13 March 2023
Tax can be complicated and expanding your business into a new country makes it even more complex. The US is no exception. There are some fundamental differences in our tax systems to be aware of – for example in the UK there is one level of corporate income tax, whereas in the US you may be liable to Federal, State and City taxes.
So, when considering an expansion into the US being aware of the tax landscape and having a tax strategy is essential. Without one, you could create additional tax filing obligations and administration that can get expensive.
Here are the top 5 tax considerations when expanding into the US:
1. The entity choice
The decision of whether to form a Limited Liability Company (LLC) or a Corporation (Inc.) is often dictated by your legal team. But, even if lawyers are driving the decision, its important to keep your tax advisors in the loop.
From a tax perspective, if the right elections are made, there is not a huge difference between having an LLC or an Inc. However, by default a wholly owned LLC should be treated as a ‘pass-through entity’, and therefore isn’t subject to federal income tax, instead its members/shareholders are. Corporations are taxed as separate legal entities, and the corporation is responsible for paying tax on its profits and potentially on the dividends paid to shareholders.
Therefore, if the right entity choice for you is an LLC, it may be necessary to make a “check the box (CTB) election”. A CTB election will result in the LLC being taxed in the same way as an Inc. i.e. the LLC will be subject to US tax, rather than its shareholders.
A popular choice for businesses expanding into the US is to establish an LLC incorporated under Delaware Law. This is mainly driven by its favourable company law, but also, it also does not impose taxes on entities incorporated in Delaware that do not do business in the state.
2. Keeping transfer pricing front of mind
An appropriate transfer pricing policy needs to be considered from day one and be aligned to the operating model of your business. Transfer pricing rules in the US are not subject to any de minimis exemptions that you may be familiar with in the UK and, therefore, appropriate documentation should be prepared to support the transfer pricing policy, as this can be requested by the US tax authorities.
3. Navigating state tax
Although you are expanding into just one country, it’s easier to think of the US as 50 different jurisdictions for tax purposes. Whilst there is a federal tax, much of tax and legal management is delegated to a state level, sometimes even to city level, and each state has its own rules when it comes to tax. It is therefore important to do your research on the state you plan to operate and expand into.
Whether you are subject to state income tax will typically depend on whether your business has created “nexus” within that state. Nexus is having a sufficient connection to trigger a state income tax obligation, and this could be determined by where your employees, customers or stock are located. The nexus rule for one state may be different from another, adding to the complexity of your tax compliance obligations.
4. Navigating sales and use tax
Sales and use taxes are also levied at state level and are triggered once nexus has been established. However, the nexus rules for sales and use tax may be different to those for state income tax.
For example, sales and use tax nexus can be created in a state even if there is no physical presence. Economic nexus rules have been widely adopted across the US and mean that nexus for sales and use tax can be triggered where certain sales thresholds are breached: in New York the economic nexus threshold is $500,000 per year in gross revenue and 100 separate transactions. These nexus rules will apply to both US and non-US businesses.
Having an experienced tax professional on hand will be critical to understand your filing obligations and, where exemptions may be available.
There are a plethora of tax incentives and credits in the US available to UK businesses looking to expand. The credits vary widely by state and are granted to encourage job creation, investment, research and development, and green energy.
The way in which most credits and incentives are allocated is delegated to a state and city level, rather than at federal level. It is therefore well worth doing your research on the type of credits that would most benefit your business. Engaging with officials at state level and understanding what credits and incentives they can provide before making any decisions can be beneficial in maximising credits you receive.
Although the tax obligations when expanding into the US are complex and intricate, it is worth the effort to have access to the largest economy in the world.