1. Corporate Income Tax

IBFD Tax Research Plat Form

1.1. Type of tax system

Corporate income tax is imposed by the United States on a net income tax basis, i.e. gross income less allowable deductions. The tax is must be computed and paid annually pursuant to the US Internal Revenue Code of 1986, as amended to date (the IRC).

The United States uses the classical system of corporate taxation. Profits are taxed at the corporate income tax rates in the year earned and are taxed again when distributed to and received by the shareholders.

Shareholders are taxable on dividends at the rates applicable to their status, i.e. corporate, individual, trust or estate. Dividends are not deductible from the taxable income of the paying corporation. Corporations that receive taxable dividends may deduct all or a portion of such dividends (see section 2.2.2.).

Dividends paid to non-residents are subject to withholding tax (see section 6.3.1.).

As a general rule, the United States uses the worldwide income tax system for US domestic corporations and the territorial system for foreign corporations.

 

1.2. Taxable persons

 Corporations

Legal entities subject to corporate income tax in the United States include corporations, associations, joint-stock companies, insurance companies and banks. The check-the-box regulations (see below) further define a corporation as including a business entity organized under a US federal or a US state statute if the statute describes or refers to the entity as incorporated, or as a corporation, body corporate or body politic. As a matter of terminology, a corporation that is a regular business corporation and does not make a Subchapter S election is referred to as a C corporation.

Except as otherwise indicated, the discussion in this survey is limited to US and foreign entities that are treated as taxable corporations under the provisions of the IRC and the check-the-box regulations. Othe types of entities, i.e. entities that are not subject to regular US corporate income tax or that are subject to US corporate income tax on a limited basis, are summaized below.

 

Subchapter S corporations

Corporations that meet the requirements for qualification as a Subchapter S corporation, and make a valid election, are treated as flow-through entities. In such case, the income is taxed at the shareholder level and is not taxed at the corporate level. A number of qualification requirements apply in order to elect status as a Subchapter S corporation, including that the corporation:

-	must be a US domestic corporation;
-	may not have more than 100 shareholders;
-	may not have shareholders other than individuals, except for certain permitted estates, trusts and tax-exempt organizations;
-	may not have non-resident individuals as shareholders; and
-	may not issue more than one class of stock.

Because of the above restrictions on shareholders, Subchapter S corporations are not available for use by other corporations, whether domestc or foreign, or for use by non-resident individuals.

 

Investment entities

Specialized types of investment companies may be formed in the United States, including the following:

-	Regulated investment companies (RICs), which are known commonly as mutual funds and are formed to invest in diversified portfolios of stocks and securities.
-	Real estate investment trusts (REITs), which are formed to invest in real property and real property mortgages.
-	Real estate mortgage investment conduits (REMICs), which are formed to invest in pools of real estate mortgages, also referred to as mortgage-backed securities.
-	Financial asset securitization investment trusts (FASITs), which are formed to invest in asset-backed securities other than mortgages, e.g. securities backed by credit card receivables, automobile loans, construction loans, finance leases and similar pools of receivables. FASITs have been repealed effective 1 January 2005, subject to a grandfather rule for entities that were in place on that date.

For US federal income tax purposes, RICs and REITs are subject to corporate income tax but are entitled to claim a deduction for investment income and capital gains distributed to shareholders, whereas REMICs and FASITs are treated as pure flow-through entities and are not subject to corporate income tax.

Foreign corporations

Foreign corporations are subject to US corporate income tax on a net income basis if they are engaged in the conduct of a trade or business in the United States (see section 6.2.). A foreign corporation that is a resident of a jurisdiction with which the United States has entered an income tax treaty is subject to US corporate income tax if the foreign corporation has a permanent establishment in the United States.

Foreign corporations that are engaged in the conduct of a trade or business in the United States or that have a permanent establishment in the United States are also subject to the US branch profits tax.

Foreign corporations are subject to US withholding tax if they derive certain types of income (generally passive or compensatory income) from US sources, referred to as FDAP income, which is not connected to a US trade or business or attributable to a US permanent establishment. The tax applies on a gross income basis (see section 6.3.4.1.).

