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Business Taxation for Expats in the United States Of America

Submitted: October 2013

The US Tax Authority is the Inland Revenue Service (IRS) acting on behalf of the Department of the Treasury, their website is here.

Registration

For expat residents in the USA a common form of business structure is a limited liability company (LLC). Other company structures include corporations of various kinds, personal holding companies, partnerships of various kinds and joint ventures.  All business structures are incorporated under state law, and the registration requirements can vary from state to state. There are links to the various state corporate registry websites here.

LLCs require a minimum of two members. There are also single member LLCs which can have only one member. The business income of LLCs is generally taxed at the corporate tax rate, but the owners of an LLC can elect to be treated differently. The owner of a single member LLC can for instance choose to report the LLC’s income and expenses on their individual tax return, by entering them on Schedule C attached to their individual income tax return Form 1040. LLC’s member(s) are not personally liable for the LLC’s debts or liabilities.

Another possible choice is a sole proprietorship, however in this case liability extends to the owner’s personal assets (unlike a single member LLC). The income and expenses of a sole proprietorship must be reported on the owner’s individual income tax return.

All US companies must obtain an Employer Identification Number (EIN) from the IRS using Form SS-4 which is available for downloading, together with instructions, from a link here. The application can also be done directly online here. In addition it is necessary to register with the local branch of the IRS, there is a link page for locating them here.

Corporate Tax

The US tax year for companies generally runs from 1 January to 31 December, though it is possible for a company to elect to have a different tax year. US resident companies are liable for corporate tax on their worldwide income and capital gains.

The corporate tax rates on the portions of income that fall in the various tax brackets are as follows:

Annual taxable income (US$)Rate
0-50,00015%
50,001-75,00025%
75,001-100,00034%
100,001-335,00039%
335,001-10,000,00034%<
10,000,001-15,000,00035%<
15,000,001-18,333,33338%
Above 18,333,33335%

In the USA capital gains are taxed as ordinary company income and can be offset against net operating losses. Capital losses can only be offset against capital gains. Capital losses can be carried back three years to cover previous capital gains, with the balance remaining being carried forward for up to five years.

A corporation must make quarterly advance estimated tax payments by the 15th day of the fourth, sixth, ninth and twelfth month of its tax year. The estimate can be made either on income tax payable accruing in the current year or on actual tax incurred in the previous year. Severe penalties apply for late payment of tax, underestimation of tax and late filing.

A federal corporate tax return Form 1120 must be filed by the 15th day of the month following the end of the tax year; this would be in March for a company with a calendar year end. There are several sub-types of Form 1120. Electronic filing is possible for all corporations.

In addition to corporation tax, companies may be liable for state, and in some cases city/municipal income taxes. The rate of tax varies from 0% to 12% depending on the location of the business. The way different states/cities calculate their taxes also varies, and they do not necessarily follow the federal rules, or use the amount of tax paid at the federal level as a starting point. It is potentially dangerous to assume that as state taxes are deductible against federal taxes, they are of little concern. There is information regarding state taxes here, and a table of state taxes here. Different states also require different tax return forms; there is a consolidated source for them here, together with other information at the state level.

 

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