US tax system overview
When it comes to US tax, there are three distinct systems which are relevant to any business expanding into the US market.
1. Federal Corporation Tax
A federal corporate tax is applied to the net taxable profits of the business.
Net taxable profits are calculated by deducting all allowable expenses from taxable income. Certain expenses are subject to specific tax limitations and calculation rules – such as client entertainment and the calculation of US depreciation of fixed assets.
The net taxable profits are subject to federal tax at a flat rate of 21%. Prior to 2017 the US Corporation Tax rate was calculated based on income bands, with a top rate of 35%.
Where a business realises a net loss for tax purposes, this is referred to as a Net Operating Loss (NOL). NOL’s can generally be carried forward indefinitely, however those realised prior to 1 January 2021 are subject to some complicated transition and limitation rules which can allow carry back to earlier tax years.
NOL’s realised after 31 December 2020 can be used to reduce the taxable profits of future tax years. However, the amount of NOL that can be used in each year is limited to 80% of that year’s taxable profits. In practice this means that a US corporation will be subject to US Corporation Tax on at least 20% of its profits each year. All unused NOL’s are carried forward to the next tax year.
2. State Corporation Tax
Each state imposes its own Corporation Tax rules and tax rates. The Corporation Tax rates vary from state to state and are generally applied in relation to the business net profits attributable to the state nexus. Some states apply a fixed minimum tax based on the gross revenue associated with the state nexus.
| State |
Corporation Tax Rate |
| California |
8.84% |
| Connecticut |
7.5% |
| Delaware |
8.7% |
| Florida |
5.5% |
| Illinois |
9.5% |
| Massachusetts |
8% |
| New York |
6.5%* |
| New York City |
8.85%^ |
| Nevada |
No Corporation Tax |
| Pennsylvania |
9.99% |
| Tennessee |
6.5% |
| Texas |
0.75%" |
| Wyoming |
No Corporation Tax |
* New York Corporation Tax is the minimum of 6.5% of net profits, 0.18755% of business capital or a fixed minimum amount based on gross income starting at $25 for revenue of less than $100k, and $200k for revenue in excess of $1 billion.
^ New York Corporation Tax is the minimum of 8.85% of net profits, 0.15% of business capital or a fixed minimum amount based on gross income starting at $25 for revenue of less than $100k, and $200k for revenue in excess of $1 billion.
‘" Texas Corporation Tax is calculated as 0.75% of taxable margin.
3. State Franchise Tax
In addition to corporation tax, some states charge a business a franchise tax for the privilege of doing business within its borders.
Franchise tax is separate from corporation tax and is usually calculated in relation to a corporation’s assets, shares or employees. The franchise tax is usually paid with a simple online form and can have a different due date form the corporation tax return.
Failure to pay required franchise taxes can lead to a corporation losing its ‘good standing’ status, being subject to penalties and, in certain situations, being dissolved.
| State |
Franchise Tax |
Due Date |
| Delaware |
$175 - $250,000 |
1 March annual |
| Illinois |
0.1% - 0.15% of paid-in capital |
Within 60 days of year end |
| Tennessee |
$0.25 per $100 of net worth |
15th day of 4th month following end of tax year |
4. State Sales & Use Tax
The Sales & Use Tax system is the closest equivalent to the UK’s VAT system. Each state will impose its own Sales & Use Tax rules and rates, and like state corporate tax, a business will be subject to these rules if it has nexus in the state.
Sales tax is a transaction tax imposes on the price paid for the purchase of tangible goods and services. Use tax is also a transaction tax and applies when a purchaser uses or consumes tangible personal property or services.
When conducting business in a state it is important to determine whether sales tax should be added to the price charged for your product or service to ensure the business is not required to pay sales tax out of net profits, and that all required registrations and tax filings are submitted on time.