 

Partnerships and LLCs

Partnerships and limited liability companies (LLCs) are generally permitted to file an election to be treated as fiscally transparent entities under the check-the-box regulations (see below). In that event, all income, gains, losses, deductions and credits will flow through and be taxed to the partners or members.

 

Check-the-box regulations

The Treasury Department has issued regulations (the “check-the-box” regulations) that govern the tax classification of business entities.

The check-the-box regulations provide that US domestic corporations, as well as foreign business entities that are included on a list in the regulations (the per se list), will be treated as corporations in all cases and may not make an election as to their desired classification. Other types of business entities, i.e. unincorporated entities such as partnerships and LLCs, are permitted to make a voluntary election to be treated as corporate entities, fiscally transparent entities or disregarded entities, within the guidelines permitted.

 

Charitable organizations

Charitable organizations are exempt from US federal income tax, provided they satisfy the prescribed qualification requirements. The exemption is available to corporations, trusts, community chests, funds, and foundations that are organized and operated exclusively for one or more of the charitable purposes recognized by the IRC.

The primary category of organizations recognized as tax-exempt in the United States are public charities, which include organizations with the following purposes: religious, charitable, scientific, literary, educational, fostering national or international amateur sports competition, or the prevention of cruelty to children or animals.

 

Pension funds

Pension funds are exempt from US federal income tax, provided they satisfy the prescribed qualification requirements.

 

Later developments:

- 20 Jan. 2015: Public comments requested on IRS Form 8802 for application for US residency certification

The status of a corporation as domestic or foreign, based on its place of incorporation, determines the method of taxation that applies.

Corporations are considered to be domestic corporations if they are organized under the laws of one of the US states or Washington DC, and are accordingly subject to tax on a residence basis (see section 6.1.). Corporations are considered foreign corporations if they are organized under the laws of a foreign jurisdiction, and are accordingly taxed on a non-resident basis (see section 6.2.).

 1.3. Taxable income

 1.3.1. General

Domestic corporations are taxable on their worldwide income from all US and foreign sources. Income is defined broadly to include all income of whatever type or character and from whatever source derived. The same rates of tax apply to all types of income received by corporations. The United States does not use a schedular system of taxation.

Taxable income is defined as gross income less allowable deductions. Capital gains are included in taxable income (see section 1.4.).

Taxable income is computed using the accounting rules provided in the IRC, which may vary from the rules used for financial accounting purposes (GAAP). In general, taxable income under the IRC is computed using either the cash method of accounting or the accrual method of accounting. The instalment method of accounting may be used to report gain from sales of eligible types of property. Specialized methods of accounting apply to certain types of income and deductions.

 1.3.2. Exempt income

Interest received on bonds issued by the US states and municipalities is exempt from federal taxation provided that the bonds are issued for approved public purposes and the issuer complies with specified requirements.

Dividends received from domestic corporations are not exempt from tax but all or a portion of such dividends may be deductible by corporate shareholders (see section 2.2.2.).

Capital gains realized in specified corporate and rollover transactions may be eligible for deferred tax treatment (see section 1.4.).

 1.3.3. Deductions

 1.3.3.1. Deductible expenses

Later developments:

- 31 Oct. 2014: IRS issues guidance on relief for Ebola outbreak in Guinea, Liberia, and Sierra Leone

Corporations may deduct all ordinary and necessary business expenses paid or accrued during the year in carrying on a trade or business. Items that are deductible include business expenses, depreciation and amortization (see section 1.3.5.), interest payments, US state and local income taxes (see section 3.2.) and real estate taxes (see section 5.2.), charitable contributions, losses that are not compensated for by insurance or otherwise, and worthless bad debts.

Special provisions permit the amortization of corporate organizational expenses and start-up costs. Foreign taxes may be credited or deducted at the option of the taxpayer (see section 6.1.3.). Incentives are provided for specified activities (see section 1.7.).

