Corporate tax

In today’s interconnected global economy, expanding business operations across borders has become increasingly common. Many Israeli entrepreneurs are exploring opportunities in the United States, drawn by its vast market and diverse business prospects. However, navigating the U.S. corporate tax landscape requires careful planning to optimize tax efficiency and ensure compliance with both federal and state regulations.

1. Selecting the Appropriate Business Entity

Choosing the right business structure is crucial, as it directly impacts taxation, liability, and operational flexibility. The primary business entities in the U.S. include:

• C-Corporation (C-Corp): A separate legal entity from its shareholders, offering limited liability protection. C-Corps are subject to federal corporate tax at a flat rate of 21% on all taxable income. taxfoundation.org
  Additionally, many states impose their own corporate taxes, which vary by jurisdiction. For instance, Louisiana reduced its corporate income tax rate to 5.5% effective January 1, 2025. taxfoundation.org
• Partnership: An arrangement where two or more individuals share ownership and operational responsibilities. Partnerships are generally not taxed at the entity level; instead, income and losses pass through to partners, who report them on their personal tax returns. This structure requires careful attention to profit-sharing arrangements and individual tax obligations.
• Limited Liability Company (LLC): Combining elements of partnerships and corporations, LLCs provide flexibility in management and taxation. By default, single-member LLCs are treated as disregarded entities for tax purposes, while multi-member LLCs are taxed as partnerships. However, LLCs can elect to be taxed as C-Corps if beneficial. It’s essential to consult with tax professionals to determine the most advantageous classification based on specific business goals.

2. Importance of Incorporation Location

The state in which a business is incorporated significantly influences its tax obligations and regulatory environment. Each state has unique laws concerning corporate taxation, fees, and operational requirements. For example, Delaware is renowned for its business-friendly laws and efficient incorporation process, making it a popular choice for many corporations. Conversely, states like California impose higher taxes and more stringent regulations. Therefore, selecting a state that aligns with your business strategy and operational needs is vital.

The incorporation procedures vary depending on the type of organization and state, but the main stages include:

1. Choosing a Corporation Name

When starting a corporation in the U.S., the name chosen must comply with intellectual property laws, ensuring that it doesn’t conflict with existing trademarks or business names. A unique name is required, and the appropriate corporate designation (such as Corp., Inc., or Corporation) must be included in the official business name.

2. Formulating the Corporation’s Basic Documents

To formally establish a corporation, it’s necessary to draft foundational documents such as the articles of incorporation (or certificate of incorporation). These documents outline the company’s purpose, structure, and governing rules. Some states or business types may also require additional regulations regarding legal relationships between shareholders, directors, and the company itself. Proper documentation ensures compliance with state-specific regulations and sets the groundwork for operations.

3. Payment of Fees and Registration

When incorporating a business, fees must be paid for registration with the state. For a Limited Liability Company (LLC), there may be additional steps such as holding an initial shareholder meeting, appointing directors, and issuing shares. Each state may have specific requirements that businesses need to meet during incorporation, which must be carefully reviewed to avoid penalties for non-compliance.

4. Issuing an Employer Identification Number (EIN)

The EIN, or Employer Identification Number, is critical for any business entity operating in the U.S. It serves as the business’s taxpayer identification number for federal and state tax reporting purposes. Even businesses without employees generally require an EIN, making this a crucial step in corporate formation.

• Do you need an EIN? Most businesses need one, especially corporations, partnerships, and LLCs. However, some exceptions apply, and it’s important to determine whether an EIN is necessary based on the structure of your business. For instance, sole proprietors without employees may not need an EIN. If an EIN is no longer needed (for example, if a business is dissolved or ceases operations), an official cancellation request must be submitted to the IRS.

Stages of association (the left column refers to steps relevant to C-CORP)

Whether a business is obligated to obtain an EIN depends on various factors. It is crucial to determine in advance whether an EIN is necessary, as canceling it requires an official application to the tax authorities. Proper tax planning, including selecting the appropriate corporate structure and location, ensures a sound investment and prevents exposure to penalties resulting from a lack of awareness of tax regulations.

Our team has extensive experience in these matters and is happy to assist with any questions.

2. Reporting Obligations and Deadlines

Timely and accurate tax reporting is essential to avoid penalties and interest. Key federal tax forms and their typical due dates are as follows:

• Form 1120 (U.S. Corporation Income Tax Return): C-Corps use this form to report income, gains, losses, deductions, and credits. For calendar-year corporations, the due date is April 15, 2025. If the fiscal year ends on June 30, the due date is October 15, 2025.
  irs.gov
• Form 1065 (U.S. Return of Partnership Income): Partnerships file this form to report income, deductions, gains, and losses. The due date for calendar-year partnerships is March 15, 2025. An extension can be requested, extending the deadline to September 15.
  irs.gov
• Form 1120-S (U.S. Income Tax Return for an S Corporation): S Corporations must file this form to report income, deductions, and other pertinent information. The due date is March 15, 2025, with an extension available until September 15.
  irs.gov

It’s crucial to adhere to these deadlines to avoid late filing penalties, which can be substantial. For instance, failing to file Form 1120 by the due date, including extensions, may result in a penalty of 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax.irs.gov

3: Taxation of Capital Gains and Dividends

Understanding how different entities are taxed on capital gains and dividends is essential for effective tax planning:

• C-Corporations: Subject to a flat 21% federal tax rate, C-Corps do not benefit from preferential rates on capital gains. Additionally, dividend distributions to shareholders are subject to double taxation—once at the corporate level and again at the individual level when dividends are distributed.
• Partnerships and LLCs: Income, including capital gains, passes through to individual partners or members, who report it on their personal tax returns. Long-term capital gains (on assets held over one year) are generally taxed at favorable rates, depending on the individual’s taxable income.
• Individuals: Qualified dividends are typically taxed at lower rates than ordinary income, with rates ranging from 0% to 20% based on taxable income. Long-term capital gains are also taxed at these preferential rates.

4: New Tax Obligations to Be Aware Of

The U.S. tax landscape has undergone significant changes in recent years, notably the Tax Cuts and Jobs Act (TCJA) of 2017, which:

• Reduced the corporate tax rate from a graduated scale with a top rate of 35% to a flat 21%.  bipartisanpolicy.org
• Introduced measures like the Global Intangible Low-Taxed Income (GILTI) tax, affecting U.S. shareholders of controlled foreign corporations (CFCs). GILTI aims to tax foreign income that is not subject to significant taxation abroad.

As of 2025, discussions continue regarding potential adjustments to corporate tax rates and structures. For instance, Vice President Kamala Harris has expressed support for increasing the corporate tax rate to 28%, aligning with certain budget proposals.

Summary

Expanding business operations into the United States presents significant opportunities. However, tax planning is crucial to ensuring compliance and minimizing liabilities.

The 2018 tax reform reduced corporate tax rates but also introduced new tax burdens on companies, making corporate taxation more complex.

To avoid unnecessary tax exposure, consult with our team of US tax experts in Israel for professional guidance and strategic tax planning.