United States Corporate – Taxes on corporate income
The United States taxes resident corporations at a flat rate of 21%. US taxation of income earned by non-US persons depends on whether the income has a nexus with the United States and the level and extent of the non-US person’s presence in the United States. Certain US-source income (e.g. interest, dividends, and royalties) not effectively connected with a non-US corporation’s trade or business continues to be taxed on a gross basis at 30% unless reduced by treaty or domestic law.
Note that US tax reform legislation enacted on 22 December 2017, the Tax Cuts and Jobs Act of 2017 (P.L. 115-97 or so-called TCJA) significantly revised the US federal income tax regime, moving it away from a ‘worldwide’ system of corporate taxation towards a ‘territorial’ system of taxation. Prior to enactment of TCJA, a non-US corporation engaged in a US trade or business was taxed at a 35% US corporate income tax (CIT) rate on net income from US sources effectively connected with that business (i.e. effectively connected income).
Corporate alternative minimum tax (CAMT)
The Inflation Reduction Act, P.L. 117-169 (IRA) enacted a new corporate AMT, effective for tax years beginning after 2022, based on financial statement income (corporate alternative minimum tax or CAMT). The CAMT is a 15% minimum tax on adjusted financial statement income (AFSI) of C corporations. The CAMT increases a taxpayer’s tax to the extent that the tentative minimum tax exceeds regular tax plus base erosion and anti-abuse tax (BEAT).
AFSI determines whether a corporation is an applicable corporation subject to tax as well as the amount of the tax. In general, a taxpayer is an applicable corporation if its average annual AFSI over a three-tax-year period exceeds 1 billion United States dollars (USD). A corporation that is a member of a foreign-parented multinational group must apply a two-part test. It is an applicable corporation if:
- the three-year average AFSI of all members of the group exceeds USD 1 billion and
- the three-year average AFSI of US members of the group (and disregarded entities owned by members of the group), US trades or business of foreign group members that are not subsidiaries of US members, and foreign subsidiaries of US members exceeds USD 100 million.
Numerous adjustments are made to financial statement income to determine AFSI, and these rules also differ for purely domestic corporations and corporations that are part of a consolidated group with a foreign parent. OBBBA added a new adjustment for certain intangible drilling and development costs.
When a taxpayer pays CAMT because tentative minimum tax exceeds regular tax plus BEAT, the taxpayer will generate a minimum tax credit, which may be carried forward indefinitely and claimed against regular tax in future years (to the extent regular tax exceeds CAMT plus BEAT). The CAMT does not limit the general business credit, which corporate taxpayers may fully utilise against both their regular tax liability and the CAMT.
The IRA also added a corporate AMT foreign tax credit (FTC), which is available to an applicable corporation that claims an FTC for the tax year. The AMT FTC reduces 15% of a taxpayer’s AFSI to arrive at the tentative minimum tax.
Treasury and the Internal Revenue Service (IRS) on 12 September 2024 issued proposed regulations on the application of CAMT. The proposed regulations provide detailed rules on AFSI adjustment computations as well as other important topics. Technical corrections to these regulations were released on 23 December 2024; Notice 2025-28 also was released on July 29, 2025.
S corporations
Corporations with 100 or fewer eligible shareholders, all of which are either individuals (US citizens or resident aliens) or permitted trusts, estates, or tax-exempt entities that meet certain other requirements, may elect to be taxed under Subchapter S of the Internal Revenue Code (IRC or ‘the Code’). S corporations are taxed in a manner similar, but not identical, to partnerships (i.e. all tax items such as income and deductions flow through to the owners of the entity). Thus, S corporations generally are not subject to US federal income tax.
Gross transportation income taxes
Foreign corporations and non-resident alien individuals are subject to a yearly 4% tax on their US-source gross transportation income (USSGTI), which has an exception for certain income treated as effectively connected with a US trade or business. Transportation income is any income derived from, or in connection with, (i) the use (or hiring or leasing for use) of a vessel or aircraft or (ii) the performance of services directly related to the use of a vessel or aircraft.
Base erosion and anti-abuse tax (BEAT)
The BEAT targets US tax-base erosion by imposing an additional corporate tax liability on corporations (other than regulated investment companies or RICs, real estate investment trusts or REITs, or S corporations) that, together with their affiliates:
- have average annual gross receipts for the three-year period ending with the preceding tax year of at least USD 500 million, and
- make certain base-eroding payments to related foreign persons during the tax year of 3% (2% for certain banks and securities dealers) or more of all their deductible expenses apart from certain exceptions.