Interest, royalties, management fees and overhead expenses are generally deductible. Dividend payments are non-deductible except in the case of specialized investment entities such as RICs and REITs (see section 1.2.). Thin capitalization rules apply to determine the character of corporate instruments as debt or equity for US federal income tax purposes (see section 7.3.).

 

1.3.3.2. Non-deductible expenses

Non-deductible expenses include excessive salaries, excessive termination payments made in connection with corporate takeovers (golden parachutes), expenses allocable to classes of tax-exempt income, and interest on indebtedness incurred or continued to purchase or carry tax-exempt obligations.

The deduction of interest is also subject to additional limitations, including the interest stripping rules for highly leveraged US subsidiaries, interest on debt obligations that are not in registered form, interest on high-yield debt obligations and interest on debt instruments where the instruments are payable in equity.

Dividends paid by corporations are non-deductible except in the case of specialized investment companies such as RICs and REITs (see section 1.2.).

Expenditure for capital items are not currently deductible, but must be capitalized and depreciated or amortized (see section 1.3.4.).

Expenditures for meals, entertainment and travel are subject to special limitations.

 1.3.4. Depreciation and amortization

 1.3.4.1. Allowance for depreciation

Depreciation deductions may be claimed for tangible personal property (movable property) and real property (immovable property) used in a trade or business of the taxpayer or held for the production of income.

The depreciation system used in the United States for US federal income tax purposes is the modified accelerated cost recovery system, referred to as MACRS.

The MACRS system involves a three-step process: (i) determining the applicable depreciation method for the asset, (ii) determining the applicable recovery period for the asset, and (iii) determining the applicable placed-in-service convention for the asset, i.e. the date during the taxable year that the asset is considered to be placed in service.

The applicable depreciation method under MACRS is either the straight–line method or the declining balance method using a 150% or 200% rate. The method permitted or required depends on the applicable recovery period of the asset.

Depreciation deductions may not be accumulated or deferred from a taxable year to a subsequent taxable year. However, depreciation deductions for a current year may contribute to the net operating loss (NOL) of the taxpayer for such year and be carried forward or back to other taxable years (see section 1.5.1.).

The tax basis of an asset must be reduced by the amount of the deductions allowed for depreciation, whether or not such deductions are claimed by the taxpayer. The gain or loss realized upon a disposition of the asset will be determined by reference to such reduced basis. Depreciation deductions may be subject to recapture and taxed as ordinary income rather than capital gains at the time the asset is disposed of (see section 1.3.4.7.).

Depreciation may not be claimed on assets that do not have an ascertainable useful life or an assigned recovery period under the MACRS system.

Amortization deductions apply to intangible properties. Depletion deductions may be claimed for production of oil, gas, minerals and other natural resources.

 

1.3.4.2. Immovable property

Non-residential real property, i.e. commercial property, is depreciated using the straight-line method over a useful life of 39 years. Residential rental property is depreciated using the straight-line method over a useful life of 27.5 years.

 

1.3.4.3. Tangible movable property

The period over which tangible personal property is depreciated depends on the recovery period of the property under the MACRS system, which is generally 3, 5, 7, 10, 15, or 20 years depending on the property’s class life as determined from tables published by the IRS.

For property with a recovery period of 3, 5, 7, or 10 years, the 200% declining-balance method is used to compute the annual depreciation allowance, switching to the straight-line method in the year in which a larger depreciation deduction results. For 15- or 20-year property, the 150% declining-balance method must be used instead of the 200% declining-balance method, again switching to the straight-line method in the year a larger deduction results.

A first-year bonus depreciation deduction of 30% could be claimed for the cost of new qualified business property acquired by a taxpayer after 10 September 2001 and before 11 September 2004. The property was required to be placed in service before 1 January 2005. The deduction was permitted, in general, for tangible personal property with a recovery period of 20 years or less, for depreciable computer software and for certain leasehold improvements.

The bonus depreciation amount was increased to 50% for qualified property acquired and placed in service after 5 May 2003 and before 1 January 2005. The 50% amount was renewed for qualified property acquired and placed in service after 31 December 2007 and before 8 September 2010.

