Income and other taxes are imposed by both the federal government and the state governments and, in some cases, by municipalities.
Corporations are subject to federal income tax. In many states, they are also subject to state income taxes. Employers and employees must pay social security tax. The United States does not have a value-added tax (VAT) system, but almost all of the U.S. states impose sales taxes.
The tax administration agency in the United States is the Internal Revenue Service (IRS).
Profits are taxed at corporate income tax rates in the year earned and are taxed again when received by shareholders. Shareholders are taxable at the rates applicable to their status – whether it is corporate, individual, trust or estate. Dividends are not deductible from the taxable income of the paying corporation.
Legal entities subject to corporate income tax include corporations, associations, joint-stock companies, insurance companies and banks. Domestic corporations are taxable on their worldwide income. Income is broadly defined to include all income of whatever type and from whatever source derived. A flat tax of 35 percent applies to a corporation that has taxable income equal to or greater than $18,333,333. Graduated rates, starting as low as percent, apply to income of a corporation with total taxable income less than $18,333,333.
Corporations that make a valid Subchapter S election are treated as “pass-through” entities. Partnerships are also treated as passthrough entities. Income is taxed at the shareholder/partner level and is not taxed at the corporate/partnership level. Foreign corporations are subject to U.S. taxation if they are engaged in business in the United States or derive certain types of income from U.S. sources.
Net worth tax is not imposed in the United States at the federal level.
If you own real estate in Greater Phoenix, you will not be taxed at the federal level; your real estate taxes will be imposed by the local municipality or the county where you live. Tax rates and methods for assessing the value of property vary from jurisdiction to jurisdiction.
Corporations are subject to tax on capital gains. The tax rates that apply are the same as those for ordinary income. Capital losses are subject to special rules.
You may be eligible to take advantage of tax incentives, including credits for certain types of activities (such as Research and Development), a deduction for qualifying domestic production activities and various provisions to accelerate the benefits of depreciation.
Foreign income taxes may offset your U.S. income tax on taxable income, to the extent the U.S. tax is allocated to foreign-source taxable income and additional conditions and limitations are satisfied.
Corporate tax returns are due on or before the 15th day of the third month following the close of the taxable year. An automatic extension of 6 months can be granted if you file an extension request with the IRS before the initial due date of the return and if you pay the properly estimated amount of tax owed at that time.
Partnership tax returns are due on or before the 15th day of the fourth month following the close of the taxable year. An automatic five-month extension is granted if the partnership files an extension request with the IRS before the initial due date.
You are required to pay the full amount of tax you owe for the year on or before the due date of the tax return (without extensions). In addition, your company will be required to make estimated tax payments on a quarterly basis during the year in an amount each equal to 25 percent of the required annual payment. Your organization will have access to optional safe harbor methods for determining your quarterly estimated payments (i.e., annualization approach).
Corporate income taxes are imposed by almost all U.S. states and, in some cases, by municipalities. Although the rules for computing the tax base differ from state to state, the tax is normally computed on the amount of the overall income of the corporation that is allocated or apportioned to the taxing jurisdiction. State and local corporate income taxes are deductible from gross income for federal income tax purposes.
The maximum rate of income tax currently imposed in Arizona is 6.968 percent.
U.S. citizens and residents are taxed on all income from whatever source received; this includes wages, salary, business income and investment income. All types of income (with the exception of capital gains) are combined and taxed at the same rates. Ordinary income tax is levied on a graduated scale with a top Federal income tax rate of 39.6 percent. Capital gains are subject to special tax rates.
Individuals are subject to federal income tax, estate tax and gift tax.
U.S. citizens and residents are subject to taxation on their worldwide income. Foreign nationals are subject to U.S. income tax if they become U.S. residents or if they derive certain types of income from U.S. sources.
Foreign nationals are treated as U.S. residents if they are lawful permanent residents of the United States (i.e., they hold a U.S. green card) or if they meet a substantial presence test. Exceptions apply to individuals in exempt categories (i.e., foreign government-related individuals, students, teachers and trainees) and to individuals who have a closer connection to a home in a foreign country.
Taxpayers compute their income tax liability using the calendar year or a fiscal year for their company.
The United States uses the self-assessment system whereby all taxpayers are required to complete a tax return and compute their own tax liability. Your personal tax return is due on or before the 15th day of the fourth month following the close of the taxable year. An automatic extension of 6 months is granted if you file an extension with the IRS before the initial due date of the return and if you pay the properly estimated amount of tax owed at that time.
The full amount of tax owed for the year is required to be paid on or before the due date of the tax return (without extensions). In addition, you are required to make estimated tax payments a quarterly basis during the year in an amount each equal to 25 percent of the required annual payment. Special safe harbor provisions are available based on your prior year tax liability.
Capital Gains: Gains from the sale of capital assets held for more than 12 months (long-term capital gains) are subject to a reduced rate of tax.
Capital Losses: Capital losses may be deducted only against capital gains. Capital losses in excess of capital gains, if any, can be deducted against ordinary income up to an annual limitation amount of $3,000. Capital losses in excess of this amount may be carried forward indefinitely.
Taxes on Income and Capital Gains: Foreign corporations are subject to U.S. federal income tax on income that is effectively connected to the conduct of a trade or business in the United States. The permanent establishment standard does not apply under U.S. domestic law but does apply for tax treaty purposes.
Disposition of U.S. Real Property: Foreign corporations and non-residents are subject to tax by the Foreign Investment in Real Property Tax Act (FIRPTA) on the disposition of real property and interests in real property located in the United States. The income or gain from the disposition is treated as if it were effectively connected with a U.S. trade or business.
The FIRPTA applies to interests in real property that are held directly and to interests in a U.S. real property holding corporation (USRPHC). A USRPHC is defined as a domestic corporation if 50 percent or more of its total fair market value of real property and business assets consist of interests in real property located in the United States. The tax is collected by means of withholding. A domestic corporation will not be treated as a USRPHC if, for the five-year period preceding the date of disposition, it has not held sufficient U.S. real property interests to meet the definition.
Taxes on Capital: Net worth tax is not imposed in the United States at the federal level. Foreign corporations that own property in the United States will be subject to real estate taxes in the local municipalities and counties where the real property is located.
Partnerships with Foreign Partners: Foreign corporations are subject to withholding tax on their allocable share of the effectively connected taxable income of a partnership that is engaged in a trade or business in the United States. The withholding tax is collected by the partnership; it is not the final tax liability, and can be claimed as a credit on the tax return filed by the corporation.
Transfer Pricing: Section 482 of the Internal Revenue Code (IRC) authorizes the IRS to make transfer pricing adjustments in transactions between commonly controlled entities if the price set by the parties is not at arm’s length. I.R.C. section 482 applies to organizations that are owned or controlled, either directly or indirectly, by the same interests. The IRS is authorized to allocate income, deductions and other tax items between commonly owned or commonly controlled organizations as it deems necessary, in order to prevent evasion of taxes or to clearly reflect the income of the parties. In the case of transfer or license of intangible property, the income from the transfer must be “commensurate with the income attributable to the intangible.”