Overview- United States Corporate Taxation 

United States Corporate Taxation

The United States underwent a major shift in its corporate tax landscape with the enactment of tax reform legislation on 22 December 2017, known as the Tax Cuts and Jobs Act (P.L. 115-97). This transformative legislation moved the United States away from a ‘worldwide’ taxation system to a ‘territorial’ taxation system, bringing about substantial changes in the taxation of both resident and non-resident corporations. 

Key Highlights of P.L. 115-97:

• Corporate Income Tax Rate Reduction: P.L. 115-97 permanently reduced the Corporate Income Tax (CIT) rate for resident corporations. The previous 35% CIT rate was replaced with a flat 21% rate for tax years commencing after 31 December 2017. 
• Shift to a Territorial System: The legislation marked a significant move from a worldwide taxation system, where income is taxed regardless of its source, to a territorial system, where taxation is focused on income earned within the United States. 
• Taxation of Non-US Corporations: Before P.L. 115-97, non-US corporations engaged in a US trade or business were subject to a 35% CIT rate on income effectively connected with that business (Effectively Connected Income or ECI). Post P.L. 115-97, the CIT rate on ECI was permanently reduced to a flat 21%. 
• Taxation of Non-US Persons: The taxation of income earned by non-US persons is contingent upon its nexus with the United States and the extent of the non-US person’s presence in the country. Certain US-source income, like interest, dividends, and royalties, not effectively connected with a non-US corporation’s business, continues to be taxed at a gross basis of 30%, unless reduced by treaty. 

Impact on US Taxation:

• Territorial System Implementation: The move to a territorial system simplifies the taxation of non-US corporations by focusing on income generated within the United States. 
• ECI Rate Reduction: The reduction in the ECI tax rate from 35% to a flat 21% aims to attract foreign investments and foster economic growth. 
• Treaty Considerations: Tax treaties play a crucial role in determining reduced rates on certain types of income not effectively connected with a non-US corporation’s business.

Alternative Minimum Tax (AMT) – Corporate

The Inflation Reduction Act, P.L. 117-169 (IRA), introduced a new corporate Alternative Minimum Tax (AMT) effective for tax years beginning after 2022. This corporate AMT, termed Corporate Alternative Minimum Tax (CAMT), is a significant development based on financial statement income.

Key Components of CAMT:

Tax Rate and Scope:

• CAMT imposes a 15% minimum tax on adjusted financial statement income (AFSI) of C corporations.
• The tax is applied if the tentative minimum tax exceeds regular tax plus the Base Erosion and Anti-Abuse Tax (BEAT).

Applicability Criteria:

• A corporation is deemed an applicable corporation subject to CAMT if its average annual AFSI over a three-tax-year period exceeds USD 1 billion.
• Foreign-parented multinational groups undergo a two-part test to determine applicability.

Adjustments to Financial Statement Income:

• Numerous adjustments to financial statement income are made to determine AFSI.
• Rules vary for purely domestic corporations and those part of a consolidated group with a foreign parent.

Minimum Tax Credit:

• When a taxpayer pays CAMT, generating a minimum tax credit, it can be carried forward indefinitely.
• The credit can be claimed against regular tax in subsequent years, provided regular tax exceeds CAMT plus BEAT.

General Business Credit: CAMT does not limit the general business credit, allowing corporate taxpayers to fully utilize it against both regular tax liability and CAMT. 

Corporate AMT Foreign Tax Credit (FTC):

• The IRA introduced a Corporate AMT FTC, available to applicable corporations claiming an FTC for the tax year.
• The AMT FTC reduces 15% of a taxpayer’s AFSI to determine the tentative minimum tax.

S Corporations:

S Corporations are entities that, under certain conditions, can elect to be taxed under Subchapter S of the Internal Revenue Code (IRC). To qualify, a corporation must have 100 or fewer eligible shareholders, and none of these shareholders can be corporations. S corporations are subject to a tax structure similar to partnerships, where all tax items, including income and deductions, flow through to the owners of the entity. Consequently, S corporations are generally not subject to US federal income tax at the entity level.