The bonus depreciation amount was further increased to 100% for qualified property placed in service after 8 September 2010 and before 31 December 2012 (before 31 December 2013 for certain longer-lived property and transportation property).

The bonus depreciation amount will be 50% for qualified property placed in service after 31 December 2012 and before 31 December 2014 (after 31 December 2012 and before 31 December 2015 for certain longer-lived property and transportation property).

 1.3.4.4. Expensing election for small businesses

Eligible small businesses may elect to claim an expense deduction for business assets in lieu of depreciation (referred to as section 179 deduction). The election applies to tangible personal property and other eligible property acquired by purchase for use in the active conduct of a trade or business (referred to as section 179 property).

An annual limitation applies to the deduction, and the deduction is phased out by the amount that the cost of property placed in service during the year exceeds a specified ceiling amount. The phase-out is dollar-for-dollar for the amount of property placed in service above the ceiling amount.

For taxable years beginning in 2010 through 2013, the deduction limitation is USD 500,000, and the ceiling amount at which the deduction begins to phase out is USD 2 million. For taxable years beginning after 2013, the deduction limitation is USD 25,000, and the ceiling amount at which the deduction begins to phase out is USD 200,000.

Section 179 property generally includes tangible personal property. Off-the-shelf computer software is eligible for the section 179 deduction if placed in service in tax years beginning after 31 December 2002 and before 1 January 2014. Specified real property, including qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property, is eligible for the section 179 deduction if placed in service in taxable years beginning in 2010 through 2013, subject to an annual limitation of USD 250,000.

The amount claimed as a deduction cannot exceed the taxable income derived in the active business during the taxable year. The deduction disallowed by reason of the taxable income limitation may be carried forward to succeeding taxable years.

 

1.3.4.5. Intangible property

The value of goodwill and certain other intangible property acquired by the taxpayer may be amortized over a 15-year period. This treatment applies to the following types of intangible property:

-	goodwill and going concern value;
-	workforce in place, including existing employment contracts;
-	business books and records, operating systems, and information bases such as customer lists;
-	intellectual rights such as patents, copyrights, formulas, processes, designs, patterns, know-how, formats and similar items;
-	customer-based intangibles such as market composition, market share, or rights to provide goods or services in the future pursuant to existing contractual relationships, including the deposit base and similar items of banks and financial institutions;
-	supplier-based intangibles such as rights to receive goods or services in the future pursuant to existing contractual relationships;
-	governmental licenses, permits or other rights;
-	covenants not to compete; and
-	franchises, trademarks and trade names.

 

1.3.4.6. Leaseholds

The cost of acquiring a leasehold for real property is amortized over the term of the lease. Improvements to the leasehold are amortized over the remaining term of the lease or, if shorter, the recovery period for the improvements.

 

1.3.4.7. Depreciation recapture

If personal property for which depreciation has been claimed is disposed of for an amount in excess of its unrecovered tax basis, the resulting gain must be treated as ordinary income, rather than capital gain, to the extent of all previously claimed depreciation deductions. Additional gain is eligible for capital gain treatment.

If real property has been held for longer than 1 year, and has been subject to allowances for accelerated depreciation, any gain resulting from a disposition must be treated as ordinary income to the extent of the accelerated portion of the previously claimed depreciation deductions, i.e. the amount of the depreciation claimed on the property in excess of the amount that would have been allowed using the straight-line method. Additional gain is eligible for capital gain treatment. If the property is held for 1 year or less, then all depreciation previously claimed on the property is subject to recapture as ordinary income rather than only the accelerated portion.

 

1.3.4.8. Oil, gas and mineral properties

Depletion allowances may be claimed for production from mines, oil and gas wells, natural deposits, and timber. The amount of the depletion allowance is computed on the cost basis. Percentage depletion (i.e. a percentage of gross income from the property) may be claimed in the case of specified mineral properties and geothermal properties, and with respect to limited quantities of production from oil and gas properties by independent producers and royalty owners. The percentage depletion rate for oil, gas and geothermal production is 15%.

