Corporate tax in the United States

State and local taxes and rules vary by jurisdiction, though many are based on federal concepts and definitions.

The changed law includes the imposing of tax only on income derived within its borders, irrespective of the residence of the taxpayer.

Where related parties do not file a consolidated return in a jurisdiction, they are subject to transfer pricing rules.

Tax rates on dividends are at present lower than on ordinary income for both corporate and individual shareholders.

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 obligations upon making certain varieties of payments to others, including wages and distributions treated as dividends.

Since the tax must be fairly apportioned, states and localities compute how much income earned by out-of-state corporations (including those in foreign countries) is taxable in the state by applying formulary apportionment to the total business taxable income of the corporation.

The Internal Revenue Service issued the so-called "check-the-box" regulations in 1997 under which entities may make such choice by filing Form 8832.

These include: Determinations of what is taxable and at what rate are made at the federal level based on U.S. tax law.

However, corporations may reduce other federal taxable income by a net capital loss[24] and certain deductions are more limited.

[29] IRS rules require that these differences be disclosed in considerable detail for non-small corporations on Schedule M-3[30] to Form 1120.

Their foreign subsidiaries can reinvest their earnings without incurring additional tax that allows them to grow faster.

[41] Eighty-three of the United States's 100 biggest public companies have subsidiaries in countries that are listed as tax havens or financial privacy jurisdictions, according to the Government Accountability Office.

Furthermore, companies try to use accounting techniques to record profits offshore by any way, even if they keep actual investment and jobs in the United States.

This explains why U.S. corporations report their largest profits in low-tax countries like the Netherlands, Luxembourg, and Bermuda, though clearly that is not where most real economic activity occurs.

[43][dead link‍] A tax deduction is allowed at the federal, state and local levels for interest expense incurred by a corporation in carrying out its business activities.

[49] An empirical study shows that state-level corruption and corporate tax avoidance in the United States are positively related.

Hence, strengthening law enforcement would definitely control the level of corruption caused by tax avoidance.

[59] In addition, corporations may change key aspects of their legal identity, capitalization, or structure in a tax free manner.

Adjustments include depreciation differences under MACRS, add-back of most tax exempt income, and deduction of many non-deductible expenses (e.g., 50% of meals and entertainment).

[69] The liquidation of a corporation is generally treated as an exchange of a capital asset under the Internal Revenue Code.

[72] The U.S. also imposes a branch profits tax on foreign corporations with a U.S. branch, to mimic the dividend withholding tax which would be payable if the business was conducted in a U.S. subsidiary corporation and profits were remitted to the foreign parent as dividends.

[74] These returns include all income, deductions, and credits of all members of the controlled group, generally expressed without intercompany eliminations.

Some states allow or require a combined or consolidated return for U.S. members of a "unitary" group under common control and in related businesses.

[75] These adjustments may be applied to both U.S. and foreign related parties, and to individuals, corporations, partnerships, estates, and trusts.

It also aims to ensure that goods and services provided by connected firms are transferred at arm's length and priced according to market circumstances, allowing earning to be reflected in the appropriate tax jurisdiction.

[76] Transfer pricing in the U.S. is governed by section 482 of the Internal Revenue Code (IRC) and applies when two or more organizations are owned or managed by the same interests.

[79][needs update] Some states, such as New Jersey, impose alternative taxes based on measures other than taxable income.

Corporations with assets exceeding $10 million must complete a detailed 3 page reconciliation on Schedule M-3[30] indicating which differences are permanent (i.e., do not reverse, such as disallowed expenses or tax exempt interest) and which are temporary (e.g., differences in when income or expense is recognized for book and tax purposes).

[85] Penalties may be imposed at the federal and state levels for late filing or non-filing of corporate income tax returns.