United States: corporate tax guide

What the tax system covers

Domestic corporations are generally within federal income tax on worldwide income, subject to foreign-income relief and anti-deferral rules. A corporation, partnership and disregarded LLC are different tax classifications. State and local taxes must be modelled separately.

When a company becomes tax resident

Federal domestic status ordinarily follows creation or organization in the United States or under US or state law. Entity classification is a separate question: a domestic LLC may be a corporation, partnership or disregarded entity for federal tax purposes. A foreign owner or foreign board does not convert a domestic corporation into a foreign corporation. Conversely, a foreign company can have US-source or effectively connected income without becoming domestically incorporated.

Rates and the tax base

21% federal corporate income tax. The ordinary C-corporation federal rate is 21%. State and local tax, corporate alternative minimum tax, foreign-income provisions and distribution-level shareholder tax are additional considerations; pass-through entities have different treatment.

Outbound dividends, interest and royalties

Dividends: 30%. Default gross withholding on US-source corporate dividends paid to a foreign beneficial owner, before treaty relief. Effectively connected income and specialized distributions require different analysis.

Interest: 30%; exemptions common. Default US-source FDAP interest rate before relief. Qualifying portfolio interest and certain bank-deposit interest are excluded; ownership, documentation and instrument terms must be checked.

Royalties: 30%. Default gross withholding on US-source royalties, ordinarily sourced by where the intellectual property is used. Treaty reductions and effectively connected business income are separate.

A U.S. LLC is a legal form, not a tax conclusion

The company’s classification and activity must be examined alongside the owner’s country of residence. A structure can be treated one way by the United States and differently abroad. Treaty relief, foreign tax credits and timing mismatches may therefore require work in both jurisdictions.

Do not choose an entity solely because a provider says it is “tax-free”. Ask which taxpayer, which income and which filing obligations the statement actually describes.

Classify the entity before calculating tax

A single-member LLC’s default disregarded status is a federal income-tax classification; it does not erase the company under state law. A multi-member LLC commonly defaults to partnership treatment, and an eligible entity can elect corporation treatment. A foreign owner must also ask how the residence country classifies the same entity.

A US corporation’s federal tax is generally computed at 21% under the Form 1120 instructions, before relevant adjustments and state taxes. Distributions to foreign shareholders can create another withholding layer. Choosing corporate treatment merely to simplify one filing may therefore change the economics substantially.

Service source, ECI and withholding are different tests

The normal service-source rule follows where the work is physically performed. A US customer paying an overseas consultant into a US account does not, solely for that reason, turn the service into US-source income. Workdays in the United States, employees, agents and an actual business presence can change the analysis.

Effectively connected income is generally taxed after allowable deductions under the applicable regime. US-source passive FDAP income commonly faces 30% gross tax or a lower treaty rate. Do not apply the service-source rule to royalties, inventory, real estate or dividends without reviewing the different rules for those categories.

Foreign-owned LLC reporting can exist without income tax

A foreign-owned US disregarded entity with reportable related-party transactions must generally file Form 5472 with a pro forma Form 1120. Owner funding, withdrawals, formation and dissolution transactions may matter. The IRS instructions impose a USD 25,000 penalty for failure to file correctly, with additional penalties for continued failure after notice.

Obtain the EIN, identify the related parties and preserve transaction records from formation. A dormant label or zero revenue does not by itself establish a filing exemption. Form 7004 may extend the filing deadline when properly submitted, but an extension does not excuse missing records or other taxes.

BOI, tax returns and bank checks remain separate

The August 2026 FinCEN final rule exempts US-created entities and US persons from the revised CTA reporting obligation. A foreign entity registered in a US jurisdiction can still require analysis under the foreign-reporting-company rules. Neither exemption is permission to conceal ownership from banks or omit an IRS return.

The final structure should name who prepares each federal and state filing and who monitors activity changes. Hiring in a new state, moving the owner, adding a partner or changing a platform’s contracting entity can require a fresh analysis even when the original company stays registered in the same state.

An LLC is a legal form, not a zero-tax rule

Federal classification depends on ownership and elections. A single-member eligible entity is commonly disregarded by default; a domestic multi-member LLC is commonly a partnership by default, while corporate treatment can be elected. Those classifications change who reports the income and which filings apply.

A foreign-owned disregarded entity can still need Form 5472 attached to a pro forma Form 1120 for reportable related-party transactions. Contributions and distributions can be reportable even when sales are small. The owner’s country may classify the LLC differently and may tax its income under residence, attribution or anti-deferral rules.