 

1.3.5. Reserves and provisions

Reserves and provisions for anticipated but unrealized losses are not permitted. The specific charge-off method must be used under which losses for outstanding receivables and debts are deductible only in the taxable year in which they become wholly or partly worthless, i.e. non-collectable.

Additions to a reserve for self-insurance are non-deductible. Payments made to captive insurance companies are treated in the same manner as a reserve for self-insurance and are non-deductible.

 1.4. Capital gains

Corporations are subject to tax on capital gains. The tax rates that apply to corporations on the sale or disposition of capital assets are the same as those for ordinary income, i.e. no distinction in the tax rate applies. Capital losses may generally be deducted, but are subject to special rules (see section 1.5.2.).

A capital gain or loss results when a capital asset, as defined in the IRC, is disposed of in a transaction that qualifies as a sale or exchange. The amount of gain or loss is equal to the difference between the amount realized on the disposition of the asset and the adjusted tax basis of the asset at the time it is sold or exchanged. The amount realized is the sum of any money received and the fair market value of any property received.

Gain realized from disposition of a capital asset that was subject to prior allowances for depreciation or amortization may be treated as ordinary income rather than capital gain under the depreciation recapture rules (see section 1.3.4.7.).

Rollover relief is provided for the following incorporation, liquidation, and reorganization transactions:

-	transfers to corporations that are 80% or more controlled by the taxpayer (IRC section 351 transactions);
-	liquidations of subsidiaries that are 80% or more owned by the corporate parent (IRC section 332 transactions);
-	statutory corporate merger or consolidation transactions (IRC section 368(a)(1)(A) transactions, referred to as Type A reorganizations);
-	stock-for-stock acquisitions, in which the acquiring corporation acquires 80% or more of the stock of a target corporation in exchange for its own stock or the stock of a parent corporation (IRC section 368(a)(1)(B) transactions, referred to as Type B reorganizations);
-	asset acquisitions, in which the acquiring corporation acquires substantially all the assets of a target corporation in exchange for its own stock or the stock of a parent corporation (IRC section 368(a)(1)(C) transactions, referred to as Type C reorganizations);
-	corporate divisions, i.e. spin-off, split-off, and split-up transactions (IRC section 368(a)(1)(D) transactions, referred to as Type D reorganizations);
-	corporate recapitalizations, i.e. changes in the capital structure of the corporation (IRC section 368(a)(1)(E) transactions, referred to as Type E reorganizations); and
-	corporate migrations, i.e. a change in the place of incorporation (IRC section 368(a)(1)(F) transactions, referred to as Type F reorganizations).

In these transactions, the gain or loss is deferred until the time that the stock or assets received in the transaction are disposed of, except that gain may be required to be recognized in specified circumstancs, for example to the extent that non-qualified property (e.g. cash or other boot) is received in a reorganization transaction.

Corporate transactions that are cross-border, i.e. incorporations, liquidations and reorganizations that are US-outbound, US-inbound or foreign-to-foreign, are subject to special rules to prevent stock, assets or earnings from leaving or entering the US taxing jurisdiction without recognition of untaxed income or gain that accrued prior to the transfer. This includes taxation of deferred earnings of foreign subsidiaries (CFCs) that have not been previously taxed in the United States under the provisions of Subpart F (see section 7.4.) if the earnings would otherwise be permanently removed.

Rollover relief is also provided in the following circumstances:

-	where business or investment property is exchanged for property of a like kind (IRC section 1031 transactions), but this does not apply to stocks, securities or property held for sale; and
-	where property is compulsorily or involuntarily converted (e.g. by eminent domain) into property which is similar or related in service or use (IRC section 1033 transactions).

In these transactions, the gain is deferred until the replacement property is disposed of.

 1.5. Losses

 1.5.1. Ordinary losses

 1.5.1.1. Deduction of ordinary losses

Losses sustained during a taxable year are deductible to the extent not compensated for by insurance or otherwise. To be eligible for deduction, the loss must be evidenced by a closed and completed transaction, fixed by identifiable events, and must actually be sustained during the taxable year.