The most notable of these exceptions are the net operating loss (NOL) deduction, the dividends received deduction (DRD) for foreign-source dividends, the deduction for foreign-derived deduction eligible income (FDDEI) and the deduction relating to the category of Net CFC tested income (NCTI), qualified derivative payments defined in the provision, and certain payments for services.
The BEAT is imposed to the extent that 10% of the taxpayer’s ‘modified taxable income’ (generally, US taxable income determined without regard to any base-eroding tax benefit or the base-erosion percentage of the NOL deduction) exceeds the taxpayer’s regular tax liability net of most tax credits, for taxable income before 1 January 2026. The above percentage is changed to 11% and 6%, respectively, for certain banks and securities dealers. The One Big Beautiful Bill Act of 2025 (OBBBA) changes this rate to 10.5% for taxable income after 31 December 2025 (the rate would have been higher without the OBBBA legislation.)
A base-eroding payment generally is any amount paid or accrued by the taxpayer to a related foreign person that is deductible or to acquire property subject to depreciation or amortisation, or for reinsurance payments. The category also includes certain payments by ‘expatriated entities’ subject to the anti-inversion rules of Section 7874.
The provision is effective for base-erosion payments paid or accrued in tax years beginning after 31 December 2017. For tax years beginning after 31 December 2025, the OBBBA repeals the provision that all credits be applied in determining the US corporation’s regular tax liability. Special rules apply for banks, insurance companies, and ‘expatriated entities’.
State and local income taxes
CIT rates vary from state to state and generally range from 1% to 10% (although some states impose no income tax). The most common taxable base is federal taxable income, which is modified by state provisions and generally is apportioned to a state on the basis of an apportionment formula consisting of one or more of the following: tangible assets and rental expense, sales and other receipts, and payroll. Many states are moving away from a three-factor formula in favour of a one-factor receipts apportionment methodology.
State and local tax legislation may also change due to OBBBA. While the majority of states will automatically conform to the enacted tax changes due to the rolling conformity to federal tax law, or by using federal taxable income as a starting point, a number of states have static conformity and will not automatically adopt such changes without legislative action.
Sales taxes
No provisions exist for a sales tax or value-added tax (VAT) at the federal level; however, sales and use taxes constitute a major revenue source for the 45 states that impose such taxes and the District of Columbia. Sales and use tax rates vary from state to state and generally range from 2.9% to 7.25% at the state level. Many states also allow a ‘local option’ that permits local jurisdictions, such as cities and counties, to impose an additional percentage on top of the state-level tax and to keep the related revenues.
In general, a sales tax is a tax applied to the retail sale of tangible personal property and certain digital products and enumerated services. Although the form of the tax may vary, it is usually imposed directly upon the receipts from the retail sale of the taxable item. The person engaged in the business of making retail sales of the taxable item generally collects the sales tax from the purchaser and remits such amounts to the state. The use tax complements the sales tax and is usually assessed on purchases made out of state and brought into the jurisdiction for use, storage, or consumption. Typically, either a sales tax or a use tax can be assessed on a transaction, but not both.
The states generally impose a sales tax collection and remission liability on a seller once a minimum threshold is met with respect to either the number of sales transactions into or within a state or the dollar amount of sales into or within a state.
Liability for state and local sales taxes was governed by a physical presence nexus standard prior to the US Supreme Court’s decision South Dakota v. Wayfair (21 June 2018). That decision voided the physical presence nexus standard and upheld South Dakota’s statutory nexus standard of delivery into the state of more than USD 100,000 of sales or 200 or more transactions. Since the decision, most states that impose sales taxes have adopted similar standards. Some states, including South Dakota, have repealed the threshold based on number of transactions, leaving only the receipts threshold to determine whether a collection obligation exists.
Customs duties and import tariffs
In general
All goods imported into the United States are subject to US Customs entry requirements and are dutiable or duty-free in accordance with their classification under the applicable items in the Harmonized Tariff Schedule of the United States. The tariff classification also identifies eligibility for special programs and free trade agreement preferential duty rates. Aside from customs duties, which are relatively constant or declining, the President has authority under US law to impose tariffs in certain cases (e.g. to address national security concerns).
