TAXATION IN THE USA

Every business in the USA is subject to a variety of federal, state and local taxes. We do not use any value added taxation (V.A.T.) in the USA as is common in many other nations. Our federal government primarily collects income tax on individual earnings and a corporate tax on business income. State governments collect an assortment of individual income taxes, business earnings taxes, sales taxes and various licensing or usage fees. Local governments and local taxing authorities tend to use a wide assortment of confusing taxes such as local income taxes, business earnings taxes, sales taxes, business privilege taxes, real estate taxes and various licensing or usage fees.

Federal taxes

The Internal Revenue Service of the United States regulates all federal taxation. Its primary instrument is the federal individual income tax. All earned income from wages, salaries, fees and investment returns are subject to this tax. Every individual wage earner is required to file a federal tax return on annual earnings by the 15th of April in the following year. For taxation purposes, total income of an individual can be reduced by legitimate expenditures on certain medical expenses, interest payments, charitable deductions, educational expenses, family allowances and other specific items. The IRS also collects additional income based fees to cover retirement benefits (FICA) and retirement medical coverage (MEDICARE). It is wise to hire a professional tax preparer in order to accurately file your tax return and to minimize your tax toll.

The Internal Revenue Service also collects taxes on corporate earnings. Individual proprietorships, partnerships and some corporations are exempt from this corporate tax. The rules and regulations governing the tax are very complex, so you should always use the services of a tax consultant to insure that you are correctly calculating your tax liability and not overpaying. In addition, the federal government collects excise taxes on alcohol, tobacco and fuel.

Most federal taxes must be prepaid before year-end. Individual income taxes, must be withheld from employees earned wages and paid to the government in a timely manner. Investment earnings and corporate taxes must be estimated and paid on a quarterly basis. The Internal Revenue Service is quite strict in enforcing its rules. Late payment or underpayment of taxes can result in severe financial penalties. Fraudulent avoidance of taxes can result in prison terms.

State taxes

Each state has its own array of taxes that apply to individuals, businesses or corporations. Most, but not all states, collect individual income taxes based on earnings. Many states impose sales tax on all purchases of goods and services completed within the state. Some states also impose excise taxes on alcohol, tobacco and fuel. Many states also charge a business privilege tax or business earnings tax on any economic activity that takes place within the state.

Before starting a business in any state, it is wise to research the taxation rules and regulations of that state. Even when your business is located in one state, it may be subject to taxation in other states if you engage in any business or economic activity within the borders of the other state.

Local taxes

Many cities, towns, municipalities, counties or school districts impose some sort of local taxation. Sometimes, they take the form of a local income taxes or a local sales tax. Sometimes, they are business privilege fees, licensing fees or usage fees. Typically, school districts impose real estate taxes based on the estimated worth of real property.

Before you start a business anywhere in the USA, it is wise to research the local taxation rules and regulations of the local taxing authorities. There may be registration requirements or specific obligations in reporting sales or income to the local tax authorities.

Tax relief

There are certain specific areas of federal tax relief as specified in the federal income tax codes. A good tax consultant or tax attorney could advise you on their application to your specific business. Other than the relief specified in the laws, it is almost impossible to obtain any special tax abatement or exemption from the IRS.

If you are creating a substantial new business venture in the USA, some state and local taxing authorities might be willing to offer limited tax relief or tax abatement in order to entice you to locate in their region. Often, state and local governments are willing to offer specific tax breaks for new enterprises that create new employment opportunities for their residents. It is advisable to employ a tax consultant or tax attorney familiar with the taxation climate in the area where you intend to locate your business.

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