Personal taxation in Memphis
Effective personal income tax rate
Teleport city rankings for personal income tax
All US citizens and residents, including resident aliens and citizens who reside outside the US, pay federal tax on their worldwide income, with credits for foreign income taxes (subject to certain limitations). Nonresident aliens are taxed only on ECI and US-source non-ECI. Special taxing rules may apply to former US citizens and long-term residents upon or after expatriation. Most of the 50 states and the District of Columbia also collect income tax from nonresidents and individuals who reside in their territory.
Aliens who have entered the US as permanent residents and who have not officially surrendered or lost the right to permanent US residence are taxed as US residents. Also taxed as residents are individuals who meet a “substantial presence test,” which requires, subject to further considerations, either physical presence in the US for 183 days or more during a calendar year, or
The categories for individuals filing are single, married filing jointly, married filing separately, head of household or qualifying widow(er).
Rates are progressive up to 39.6%.
Deductions and allowances
Individual taxpayers are entitled to a standard deduction from adjusted gross income in calculating taxable income, or they may “itemize” deductions. Numerous credits also are available.
Individuals generally must include gross income from whatever source derived in their taxable income, including compensation for services (all forms of remuneration and allowances and the value of other perquisites that are not specifically exempted), dividends, interest, royalties, rents, fees and commissions, gains from dealings in property and income from a partnership. Nonresident aliens exclude non-ECI in computing taxable income; however, they are subject to US tax on the gross amounts of such income, generally collected on receipt via withholding, if the income is from US sources and not from the sale or exchange of property.
The excess of net long-term capital gains (generally, gains from investments held for more than one year) over net short- term capital losses (net capital gains) generally is taxed at a maximum rate of 20%. The net capital gains rate also is applicable to qualified dividends received from domestic corporations generally and from certain foreign corporations.
Other taxes on individuals
Real property tax
Tax generally is imposed by the local governments at various rates.
For US citizens and residents, a unified estate and gift tax is imposed, generally based on the net value of the transferred assets of the donor or decedent in excess of USD 5,450,000 for 2016 (USD 5,430,000 for 2015). In the case of assets inherited from a decedent, heirs generally are not subject to income
Individuals, estates and certain trusts must pay a 3.8% tax on net investment income over a threshold amount (individuals, USD 250,000 if married filing jointly, USD 125,000 if married filing separately and USD 200,000 in other cases; estates and certain trusts, USD 12,300). Individuals also must pay a .9% tax on wages, compensation or self-employment income that exceeds a threshold amount (USD 250,000 if married filing jointly, USD 125,000 if married filing separately and USD 200,000 if single).
See under “Corporate taxation.”
Compliance for individuals
US tax rules include a comprehensive set of penalty and interest provisions for failure to pay and failure to file, with relevant amounts generally determined based on the specific form or code section at issue. See also “Disclosure” under “Anti-avoidance measures.”
Individuals are required to file a statement with their income tax returns to report interests in specified foreign financial assets if the aggregate value of those assets exceeds certain thresholds. Reporting thresholds vary based on whether a filer files a joint tax return or resides abroad, and are higher for married couples and taxpayers who qualify for foreign residency. For example, unmarried taxpayers living in the US have a filing requirement if the total value of specified foreign financial assets is more than USD 50,000 on the last day of the tax year, or more than USD 75,000 at any time during the tax year. Applicable assets include financial accounts, foreign stock and securities, interests in foreign entities and other financial instruments and contracts. Failure to disclose for any taxable year would subject the individual to a USD 10,000 penalty (with the continuation penalty capped at USD 50,000) and a 40% penalty on an understatement of tax attributable to nondisclosed assets.
Filing and payment
Tax is withheld at source from employment income. Individual self-assessment tax returns are due (without extension) by the 15th day of the fourth month following the end of the tax year (or the sixth month, in the case of certain nonresident aliens). An extension of six months is granted if the taxpayer makes an election on or before the due date for the return and pays the estimated final tax due.
The tax year is the calendar year, unless a fiscal year is elected. Any fiscal year must end on the last day of a calendar month.
Corporate taxation in Memphis
Teleport city rankings for corporate income tax
Domestic corporations are taxed by the federal government on worldwide income, including income from branches, whether or not repatriated. Profits of foreign subsidiaries usually are not taxed until they are repatriated as dividends, unless they are subject to current inclusion under the “subpart F” (see “Controlled foreign companies” below) or passive foreign investment company (PFIC) qualified electing fund rules. A foreign corporation is taxable on income effectively connected with the conduct of a trade or business in the US (“effectively connected income” or “ECI”) and on most non- ECI that is derived from US sources (see below under “Taxable income”). A US trade or business (e.g. a business conducted through a branch office located in the US) is relevant for this purpose if
Taxation of dividends
A dividends received deduction is available for dividends received by a corporate shareholder from a domestic corporation, at a rate of 70% (for a less-than 20% shareholder), 80% (for a noncontrolling shareholder owning 20% or more) or 100% (for distributions among members of the same affiliated group, provided other requirements are met).