Key Features of S Corporations:

Eligibility Criteria:

• 100 or fewer eligible shareholders.
• No shareholders can be corporations.

Tax Treatment:

• Income and deductions flow through to individual shareholders.
• Not subject to US federal income tax at the entity level.

Similarity to Partnerships:

• Taxed in a manner akin to partnerships but not identical.

Gross Transportation Income Taxes:

Foreign corporations and non-resident alien individuals face a 4% yearly tax on their US-source gross transportation income (USSGTI). However, there is an exception for income treated as effectively connected with a US trade or business. Gross transportation income includes income derived from the use of a vessel or aircraft or services directly related to their use.

Key Aspects of Gross Transportation Income Taxes:

• Tax Applicability: Imposed on foreign corporations and non-resident alien individuals.
• Tax Rate: A 4% tax is levied on US-source gross transportation income.
• Exception for Effectively Connected Income: Certain income treated as effectively connected with a US trade or business is exempt from this tax.

Base Erosion and Anti-Abuse Tax (BEAT):

P.L. 115-97 introduced the Base Erosion and Anti-Abuse Tax (BEAT) as part of US federal tax reform. BEAT aims to counter tax-base erosion by imposing an additional corporate tax liability on certain corporations making significant base-eroding payments to related foreign entities. Key aspects include:

Applicability Criteria:

• Corporations and their affiliates with average annual gross receipts of at least USD 500 million.
• Base-eroding payments to related foreign persons of 3% (2% for certain entities) or more of deductible expenses, with exceptions for certain payments.

Calculation of Liability:

• Imposed to the extent 10% (5% for 2018) of the taxpayer’s modified taxable income exceeds regular tax liability net of most tax credits.
• Different percentages for certain banks and securities dealers.

Base-Eroding Payments:

• Includes deductible payments to related foreign persons for various purposes, such as acquisitions, depreciation, and reinsurance. 
• Applies to certain payments by expatriated entities subject to anti-inversion rules. 

Effective Period:

• Effective for base-erosion payments in tax years beginning after 31 December 2017.
• Percentage increases and credits allowed for tax years beginning after 31 December 2025.

State and Local Income Taxes:

Corporate Income Tax (CIT) rates vary across states, ranging from 1% to 12%, with some states imposing no income tax. The taxable base is typically federal taxable income, modified by state provisions, and apportioned to a state based on factors like tangible assets, sales, and payroll. Noteworthy points include:

CIT Rates and Variations:

• CIT rates differ by state, with a general range of 1% to 12%.
• Some states have no income tax.

Taxable Base:

• Federal taxable income, modified by state provisions.
• Apportionment based on factors like tangible assets, sales, and payroll.

Shift in Apportionment Methodology: Many states moving towards a receipts apportionment methodology, departing from a three-factor formula.

Corporate Residence in the United States

Definition of Domestic Corporation: A corporation organized or created in the United States under the laws of the United States or any state is termed a domestic corporation.

Corporate Residence: Being a domestic corporation automatically qualifies it as a resident corporation, irrespective of whether it engages in business activities or owns property within the United States.

Key Points:

• Organizational Jurisdiction: A corporation formed under U.S. federal law or the laws of any individual state is classified as a domestic corporation.
• Residency Status: The domestic corporation is considered a resident corporation, implying that it is subject to the regulatory and tax frameworks applicable to corporations within the United States.
• Business Activity Irrelevant: The corporation’s residency status is not contingent on conducting business or possessing property within the United States.

Corporate – Branch Income in the United States

Overview: U.S. tax law establishes a Branch Profits Tax applicable to the earnings and profits of a foreign corporation’s U.S. branch that are effectively connected with a U.S. business. This tax aims to parallel the taxation of U.S. corporations owned by foreign entities.

