Lost in the US Business Tax Woods? Here is How to Build a Tax Calendar for Your US Entity.

Lost in the US Business Tax Woods? Here is How to Build a Tax Calendar for Your US Entity.

Howdy! April 15 is over, and so is the busy tax season for US accountants and CPAs. We have witnessed many happy tax returns but also noticed that companies expanding to the USA still make many, often costly mistakes. “April 15” is not the only deadline companies should pay attention to. So, we thought it would be the perfect timing for publishing a practical guide on US business taxes and help you build “your” own tax calendar. Enjoy!

TradeSherpa_Build Your US Business Tax Calendar
CHALLENGES:
  • Understanding the 4 main taxes imposed on US corporations (franchise tax, corporate income tax, sales tax, and property tax):  whom to pay them to, how to calculate them, and when to pay them

  • Building an accurate and actionable calendar for declaring and paying taxes, whether your tax year starts on January 1 or at another date => check out these 2 real-life examples as you read this guide

  • Mastering basic optimization tips and assessing extension opportunities as well as potential penalties

1. Franchise tax, corporate income tax, sales tax, and property tax: 4 taxes that apply to your business in the USA

Franchise tax:

  • Scope: this is the tax charged by US states to US entities that have a nexus in these states.
  • Payable to: this tax must thus be paid to the state in which the entity has been incorporated AND to all states where the entity is “qualified to do business” *.
  • Calculation: it is calculated based on the net worth of or capital held by the US entity in Delaware or a flat fee for most other states (Each state has its own fee usually between $25 to $800).
  • Frequency: once a year for each state (dates vary by state), except for NY (every 2 years)
  • States to consider: about half of US states impose a franchise tax on US entities (including Delaware)

* “Doing business” is defined differently in each state by the laws of that state. Your tax expert will help you identify in which states you should file reports.

Corporate income tax:

  • Scope: this tax is based on the US entity’s gross income less allowable tax deductions
  • Payable to: this tax is charged both at the federal level AND at the state level (sometimes, localities also have such a tax).
  • Calculation: the corporate income tax rate has been set as 21% on January 1, 2018 for federal and it varies from 3% to 12% for states. Corporate income tax is payable in advance installments, or “estimated payments”, at the federal level and for many states. Returns are a self-assessment of tax based on company’s performance for the previous year and company’s budget for the current year.
  • Frequency: every quarter of your tax year then a final adjustment is paid when the tax return is submitted to the tax administration
  • States to consider: 48 US states (+ District of Columbia) impose an income tax on corporations.

Sales tax:

  • Scope: sales tax is a tax placed on the sale or lease of goods and services in the USA.
  • Payable to: this tax must be paid to the states in which sales tax applies (and sometimes also to counties and cities).
  • Calculation: each state, city, and county has its own sales tax rate which may vary between 2% and 10%. You first collect sales tax from your clients (= rate on goods’ or services’ price before tax), and then pay the corresponding amount to the local tax administration.
  • Frequency: every month (the 25th of each month for sales tax collected during the previous month) or every quarter, depending on the amount and states’ rules.
  • States to consider: 45 US states (+ District of Columbia) impose sales tax on transactions.

Property tax:

  • Scope: this is a tax on the market value of privately owned property, including land, cars, business inventory, etc.
  • Payable to: states and some localities
  • Calculation: each state and locality have their own property tax rate. Property tax liability is calculated by multiplying the nominal property tax rate by the assessment ratio (the percentage of the value of the property that is taxed) by the value of the property.
  • Frequency and states to consider: each of the 50 states have different definitions of what property is taxable and when tax is due.

2. Build your US tax calendar: 2 real-life examples

Corporations may choose their tax year. Generally, a tax year must be 12 months maximum or 52/53 weeks long. The tax year does not need to conform to the financial reporting year, and does not need to coincide with the calendar year, provided books are kept for the selected tax year. Usually, foreign owners decide to use the same tax year for both the US entity and the parent company.

Let’s thus have 2 examples:

1 = tax year starting on January 1 (the beginning of the calendar year)

2 = tax year starting on April 1 (a custom date for beginning the tax year)

Don’t forget to include the mandatory 1096 and 1099 forms in your tax calendar: they must be reported to the tax administration at the federal level. Failure to do so can result in onerous penalties.

US Tax Calendar_Example 1_Tax Year Matches Calendar Year
US Tax Calendar_Example 2_Tax Year Does Not Match Calendar Year

3. Extensions, penalties, and operational tips

Managing your tax year:

The franchise tax and the sales tax are due on specific dates defined at the federal, state and local levels. The corporate income tax is the only one for which dates may vary based on your company’s tax year (calendar year or custom tax year).

You can change your company’s tax year by filing a request with the Internal Revenue Service (IRS).

Since a tax year must be 12 months or 52/53 weeks long, you may consider creating a US entity quite early during the calendar year so as to optimize the amount of fees for filing reports. To learn more about the appropriate calendar for creating a US entity, please refer to this guide.

Planning for adjustments:

Regarding the corporate income tax, you will pay the estimated tax each quarter: you may want to add some markup on estimates compared to your budget so as to minimize the adjustments / penalties to pay on the first quarter of the following year.

Be careful with extensions and penalties:

Business Taxes USA_Extensions and Penalties
  • You can file for a 6-month extension to declare and pay the adjustment due on Quarter 1 for the corporate income tax. Please note that if you only file 1 extension for the federal corporate income tax, you will have to file as many extensions as states for which you are eligible to pay the state corporate income tax.
  • Such an extension does not apply to your estimated tax (be it Q1, Q2, or Q3): you have to pay what you estimated has to be paid. Please note that if the adjustment made on Q1 of the following year is higher than 10% of the total paid during the current year, you will get penalties from the tax administration.
  • Penalties for not filing the 5472 form(s) on time amount to $10,000 per form (and may increase in coming years). Mind the deadline!
  • Make sure that you have asked a tax expert to identify all the states in which you have to collect sales tax. Penalties can be huge and you may not want to have to ask your clients to pay sales tax on past transactions. For more information about sales tax, please refer to Sales Tax in the USA: Eligibility, Calculation, and Exemptions.

Let’s get back to Example 1. In case you are requesting an extension, here is how your tax calendar will look like:

Want to talk about your expansion to the USA? We offer a free consultation to all TradeSherpa members who sign up for a 3-month Expansion plan (no strings attached). Check this out!

Disclaimer: The materials provided in this US Toolbox are for general information purposes only and are not intended to constitute comprehensive or specific legal, accounting, tax, marketing, or other advice. These materials may not reflect recent developments in the law, may not be complete, and may not pertain to your specific situation and circumstances.TradeSherpa, Inc. assumes no responsibility for errors or omissions in the materials, or for any losses that may arise from reliance upon the information contained these materials. Because these materials are intended to provide only general advice, specific advice should be taken from qualified professionals when dealing with specific situations and circumstances. 

2018-06-11T18:12:01+00:00