USA Law and Practice Contributed by: Devon M Bodoh, Joseph M. Pari and Blake D. Bitter, Weil, Gotshal & Manges LLP
The USA also applies a corporate minimum tax (effec - tive from 1 January 2023) that generally imposes a 15% minimum tax on the financial statement income for US corporations (including consolidated groups; see 4.4 Transfer Pricing Issues for Inbound Inves- tors ) with financial statement income of more than USD1 billion for three taxable years (or USD100 million in the case of a US corporation that is part of a non- US multinational group that has combined financial statement income of more than USD1 billion). In contrast to corporations, the maximum income tax rate for individuals (including individuals invested in certain pass-through entities) is 37%. Furthermore, US states and local governments may levy additional taxes on the same (or similar) income incurred by such individuals, the rate of which fluctuates significantly between the various states and municipalities. Addi - tionally, some US states and local governments may also levy an entity-level tax on the business entity not - withstanding its US federal tax classification. The US federal income tax is imposed on “taxable income”, which is calculated as “gross income” reduced by deductions allowed under the Internal Revenue Code (Code). Gross income is defined as “income from whatever source derived”; thus, the USA employs a global definition of income based on the accretion concept, where any accession to wealth (other than mere appreciation of asset value with nothing more) constitutes income unless the Code expressly excludes it. Every taxpayer must figure taxable income for an annual accounting period called a “tax year”. The calendar year is the most common tax year; however, other tax years can be selected (ie, fiscal year). Tax - payers must use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are: • the cash method (generally used by individuals and other small businesses); and 2. Corporate Tax Regime 2.1 Taxable Profits
• the accrual method. Under the cash method, a taxpayer reports income in the tax year such income is received and deducts expenses in the tax year such expense is paid. Under the accrual method, the taxpayer reports income in the tax year it is earned (regardless of when payment is received) and deducts expenses in the tax year incurred (regardless of when payment is made). 2.2 Technology Investments The Code includes a wide variety of credits that can help reduce, or fully satisfy, the income tax obliga - tions (as well as payroll tax obligations) of taxpayers across a variety of industries, and that can even sim - ply result in a net payment from the government to the taxpayer. These credits have many rules regarding who can claim them and the timing of when, in what order and how much of the credit(s) can be used (or carried forward or backward). Notably, the R&D tax credit provides an incentive to invest in R&D (ie, performing activities related to the development, design or improvement of products, processes, formulas, technology or software) by allowing companies to claim credits for spending on certain qualified research expenditures (QREs). The R&D tax credit has four separate components: • the regular credit (equal to 20% of QREs above a base amount); • the alternative simplified credit (equal to 14% of QREs above half the average of QREs over the prior three years); • the energy research credit (equal to 20% of QREs); and • the basic research credit (equal to 20% of QREs above a base amount). In any year, taxpayers can take the energy research credit and the basic research credit, along with either the regular credit or the alternative simplified credit. In addition to credits, the One Big Beautiful Bill Act (that was recently passed by Congress and signed by President Trump) allows taxpayers once again to immediately deduct certain types of R&D expenses.
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