Key Elements:

• Tax Rate:  The Branch Profits Tax is set at a rate of 30% on the U.S. branch’s earnings and profits for the year.
• Taxable Base: The taxable base is determined by considering the U.S. branch’s earnings and profits that are not reinvested in branch assets. Any decrease or increase in the U.S. net equity of the branch impacts the taxable base.
• Treatment of Interest Payments: A 30% (or lower treaty rate) branch profits tax is imposed on interest payments made by the U.S. branch to foreign lenders, subject to treaty provisions and anti-‘treaty shopping’ rules.
• Treaty Provisions: The branch profits tax on profits may be mitigated or entirely eliminated if a relevant tax treaty provides for such relief. However, strict rules prevent abuse of treaty benefits through ‘treaty shopping.’
• Purpose: The primary purpose of the branch profits tax is to ensure that the U.S. operations of foreign corporations face taxation in a manner akin to U.S. corporations owned by foreign entities.
• Interest Deduction Limitation: The tax also applies if the interest deducted by the U.S. branch on its tax return exceeds the actual interest paid during the year.

 Corporate – Income Determination in the United States

Overview: The income determination process for corporations in the United States involves various elements, including inventory valuation, treatment of capital gains, dividend income, stock dividends, interest income, and income from sources like rentals, royalties, and partnerships.

Key Elements:

• Inventory Valuation: Inventories are valued at either cost or the lower of cost or market. Methods such as FIFO or LIFO (allowed for tax purposes only on a cost basis) may be employed. UNICAP rules require capitalization of certain costs to inventory.
• Capital Gains: Gains or losses on the sale of capital assets held for over 12 months are treated as long-term, while those held for 12 months or less are short-term. Net capital gain is the excess of long-term over short-term gains. Capital losses can be carried back three years and carried forward five years.
• Dividend Income: US corporations can generally deduct 50% of dividends received from other US corporations. A 65% deduction is allowed if the recipient owns 20%-80% of the distributing corporation. Dividends within the same affiliated group are generally excluded. No deduction is allowed for dividends from foreign corporations, except for a 100% DRD for certain foreign-source dividends.
• Stock Dividends: A US corporation can distribute tax-free dividends in common stock. Distributions with the right to elect cash are taxable. Caution is advised in making such distributions.
• Interest Income, Rental Income, Royalty Income: Interest, rental, and royalty income are generally includible in taxable income.
• Partnership Income: Income (loss) of a partnership passes through to partners, making the partnership itself not subject to tax. Each partner includes its distributive share of taxable income.

Foreign Income (Subpart F Income) of US Taxpayers

Overview: Controlled Foreign Companies (CFCs) may generate undistributed income subject to current taxation for certain US shareholders under Subpart F income rules. Subpart F income encompasses passive income and income easily moved across jurisdictions. The inclusion of Subpart F income is irrespective of actual distribution to US shareholders.

Key Points:

• CFCs and US Shareholders: US shareholders owning 10% or more of a CFC must include their pro rata share of Subpart F income in gross income. The definition of Subpart F income covers various categories such as passive income, foreign base company income, and income related to international boycotts.
• Subcategories of Foreign Base Company Income: Common subcategories include Foreign Personal Holding Company Income (FPHCI), Foreign Base Company Sales Income (FBCSI), and Foreign Base Company Services Income (FBCSvI). Exceptions exist, excluding certain income from Subpart F classification, like highly taxed income, related-party payments, and active business operations.
• Foreign Tax Credits and Previously Taxed Income: Domestic corporate shareholders may claim foreign tax credits for taxes paid by a CFC. Rules track earnings and profits included as Subpart F income to avoid double taxation upon actual distribution (Previously Taxed Income or PTI).
• Global Intangible Low-Taxed Income (GILTI): P.L. 115-97 introduced GILTI rules, requiring US shareholders to include their pro rata share of a CFC’s total net income, excluding specific categories. A deduction of 50% or 37.5% applies, and a credit for 80% of foreign taxes associated with GILTI may be claimed.

Corporate Deductions – Depreciation and Amortisation

Overview: Depreciation and amortisation are crucial deductions allowing businesses to recover costs associated with tangible and intangible assets over time. The Modified Accelerated Cost Recovery System (MACRS) governs depreciation for tangible property, while intangible assets generally follow a 15-year amortisation period.