A corporation (or partnership) is “domestic” for federal tax law purposes if it is created or organized in the US or under the laws of the US, one of the 50 states or the District of Columbia. If certain transactions are executed whereby a foreign corporation directly or indirectly acquires substantially all of the property held directly or indirectly by a domestic corporation (or substantially all of the property constituting a trade or business of a domestic partnership) (an “inversion”), the foreign corporation may, in certain cases, be treated as a domestic corporation for purposes of applying US tax provisions.
A corporation’s net operating losses generally may be carried back two years and forward 20 years.
Incentives include numerous credits for special types of activities (including R&D), a deduction for qualifying domestic production activities and various temporary “expensing” provisions to accelerate the benefits of depreciation deductions.
A flat tax of 35% applies to the taxable income of a corporation that has taxable income for the year equal to or greater than USD 18,333,333. Graduated rates, starting as low as 15%, apply to income of a corporation with total taxable income of less than USD 18,333,333. The gradations in the rate brackets that apply to a single corporation’s progressive amounts of income phase out as the corporation’s total taxable income rises from USD 100,000 to USD 18,333,333. For this purpose, members of a controlled group of corporations are treated similarly to a single corporation.
Alternative minimum tax
Domestic and foreign corporations are liable for a 20% alternative minimum tax (AMT) to the extent 20% of an adjusted measurement of income, computed without certain preferences, exceeds the regular tax on taxable income.
Foreign tax credit
Foreign income taxes may offset dollar for dollar the US income tax on taxable income, to the extent the US tax is allocated to foreign-source taxable income and additional conditions and limitations are satisfied. Creditable foreign income taxes include taxes borne by foreign subsidiaries on profits repatriated to a US corporate shareholder (“deemed-paid taxes”).
Domestic corporations are taxed on nearly all gross income (including, e.g. income from a business, compensation for services, dividends, interest, royalties, rents, fees and commissions, gains from dealings in property and income from a partnership), from whatever source derived, less allowable deductions for depreciation, amortization, expenses, losses and certain other items.
Gains recognized by domestic corporations on capital assets (e.g. assets held for investment) are taxed at the same rate as ordinary income. Capital losses may be deducted against capital gains, but not against ordinary income. Relief from gain recognition is available for sales or exchanges of business assets in certain situations. A foreign corporation generally is exempt from tax on capital gains, unless the gain is from the sale of a US real property interest or is connected with the operation of a US trade or business
The deduction for dividends received, which serves a similar function in the case of a participation in a subsidiary (but not a branch or a PE), generally is not available for dividends received from foreign corporations (except in certain cases where the foreign corporation has ECI).
Other taxes on corporations
Documentary stamp taxes may be imposed at the state level. "Stamp" taxes also may be imposed on items such as alcohol and tobacco.
Social security taxes are comprised of old age, survivors and disability insurance (OASDI), and “hospital insurance” (also known as “Medicare”). The taxes generally are borne equally by the employer and the employee, with the employer responsible for remitting each employee’s portion to the federal government. The OASDI tax is imposed on the first USD 118,500 of wages, at the combined rate of 12.4%. The Medicare tax is imposed on total wages, at the combined rate of 2.9% (plus an additional 0.9% for wages above a certain threshold).
The federal government imposes a variety of excise taxes, in addition to the social security taxes on wages described above. In
Transfer taxes may be imposed at the state level.
Real property tax
Tax generally is imposed by the local governments at various rates.
The employer must withhold federal, state and local income taxes from employee wages (where applicable) and must remit these taxes to the respective government agencies. The employer also must pay federal and state unemployment taxes (where applicable) and, as noted below, social security taxes. The federal unemployment insurance rate is 6% on the first USD 7,000 of each employee’s wages. State unemployment insurance, mandatory in all 50 states and the District of Columbia, varies widely. The employer receives a credit, up to a maximum of 5.4% (5.1% for states classified as “credit reduction states” that have outstanding FUTA loans), against the federal tax for amounts paid to state unemployment insurance funds.
Compliance for corporations
US tax rules include a comprehensive set of penalty and interest provisions for failure to pay and failure to file, with relevant amounts generally determined based on the specific form or tax code section at issue.