 

1.5.1.2. Net operating losses

If the allowable deductions for the taxable year, including losses, exceed the gross income for the taxable year, the taxpayer will have a net operating loss (NOL) for such year.

NOLs arising in taxable years beginning after 5 August 1997 may be carried back 2 years and carried forward 20 years and used to offset taxable income in such years. For NOLs arising in taxable years beginning on or prior to 5 August 1997, the carry-back and carry-forward periods are 3 and 15 years, respectively.

The NOL carry-back period is temporarily increased for NOLs arising in 2008 or 2009. NOLs arising in such years may be carried back for up to 5 taxable years, at the election of the taxpayer, i.e. carried back for an additional 3, 4 or 5 taxable years. The taxpayer is permitted to make the increased carry-back election only for NOLs arising in either 2008 or 2009, with the exception that eligible small businesses may make the carry-back election for NOLs arising in both 2008 and 2009.

 

1.5.1.3. Limitation after change of ownership

In the event of a change in corporate ownership, the deduction of NOLs is limited. An ownership change is deemed to occur if there is a change in the stock ownership of the corporation or an equity structure shift (i.e. a merger or reorganization transaction) that, generally described, results in a 50% change in the ownership of the corporation relative to the ownership during the prior 3-year period. In that event, the amount of NOL carry-overs that may be deducted in each subsequent year is limited to the value of the corporation immediately before the ownership change multiplied by the long-term tax-exempt rate of interest published by the IRS for the month of the ownership change.

 

1.5.1.4. Losses from worthless securities

Losses from worthless securities are generally treated as capital losses rather than ordinary losses, except for securities of corporate affiliates. For further discussion, see section 1.5.2.4.

 

1.5.1.5. Limitation for related-party transactions

The deduction of losses is disallowed in the case of losses incurred from sales or exchanges of property between related persons. The definition of related persons includes an individual and a greater than 50%-owned corporation, two corporations that are members of a controlled group (defined at a 50% ownership level) and corporations and partnerships with a common ownership that is greater than 50%.

 

1.5.1.6. Limitation for tax-avoidance transactions

The IRS is authorized to disallow any deduction, credit or other tax allowance if stock or assets of another corporation are acquired in specified transactions and the IRS determines that the principal purpose of the acquisition is the evasion or avoidance of US federal income tax.

 1.5.2. Capital losses

 1.5.2.1. Deduction of capital losses

Capital losses, defined as losses from the sale or exchange of capital assets, are permitted to be deducted. In the case of corporations, however, such losses may be deducted only against capital gains and to the extent thereof. Capital losses of corporations cannot be used to offset ordinary income.

 

1.5.2.2. Carry-over of capital losses

Capital losses of corporations that are not deductible during the current taxable year may be carried back to the 3 preceding taxable years and/or carried forward to the 5 succeeding taxable years, and used to offset capital gains in such years.

 

1.5.2.3. Limitation after change of ownership

The deduction of capital losses is limited after a change in corporate ownership. The rules of limitation are the same as those that apply to the deduction of net operating losses (see section 1.5.1.3.).

 

1.5.2.4. Losses from worthless securities

Capital loss treatment normally requires that the loss result from a transaction that constitutes a sale or exchange. With regard to specified types of securities, however, a capital loss will result if the security is held by the taxpayer as a capital asset and becomes worthless during the taxable year. In this case, the loss is treated as a loss from the sale or exchange of a capital asset on the last day of such taxable year.

An exception applies to securities owned by US domestic corporations in affiliated corporations (whether domestic or foreign), which are not treated as capital assets, with the result that ordinary loss treatment will apply.

No deduction is allowed solely on account of a decline in value of stock when the decline is due to a fluctuation in the market price of the stock or other similar causes. A deduction is permitted only if the stock is disposed of or becomes worthless.

 1.5.2.5. Wash-sale rule

A loss from the sale or disposition of stocks or securities will be disallowed if the taxpayer acquires, or has entered into a contract or option to acquire, substantially identical stocks or securities within the 60-day period that begins 30 days prior to the sale or disposition and ends 30 days after the sale or disposition. This is referred to as the wash-sale rule. It is designed to prevent the claiming of a tax loss when the taxpayer re-establishes the position in the stock or security within a limited time period.