Key Points:

• Depreciation of Tangible Property: MACRS classifies tangible property into recovery periods ranging from three to 39 years, depending on the type of asset. The 200% declining-balance method is initially applied, switching to the straight-line method when it maximises depreciation. Alternately, the alternative depreciation system (ADS) may be chosen.
• Special Rules for Real Property: Residential rental property is typically depreciated over 27.5 years using the straight-line method, while non-residential real property follows a 39-year straight-line method. Elections for different methods or recovery periods are available to taxpayers.
• Automobiles and Listed Property: Special rules apply to automobiles and listed property. Accelerated depreciation is contingent on business use, and specific dollar limitations govern depreciation deductions for post-1986 automobiles.
• Tax Depreciation vs. Book Depreciation: Tax depreciation may differ from book depreciation, and recapture provisions exist when certain property is sold, treating gains as ordinary income.
• Intangible Assets: Most intangible assets have a 15-year amortisation period. Rapid amortisation may apply to pollution control facilities.
• Global Considerations: Separate methods and periods exist for tangible personal and real property used outside the United States, reflecting the global nature of some businesses

Section 179 Deduction and Bonus Depreciation

Overview:

• Section 179 deduction and Bonus Depreciation are tax incentives allowing businesses to accelerate the depreciation of certain property, providing immediate expensing of qualifying asset costs. These provisions aim to stimulate business investment by offering upfront tax benefits.

Section 179 Deduction:

• Eligible Property: Corporations can elect to expense the cost of eligible property used in active trade or business, known as the Section 179 deduction.
• Limits and Thresholds (Before 1 January 2018): Varying amounts and thresholds applied for tax years before 2018.
• Post-2017 Changes:

i) For property placed in service after 31 December 2017, the deduction limit is $1 million, with a phase-out threshold at $2.5 million.

ii) These limits are indexed for inflation for tax years after 31 December 2018.

• Limitation: The deduction is restricted to the taxable income of the business.

Bonus Depreciation:

100% Special First-Year Depreciation:

• Bonus Depreciation allows a 100% special first-year depreciation allowance for qualifying property, fostering immediate expensing. 
• Applies to property with original use starting with the taxpayer, MACRS property with a recovery period of 20 years or less, certain software, water utility property, and specific leasehold improvements.
• Excludes property subject to alternative depreciation and ‘listed property’ not predominantly used for business.

Changes Over Time:

• Taxpayers could entirely expense property placed in service before 1 January 2023.
• For property placed in service in 2023 and beyond, the allowance reduces annually: 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026.
• Previous bonus depreciation rules apply to property acquired before 28 September 2017.

Depletion, Goodwill, and Start-up Expenses

Depletion:

Methods:

• For natural resource properties (excluding timber and some oil and gas properties), depletion can be computed using cost depletion or percentage depletion methods.
• Cost depletion is based on the adjusted basis of the property and estimates the number of units extracted and sold during the year.
• Percentage depletion is applicable to minerals, geothermal deposits, and limited oil and gas cases, allowing deductions ranging from 5% to 25% of gross income.

Limitations:

• Cost depletion reduces the adjusted basis each year but not below zero.
• Percentage depletion is capped at 50% (100% for oil and gas properties) of taxable income from the property, with exceptions for specific situations like natural gas from geopressurised brine and independent producers of oil and gas.
• Exclusions: Generally, percentage depletion is not available for oil or gas wells, but exceptions exist for specific cases.

Goodwill:

Amortization: Goodwill acquired in asset acquisitions constituting a trade or business is capitalized and amortized evenly over 15 years, starting from the month of acquisition.

Start-up Expenses:

Amortization Rules:

• Start-up expenditures, in general, must be amortized over a 15-year period.
• Certain taxpayers have the option to deduct a portion of start-up expenditures in the tax year the business commences.

Interest Expense Limitation (Section 163(j)):

Background:

• Section 163(j), effective after 31 December 2017, limits US business interest expense deductions.
• The limitation includes business interest income, 30% of adjusted taxable income (ATI), and floor plan financing interest.

Applicability:

• Applies broadly to any taxpayer regardless of form, related or unrelated to the payee.
• ATI is akin to EBITDA for tax years before 2022 and EBIT for subsequent years.

