difference in time of income or deduction, tax exemption for certain income, and the prohibition or limitation of certain tax deductions. IRS Rules require that this disclosure be disclosed in detail to non-small companies on Schedule M-3 through Form 1120.
Corporate Flat Rate
Federal tax rate
After the issuance of the Tax Cut and Employment Act, on December 20, 2017, the corporate tax rate has been changed to 21% flat starting January 1, 2018.
Country income tax rate
The table on the right lists the tax rates on corporate earnings applied by each state, but not by the local government in the state. Since state and local taxes are deductible expenses for federal income tax purposes, the effective tax rate in each country is not a simple addition to federal and state tax rates.
Although a country can not levy a corporate income tax, they may impose other similar taxes. For example, Washington state has no income tax but implements B & O (business and employment taxes) which can be considered a greater burden because of B & O is calculated as a percentage of revenue rather than a percentage of net income, such as corporate income tax. This means companies that suffer losses have to pay taxes.
Tax Credits
Corporations, like other businesses, may qualify for various tax credits that reduce federal, state or local income taxes. The biggest of these with dollar volume is a federal foreign tax credit. This credit is allowed to all taxpayers for income tax paid to foreign countries. This credit is limited to the federal income tax section before any other credits earned by foreign taxable income. This credit is intended to reduce the taxation of equal income to the same taxpayers by two or more countries, and has been a feature of the US system since 1918. Other credits include credits for certain wage payments, credits for investments in certain types of assets including certain motor vehicles , credit for use of alternative fuels and use of off-road vehicles, credits related to natural resources, and others. See, for example. , Research & amp; Experiment Tax Credits.
Tax delay
Suspension is one of the main features of a worldwide tax system that allows US multinational companies to delay paying taxes on overseas earnings. Under the US tax law, companies are not required to pay US taxes on their foreign subsidiaries' profits for years, even indefinitely until income is returned to the US. Therefore, this is one of the main reasons why US corporations pay low taxes, even though the corporate tax rate in the US is one of the highest rates (35%) in the world. The corporate tax rate will change to flat (21%) on January 1, 2018, permanently.
Suspension is beneficial for US companies to raise the capital costs relative to their foreign competitors. Their foreign subsidiaries can reinvest their earnings without incurring additional taxes that allow them to grow faster. It is also valuable for US companies with global operations, especially for companies with revenues in countries with low taxes. Some of the largest and most profitable US companies pay very low tax rates through the use of their subsidiaries in countries called "tax haven". Eighty-three of the 100 largest public companies in the US have subsidiaries in countries listed as tax havens or financial privacy jurisdictions, according to the Government Accountability Office.
However, tax deferrals encourage US companies to invest in creating jobs abroad even if similar investments in the United States can be more profitable, without tax considerations. Furthermore, companies try to use accounting techniques to record earnings abroad in any way, even if they keep investing and working in the United States. This explains why US firms report their biggest profits in low-tax countries such as the Netherlands, Luxembourg and Bermuda, although it is clearly not where the most obvious economic activity occurs.
Limitations of interest reduction
Tax deductions are allowed at the federal, state and local level for interest expenses incurred by the company in carrying out its business activities. If the interest is paid to the related party, the deduction may be limited. Classification of instruments as debt which interest can be deducted or as equity by considering which distribution can not be subtracted is very complex and based on the law developed by the court. The court has considered 26 factors in deciding whether an instrument is debt or equity, and no single factor dominates.
The federal tax regulation also limits the reduction of interest expense paid by companies to foreign shareholders based on complex calculations designed to limit reductions of up to 50% of cash flow. Some countries have other restrictions on interest payments and related party royalties.
Other corporate events
The US Rules stipulate that certain company events are not taxed to the company or shareholders. Significant restrictions and custom rules often apply. The rules associated with such transactions are complex, and are present primarily at the federal level. Many states follow federal tax treatments for such events.
Formation
Company formation by controlling corporate or non-corporate shareholders is usually an event that can not be broken. Generally, in the tax-exempt formation attributes tax assets and liabilities are transferred to a new company along with these assets and liabilities.