When goods are dutiable on an ‘ordinary’ basis, ad valorem, specific, or compound duty rates may be assessed. An ad valorem duty rate, which is the type of duty mechanism most often applied, identifies the percentage of tax that will be assessed on the value of the merchandise, such as 7% ad valorem. A specific duty rate is a specified amount per unit, unit of weight, or other quantity, such as 6.8 cents per dozen. A compound duty rate is a combination of both an ad valorem rate and a specific rate, such as 0.8 cents per kilo plus 8% ad valorem.
In addition to ordinary duties, select products also may be subject to punitive tariffs, including anti-dumping and countervailing duties, that are imposed in response to specific trading conditions, at individually determined rates, and for specified time periods. In such cases, the punitive tariffs are assessed in addition to the ordinary duties. Customs requires that the value of the imported goods be properly declared, in accordance with US Customs regulations, regardless of the dutiable status of the merchandise.
Liability for the payment of duty and other customs fees becomes fixed at the time an entry is filed with US Customs and Border Protection (CBP), although the amount of duty owed may change subsequently if any of the information declared on entry is later determined to be erroneous. The obligation for payment is upon the person or entity in whose name the entry is filed, the Importer of Record.
New trade policies
President Trump announced an ‘America First Trade Policy’ through an Executive Order (EO) aimed at reshaping US trade relations and encouraging domestic manufacturing. The EO calls for a review of the causes of US trade deficits and recommendations on potential tariffs or other measures that may be appropriate. The EO also states that the US-Mexico-Canada agreement and other trade agreements are to be reviewed and may be renegotiated.
The US also announced a broad package of US import tariffs on April 2, 2025 – a day President Trump called ‘Liberation Day’. Since this time, the administration has been negotiating trade deals with a multitude of countries that will ultimately be formalized in written trade agreements.
Excise taxes
Excise taxes (including retail excise taxes) are generally imposed by the federal and state governments on a wide range of goods and activities, including gasoline, kerosene, and diesel fuel used for transportation, air transportation, wagering, foreign insurance, ozone depleting chemicals (or products manufactured using ozone depleting chemicals), superfund taxes, manufacturing/importing of specified goods (e.g. certain sporting goods, tires, firearms and ammunition, alcohol, and tobacco), and selling certain goods at retail (e.g. heavy vehicles, trailers, bodies, and chassis). See the Environmental tax section below for further detail regarding the excise taxes levied on ozone depleting chemicals (or products manufactured using ozone depleting chemicals), among other goods and activities.
The excise tax rates are as varied as the goods and activities upon which they are levied. For example, a federal excise tax of 7.5% is levied on domestic commercial air passenger transportation, whereas the federal excise tax imposed on motor fuel generally is 18.3 cents per gallon of gasoline (plus 0.1 cents per gallon Leaking Underground Storage Tank or LUST tax) and 24.3 cents per gallon of diesel fuel (plus 0.1 cents per gallon LUST tax). The federal excise tax imposed on the first retail sale, lease, or use of heavy vehicles, trailers, bodies, chassis, etc. is 12%. These taxes usually are imposed on the manufacturer, importer, retailer, or provider of the goods and activities and then passed through to the purchaser.
An excise tax of 1% is also imposed on publicly traded US corporations on the fair market value of stock that is repurchased by the corporation (or certain of its affiliates) during the tax year. This levy is effective for certain stock repurchases made after 31 December 2022, subject to exceptions and adjustments for certain share issuances.
OBBBA also added a new excise tax on certain remittance transfers that are cross-border.
Property taxes
Many states and local governments impose a variety of property taxes on real property. Most states also impose a tax on business personal property.
Stamp taxes
Stamp taxes are not generally relevant at the federal level, except for the federal stamp tax imposed on the transfer of National Firearms Act (NFA) firearms. State and local governments frequently impose stamp taxes at the time of officially recording a transaction involving real property (commonly referred to as transfer taxes). Such taxes generally are based upon the value of the real property being transferred. The tax generally is imposed on the direct sale of real property, but some state and local governments also impose such a tax on the sale of a controlling interest of real property, which is the sale of a direct or indirect ownership of the real property.
Many state and local governments also impose stamp taxes on certain goods made available for sale in the respective jurisdiction, like cigarettes and other tobacco products.
