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CalculateThe basis for American tax legislation is the Internal Revenue Code of 1954, which is a complete description of all laws passed since the introduction of the income tax in 1913. Laws passed after 1954 that contain changes and additions to the Code are executed as its separate sections.
The Code gives the Department of Treasury the right to pass Treasury Regulations made to enforce provisions of the Code. The Department of Treasury periodically issues Treasury Decisions that reflect changes made by Treasury Regulations.
The Department of Treasury, through the Internal Revenue Service (IRS), issues rules, instructions, explanations and other documents called Revenue Rulings. These rulings explain articles of the Code, Treasury Regulations and Treasury Decisions and inform on how the IRS will act in one situation or another.
The system of precedent is used in court for tax cases.
And lastly, the IRS in response to taxpayers’ requests issues Private Letter Rulings, which, however cannot be considered precedents. In addition, the IRS on its own initiative issues memoranda that explain separate provisions of legislation (Technical Advance Memoranda), which also cannot be considered precedents.
The basis for financial reporting in the United States is set in accordance with a few laws and regulations, such as the Securities Exchange Act of 1934 (the Act) and the Sarbanes–Oxley Act of 2002 as well as the US Generally Accepted Accounting Principles (US GAAP) issued by the Financial Accounting Standards Board (FASB).
The US Generally Accepted Accounting Principles (US GAAP) are developed to be applied by all non-governmental entities, however only public business entities are required by law to make financial statements.
In accordance with the definition by the FASB, a public business entity meets one of the following criteria:
The US SEC requires US public companies to provide financial statements in accordance with the US GAAP set for public and private companies and non-profit entities.
Foreign public business entities registered with the SEC can use the International Financial Reporting Standards (IFRS) when preparing accounts.
Even though the law does not require non-public companies to use the US GAAP, there are a variety of situations such as receiving a loan or looking for investors who require under contract that those entities follow the US GAAP when making their financial statements.
Just like in the case of preparation of financial statements, only public business entities are required by law to be audited. Non-public entities, normally, are not subject to audit. However, entities seeking to receive financing by private placement or debt or equity securities in certain circumstances may be required to furnish audited financial statements. Entities in regulated industries that have state contracts or draw state financing or have contractual or other reasons to furnish audited financial statements are expected to be obliged to be audited in accordance with the auditing standards generally accepted in the US. These standards are promulgated by the Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants (AICPA) and make up so-called generally accepted auditing standards of the US. All auditing standards have been revised using the format of the IAASB and, where possible, based on ISA and ISQC1.
The main legal forms of business entities in the US
Tax accounts shall only be filed with the Internal Revenue Service (IRS). There is no compulsory audit. Separate accounting statements are not required to be filed with registration authorities.
In general, a legal entity (American or foreign legal entity of any legal form) must be registered for tax purposes if it has started activity resulting in tax obligations to the IRS – corporate income tax, withholding taxes from other persons (payroll taxes, taxes at source), etc. All American corporations must register and file a tax return in any case, including when there is no taxable profit.
Registration consists in obtaining an Employer Identification Number (EIN). This number is necessary when filing a tax return or otherwise interacting with the IRS, and in some cases when transacting with other taxpayers.
A partnership must file an annual information return on profit and its distribution among partners (form 1065; in the case of an LLC, it shall be signed by one of its members). No tax is paid on behalf of a partnership; the respective profit (loss) share must be included in the tax return of each partner.
Every local partnership must file form 1065, unless it receives income or incurs expenses considered as tax deductions or credits for the purpose of the federal income tax.
If there are non-residents of the US among partners, individuals or legal entities, they additionally file forms 8804 and 8805. According to section 1446 of the Internal Revenue Code, partnerships with non-resident partners must withhold tax at source on the part of the income the origin of which is connected with the territory of the US.
A local partnership must normally file a return (form 1065) by the 15th day of the 3rd month after the reporting date.
A partnership normally sets one of the following reporting periods:
For tax periods that begin after 2017, any partnership qualified as a small business taxpayer can use the cash method. Before 2017, a partnership could use the cash method of accounting only if it had no inventories, had no C-corporation among its partners and was not a tax shelter.
In 2021, a small business taxpayer is a taxpayer that (a) has average annual gross receipts of 26 000 000 USD or below for the previous 3 tax years and (b) is not a tax shelter (as defined in section 448 (d)(3) of the Internal Revenue Code).
For the purpose of this subsection the term “tax shelter” means –
For the purpose of subparagraph (B) the term “syndicate” means any partnership or other legal entity (except for a corporation that is not an S-corporation) if over 35% of losses of such a legal entity during the tax year can be distributed among its limited partners or limited liability entrepreneurs.
For the purpose of paragraph (C) the term “tax shelter” means:
if the essential goal of such a partnership, entity, plan or arrangement is avoidance or evasion of the federal income tax.
A partnership must keep accounting records and relevant source documents during 3 years after the latest of the dates: the date of filing each partner’s declaration or the date the declaration must have been filed. It is also required to keep records confirming the basis of ownership of the partnership while they are necessary to determine the initial or replacement cost of property.