Example: John and Mary are residents of the United States who run the business. They decided to enter for business reasons. They transferred business assets to Newco, a newly formed Delaware company in which they are sole shareholders, subject to liability borne from business, solely in exchange for Newco's common stock. This transfer should not generally result in the acquisition or loss of recognition for John, Mary, or Newco. Newco assumes the tax base of John and Mary in the assets it earns. If on the other hand Newco also assumes a bank loan that exceeds the base of the transferred asset minus the accrued liability, John and Mary will recognize the taxable gain on the excess.
Acquisitions
Corporations may incorporate or acquire other companies in a manner that is treated as non-applicable to one company and/or to their shareholders. Generally, significant restrictions apply if tax-free treatment should be obtained. For example, Bigco acquired all Smallco shares of Smallco shareholders in exchange solely for Bigco shares. This acquisition is not taxable to Smallco or its shareholders under US tax law if certain conditions are met, even if Smallco is subsequently liquidated into or merged with Bigco.
Reorganize
In addition, companies can change key aspects of their legal identity, capitalization, or structure in a tax-exempt manner. Examples of possible tax-exempt reorganizations include mergers, subsidiary liquidation, share for stock exchange, stock exchange for assets, change of form or place of organization, and recapitalization.
Advanced tax planning can reduce the tax risks resulting from business reorganization or potentially increase tax savings.
Distribution of earnings
The shareholders of the company are subject to an individual or individual income tax when the income of the enterprise is distributed. The distribution of such profits is generally referred to as dividends.
Dividends received by other companies may be taxed at a reduced rate, or exempt from tax, if the dividend receives deductions in effect. Dividends received by individuals (if dividends are "qualified dividends") are taxed at a reduced rate. Exclusions on shareholder taxation apply to certain non-routine distributions, including distribution in the liquidation of a subsidiary of 80% or termination entirely of shareholder interest.
If a company makes distribution in a non-cash form, it must pay tax on any profit from the distributed property.
The United States in general does not require tax deductions on dividend payments to shareholders. However, tax cuts are necessary if the shareholders are not US citizens or US residents or companies, or in some other circumstances (see Tax Withholdings in the United States).
Earnings and profits
US companies are allowed to distribute amounts that exceed statutory earnings in most countries where they can be arranged. The distribution by the company to the shareholders is treated as a dividend by profit and profit (E & amp; P), a tax concept similar to retained earnings. E & amp; P is the current taxable income, with significant adjustments, plus E & amp; P previously reduced by E & amp; P. Adjustments include depreciation depreciation under MACRS, reimbursement of most tax-free income, and deductions of many non-deductible costs (eg, 50% of food and entertainment). Distribution of companies that exceed E & P is generally treated as a payback to shareholders.
Liquidation
Company liquidation is generally treated as an exchange of capital assets under the Internal Revenue Code. If a shareholder buys a share of $ 300 and receives a $ 500 property from the company in liquidation, the shareholder will recognize a $ 200 capital gain. The exception is when the parent company liquidates a tax-exempt subsidiary as long as its parent holds more than 80% of the subsidiary. There are certain anti-harassment rules to avoid engineering losses in corporate liquidation.
Branch of foreign company
The United States collects foreign companies (ie, not US) differently from domestic companies. Foreign companies are generally taxed only on business income when earnings are effectively connected with US trading or business behavior (that is, in branches). This tax is levied on the same rate as the tax on the business income of the resident enterprise.
The US also imposes a branch profit tax on foreign firms with US branches, to mimic dividend paying tax to be paid if business is made in US subsidiaries and profits are deposited to foreign parents as dividends. A branch profit tax is applied at the time the profit is sent or is considered to be shipped outside the US.
In addition, foreign companies are subject to withholding tax of 30% of dividends, interest, royalties, and certain other income. The tax agreement may reduce or eliminate this tax. This tax applies to "dividend equivalent amounts," which are effectively connected earnings and profits for this year, fewer investments made by companies in US assets (money and customized property base related to US trade or business behavior). Taxes are imposed even if there is no distribution.
Consolidated return
80% or more corporations owned by the same parent company may propose federal returns and some state income taxes. This return includes all revenues, deductions, and credits from all members of the controlled group, commonly expressed without inter-company elimination. Some countries allow or request a combined or combined return for US members of the "unity" group under the same control and in the business concerned. Certain transactions between group members can not be recognized until events for other members. For example, if Company A sells goods to sister Company B, the return on sale is deferred until Company B uses or sells goods. All members of the aggregated group must use the same tax year.