 

1.5.2.6. Other limitations

The limitations discussed above with regard to the deduction of ordinary losses, i.e. losses incurred in related-party transactions (see section 1.5.1.5.) and losses incurred in acquisitions with a tax-avoidance purpose (see section 1.5.1.6.) also apply to the deduction of capital losses.

1.6. Rates

 1.6.1. Income and capital gains

The income tax rates and brackets for corporations are set forth below. Capital gains are combined with ordinary income and subject to the same rates of tax.

 

Taxable income (USD)			Rate for income in bracket (%)
Up to		50,000	15
50,001	–	75,000	25
75,001	–	100,000	34
100,001	–	335,000	39
335,001	–	10,000,000	34
10,000,001	–	15,000,000	35
15,000,001	–	18,333,333	38
Over		18,333,333	35

Corporations are subject to an alternative minimum tax (AMT) to the extent that the AMT exceeds the amount of the regular tax liability. The tax base for the AMT takes into account certain income items that are granted favourable treatment under the regular tax provisions.

The AMT applies at a rate of 20% of alternative minimum taxable income (AMTI) in excess of an exemption amount of USD 40,000. The amount by which the AMT exceeds the taxpayer’s regular income tax is imposed as an additional tax.

The AMT exemption amount is phased out for corporations with AMTI in excess of USD 150,000. The phase-out is calculated at the rate of 25% of AMTI in excess of USD 150,000, and the exemption amount is thus fully phased out at AMTI equal to USD 310,000 and is zero for AMTI above this amount.

Foreign corporations that are engaged in the conduct of a trade or business in the United States, or that have a permanent establishment in the United States, are also subject to corporate income tax at the above rates on income that is effectively connected to the US trade or business or that is attributable to the US permanent establishment.

Foreign corporations are subject to US withholding tax at a 30% rate, or lower treaty rate, if they derive certain types of income (generally passive or compensatory income) from US sources, referred to as FDAP income, which is not connected to a US trade or business or attributable to a US permanent establishment (see section 6.3.4.1.).

 1.6.2. Withholding taxes on domestic payments

Payments to US corporations, US citizens and US residents are generally exempt from withholding tax unless the recipient is subject to the US backup withholding system (see Individual Taxation section 1.9.2.).

For payments to foreign corporations and non-residents, see section 6.3..

 1.7. Incentives

 

1.7.1. Accelerated depreciation

Accelerated depreciation is permitted under the MACRS system for tangible property used in a trade or business (see section 1.3.4.3.).

 1.7.2. Investment deductions

Incentives are provided which permit expense deductions and bonus depreciation, in lieu of capitalization, for qualified property purchased for use in a trade or business (see sections 1.3.4.3. and 1.3.4.4.).

In addition, bonus depreciation and immediate expensing deductions are permitted for eligible property.

 

1.7.3. Research and development

Research and development (R&D) expenses can be deducted in the year incurred or amortized over a 60-month period. Increased expenditures for R&D are eligible for a 20% tax credit to the extent they exceed a base amount determined by reference to a fixed-base percentage of the taxpayer’s average annual gross receipts for the preceding 3 taxable years. A 20% R&D credit may also be claimed for qualified basic research payments. The 20% R&D credit is scheduled to expire on 31 December 2013.

 1.7.4. Domestic production activities

A deduction is permitted for income attributable to qualified domestic production activities. The deduction replaces the benefits of the former extraterritorial income (ETI) and foreign sales corporation (FSC) regimes.

The deduction was phased in during the years 2005-2010, and is equal to the phase-in percentage of the lesser of (i) the taxpayer’s income from qualified production activities (QPAI), as defined in the statute, or (ii) the taxpayer’s taxable income, but not to exceed in either case 50% of the wages paid by the taxpayer during the year that are properly allocable to domestic production gross receipts.

The phased-in percentage was 3% for 2005 and 2006, 6% for 2007 through 2009, and 9% in 2010 and thereafter. Taxpayers with income from certain oil-related production activities, as defined in the statute, are generally required to reduce the deduction by 3% of such income in taxable years beginning after 2009.

