For accountants and finance professionals working with U.S.-based clients, understanding U.S. tax regulations is essential. The U.S. tax system, overseen by the IRS, has unique structures at the federal, state, and local levels.
Below, we’ll dive into the key tax differences relevant to finance professionals outside the U.S., supporting accurate, compliant, and strategic financial guidance for American clients.
1. Federal, State, and Local Taxation Layers
In the U.S., taxes are assessed at multiple levels, making it essential for finance professionals to understand each layer’s impact.
Federal Taxes: These national taxes apply uniformly across the country, including income, corporate, capital gains, and payroll taxes (IRS, 2023).
State Taxes: Each state has its own tax rules, with some, like Texas, imposing no state income tax, and others, like California, enforcing relatively high rates. These variations impact clients’ tax planning and compliance, especially those with business across multiple states (Deloitte, 2023).
Local Taxes: Some U.S. cities and counties impose their own taxes (e.g., New York City income tax). These taxes add complexity to tax filing, particularly for businesses and employees with multi-locality operations (Thomson Reuters, 2023).
2. Corporate Tax Structure and Rates
Federal Corporate Income Tax: The U.S. imposes a flat 21% corporate tax rate at the federal level, while state corporate tax rates vary, creating a combined tax burden (IRS, 2023).
Pass-Through Entities: Many U.S. businesses are structured as pass-through entities—such as S corporations, partnerships, and LLCs—where income is reported on owners’ personal tax returns instead of at the corporate level. Understanding this structure can help identify tax-saving opportunities (Deloitte, 2023).
3. Double Taxation Agreements for Cross-Border Operations
To prevent double taxation, the U.S. has treaties with numerous countries, including Jordan, that facilitate tax credits and exemptions.
Tax Credits: U.S. taxpayers operating abroad can often use foreign tax credits to offset U.S. tax on income already taxed by another country (IRS, 2023).
Permanent Establishment (PE): Tax treaties include provisions on Permanent Establishment (PE), determining if a foreign company has sufficient presence in the U.S. to be taxed on U.S.-generated income. This is crucial for non-U.S. companies conducting business in the U.S. (U.S. Department of the Treasury, 2023).
4. Income Tax Filing for Individuals and Corporations
Individual Taxation: U.S. citizens and residents are taxed on their worldwide income, while non-residents are only taxed on U.S.-sourced income (IRS, 2023).
Corporate Tax Filings: U.S. corporations must file annual returns, with forms varying by entity type, such as Form 1120 for C corporations and Form 1120S for S corporations. Using the correct form is essential for accurate filings (Thomson Reuters, 2023).
5. Capital Gains Tax: Short-Term vs. Long-Term
Short-Term vs. Long-Term Rates: Short-term capital gains (assets held for less than a year) are taxed at ordinary income rates, while long-term gains (assets held for over a year) are taxed at lower rates, making holding periods a crucial planning consideration (IRS, 2023).
Tax-Deferred Accounts: Many U.S. taxpayers use tax-deferred accounts like 401(k)s and IRAs for investments. Gains in these accounts are deferred from taxation until funds are withdrawn, impacting both tax strategy and planning (Deloitte, 2023).
6. Payroll and Withholding Obligations
Federal Payroll Taxes: U.S. employers contribute to Social Security and Medicare, while employees share in these contributions. Together, they amount to approximately 15.3%, with self-employed individuals covering the full amount (IRS, 2023).
Federal Income Tax Withholding: Employers are responsible for withholding federal income tax from employees’ wages. Non-U.S. companies with U.S. employees must adhere to IRS withholding tables to ensure correct payroll compliance (Thomson Reuters, 2023).
State and Local Payroll Taxes: Several states and cities also have payroll taxes, further complicating payroll administration for employers with multi-state operations (Deloitte, 2023).
7. Deductions and Credits for Tax Relief
The U.S. tax code includes multiple credits and deductions that can significantly reduce taxable income for businesses:
R&D Tax Credit: This credit offsets federal income tax for qualifying research and development expenses, incentivizing innovation and growth (IRS, 2023).
Foreign Tax Credit: Available to U.S. taxpayers earning foreign income, this credit offsets U.S. tax owed on foreign income already taxed abroad (U.S. Department of the Treasury, 2023).
Depreciation Options: The U.S. allows for various depreciation methods, such as the Modified Accelerated Cost Recovery System (MACRS), which provides faster deductions on certain business assets (Thomson Reuters, 2023).
8. Transfer Pricing for Cross-Border Transactions
Transfer pricing rules prevent income shifting by requiring related-party transactions to reflect "arm’s length" prices.
Documentation Requirements: IRS rules require specific documentation to demonstrate that intercompany transactions are priced as they would be with unrelated entities. Compliance with these requirements is essential for avoiding penalties and adjustments (OECD, 2023).
Alignment with OECD: For multinational clients, adherence to both U.S. and OECD transfer pricing guidelines ensures smoother operations across borders and reduces the risk of tax disputes (OECD, 2023).
9. Estate and Gift Taxes for U.S. High-Net-Worth Clients
Estate Tax Exemption: The U.S. estate tax exemption currently exceeds $12 million per individual, though legislative changes may impact this threshold (IRS, 2023).
Gift Tax Exclusion: U.S. taxpayers can give up to a certain amount per recipient annually without incurring gift tax. Understanding these rules is essential when advising high-net-worth clients with U.S.-based assets or family ties (Thomson Reuters, 2023).
To balance and round up (Pun intended)
For accountants and finance professionals aiming to serve U.S. clients, understanding U.S. tax laws and regulations is crucial. With layers of federal and state taxes, unique structures for corporate entities, and specific international tax treaties, a thorough knowledge of these areas can significantly enhance the value you offer to your U.S.-based clients.
By staying informed on these regulations, Jordan-based professionals can better advise on tax strategies, compliance, and planning tailored to the U.S. market. (Written by ChatGPT; Prompted by Leo Khoury)
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