How Do Businesses Pay Taxes in the United States: Benefits and Comparison with Latin America

If you are considering expanding your business or starting a company in the United States, understanding how businesses are taxed in the country is essential for optimizing your finances. The U.S. offers a relatively competitive and flexible tax environment, making it an attractive destination for international entrepreneurs, including those from Latin America.

In this blog, we will analyze how businesses are taxed in the United States, compare its advantages to Latin American tax systems, and provide key data and benefits to help you make strategic financial decisions.

1. Federal and State Taxes: How Businesses Are Taxed in the U.S.

The U.S. tax system operates on two levels: federal and state taxes. Businesses must comply with tax obligations at both levels, although the rates and types of taxes can vary from one state to another.

Federal Corporate Income Tax

The primary federal tax is the Federal Corporate Income Tax, which taxes business income at a flat rate of 21% since the 2018 tax reform. This tax applies to all C-Corporations, which are typically chosen by businesses looking to issue shares and raise capital.

Key Facts:

• Flat 21% Rate: Unlike other countries with progressive tax rates, the U.S. maintains a fixed corporate tax rate regardless of business size.
• Benefit: Before 2018, the tax was progressive and reached up to 35%, making the current 21% rate much more competitive globally.

State Taxes

In addition to the federal tax, each state can establish its own corporate income tax.

• States like Wyoming and Texas have no state income tax.
• States like California impose rates ranging between 8% and 12%.

2. Tax Comparison: United States vs. Latin America

The main difference between the U.S. and Latin American tax systems lies in the rates and overall fiscal environment. While the U.S. uses a more uniform and competitive system with its 21% federal rate, many Latin American countries face higher rates and a heavier tax burden for businesses.

Corporate Tax Rates in Latin America:

• Argentina: Up to 35% corporate tax, plus a 7% tax on dividends.
• Mexico: A 30% tax on corporate income and an additional 10% tax on distributed dividends. If no tax treaty exists, the rate can reach 35%.
• Colombia: Corporate tax at 35%, plus up to 10% on dividends.

Benefits of Paying Taxes in the U.S.:

• Competitive Rates: The flat 21% rate in the U.S. is significantly lower than in Argentina or Colombia.
• Simplified System: The U.S. offers a less bureaucratic tax system, making it easier to file taxes and plan financially.
• Flexibility: States like Wyoming and Texas have no state income tax, further reducing the overall burden.

3. Types of Business Structures and Their Taxation in the U.S.

Different business structures in the U.S. come with distinct tax treatments. The most common are:

C-Corporations

• Taxed at the corporate level.
• Dividends distributed to shareholders are taxed again at the individual level, resulting in double taxation.
• Best suited for businesses seeking external investors and rapid growth.

S-Corporations

• Avoid corporate-level taxes.
• Income “passes through” to shareholders and is taxed at the individual level, avoiding double taxation.
• Ideal for small businesses.

LLCs (Limited Liability Companies)

• Offer flexibility in taxation. Owners can choose to be taxed as a C-Corp, S-Corp, or as a pass-through entity where income is reported on personal tax returns.

4. Tax Benefits for Foreign Businesses in the U.S.

In addition to relatively low tax rates, the U.S. provides various fiscal benefits to foreign businesses operating in the country. Entrepreneurs from Latin America can leverage these advantages to expand into the U.S. market.

Tax Credits and Deductions:

• Interest Deduction: Businesses can deduct interest paid on commercial debt, a benefit for companies financing growth.
• Accelerated Depreciation: Companies can deduct capital asset costs through accelerated depreciation, reducing taxable income.

State Incentives:

‍Many states, such as Florida, Delaware and Wyoming, offer additional incentives to attract foreign businesses, including low registration costs and favorable fiscal conditions.

5. Key Differences Between the U.S. and Latin American Tax Systems

1. Simplified Fiscal System:
   The U.S. tax system is more straightforward and less bureaucratic, making tax filings and financial planning easier.
2. Lower Tax Burden:
   Compared to countries like Argentina, Mexico, or Colombia, U.S. taxes are generally lower at both federal and state levels, providing businesses with more flexibility to reinvest in growth.

Conclusion

Paying taxes in the United States offers multiple advantages over the tax systems in Latin America, from competitive rates to additional benefits and a more streamlined fiscal environment. The U.S. is an attractive destination for entrepreneurs and foreign businesses looking to expand their presence in a global market.

If you are considering registering your company in the United States or want to learn more about how taxation works in the country, contact us. We can help you structure your business to optimize your tax burden and make the most of available fiscal benefits.