Carryforward: Disallowed interest expense can be carried forward indefinitely.

Temporary Modification (CARES Act):

• The CARES Act temporarily increased the ATI percentage from 30% to 50% for tax years 2019 and 2020.
• Taxpayers could elect not to increase the ATI percentage for 2019 or 2020, with an irrevocable election.

Partnerships:

• For 2019, the ATI change didn’t apply to partnerships; instead, 50% of excess interest was treated as paid by partners in 2020.
• Partnerships could elect out of the special rule for 2019.
• The ATI percentage change applies to partnerships for 2020 unless an election out is made.
• An election to substitute 2019 ATI for 2020 ATI was allowed for tax years starting in 2020.

Bad Debt Deduction:

• Nature: Bad debt resulting from a trade or business is deductible in the year it becomes worthless.
• Determining Worthlessness: Determining the date of worthlessness may be challenging.
• Partial Worthlessness: Taxpayers can claim a deduction for partially worthless bad debt when charged off from the books

Charitable Contributions:

Deduction Limitations:

• Allowable charitable contributions are capped at 10% of taxable income (excluding certain deductions).
• Excess deductions can be carried over for five years, with a 10% annual limitation.
• Qualified conservation contributions have a 15-year carryover.

Inventory Donations: Corporations may get an additional deduction for donating inventory for the care of the ill, needy, or infants.

Employee Benefit Plans:

General Overview:

• The government encourages employers to offer qualified retirement benefits through the tax code.
• Employer contributions to qualified plans are deductible, and employee tax liability is deferred until benefit distribution.

Types of Qualified Plans:

Defined Benefit Plan (Pension):

• Ongoing employer contributions cover retirement income owed to employees.
• Benefits based on factors like years of service, average salary, and age at retirement.
• Investment gains/losses don’t impact benefits paid to participants.

Defined Contribution Plan (401(k)):

• Employees contribute pre-tax compensation to individual accounts, with annual limits.
• Employers may match or make profit-sharing contributions.
• Investment gains/losses and contribution history affect account values at retirement.
• Employers aren’t obligated to ensure specific benefit levels.

Plan Categories and Requirements:

• Plans subject to reporting and disclosure rules under ERISA (Employee Retirement Income Security Act of 1974).
• Qualified plans must provide broad employee coverage.
• Annual limits on benefits earned by participants.

Non-Profit and Government Entities:

• Similar employee benefit plans with varying requirements.
• Non-profits, churches, and government entities follow distinct rules.

Self-Employed Individuals:

• Self-employed individuals can establish retirement plans with separate requirements.

Foreign-Derived Intangible Income (FDII) and Research & Experimental (R&E) Expenditures

Foreign-Derived Intangible Income (FDII):

Tax Year Applicability:

• Applicable for tax years starting after 2017 and before January 1, 2026.
• Section 250 allows a deduction of 37.5% of a domestic corporation’s FDII.
• Deduction includes 50% of Global Intangible Low-Taxed Income (GILTI) under Section 951A.

Deduction Reduction:

• Deduction percentages reduce to 21.875% and 37.5% for tax years after December 31, 2025.
• If taxable income is less than FDII and GILTI amounts, deductions are proportionally reduced.

FDII Calculation:

• FDII = Deduction-Eligible Income (DEI) – 10% deemed return on tangible assets.
• DEI includes total net income (excluding specified categories) multiplied by a sales-based fraction.
• FDII is not limited to intangible property; it includes sales or services to foreign persons or locations.

Research & Experimental (R&E) Expenditures:

Pre-2022 Rules

• Section 174 allows corporations to expense R&E expenditures or defer for 60 months.
• Special election under Section 59(e) allows 120-month amortization.
• Research tax credit may apply for a portion of the expenditures.

Post-2021 Rules (P.L. 115-97)

• Repealed expensing under Section 174 for tax years after 2021.
• R&E expenditures, including software development costs, are capitalized and amortized over five years.
• Research conducted outside the U.S. requires 15-year capitalization and amortization.

