US Corporate Tax System
The corporate tax system of the US is based on the principle of voluntary reporting and self-assessment. You can easily expand your small business credit under this system. A corporate taxpayer in the US is required to file an annual tax return by the 15th of the fourth month of a tax year. That falls under the US 1120 tax number. A taxpayer can get an extension for filing for no more than six months. In case of failure, taxpayers can face penalties. This is an overview of the US tax filing system for C-Corps.
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Understanding C-Corp Tax
C-Corp tax simply means the tax paid by non-US persons on the profit of C-Corporation. The US tax system is liable for taxable income which means revenue excluding COGS (Cost of Goods Sold), G&A (General and Administrative) expenses, and other operating costs such as marketing, research, etc. The C-Corp tax implications vary widely by the countries but in the US, it is highly considered.
The federal tax rate for C-Corps and S-Corps in the US is currently at a flat 21%. The percentage resulted in the result of TCJA (Tax Cuts and Job Acts) by the approval of Donald Trump in 2017. However, it has become more effective in 2018. Previously, the tax rate was 35%. Corporate taxpayers can easily pay their tax returns in installments in some specific months of every year. Overall, the corporate taxes are reported under 1120 in the US. The tax returns for a corporation with more than $10 million in assets go online.
The C-Corp formation is a double taxation system in general. However, corporations are allowed to reduce their taxable income by ordinary business expenses. Currently, all business operations are fully tax-deductible. In the same way, real estate and investment purchases for the sake of generating income also fall under the same category.
Types of C-Corp Taxes for Non-US Residents
Some of the taxes implied by the US government on non-US C-Corps are listed below. Remember, the taxes may slightly vary according to the state and business nature.
It is paid by the corporation at the state and federal levels separately. The corporation is solely responsible for this tax and not the shareholders. The state corporate tax is liable only for certain states. It depends on which state you’re operational and incorporated into the business. For example, states like Wyoming have zero corporate tax and it is ideal for non-US C-Corps. At the federal level, the C-Corp tax is 21% to 28% at a corporate annual rate.
The sales taxes might take exit from the federal taxation but the major 45 states of the US constitute this tax. The sales tax rates vary from state to state and generally range from 3% to 7.50% at the state level. In general, a sales tax is applied to the retail sale of tangible personal property and certain enumerated and digital products.
Payroll taxes are collectively called Medicare taxes, unemployment insurance, and social security taxes. C-Corps are only subjected to pay these taxes when they have employees. The amount is then collectively paid by the corporation and employees. The half amount paid by the employees will be exempted from FUTA (Federal Unemployment Tax Act).
Import Tariffs and Custom Duties
All the goods that are imported into the US and are subjected to entry are duty-free or dutiable in accordance with their classification under the US Harmonized Tariff Schedule. The schedule also identifies the free trade agreement duty rates and special programs. The US president has the only authority to increase tariffs in some special cases.
This tax is generally imposed by the state and federal governments on a wide range of goods and activities. These goods include kerosene, gasoline, and diesel fuel used for wagering, transportation, and air transportation, ozone-depleting chemicals, manufacturing of some specific goods, and selling certain goods at retail. The rate of excise tax is varied upon the rate of the goods levied. Most of the states charge the same tax with the name of ‘franchise tax’, ‘annual registration fees’, or ‘renewal fees’. The taxes can be variable or fixed totally depending upon the authorized assets or shares. All the states choose different methods for calculating this tax. Moreover, all states release annual reports for filing the small annual report fee to be paid.
These taxes are relevant at the federal level and imposed on the NFA(National Firearms Act). The taxes are imposed usually at the time of recording transactions by the state and local government. These are also commonly referred to as transfer taxes. Most of the time, the transfer taxes are based on the value of the transfer of real property. The tax is imposed directly on the real property sale but in some cases, it is also imposed in controlling interest as well. The state and local governments impose this tax on controlling interest in real property. The stamp tax is also imposed on certain goods available for sale such as tobacco products and cigarettes.
Personal Holding Corporate Tax
Non-US C-Corporations that receive substantial passive income may be subjected to this tax. It is 20% of C-Corp income and is levied in addition to the regular tax.
Other taxes include the environmental, and municipal taxes based on the nature of C-Corp. The environmental taxes are for importers, and manufacturers of chemicals, and goods. The tax is determined under the special conditions. Such taxes are regulated by the federal authorities at the larger level for larger C-Corps of US and non-US citizens. The other taxes like municipal and capital are also heavily based on the C-Corp company. The municipal and state taxes are deductible expenses and are highly for federal income expenses.
US Tax Legislations for C-Corps
In the US, the tax reform legislation was first enacted in 2017. It became public law (P.L 115-97) that changed the tax landscape of the US. The US taxation system changed into a ‘territorial’ system from the ‘worldwide’. The reforms reduce the corporate income tax (CIT) permanently from 35% to 21% on residential corporations. For a non-US person, the US taxation system highly depends on whether the income has a nexus or not. Moreover, it is highly considerable by the factor of presence in the country as well. The CIT rates vary from state to state. Usually, it ranges from 1-12%. The most common tax in the US is the tax based on income that is further modified by the states and provisions. The apportionment formula came into being that consists of rental expenses, tangible assets, payroll, and other receipts to evaluate the gross income and then finalize the income tax.
The P.L. tax reform (115-97) has significantly impacted the federal tax regime. In the case of C-Corporations, there is a double taxation system for all shareholder’s dividends. The US source income then is not effectively connected with the non-US corporation business. The taxation continued for 30% on a gross basis level.