Accumulated earnings tax
Corporations (other than S corporations, domestic and foreign personal holding companies, corporations exempt from tax under Subchapter F of the Code, and passive foreign investment companies) are subject to the accumulated earnings tax. Accumulated earnings and profits for the purpose of avoiding shareholder personal income tax (PIT) are subject to a penalty tax in addition to any other tax that may be applicable, equal to 20% of ‘accumulated taxable income’. Generally, accumulated taxable income is the excess of taxable income with certain adjustments, including a deduction for regular income taxes, over the dividends paid deduction and the accumulated earnings credit. Note that a corporation can justify the accumulation of income, and avoid tax, based on its reasonable business needs.
Personal holding company tax
US corporations and certain foreign corporations that receive substantial ‘passive income’ and are ‘closely held’ may be subject to personal holding company tax. The personal holding company tax is 20% of undistributed personal holding company income and is levied in addition to the regular tax.
Payroll taxes
Employers generally are subject to federal unemployment tax (FUTA) of 6% on the first USD 7,000 of wages paid to employees meeting certain criteria, with potential reduction of up to 5.4% for state unemployment taxes. For 2025, employers also are subject to social security tax of 6.2% on the first USD 176,100 (up from USD 168,600 in 2024) of wages paid to employees and Medicare tax of 1.45% on all wages (collectively, FICA taxes). Employers are required to withhold an equivalent amount of FICA taxes from employee wages, federal income tax at graduated rates, and Additional Medicare tax of 0.9% on wages in excess of USD 200,000 for a single taxpayer.
In addition, states may impose state income tax, state unemployment tax, workers’ compensation insurance tax, and other state-level benefit requirements at varying rates depending on state law and the nature of employees’ activities. The federal supplemental withholding rates, when applicable, are at 22% on supplemental income below USD 1 million in the aggregate and 37% on supplemental income in excess of USD 1 million in the aggregate for 2025 and 2024.
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Environmental taxes
Importers, manufacturers, and sellers of ozone-depleting chemicals (ODCs), or imported products manufactured using ODCs, are subject to environmental taxes calculated per weight of the ODC. These taxes are reported on Forms 6627 and 720. The ODC tax on imported taxable products is determined under an exact method by weight or via the table method based on the listed product (such table is provided in Reg. sec. 52.4682-3(f)(6)). If the weight cannot be determined, the tax is 1% of the entry value of the product.
There also is a tax on crude oil and petroleum products (the rate of tax is the combined oil spill liability trust fund tax rate and the hazardous substance superfund financing rate). The tax is imposed on operators of refineries that receive crude oil and petroleum products entered into the United States for consumption, use, or warehousing.
The Infrastructure Investment and Jobs Act, enacted on 15 November 2021, reinstated certain chemical excise taxes. These excise taxes are commonly referred to as ‘Superfund’ taxes and are imposed on the first sale or use of certain chemicals and substances. The taxes were reinstated effective 1 July 2022 (these taxes had previously expired in 1995). In general, Section 4661 imposes on manufacturers, importers, and producers a per ton federal excise tax on the first sale or use of 42 enumerated chemicals (‘taxable chemicals’). Section 4671 imposes taxes on an importer’s sale or use of a list of specified substances (‘taxable substances’) that are produced using these taxable chemicals.
The taxes are reported on Forms 6627 and 720, and rates of tax on taxable chemicals range from USD 0.44 to USD 9.74 per short ton (2,000 lbs.). Taxable substances are taxed based upon their underlying chemicals. The taxes currently expire on 31 December 2031.
Other state and municipal taxes
Other taxes that states may impose, in lieu of or in addition to taxes based on income, include franchise taxes and taxes on the capital of a corporation. State and municipal taxes are deductible expenses for federal income tax purposes.
Branch income
US tax law imposes a 30% branch profits tax on a foreign corporation’s US branch earnings and profits for the year that are effectively connected with a US business, to the extent that they are not reinvested in branch assets. Thus, the taxable base for the branch profits tax is increased (decreased) by any decrease (increase) in the US net equity of the branch. The branch profits tax on profits may be reduced or eliminated entirely if a relevant treaty so provides (subject to strict ‘treaty shopping’ rules).
The purpose of the branch profits tax is to treat US operations of foreign corporations in much the same manner as US corporations owned by foreign persons. With certain exceptions, a 30% (or lower treaty rate) branch profits tax also will be imposed on interest payments by the US branch to foreign lenders. In addition, the tax will apply if the amount of interest deducted by the branch on its US tax return exceeds the amount of interest actually paid during the year.