Taxpayers may request a private letter ruling, to be issued relative to a specific taxpayer and specific transaction or series of events. Prefilling agreements also are available.
A corporation may adopt as its tax year a fiscal year consisting of 12 months and ending (except in the case of a 52/53- week year) on the last day of any month. Special rules apply in determining the permitted or required taxable year of certain entities (e.g. CFCs).
For taxable years beginning after 31 December 2015, a C corporation generally must file its income tax return by the 15th day of the fourth month following the end of its taxable year (previously, the deadline was the 15th day of the third month following the end of its taxable year). Thus, the due date of the tax return (without extension) for C corporation filers with a calendar year end is 15 April rather than 15 March. However, for C corporations with a fiscal year ending 30 June, this change is delayed and will take effect for taxable years beginning after 31 December 2025.
Other taxation in Memphis
The US does not levy a federal value added tax or sales tax. Individual states and localities levy sales tax at various rates, subject to statutory requirements.
The US has numerous structure-specific regimes, including the anti-inversion and PFIC provisions.
The tax authorities may adjust income in related party transactions that are not at arm's length. Detailed regulations prescribe the scope, specific methodologies and principles. Documentation is required. Advance pricing agreements, both bilateral and unilateral, may be negotiated.
Corporations with USD 10 million or more in assets are required to file Schedule UTP, disclosing information about tax positions treated as “uncertain” for financial statement purposes.
Controlled foreign companies
Certain types of income of controlled foreign corporations (CFCs) are included currently in the taxable income of "US shareholders" (US persons that own at least 10% of the foreign corporation’s voting stock). A CFC is a foreign corporation, more than 50% (by vote or value) of whose stock is owned (directly, indirectly or by attribution) by “US shareholders.”
The “earnings stripping” rules restrict the ability of US (and certain foreign) companies to claim an interest deduction on debt owed to, or guaranteed by, certain non-US related persons (and other related persons exempt from US tax). The rules generally apply where the debt-to-equity ratio of the payer exceeds 1.5 to one and the payer’s “net interest expense” exceeds 50% of its “adjusted taxable income” for the year. Disallowed interest that is not currently deductible may be carried forward and deducted in future years if certain conditions are satisfied.
Foreign exchange control
While there are no general restrictions on remittances of profits, dividends, interest, royalties or fees to nonresidents, sanctions and embargoes apply to listed countries and entities, with restrictions on foreign payments, remittances and other types of contracts and trade transactions. Regulations are prescribed by the US Treasury and the Treasury’s Office of Foreign Assets Control maintains related lists. Extensive currency transaction reporting and recordkeeping requirements also apply.
Accounting principles/financial statements
The US Securities and Exchange Commission requires publicly traded companies to file their financial statements according to US GAAP, which is set by the Financial Accounting Standards Board (a nongovernmental entity) for public and private companies and nonprofits.
Principal business entities
These are the corporation, limited liability company, business trust, partnership and limited partnership, usually created under the laws of one of the 50 states or the District of Columbia. US business also may be carried on directly by an individual (sole proprietorship) or a US branch of a foreign business entity.
Royalties received by a foreign corporation for the use of property in the US are subject to a 30% withholding tax, unless the rate is reduced under a tax treaty or the income is ECI.
The gross amount of dividends paid by a domestic corporation to a foreign corporation generally is subject to a 30% withholding tax, unless the rate is reduced under a tax treaty or the income is ECI. Dividends paid by a narrow class of “grandfathered” 80/20 companies (a domestic corporation that derives at least 80% of its income for the three-year testing period from active foreign business (its own or its subsidiaries)) existing before 2011 are eligible for relief from gross-basis tax in the hands of foreign corporations.
Branch remittance tax
The US imposes a branch profits tax, as discussed under the “Taxable income” section of “Corporate taxation.”
Any other income, gain or profit characterized as “fixed or determinable, annual or periodic” (FDAP) is subject to a 30% withholding tax, unless the rate is reduced under a tax treaty or the income is ECI. A nonfinal tax also must be withheld on proceeds from the disposition of US real property interests (10%) and by partnerships on their ECI allocable to foreign corporate partners (35%).
The gross amount of interest received by a foreign corporation from US sources generally is subject to a 30% withholding tax, unless the rate is reduced under a tax treaty or a statutory exemption applies. Interest that is ECI and certain interest on portfolio debt obligations, short-term obligations, bank deposits, bonds issued by state or local governments and debts of grandfathered 80/20 companies generally may be exempt from withholding tax.
Technical service fees
There is generally only a tax on fees for personal services, including technical services, if the services are performed within the US. If the services are performed in the US, such fees typically would be ECI.
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