Prior to 2018, AMT (Alternative Minimum Tax) was imposed on S-Corps and small C-Corps. It was generally those with a gross average of three years with not exceeding $7.5 million. The tax was 20% in excess of $40,000. AMTI (Alternative Minimum Taxable Income) was computed by adjusting C-Corps’ regular taxable income through some tax preference items. Later, P.L. (115-97) ruled out the AMT effect and provided the mechanism for corporate AMT credits by the end of 2021. With the start of 2022, the AMT effect has been enacted again based on the financial statement income of C-Corps. AMT was enacted again as CAMT (Corporate Alternative Minimum Tax) with a 15% tax on the financial statement income of C-Corporations.
As far as the domestic tax law of the US is concerned, a foreign person is always subjected to a 30% US tax on the gross amount of a certain income. All foreign persons as withholding agents making US source FDAP (Fixed, Determinable, Annual, periodical) payments are subjected to this tax law. The US has always entered into various bilateral income tax treaties. The main reason is to provide relief to C-Corps from this double taxation system and prevent tax evasion. The taxation system for C-Corps is supported through various considerations and procedures at every time.
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Tax Advantages for C-Corps
You can never run away from the fact that C-Corps is a double taxation system. These corporations are taxed on the taxable income of the company. When the income is divided among all the shareholders’ dividends, then these individuals are forced to pay the taxes. However, the special tax consideration for C-Corps is that they can reduce taxation by reducing C-Corp costs such as insurance premiums and other expenses, debts, and receipts. Other costs like bookkeeping, legal services, and preparation fees can also affect taxation.
If they want, then they can opt for S-Corps as well. In this way, all income will pass through to the business owners and the corporation does not have to pay corporate taxes.
The other special consideration of this US tax system for C-corps is that it provides a beneficial layout for foreign business owners. The tax system brings fringe benefits for taxpayers such as medical insurance, tax-deferred trusts, and retirement plans. The most important is the corporation can deduce the loss too. It allows companies to do extra tax planning and more tax advantages in the future.
Income Tax Return Filing for C-Corps
All corporations in the US are liable to file an income tax return that generates net income during a tax year. A C-Corp is a separate legal entity and is also taxable. Therefore, it has to pay federal income taxes. It is a legal structure in which the shareholders are taxed separately and they are subjected to federal corporate income taxation. Taxation is done on both personal and corporate levels. Other than a C-Corp, there is an S-Corp that passes income along with deductions, credits, and losses directly to shareholders. The S-Corporation is not subjected to federal corporate income taxation. However, the S-Corp loses the fringe benefits in this way and the only C-Corp remains fundamental for that. Both corporations are subjected to file their corporate tax returns to local, and federal authorities once a tax year via corporate tax returns.
C-Corp Tax Returns and Filings Procedure
Once you form your C-Corp in the US, you must legally follow the filing tax and return procedure. This will definitely save you from the last-moment hurdles and keep you in a defined direction for the coming years.
Keep in mind the following steps and take action accordingly!
Determine your Corporation Status
You choose the status of your company and go through the tax system. By default, a corporation is a C-Corporation in status if you don’t opt for S-Corp or LLC.
Determine Your C-Corp Tax Deductions
The next step is to make a clear plan and determine your tax deductions for write-offs. You need complete and right knowledge about the IRS as it will allow you to deduct your necessary current expenses. A right advocate hiring can help in solving your write-off problems.
Pay Your C-Corp Taxes
Now, is the time to submit your tax payments to the IRS. You need to pay these four times a year to state and federal authorities.
File Your C-Corp Tax Return
Now you must file your tax return to federal by using form 1120. Your legal team will take care of all these matters but a sound knowledge of the legal matters cost nothing.
C-Corp Tax Filing Considerations
Once you deal with everything, you must consider some points carefully. First of all, it’s the tax return due date that you mustn’t forget. You must file your C-Corp tax return on the 15th day of the fourth month after the end of the fiscal year. You can hire a fastcorpusa professional team that will help you keep track of these deadlines.
However, this is not it. You can get an extension for your corporate tax return through the IRS by visiting their website. You can easily get the extension of 6 months to file your income tax return through the form 7004. While dealing with the due dates and extensions, do not forget that penalties are also for the deal-breakers. The tax return missed deadline is 5% of the outstanding tax for up to 5 months mostly depending on the amount owed. Last but not least, you should know about the e-file corporate federal return. C-Corps and S-Corps are subjected to file their income tax returns through a tax professional. But take care of the fact that these tax professionals must be authorized E-File providers by the IRS.
Pain Points for C-Corp Taxation
You are aware of the taxation and filing situation in the US but still, you can face challenges in dealing with these. The complexities arise in the preparation and filing of tax returns accurately. First of all, it’s essential to stay updated with the ongoing tax rules and regulations. These keep getting changed and you need to have an eagle-eye view of the system at all levels. The taxation system can become challenging often in the case when your company has a nexus in multiple states. Thus, you are required to file taxes in multiple jurisdictions. There is not a whole tax and accounting research formula for it as these can be invaluable in most cases.
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Entrepreneurs come with a mindset of loving solving a puzzle. They bring and join all the puzzles one by one and decide whether C-Corp status can make sense for the business or not. The US tax filing procedure and everything will help you to make a better decision and we are sure of that. Incorporating a business into US horizons is not a piece of cake for everyone. Legal and attractive tax planning can help businesses form the structure correctly.
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