USA Law and Practice Contributed by: Devon M Bodoh, Joseph M. Pari and Blake D. Bitter, Weil, Gotshal & Manges LLP
rates, and losses from the disposition of capital assets may only offset capital gains (see 2.4 Loss Relief ). The Code includes various non-recognition provisions under which a built-in gain may be deferred (or in the case of a tax-free subsidiary spin-off, eliminated) rath - er than recognised and included in taxable income in the specified transaction. For example, such provi - sions include: • like-kind exchanges of real property; • involuntary conversion; and • certain corporate reorganisations such as mergers, stock sales or liquidations. In addition, the One Big Beautiful Bill Act made per - manent a provision where taxpayers may defer or partially eliminate certain capital gains by investing in a “qualified opportunity fund” located in any of the “qualified opportunity zones” enumerated by the IRS. 2.8 Other Taxes on Transactions Various other transaction taxes may apply at the state and local levels. For example, most US states impose an ad valorem real property transfer tax. In addition, beginning on 1 January 2023, stock repurchases or redemptions of more than USD1 million by a US cor - poration (and in certain cases, a non-US corporation) that has stock traded on an established securities market will be subject to a 1% US federal excise tax. 2.9 Other Notable Taxes Various other taxes may apply in addition to the taxes discussed elsewhere in this chapter, such as: • the federal excise tax imposed on insurance and reinsurance premiums paid to non-US persons; • the federal excise tax on certain stock repurchases or redemptions (see 2.8 Other Taxes on Transac- tions ); • social security; and • Medicare tax and unemployment tax imposed on employers. In addition, US states and local governments impose various other direct taxes (ie, franchises tax) and indi - rect taxes (ie, excise taxes, mortgage recording tax -
es, telecommunications taxes or insurance premium taxes) that may vary greatly between such US states.
3. Corporations and Non-Corporate Businesses 3.1 Form of Closely Held Local Businesses As noted in 1.1 Corporate Forms and Their Tax Treat- ment , the LLC (a hybrid-type entity) is the most com - monly used entity type in the USA. This is because it not only affords liability protection for its members (similar to the protection that a corporation offers its shareholders) but also permits significant flexibility from a tax-planning perspective. Specifically, an LLC, as an eligible entity, can generally elect to be classified for federal tax purposes as a corporation, a partner - ship or a disregarded entity depending on its owner - ship. That said, by default LLCs are generally taxed like sole proprietorships or partnerships, meaning the owners are considered self-employed and generally are required to pay self-employment tax on all busi - ness profits. Another popular form is the S corporation. As noted in 1.2 Use and Taxation of Transparent Business Struc- tures , S corporations are generally exempt from a fed - eral income tax (meaning that any income is taxed only at the individual level) and, notably, provide cer - tain self-employment tax benefits to their owners that are generally not available to other types of entities. Along with the tax advantages, S corporations enjoy the same protection from liability offered by corpora - tion status. There are, however, a number of stipu - lations for operating as an S corporation that may disqualify or disincentivise a business seeking S cor - poration status. Perhaps the most important are the strict limits around shareholders, which are restricted largely to US individuals. Furthermore, unlike other types of pass-through entities (ie, partnerships), S corporations do not have flexibility when it comes to the allocation of income. 3.2 Individual and Corporate Rates Corporations in the USA are subject to what is referred to as the classic regime of corporate taxation. Spe - cifically, corporations (other than certain types of corporations qualifying under special tax regimes –
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