Everything You Need to Know about the U.S. Corporate Tax System
Do you have a sufficient understanding of the investment and cooperation environment in the United States before you prepare to invest and cooperate in the United States of America? What are the local laws and regulations governing foreign investment cooperation? What matters should you pay special attention to when you conduct investment cooperation in the U.S.? Today, to solve your problems like above, we will give you a brief introduction to the U.S. corporate tax system and the types of taxes involved in U.S. corporations.
The American statesman Benjamin Franklin said that the only things that are inevitable are death and taxes. Due to the complicated organization in the United States, each state has great autonomy. Therefore, the complexity of the American tax system is well-known around the world.
The current tax code in the United States is one of the most complex tax systems in the world, known as the tax sharing fiscal administration system, with tax jurisdiction divided among the federal government, the 50 state governments, the District of Columbia, as well as local governments. Federal taxes account for approximately 70% of the nation’s total tax revenue, while states’ and local governments’ taxes account for 30%. The amount of a company’s tax liability depends on the provisions of the tax system of the jurisdiction in which it conducts business and receives its income.
Basic U.S. Tax System
Donald Trump, the former American president, previously signed and passed the largest tax reform since the Reagan administration’s tax reform on December 25, 2017, and it took effect on January 1, 2018. The tax reform mainly focuses on corporate income tax and other aspects including individual income tax and cross-border tax system, in an attempt to reshape the global competitiveness of the US market, especially the manufacturing industry.
The tax system of the United States can be broadly divided into several levels including local taxation, state taxation and national taxation. However, from the principle of attribution of tax subjects, there are both territorial taxation and personal taxation. In addition, there are some overlaps in the types of taxes levied. Generally speaking, corporate taxes in the United States are quite complicated.
The U.S. tax levying authorities are the Internal Revenue Service, the Customs Service, and the states and local taxing authorities. The Internal Revenue Service is responsible for the levy of federal taxes and the administration of the Internal Revenue Code, while the Customs Service is in charge of the levy of customs duties, and states and local taxing authorities see to the collection of state and local taxes. The state and local taxing authorities have the authority to make decisions on the levy issues without the approval of the Internal Revenue Service, which means that the state taxing authorities and the federal taxing authorities are essentially independent of each other.
The U.S. federal government primarily levies individual income taxes, corporate income taxes, social security taxes, domestic consumption taxes, customs duties, and estate and gift taxes. Individual and corporate income taxes are the primary sources of revenue for the U.S. federal government, while sales taxes are the major source of revenue for state governments, and property taxes are the main source of revenue for local governments.
Major Taxes Involved in U.S. Corporations
For an American company, the most common types of taxes are mainly corporate income tax and sales tax. The U.S. corporate income tax refers to the tax levied on a company’s income by the U.S. federal government and state corporations.
Corporate income tax is imposed on U.S. corporations and foreign corporations. Under U.S. tax law, all corporations incorporated under the laws of each state and registered with the state government are U.S. corporations, whether located in or outside the United States and regardless of who owns the equity.
1. U.S. federal corporate income tax
Prior to the 2017 tax reform, the U.S. federal corporate income tax rate was relatively high under an excess progressive tax system. After the 2017 tax reform, the U.S. federal corporate income tax rate is a flat proportional rate of 21%, applicable to taxable income generated after December 31, 2017.
2. U.S. state corporate income tax
Each state and local government in the United States has its own tax laws and tax system, including independent tax laws, tax levying and administration as well as tax jurisdictions. State (local) governments may levy state (local) income taxes, excise taxes, use taxes, property taxes, etc., and some states also have the authority to levy franchise taxes. State corporate income tax rates range from 1% to 12% in every state (except those that do not have a state corporate income tax).
3. Sales tax
Sales tax is one of the most widely levied taxes in the United States, and is collected by almost every state (including the U.S. federal government). There are two types of sales taxes: general sales tax and retail sales tax. The general sales tax is levied on individuals or enterprises engaged in business operations, which is levied once on the flow of goods and adopts a proportional tax rate. The retail sales tax, on the other hand, is a tax levied on the retail sale of goods, with rates varying greatly from state to state. Many states levy sales tax only on physical goods, but there are exceptions, such as Hawaii, New Mexico and South Dakota, which also levy sales taxes on service providers.
Major U.S. Corporate Taxes and Tax Rates
U.S. federal tax law requires U.S. tax residents, including corporations and individuals, to pay U.S. income tax on their global revenue. In the case of a corporation, global revenue includes the income derived from the subsidiary of the corporation established outside the United States, whether or not the branch distributes profits to its U.S. head office. To avoid double taxation, a tax credit is available for taxes paid on foreign-sourced income by U.S. residents or businesses.
Before the tax reform in 2017, the federal corporate income tax rate of the United States adopted the excess progressive tax system. As the most significant part of the tax reform, the U.S. federal corporate income tax is now a flat rate of 21%.
The Tax Reform Bill of 2017 retained the previous seven excess progressive levels form of the federal individual income tax, but lowered the tax rates and adjusted the brackets as well. From 2018 to 2025, the seven-tier tax rates become 10%, 12%, 22%, 24%, 32%, 35% and 37%.
Tax filing schedule for U.S. corporations
The timing of tax filing for American companies is complex and different tax filing times will be stipulated according to different organizational forms of the company and the way of dividing the company’s financial year. If a company chooses a natural year as its fiscal year, a tax declaration should be made within three and a half months after the end of the company’s financial year.
1. The partnership shall file tax returns within three and a half months after the annual settlement date, and may apply for an extension by filling in a form, but the extension shall not exceed half a year;
2. Joint-stock companies need to file tax returns within 4 and a half months after the annual settlement date, and can also fill in the application for an extension of tax return, but the extension should not exceed half a year.
It should be noted that as a limited liability company (L.L.C), the taxpayer is an individual, so the company only carries out information declaration, but does not act as the taxpayer.