Bribes, Kickbacks, and Illegal Payments; Fines and Penalties; Taxes; and Other Significant Items

Bribes, Kickbacks, and Illegal Payments:Payments classified as bribes, kickbacks, or illegal payments are non-deductible.

Fines and Penalties:

• No deduction for fines or penalties paid to the government before December 22, 2017.
• Post-December 22, 2017, non-deductibility unless for restitution, remediation, or compliance, identified in the agreement.

Taxes:

• Deductible: State and municipal taxes on businesses.
• Non-deductible: Federal income taxes on businesses.

Other Significant Items:

Contingent Liability: No deduction for an accrual-method taxpayer unless liability is fixed, determinable, and economic performance occurred.

Entertainment Expenses:

• Pre-2018: Deductible if meeting strict tests, limited to 50%.
• Post-2017: Generally 100% disallowed unless an exception applies.
• Food and beverages provided by a restaurant 100% deductible in 2021 and 2022; 50% deductible afterward.
• Royalty Payments, Circulation Costs, Mine Exploration, and Other Costs: Deductible with conditions and limitations.
• Executive Compensation: Limitation on deductions for CEO, CFO, and other SEC executive officers’ compensation, subject to a USD 1 million per-year limit.

Net Operating Losses (NOLs):

• Pre-2018: Carryback two years, carry forward 20 years.
• Post-2017: NOLs generally not carried back, limited to 80% of taxable income, carried forward indefinitely.
• Special rules for specified liability losses and qualified disaster areas.
• Modified limitation for pass-through businesses until January 1, 2021.

Payments to Foreign Affiliates:

• Deduction for payments to foreign affiliates, subject to arm’s length and certain limitations.
• Payments may trigger BEAT liability under specific circumstances.

Group Taxation for US Corporations

Consolidated Federal Income Tax Return:

• Affiliated group of US includible corporations (parent and subsidiaries 80% owned) can elect to file a consolidated federal income tax return.
• Profits of one affiliate can be offset against losses of another within the group.
• Certain foreign subsidiaries and partnerships are generally not included in the consolidated return.

Foreign Incorporated Subsidiaries:

Foreign incorporated subsidiaries are not consolidated into the US group, except for specific cases:

• Certain Mexican and Canadian incorporated entities.
• Certain foreign insurance companies opting for domestic treatment.
• Certain expatriated foreign corporations under anti-inversion rules (deemed domestic for income tax purposes).

Partnerships and Consolidation:

• Partnerships cannot be included in a consolidated return, even if 100% owned by the affiliated group.
• Member’s earnings from a partnership are included in the consolidated group’s taxable income or loss.

State-Level Consolidation:

• Consolidated filing may be allowed, required, or prohibited at the state level.
• Sales, distributions, and transactions between group members are deferred until involving a non-group member.

Treatment of Stock Sales:

• Losses on stock sales of group members may be disallowed under specific circumstances.

Transfer Pricing, CbC Reporting, Thin Capitalization, and CFCs

Transfer Pricing Regulations:

• Governs internal prices for goods, intangibles, services, and loans in related entities.
• Aims to prevent tax avoidance, ensuring an arm’s-length standard for controlled parties.
• Non-compliance may lead to IRS adjustments, potentially resulting in double taxation for multinational companies.
• Advance Pricing Agreements (APAs) can be pursued to avoid transfer pricing penalties.

Country-by-Country (CbC) Reporting:

• US multinational enterprises (MNEs) report financial information on a CbC basis.
• Form 8975, Country-by-Country Report, is filed by parent entities with USD 850 million or more revenue.
• Information exchange through bilateral Competent Authority Arrangements (CAAs) with foreign tax administrations.
• Exchanged data is confidential and protected by legal instruments.

Thin Capitalization:

• Pertains to interest expenses in the Deductions section.
• Rules governing the amount of debt a company can have concerning its equity.
• Ensures that companies do not excessively use debt to reduce taxable income.

Controlled Foreign Companies (CFCs):

• Under Subpart F regime of the IRC, a CFC is a foreign corporation with US shareholders owning over 50% of voting power or total stock value.
• US shareholders include individuals owning 10% or more of the foreign corporation’s stock.
• Designed to prevent US taxpayers from deferring US tax by keeping income in foreign corporations.

