Understanding the complexity of the U.S. tax system can be a daunting task, but we strive to make this subject more accessible. However, it is crucial to note that these explanations can in no way replace the advice of a tax attorney specializing in U.S. tax law, or that of tax professionals in your country of tax residence.
General Overview of Taxes in the USA
The United States imposes a variety of taxes on businesses, the most notable of which include:
1. Federal Income Tax: This is the federal personal income tax in the United States, with a rate that can reach 37%.
2. State Income Tax: This tax is levied at the state level and varies from state to state. In our case, the state of Florida does not impose it.
3. State Sales Tax: This tax is imposed at the state and county levels in Florida, added to the amount of sales of goods, storage, or rentals in Florida, at a rate of 6%. However, businesses that provide services or sell goods outside Florida are not subject to this tax, hence our LLC formation solution.
Your liability for Federal Income Tax depends on your business's circumstances, namely whether it is based in a U.S. state and whether it conducts activities in the United States. This is based on the concept of “Engaged in a Trade or Business in the US” (ETBUS). You are considered ETBUS if you have an agent in the United States carrying out substantial activities for your business.
The presence of an employee or subcontractor working primarily for your company is generally considered to mean that you have an agent in the United States. By contrast, having a customer or bank account in the United States does not constitute a criterion for being subject to U.S. tax.
If you are not ETBUS, you have no taxes to pay in the United States. If you are ETBUS, you have two tax options:
1. Partnership Taxation (Tax Transparency): The partners pay tax individually, which offers considerable tax advantages.
2. Corporation Taxation (Tax Opacity): The company is taxed in its own name.
What Taxation Applies to a Company in the USA?
Case No. 1 - No Taxation in the USA: In this scenario, the company pays no taxes in the United States, provided that it is classified as a "disregarded entity." This classification means that the sole member reports their income individually and is taxed in their country of tax residence.
It is important to note that, in theory, it is possible to request a tax exemption if the company has multiple members, but by default, the Internal Revenue Service (IRS) taxes the company as a Partnership Taxation entity (the following case No. 2.A). As a precaution, it is therefore recommended that the company have only one member to ensure its “disregarded entity” tax status.
Case No. 2 - Tax Option A (Partnership Taxation): In this case, the company's members pay tax on their income, with a maximum tax rate of 37%. In Florida, there is no state income tax, as in other states such as Alaska, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Case No. 2 - Tax Option B (Corporation Taxation): The company is taxed on its profits at a federal rate of 21% and a state tax rate of 5.5%, with no state income tax in Florida.
Special Cases: Passive Income: All passive income, such as dividends, interest, and royalties, is subject to a 30% withholding tax. However, this rate may be reduced or even eliminated if a tax treaty applies. The existence of a tax treaty can be a financial advantage for members wishing to establish themselves in Florida.
Partnership taxation or corporation taxation?
In general, Partnership Taxation is the most advantageous from a tax perspective. However, if the company does not distribute its profits, Corporation Taxation may prove more advantageous, with taxation of only 21% and no double taxation on undistributed income. It is possible to switch from one tax regime to the other every five years.
If you are looking for a tax-efficient option and reduced corporate taxes in a U.S. state, our LLC formation service could be the solution you need.