 

1.7.5. Natural resources

Incentives are provided for qualified oil and gas activities and for geothermal activities. For example, percentage depletion may be claimed on production from oil and gas properties and geothermal deposits (see section 1.3.4.8.), and intangible drilling costs may be claimed for the development of oil and gas properties in lieu of capitalization.

Incentives are also provided for mining activities, the production of timber and farming.

 1.8. Administration

Later developments:

- 08 Dec. 2014: IRS releases interest rates on tax overpayments and underpayments: Q1/2015

1.8.1. Taxable period

Taxpayers may compute their income tax liability using the calendar year or a fiscal year. A fiscal year is defined as a 12-month period that ends on the last day of a month other than December.

A 52-53 week year may be used if the taxpayer regularly keeps its books on that basis. A 52-53 week year is an annual accounting period that always ends on the same day of the week and always ends on (i) the date that such day last occurs in a calendar month or (ii) the date that such day falls which is nearest to the last day of a calendar month.

 1.8.2. Tax returns and assessment

The United States used the self-assessment system whereby all taxpayers are required to complete a tax return and compute their own tax liability.

Corporate income 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 is granted if the taxpayer files an election with the IRS before the initial due date of the return and pays the properly estimated amount of tax owed at that time.

 1.8.3. Payment of tax

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, estimated tax payments are required to be made on a quarterly basis during the year in an amount each equal to 25% of the required annual payment. Special estimated payment provisions apply to corporations with assets of USD 1 billion or more.

The total amount of the quarterly payments must be equal to at least the lesser of (i) 100% of the tax shown on the final return for the current year, or (ii) 100% of the tax shown on the final return for the immediately preceding taxable year. Penalties apply if the payments are less than these safe harbour amounts.

For large corporations, defined as those with taxable income of USD 1 million or more during any of the 3 preceding taxable years, the required annual payment must equal 100% of the current year’s tax liability, i.e. the preceding year safe harbour of clause (ii) above cannot be used.

 1.8.4. Rulings

Later developments:

- 06 Jan. 2015: IRS updates annual list of international no-ruling areas

- 06 Jan. 2015: IRS issues updated procedures for private letter rulings and other guidance from IRS National Office

Advance rulings, referred to as private letter rulings (PLRs), may be obtained from the IRS on most tax issues. Each January the IRS publishes the procedures to be followed in requesting a ruling. The IRS also publishes a list of the areas in which rulings will not be issued. The payment of a fee to the IRS is required to process the ruling application.

In general, the IRS will not consider rulings on issues that are factual in nature (e.g. valuation issues, debt/equity issues), that involve hypothetical transactions, that involve only one aspect of an integrated plan, that are involved in an audit or in litigation regarding the taxpayer, or that concern a subject that is under extensive study by the IRS.

In the international area, the IRS will not issue rulings on issues involving, among others, eligibility to claim benefits under the limitation on benefits provision of a tax treaty or on issues that are the subject of a pending request for competent authority relief. In addition, the IRS will not ordinarily (i.e. absent unique and compelling reasons) issue advance rulings on whether a foreign taxpayer is engaged in a trade or business in the United States, whether income is effectively connected to a US trade or business, whether a foreign taxpayer has a permanent establishment in the United States, whether income is attributable to a US permanent establishment, or on issues concerning conduit financing arrangements.

A PLR is binding on the IRS and may be relied on by the taxpayer, unless the representations on which the PLR is based are inaccurate, the transaction is not carried out as substantially proposed, or there is a change in the law during the period in which the transaction is carried out. A PLR may be relied on only by the taxpayer to whom it is issued and not by any other taxpayer.

A PLR may be revoked or modified by the IRS after issuance if it is found to be in error or not in accordance with the current views of the IRS. A PLR may also be revoked or modified if there is a change in the law, including the ratification of a tax treaty, a decision by the US Supreme Court, the issuance of temporary or final regulations, or the issuance of other public administrative guidance by the IRS.

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