Corporate Tax Credits and Incentives

Foreign Tax Credit (FTC):

• Allows taxpayers to choose between a credit and a deduction for foreign income, war profits, and excess profit taxes.
• Reduces US income tax liability dollar for dollar.
• Can be carried back one year and carried forward ten years.
• Applies to direct and indirect taxes, including those ‘in lieu of’ income tax.
• Subject to limitations and has various restrictions to prevent abuse.

General Business Credit:

• Combines various business credits into one for determining the allowance limitation.
• Current year’s credit not fully used can be carried back one year and carried forward 20 years.
• Includes credits like investment credit, work opportunity credit, research credit, low-income housing credit, and more.
• The Inflation Reduction Act of 2022 introduced new credits like zero-emission nuclear power plant credit, sustainable aviation fuel credit, and clean hydrogen production credit.
• The CHIPS Act added the advanced manufacturing investment credit and the clean energy investment credit.
• Allows an election for taxpayers to receive certain credits as a direct payment of tax.
• Permits the transfer of certain credits to another taxpayer.

Investment Credit:

• A component of the general business credit that encompasses various credits for infrastructure investment.
• Includes rehabilitation credit, energy credit, qualifying advanced coal project credit, and more.
• Credits under the investment credit may be subject to recapture upon property disposition.

Recent Additions:

• The Inflation Reduction Act of 2022 and CHIPS Act introduced new business credits.
• These include credits for clean electricity production, clean fuel production, and advanced manufacturing production.
• An election allows taxpayers to receive specific credits as a direct payment, benefiting those with low or no taxable income.

Employment Credits, Research Credit, and Orphan Drug Credit

Work Opportunity Tax Credit (WOTC):

• Available through 2025 for qualified wages paid to specific worker categories.
• Qualified wages generally include the first $6,000 per employee for the year.
• Credits range from 25% to 40% of qualified wages, with exceptions for specific demographics.
• Tax-exempt organizations can claim WOTC against payroll taxes for hiring qualified veterans.

Research Credit (R&D Credit):

• Encourages qualified research expenditures (QREs) for developing new products, processes, or software in the US.
• The credit equals 20% (RRC method) or 14% (ASC method) of QREs over a base amount.
• An Energy Research Consortium Credit is available for qualified energy research expenditures.
• For tax years before 2022, the Section 174 deduction for R&D expenditures must be reduced by the entire R&D credit unless an election is made.
• After 2021, R&D expenditures are capitalized and amortized over five years, with a 15-year period for research conducted outside the US.

Orphan Drug Credit (ODC):

• Provides a credit for qualified clinical trial expenses related to orphan drugs targeting rare diseases or conditions.
• For tax years before January 1, 2018, the ODC equals 50% of qualified clinical trial expenses.
• For tax years after January 1, 2018, the ODC rate is reduced to 25%, and taxpayers may opt for a reduced credit election.
• Similar to the research credit, the Section 174 deduction for ODC expenditures must be reduced by the entire ODC credit unless an election is made

Inbound Investment Incentives

Limited Federal Incentives:

Limited federal incentives for inbound investment.

Exceptions for non-residents and foreign corporations:

• Portfolio Debt Exception: Allows tax-free investment in certain US obligations meeting specific requirements.
• Short-Term Debt Exception: Income from obligations with a term of 183 days or less is tax-free.
• Bank Deposit Exception: Non-US investors can deposit funds in US banks tax-free under certain conditions.
• Securities and Commodities Trading Safe Harbors: Exceptions for non-US persons trading through resident agents.

Qualified Private Activity Bonds:

• Interest income from qualified private activity bonds is generally exempt from federal income tax. 
• Enables state or local governments to issue bonds at lower rates, benefitting business enterprises in conduit arrangements. 

