United States Tax & Business Guide - Deloitte

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Basic facts
Population 296.4m Inflation 3.4% (2005)*
Main languages English GDP per head US$42,129*
Currency US dollar (US$) GDP growth 3.5% (2005)
Economic communities Asia Pacific Economic Co-operation, North American Free Trade Agreement, OECD, WTO
GDP sources 0.9% agriculture, 20.4% industry, 78.7% services
*Economist Intelligence Unit.
Political environment

The US is a federal republic. Powers are constitutionally divided between the executive, legislative and judicial branches of the government, and between federal and state governments. The president heads the executive branch. The federal legislature, the Congress, consists of the House of Representatives, whose members are elected for constituencies based on population, and the Senate, whose members are elected from each of the 50 states (two per state). Two parties, the Republicans and the Democrats, traditionally dominate the political system.

The current president, George W. Bush, a Republican, took office in January 2001. He was re-elected to a second term in November 2004. The next legislative election is due in 2006 and a presidential election in 2008.
Foreign trade and investment
Exports US$892.6bn (2005)* Imports US$1.7trn (2005)*
*Economist Intelligence Unit.

Major exports: Capital goods, industrial supplies, consumer goods and automotive goods.

Leading export markets: Canada, the EU, Mexico, Japan and China.

The US generally favors foreign investment. No general federal laws govern new investments, and foreign investors are not required to register with the federal government. However, acquisitions by non-US interests are monitored and restrictions apply to sectors deemed sensitive to national security. Key incentives include foreign trade zones for exhibiting, packaging and manufacturing, and state and local tax and development incentives.
Business and financing
Business forms Corporation, Pass-through entity, Sole proprietorship

A firm may organize under the laws of any one of the 50 states or the District of Columbia.

Legally, a corporation is considered ÏdomesticÓ only in the state in which it is incorporated, and is considered ÏforeignÓ elsewhere.

Most firms do business in more than one state, and the state of incorporation is often different from where a company actually operates. Rules vary from state to state. Owing to liberal corporate laws, Delaware, Maryland and New York are favored states of incorporation. Both domestic and foreign-owned banks provide funding.

New York is the traditional center of US finance. Other regional centers are Chicago, Boston, Philadelphia, San Francisco and Los Angeles.

Businesses may also operate as pass-through entities, in which the income is distributed to partners. A sole proprietorship is an unincorporated business owned by a single individual.
Labor environment
Unemployment rate 5.1% (2005)* Minimum wage US$5.15 (hourly)
*Economist Intelligence Unit.

The federal minimum wage is US$5.15 per hour. Workers under age 20 can be paid US$4.25 per hour for their first 90 days of employment.

The Social Security system requires mandatory employer and employee contributions of 6.2% per employee on the first US$94,200 of earnings for 2006.

Union membership is currently around 13%.

Aliens need non-immigrant visas from a US embassy or consulate abroad.
Taxation
Corporate tax
Main rate 35%, plus branch profits tax and alternative minimum tax (effective rate 39.5%)

The taxation of a corporation is based on its place of incorporation. A corporation is a domestic corporation if it is incorporated under the laws of one of the US states or the District of Colombia. US resident companies generally are subject to tax on their worldwide income, including income of foreign branches (regardless of whether profits are repatriated). Foreign corporations in the US with income from an effectively connected US trade or business are also subject to corporate income tax. The corporate income-tax rate is generally 35%. Corporations are subject to the alternative minimum tax (AMT) if amounts calculated under the AMT exceed the regular tax for the year. The effective tax rate for corporations is around 39.5%. A dividends-received deduction is available for dividends paid between US companies. A foreign tax credit is available for foreign tax paid (or deemed paid) with certain limitations. The states impose corporate taxes on the taxable income attributable to each state, generally using the federal definition of taxable income as a starting point and applying state tax rules.

Pass-through entities may or may not pay tax on income, depending on the type of entity and whether the income is distributed to its partners. Income distributed to partners would be taxed to the partner rather than the entity. The manner in which the distributed income is taxed depends on the nature of the partner (eg whether the partner is an individual or a corporation, or other type of entity).
Individual tax
Progressive rates up to 35%, with the top rate applying to income over US$336,550 (for 2006). The alternative minimum tax (AMT) can apply to income adjusted for AMT purposes (up to 28%)

All US citizens and residents, including resident aliens and citizens who reside outside of the US, pay federal tax on their worldwide income at progressive rates to 35%, with credits for foreign tax. Non-resident aliens pay US personal taxes on all income from US sources that is effectively connected with a trade or business in the US. Investment income and other fixed income not effectively connected with a US trade or business is taxed at a flat rate of 30% or a lower treaty rate. The AMT applies to a different tax base at rates of 26% and 28%, and is chargeable when it exceeds the amount of regular tax due. An exemption applies to AMT income, but it phases out for higher taxpayers. The states impose income tax on persons residing in the territory of the state, using varying tax bases and rates, but the burden of state income tax is light compared with the federal income tax. Counties and municipalities may also levy an income tax.
Capital gains
Gains are taxed as income; short-term gains are subject to higher rates

Gains derived by companies on assets held for investment are taxed at the same rate as ordinary income (maximum 35%). Gains from the sale of depreciable property used in business are treated as ordinary income to the extent that they result in the recovery of past depreciation. Rollover relief is available for sales of business assets in certain situations.

Long-term capital gains of individuals are taxed at a flat rate of 15% (with a required holding period of more than 12 months). There is a 5% rate for gains of individuals in lower-income tax brackets, and a 25% rate for certain real-estate gains.
Indirect tax
Many states levy sales taxes, at varying rates

The US does not levy a federal value-added tax (VAT) or sales tax. Many states and municipalities levy sales taxes at varying rates, and Michigan levies a type of modified VAT known as the single business tax.
Tax administration and compliance
Tax year Corporations: fiscal year consisting of 12 months and ending on the last day of any month may be selected; Individuals: calendar year

An affiliated group may file a consolidated tax return. Corporations make estimated tax payments on a quarterly basis, each payment amounting to 25% of the annual tax due. The total amount of the payment should be at least equal to the total amount of tax due for the year or the amount due for the previous year (whichever is less); otherwise penalties apply. Corporate tax returns must be filed by the 15th day of the third month following the end of the tax year. A six-month extension is allowed where the taxpayer elects for the extension before the due date for the return and pays the estimated amount of final tax due.

Tax is deducted at source from employment income. Individual self-assessment tax returns are due by the 15th day of the fourth month following the end of the tax year. An extension of four months is granted if the taxpayer makes an election before the due date for the return and pays the estimated final tax due.
Additional tax information
Withholding taxes Dividends, Interest and Royalties received by non-residents, 30%. Rates may be reduced by tax treaty.
Tax treaties The US has concluded more than 55 double-tax treaties.
Dividends For individuals, dividends are taxable (often at reduced rates). For companies, a dividends-received deduction is available.
Revenue protection Transfer-pricing, thin-capitalization, offshore subsidiary legislation.
Groups Consolidated filing applies.
Incentives Research and development incentives; qualifying production activities.
Other taxes Accumulated earnings tax, Generation skipping transfer tax, Gift tax, Capital gains tax, Import duties, Estate tax, Some municipal taxes on income, Federal environmental tax, States sales tax, State taxes on income, Unemployment tax, Alternative minimum tax, Excise taxes. States and municipalities also levy franchise, license, stamp, estate, property, mineral and other taxes.