A partnership must also keep copies of all furnished tax returns. They help when preparing future tax returns and filing an amended tax return.
The penalty for late filing of (failure to file) a tax return is 210 USD multiplied by the number of partners for each complete or incomplete month of delay, but not more than 12 months.
In the case of failure to provide Annex K-1 by the set deadline and provision of unreliable information in Annex K-1, a 280 USD penalty can be imposed for each Annex K-1 in which there was a violation. The maximum penalty is 3 426 USD in a calendar year. If a requirement to provide reliable information is intentionally ignored, each 280 USD penalty is increased to 570 USD or, if more, to 10% of the total amount of items that must be reported. In this case the amount of penalty is not limited.
The first tax period can start at the beginning of activity and not on the date of incorporation or registration. Any tax period does not last more than 12 months. By filing the first tax return for the chosen period the company sets its reporting date even if the incorporation application contained another date. It can be the last day of any month. Corporations generally use a calendar or financial year (until 30 September). Form 1128 needs to be filed in order to change the reporting date.
The deadline for filing a tax return and paying tax (RDD – Return Due Date) is the 15th day of the fourth month after the reporting date (before 31.12.2015, the 15th day of the third month after the reporting date), i.e. for legal entities whose financial period ends on 31 December the filing deadline is 15 April of the year following the reporting year. However, for corporations whose financial period ends on 30 June the filing deadline is still the 15th day of the third month after the reporting date, i.e. 15 September. The filing deadline for such corporations is expected to be extended by 1 month for tax periods after 31 December 2025.
If the deadline falls on Saturday, Sunday or official holiday, the tax return can be filed on the next workday. The deadline for filing a tax return can be extended by 6 months by filing form 7004 by the initial deadline.
In this case, the period allowed for paying tax is not extended and is still two and a half months. If the estimated amount of tax for the year exceeds 500 USD, the company must make advance payments by the 15th day of the 4th, 6th, 9th and 12th months of its tax year. Normally, the payment is 25% of the tax amount according to the tax return of the current or previous year (the lowest of the two).
A corporation qualified as a small business taxpayer can use the cash method, unless it is a tax shelter. In all other cases, the corporation must keep accounting records under the accrual method.
In 2021, a small business taxpayer is a taxpayer that (a) has average annual gross receipts of $26,000,000 or below for the previous 3 tax years and (b) is not a tax shelter (as defined in section 448 (d)(3)).
A C-corporation must keep accounting records and relevant source documents during 3 years after the latest of the dates: the date of filing each partner’s declaration or the date the declaration must have been filed. It is also required to keep records confirming the basis of ownership of the corporation while they are necessary to determine the initial or replacement cost of property.
A corporation must keep copies of all furnished tax returns. They help when preparing future and amended tax returns and calculating earnings and profits.
A corporation that fails to file a tax return by the set deadline, subject to extension of the deadline, can be imposed with a penalty of 5% of the amount of unpaid tax for each month or part of month of delay, up to the maximum of 25% of the amount of unpaid tax.
The minimum penalty for a delay in filing a tax return of more than 60 days is the smallest of the amounts: the amount of tax payable or 435 USD. The penalty can be lifted if the corporation can show that the late filing of documents took place for a sensible reason.
The penalty for late payment of tax is 1/2 of 1% of the unpaid amount of tax for each month or part of month when the tax is unpaid, up to the maximum of 25% of the amount of unpaid tax.
S-corporations are corporations that prefer “passing” corporate income, losses, subtractions from taxable base and tax deductions to their shareholders for the purpose of their federal taxation.
A corporation or other legal entity must file form 1120-S if
After filing form 2553, the corporation must receive confirmation of the fact that form 2553 is accepted.
An S-corporation generally cannot use the cash method of accounting if it is a tax shelter.
A corporation must use the accrual method for sales and purchases of inventory, unless it is a small business taxpayer.
A small business taxpayer is a taxpayer that (a) has average annual gross receipts of 26 000 000 USD or below for the previous 3 tax years and (b) is not a tax shelter.
An S-corporation must use one of the following tax periods:
A new S-corporation must use form 2553 to choose its reporting period. A corporation must file form 1128 to change its reporting period later on.
An S-corporation must file form 1120-S by the 15th day of the 3rd month after the end of the tax year. For corporations that use a calendar year, it is 15 March 2022. A dissolved corporation generally must file an application by the 15th day of the 3rd month after the date of its dissolution.
If the deadline falls on Saturday, Sunday or official holiday, the tax return can be filed on the next workday. The deadline for filing a tax return can be extended by 6 months by filing form 7004 by the initial deadline.
The period allowed for paying tax is not extended and is still two and a half months.
A corporation generally must make advance payments on the following taxes, if the total amount of these taxes is 500 USD or more:
Built-in gains tax is a special federal tax charged from an S-corporation after the conversion from a C-corporation. Built-in tax on profits of an S-corporation applies to assessed assets and profits received by the S-corporation by the date of conversion.