Other Credits and Incentives:

• Federal, state, and local governments offer various incentives to encourage business investment.
• Incentives include cash grants, property and sales/use tax abatements, utility rate reductions, and other tax benefits.
• Aimed at reducing costs and providing cash support for investments, job creation, expansion, and facility openings

Corporate – Tax Administration

1. Tax Period:

• US corporate taxpayers are taxed annually.
• Option to choose a tax year different from the calendar year.
• New corporations may use a short tax year initially, and changes are allowed.

2. Tax Returns:

• Self-assessment and voluntary reporting principle.
• Annual tax return filing (Form 1120) due by the 15th day of the fourth month after the tax year closes.
• Six-month extension available with penalties for late filing.

3. Important Tax Return Due Dates:

Form No.	Title	Purpose	Due Date
W-2	Wage and Tax Statement	Employee compensation and withholding statements	On/before January 31
1099 series	Various	Information returns to IRS and recipients (dividends, interest, etc.)	Varies (January 31, February 28, March 31)
1120 series, incl. 1120S	US Corporation Income Tax Return	Income tax returns for domestic/foreign corporations	April 15 for C corporations, March 15 for S corporations (with extension)
Schedule K-1	Partner’s Share of Income, Deductions, etc.	Information returns for partners	March 15
1065	US Return of Partnership Income	Information returns for partnerships	March 15

• State tax return deadlines vary but often align with federal deadlines.

4. Payment of Tax:

• Tax liability to be prepaid in four equal estimated payments.
• Full estimated tax liability due in four payments by specified dates.
• Generally, no extensions allowed; non-compliance results in penalties and interest charges.

5. Penalties:

• Categories include delinquency, accuracy-related, information reporting, and preparer/promoter penalties.
• Penalties for failure to file, pay, and make timely tax deposits.
• Interest applies to underpayments.
• Criminal penalties for wilful and egregious failures within the tax system.

6. Tax Audit Process:

• Voluntary self-assessment system.
• Large and mid-size businesses subject to annual IRS and state tax audits.
• Smaller businesses audited more selectively and randomly.

7. Statute of Limitations:

• IRS generally has three years after the original return filing to assess income taxes.
• Limitations period starts from the original due date.

8. Topics of Focus for Tax Authorities:

• Focus areas include Form 1120-F filing, foreign tax credits, earnings repatriation, success-based fees, research credits, transfer of intangibles, and new provisions like Section 965.

9. Tax Shelter:

• Regulations require disclosure of abusive transactions.
• Listed and reportable transactions information available on the IRS website.

10. Methods of Accounting:

• Key characteristics: timing and consistency.
• Changes require IRS approval and consistent application.
• Primary methods: accrual and cash receipts and disbursements.

Corporate – Other Issues 

1. Tax Accounting:

• Financial Accounting Standards Board (FASB) ASC 740 addresses tax accounting under US Generally Accepted Accounting Principles (GAAP). 
• SEC registrants must prepare financial statements in accordance with US GAAP; foreign issuers may use IFRS. 

2. Corporate Reorganisations:

• Mergers, acquisitions, and consolidations are generally taxable but can qualify as tax-free under specific criteria. 
• Tax-free transactions defer gains/losses, employing carryover basis and holding period mechanisms. 

3. Foreign Account Tax Compliance Act (FATCA):

• Enacted in 2010 to combat offshore tax evasion by US persons. 
• Requires disclosure of US persons’ ownership of foreign accounts, affecting global companies beyond finance. 
• Withholding agents must report, withhold, and document payees, imposing changes on multinational enterprises. 
• Intergovernmental Agreements (IGAs) facilitate FATCA compliance, allowing information exchange with local governments. 

4. Common Reporting Standard (CRS) and Multilateral Instrument (MLI):

• CRS, launched by the OECD, establishes global automatic exchange of financial account information to combat tax evasion. 
• As of July 2020, the United States has not adopted CRS. 
• MLI, effective from July 2018, implements BEPS recommendations affecting double tax treaties (DTTs). 
• The United States, while part of post-BEPS discussions on the MLI, has not signed it. 

5. US Possessions:

• Puerto Rico, American Samoa, Guam, the Northern Mariana Islands, and the US Virgin Islands have independent tax departments. 
• They formulate their own tax rules.