Transfer pricing
Transactions between companies and related parties are subject to potential adjustments by the tax authorities. This adjustment can be applied to both US and foreign related parties, and to individuals, companies, partnerships, estates, and trusts.
Alternate tax
United States federal income tax incorporates alternative minimum taxes. This tax is calculated at a lower tax rate (20% for companies), and is charged on a modified version of taxable income. Modifications include longer depreciation of assets under MACRS, adjustments related to natural resource development costs, and additional interest-free taxes.
Corporations may also be subject to additional taxes under certain circumstances. This includes taxes on the excess accumulated undistributed profits and private holding companies and tariff restrictions passed on for personal service firms.
Some states, such as New Jersey, enact alternative taxes based on measures other than taxable income. Among these measures are gross revenue, pipeline revenue, gross receipts, and various assets or capital. In addition, some countries impose a tax on corporate capital or on shares issued and outstanding. The US state of Michigan previously weighed on businesses on an alternative basis that did not allow employee compensation as a tax deduction and allowed a full reduction of the cost of production assets at the time of the acquisition.
Tax return
US tax-imposed corporations should file federal and state income tax refunds. Different tax returns are required at the federal and state levels for different types of companies or companies engaged in specialized businesses. The United States has 13 variations on the Form 1120 basis for S companies, insurance companies, Domestic Sales Corporation Corporations, foreign companies, and other entities. The specified form and schedule structure varies by form type.
US federal tax returns require the calculation of taxable income from its components and the reconciliation of taxable income to financial statement earnings. Corporations with assets exceeding $ 10 million must complete a detailed 3-page reconciliation on Schedule M-3 that shows which differences are permanent (ie, not reversing, such as unauthorized fees or tax-free) and that are temporary (eg, income difference or fees recognized for books and tax purposes).
Some state tax returns have a significant or inherent schedule associated with the features of the different state tax system of the federal system.
Preparation for a non-modest corporate tax return can be time consuming. For example, U.S. Internal Revenue Service states that the average time required to complete Form 1120-S, for privately-owned companies that choose to flow through status, is more than 56 hours, excluding recording time.
The federal corporate tax return for most types of companies is due on the 15th day of the third month after the tax year (March 15 for the calendar year). The due date of corporate income taxes varies, but most of them mature on the same date or one month after the federal due date. Extended time for files is routinely given.
Penalties may be imposed at federal and state level for final filing or not filing for corporate income tax returns. In addition, other substantial penalties may apply in respect of failures related to returns and tax refund calculations. A deliberate failure to lodge or a deliberate submission of an incorrect return may result in a criminal penalty for those involved.
See also
- Qualifying Production Activity
Further reading
IRS Publications 542, Corporations
Standard tax text
- Willis, Eugene; Hoffman, William H. Jr., et al : Federal-Western Taxation , is published annually. 2013 Edition (quoted above as Willis | Hoffman) ISBN 978-1-133-18955-8.
- Pratt, James W.; Kulsrud, William N., et al : Federal taxation , updated periodically. Issue 2013 ISBN 978-1-133-49623-6 (quoted above as Pratt & Kulsrud).
- Fox, Stephen C., Income Tax in the US , is issued annually. 2013 Edition ISBN 978-0-985-18231-1
Treatises
- Bittker, Boris I. and Eustice, James S: Corporate Income and Shareholder Taxes : paperback summary ISBN 978-0-7913-4101-8 or as a subscription service. Quoted above as Bittker & amp; Eustice.
- Crestol, Jack; Hennessey, Kevin M.; and Yates, Richard F.: "Consolidated Tax Returns: Principles, Practice, Planning , 1998 ISBNÃ, 978-0-7913-1629-0
- Kahn & amp; Lehman. Corporate Income Tax
- Healy, John C. and Schadewald, Michael S.: Corporate Tax Course Multistate 2010 , CCH, ISBN 978-0-8080-2173-5 (also available as a multi-volume guide, ISBN 978-0-8080-2015-8)
- Hoffman, et al.: Corporations, Partnerships, Plantations and Trusts , ISBN 978-0-324-66021-0
- Momburn, et al.: Mastering Corporate Tax , Carolina Academic Press, ISBN 978-1-59460-368-6
- Keightley, Mark P. and Molly F. Sherlock: Corporate Income Tax System: Overview and Options for Reform , Congressional Research Service, 2014.
References
Source of the article : Wikipedia
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