The estimated tax amount payable annually is the smallest of the following: (a) total sum of the above taxes stated in the tax return for the tax year (or, if no tax return has been filed, the total sum of these taxes for the year), or (b) the sum of (i) imputed tax on investment tax credit and built-in gains tax stated in the tax return for the tax year (or, if no tax return has been filed, the total sum of these taxes for the tax year), and (ii) tax on excess profits from net passive income for the previous tax year. If the previous tax year lasted less than 12 months, the estimated tax must be determined in accordance with clause (a).
The estimated tax is usually paid in four equal installments. However, a corporation can decrease the amount of one or more installments by using the annualized income installment method or adjusted seasonal installment method in accordance with section 6655(e) of the Inland Revenue Code.
Corporations whose tax period coincides with a calendar year must make payments for the year 2022 by 18 April, 15 June, 15 September and 15 December. Corporations whose tax period coincides with a financial year must pay advance tax by the 15th day of the 4th, 6th, 9th and 12th months of the year. If any of the dates falls on Saturday, Sunday or official holiday, the payment shall be made on the next day that is not Saturday, Sunday or official holiday.
An S-corporation must keep accounting records and relevant source documents during 3 years after the latest of the dates: the date of filing each shareholder’s declaration or the date the declaration must have been filed. It is also required to keep records confirming the basis of ownership of the S-corporation while they are necessary to determine the initial or replacement cost of property.
An S-corporation must also keep copies of all furnished tax returns. They help when preparing future tax returns and filing an amended tax return.
The penalty for late filing of a tax return or incompleteness of furnished information is 210 USD multiplied by the number of shareholders for each complete or incomplete month of delay, but not more than 12 months. If in this case the S-corporation delays paying its tax obligations, then the amount is also increased by 5% of the unpaid amount of tax for each month or part of month when the tax is unpaid, up to the maximum of 25% of the amount of unpaid tax.
The minimum penalty for a delay in filing a tax return of more than 60 days is the smallest of the amounts: the amount of tax payable or 435 USD.
The penalty for late payment of tax is 1/2 of 1% of the unpaid amount of tax for each month or part of month when the tax is unpaid, up to the maximum of 25% of the amount of unpaid tax.
There are four different ways of tax filing for an LLC. An LLC can be treated as a partnership, S-corporation or C-corporation, or part of a tax return of the owner of the LLC (fiscally transparent entity). LLCs with one owner are treated as a sole proprietor (sole member) for the purpose of taxation. LLCs with two or more members are treated as partnerships. If members of an LLC wish so, they can choose to treat the LLC as an S-corporation or C-corporation, for which purpose form 8832 needs to be filed.
There are four different ways of tax filing for an LLC. An LLC can be treated as a partnership, S-corporation or C-corporation, or part of a tax return of the owner of the LLC (fiscally transparent entity). LLCs with one owner are treated as a sole proprietor (sole member) for the purpose of taxation. LLCs with two or more members are treated as partnerships. If members of an LLC wish so, they can choose to treat the LLC as an S-corporation or C-corporation, for which purpose form 8832 needs to be filed.
Normally, financial consolidation is required when the enterprise has direct or indirect controlling financial interest in another enterprise. This model set by ARB 51 is called voting interest entity (VOE). The FASB defines controlling financial interest as investment of 50% or more in the voting capital. This model implies that the controlling entity will not allow its subsidiaries to make transactions or decisions that are not in the interests of the parent company or controlling group.
However, companies have developed complex strategies in order to organize their affiliated legal entities and bypass requirements of the VOE model. As a result, the parent investor company can hold the controlling stake not necessarily holding the majority of voting or ownership rights.
In order to resolve this type of arrangements, the FASB has created a company model called variable interest entity (VIE). Created by FIN 46 in response to the Enron Corp scandal, the VIE model requires the reporting entity to hold the controlling financial interest when the voting rights cannot precisely indicate which party must consolidate the legal entity. You must consider an affiliated legal entity a VIE if it meets any of the following criteria:
Consolidated financial statements are considered more significant and are required for holders of SEC registrations.
CbC reporting is part of Action 13 of the OECD Base Erosion and Profit Shifting Project intended to increase transparency for tax authorities by providing them with up-to-date and reliable information in order to conduct a high-level assessment of transfer pricing risks.
For this purpose, the competent authority will automatically exchange CbC reports prepared by groups of multinational enterprises (MNE) with the reporting entity in its jurisdiction with competent authorities of the partner jurisdiction in all jurisdictions where the group of MNEs operates, provided that a legal document is in force that allows automatic information exchange (for example, a double taxation convention (DTC) or tax information exchange agreement (TIEA)) and a competent authority arrangement (CAA) on exchange of CbC reports with such second mentioned jurisdictions. Per Treasury Regulations §1.6038-4 (TD 9773), the ultimate parent entity of a US multinational enterprises group with $850 million or more of revenue in the relevant preceding annual reporting period shall file form 8975 and Schedule A (i.e., the "CbC Report") with their annual income tax return.