Current transparency rules and the continuing filing burden

FinCEN’s August 2026 final rule removes Corporate Transparency Act reporting for US-created entities and US persons, while relevant foreign reporting entities remain within the revised regime. This change does not repeal IRS information returns, state requirements or bank identity checks.

For a serious international business, the useful output is a recurring compliance schedule: entity returns, owner returns, related-party reports, state renewals, registered-agent service and account reviews. Offshore Capitalist can coordinate the formation and operating setup after the intended use and tax treatment have been established.

Moving a business abroad: identify the taxable transfer

A restructuring needs a transaction-by-transaction analysis. Identify the US tax classification of each entity before and after every step, what property or rights move, who transfers them, what consideration is received and whether an otherwise tax-deferred incorporation, liquidation or reorganization provision applies. The IRS specifically notes that a check-the-box election can itself create a deemed transfer to a foreign corporation. A diagram showing only the final ownership structure will miss that event.

Section 367(a) can override nonrecognition for appreciated property transferred by a US person to a foreign corporation in the covered exchanges. Gain recognition is not the same as a universal departure charge on every asset whenever a director travels. The legal transaction, tax classification and identity of the transferor matter. The former active foreign trade-or-business exception was removed for transfers after 31 December 2017; a genuine operating business abroad does not revive it.

A hypothetical US corporation contributes machinery with an adjusted tax basis of USD 400,000 and fair market value of USD 700,000 to its foreign subsidiary in an otherwise qualifying section 351 exchange. Assuming the ordinary section 367(a) rule applies and no applicable exception changes the result, USD 300,000 is recognized. This is the amount of gain, not the final tax bill. Character, tax attributes and other provisions must then be applied. Transferring a second asset at a built-in loss does not automatically permit that loss to offset the first asset’s gain under section 367(a).

Intellectual property and shares follow different rules

Covered intangible property transferred in a section 351 or 361 exchange follows section 367(d), rather than the ordinary section 367(a) calculation. The mechanism generally treats the transferor as receiving contingent payments and requires annual income inclusions reflecting an arm’s-length charge over the intangible’s useful life. The definition expressly includes goodwill, going-concern value and workforce in place for post-2017 transfers. Assigning a low book value to a developed business does not answer the valuation question.

Stock and securities have specific exceptions and conditions. Some transfers can obtain nonrecognition through a gain recognition agreement; that is a continuing compliance commitment, not a blanket exemption for any share contribution. Section 367(b) can also require recognition of relevant accumulated earnings in a transaction that avoids current section 367(a) gain. Analyse each provision rather than assuming that satisfying one exception settles the entire restructuring.

Prepare separate schedules for tangible assets, stock, receivables, intellectual property and any deemed transfers. For each, document adjusted basis, current value, the valuation method, the governing provision and the expected reporting. The example above concerns tangible property only; an intellectual-property transfer should not be modelled simply by replacing the machinery value in the same calculation.

Form 926 and the implementation file

Where required, Form 926 accompanies the US transferor’s income tax return for the year containing the transfer. Reporting is not limited to transfers that generate immediate tax. A cash transfer to a foreign corporation is reportable when the stated ownership or payment threshold is met: at least 10% of voting power or value immediately after the transfer, or more than USD 100,000 transferred during the relevant 12-month period. Apply the attribution and aggregation rules rather than testing each wire in isolation.

The published instructions state a section 6038B failure penalty equal to 10% of the property’s fair market value, generally capped at USD 100,000 unless intentional disregard applies, subject to the reasonable-cause standard. A missing report can also extend the assessment period. This illustrates why implementation should include the filing calendar and supporting attachments, not only incorporation documents.

Retain the dated transaction sequence, entity elections, valuations, basis records, agreements and the reporting conclusion for each step. If a gain recognition agreement is used, assign responsibility for its continuing obligations. The sources consulted are the IRS manual’s 2020 revision and Form 926 instructions revised in November 2018, still linked by the IRS when checked on 12 October 2026. They establish these mechanisms; a transaction-specific review must check later legislation, regulations and filing-year instructions.

Foreign companies and income attribution

CFC ownership attribution, Subpart F and other current-inclusion rules can apply to U.S. shareholders; individual and corporate outcomes differ.

Departure, migration and continuing obligations

Outbound transfers can trigger gain under section 367 even when a domestic incorporation or reorganization would have been tax-deferred. Section 367(a) generally recognizes built-in gains on covered appreciated property transferred by a US person to a foreign corporation; section 367(d) separately governs covered intangible transfers. This is a transaction-based corporate migration/asset-transfer regime, distinct from an individual’s section 877A expatriation tax. Stock exceptions, deemed transfers, asset classification and reporting must be tested separately.