US tax reform legislation enacted on 22 December 2017 (P.L. 115-97) moved the United States from a ‘worldwide’ system of taxation towards a ‘territorial’ system of taxation. Among other things, P.L. 115-97 permanently reduced the 35% CIT rate on resident corporations to a flat 21% rate for tax years beginning after 31 December 2017.
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.
Prior to enactment of P.L. 115-97, a non-US corporation engaged in a US trade or business was taxed at a 35% US CIT rate on income from US sources effectively connected with that business (i.e. effectively connected income or ECI). However, as noted above, P.L. 115-97 significantly revised the federal tax regime. P.L. 115-97 permanently reduced the 35% CIT rate on ECI to a 21% flat rate for tax years beginning after 31 December 2017. Certain US-source income (e.g. interest, dividends, and royalties) not effectively connected with a non-US corporation’s business continues to be taxed on a gross basis at 30%.
Alternative minimum tax (AMT)
Prior to 2018, AMT was imposed on corporations other than S corporations (see below) and small C corporations (generally those with three-year average annual gross receipts not exceeding USD 7.5 million). The tax was 20% of alternative minimum taxable income (AMTI) in excess of a USD 40,000 exemption amount (subject to a phase-out). AMTI was computed by adjusting the corporation's regular taxable income by specified adjustments and 'tax preference' items. Tax preference or adjustment items could arise, for example, if a corporation had substantial accelerated depreciation, percentage depletion, intangible drilling costs, or non-taxable income.
P.L. 115-97 repealed the corporate AMT effective for tax years beginning after 31 December 2017 and provided a mechanism for prior-year corporate AMT credits to be refunded by the end of 2021.
P.L. 116-136, enacted as part of COVID-19 relief legislation, amended this provision and provided for all corporate AMT credits to be refunded by the end of 2019. More specifically, P.L. 116-136 accelerated the ability of companies to receive refunds of AMT credits in tax years beginning in 2019. Alternatively, companies could elect to claim the entire refundable AMT credit in tax years beginning in 2018.
The 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 USD 1 billion. A corporation that is a member of a foreign-parented multinational group must apply a two-part test. It is an applicable corporation if (i) the three-year average AFSI of all members of the group exceeds USD 1 billion and (ii) 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.
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.
Corporations with 100 or fewer eligible shareholders, none of whom may be corporations, that meet certain other requirements may elect to be taxed under Subchapter S of the Internal Revenue Code (IRC or 'the Code') and are thus known as S corporations. S corporations are taxed in a manner similar, but not identical, to partnerships (i.e. all tax items [e.g. income, 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)
P.L. 115-97 created a new US federal tax called the ‘base erosion and anti-abuse tax' (BEAT). P.L. 115-97 targeted US tax-base erosion by imposing an additional corporate tax liability on corporations (other than regulated investment companies [RICs], real estate investment trusts [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 that 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 NOL deduction, the new dividends received deduction (DRD) for foreign-source dividends, the new deduction for foreign-derived intangible income (FDII) and the deduction relating to the new category of global intangible low-taxed income (GILTI), qualified derivative payments defined in the provision, and certain payments for services.
The BEAT is imposed to the extent that 10% (5% for 2018) 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. The above percentages are changed to 11% and 6%, respectively, for certain banks and securities dealers.
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 percentage of modified taxable income that is compared against the regular tax liability increases to 12.5% (13.5% for certain banks and securities dealers) and allows all credits to 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 12% (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.