United States - Corporate - Income determination (2024)

Inventory valuation

Inventories generally are stated at either cost or the lower of cost or market. Items may be deemed to be sold on a first in first out (FIFO) or last in first out (LIFO) basis, or through specific identification. LIFO may be elected for tax purposes on a cost basis only and, if used for tax, must also be used in financial reports issued to shareholders and creditors. The LIFO method is particularly beneficial in times of high inflation; however, many taxpayers do not use it because of the financial reporting consistency requirement. International Financial Reporting Standards (IFRS) do not permit use of LIFO.

The uniform capitalisation(UNICAP) rules require taxpayers to capitalise the direct and indirect costs of producing property or acquiring property for resale to inventory and to the basis of self-created property. Capitalisable costs include certain coststhat might be expensed as current operating costs for financial reporting (e.g. a portion of general and administrative costs, cost variances) and differences between book and tax costs (i.e.the excess of tax depreciation over financial statement depreciation).

At the end of the tax year, costs allocable to inventory that is deemed sold is subtracted from gross receipts as costs of goods sold to compute gross income. Amounts included in cost of goods sold are not subject to the BEAT unless the payments are made to an ‘expatriated entity'.

Capital gains

In general, gains or losses on the sale or exchange of capital assets held for more than 12 months are treated as long-term capital gains or losses. Gains or losses on the sale or exchange of capital assets held for 12 months or less are treated as short-term capital gains or losses. The excess of net long-term capital gain over net short-term capital loss is considered net capital gain. Capital losses are allowed only as an offset to capital gains. For corporations, an excess of capital losses over capital gains in a tax year generally may be carried back three years and carried forward five years to be used to offset capital gains.Under current law, the tax rate for corporate capital gain is the same as ordinary income.

For dispositions of personal property and certain non-residential real property used in a trade or business, net gains are first taxable as ordinary income to the extent of the depreciation/cost recovery, with any remainder generally treated as capital gain. For other trade or business real property, net gains generally are taxed as ordinary income to the extent that the depreciation or cost recovery claimed exceeds the straight-line amount, with any remainder treated as capital gain.

An exception to capital gain treatment exists to the extent that losses on business assets were recognised in prior years. A net loss from the sale of business assets is treated as an ordinary loss. Future gains, however, will be treated as ordinary income to the extent of such recharacterised losses recognised in the five immediately preceding years.

Dividend income

A US corporation generally may deduct 50% of dividends received from other US corporations in determining taxable income. The dividends received deduction (DRD) is increased from 50% to 65% if the recipient of the dividend distribution owns at least 20% but less than 80% of the distributing corporation. Generally, dividend payments between US corporations that are members of the same affiliated group (see the Group taxation section) are deferred or eliminated until a transaction with a third party occurs. With minor exceptions, a US corporation may not deduct dividends it receives from a foreign corporation.

A 100% DRD is provided for the foreign-source portion of dividends received by a US corporation from certain foreign corporations with respect to which it is a 10% US shareholder.

Stock dividends

A US corporation can distribute a tax-free dividend of common stock proportionately to all common stock shareholders. If the right to elect cash is given, all distributions to all shareholders are taxable as dividend income whether cash or stock is taken. There are exceptions to these rules, and extreme caution must be observed before making such distributions.

Interest income

Interest income is generally includible in the determination of taxable income.

Rental income

Rental income is generally includible in the determination of taxable income.

Royalty income

Royalty income is generally includible in the determination of taxable income.

Partnership income

The income (loss) of a partnership passes through to its partners so that the partnership itself is not subject to tax. Thus, each partner generally includes in taxable income its distributive share of the partnership's taxable income (or loss).

Foreign income (Subpart F income) of US taxpayers

In the case of controlled foreign companies (CFCs), certain types of undistributed income are taxed currently to certain US shareholders (Subpart F income). More specifically, in situations in which a foreign corporation is a CFC, every US shareholder owning 10% or greater of the total value of shares of all classes of stock or the total combined voting power of all classes of stock entitled to vote of such a foreign corporation (US shareholder) must include in gross income its pro rata share of the Subpart F income earned by the CFC, regardless of whether the income is distributed to the US shareholders.

With certain exceptions, Subpart F income generally includes passive income and other income that is readily movable from one taxing jurisdiction to another (i.e. income that is separated from the activities that produced the value in the goods or services generating the income). In particular, Subpart F income includes insurance income, foreign base company income, and certain income relating to international boycotts and other violations of public policy.

There are several subcategories of foreign base company income, the most common of which are foreign personal holding company income (FPHCI), foreign base company sales income (FBCSI), and foreign base company services income (FBCSvI). FPHCI is passive income (e.g. dividends, interest, royalties, and capital gains). FBCSI and FBCSvI are sales and services income earned in cross-border, related-person transactions. There are a number of common exceptions that may apply to exclude certain income from the definition of Subpart F income, including exceptions relating to highly taxed income, certain payments between related parties, and active business operations.

In situations in which the US shareholder is a domestic corporation, the domestic corporate shareholder may claim a foreign tax credit (discussed below) for foreign taxes paid or accrued by a CFC. Furthermore, certain rules track theearnings and profitsof a CFC that have been included in the income of US shareholders as Subpart F income to ensure that such amounts (known as previously taxed income or PTI) are not taxed again when they are actually distributed to the US shareholders.

P.L. 115-97 also requires a US shareholder to include in income the 'global intangible low-taxed income' (GILTI) of its CFCs, effective for tax years of foreign corporations beginning after 2017. Despite the name, this provision is not limited to low-taxed income from intangible assets. Rather, it applies to the shareholder’s pro rata share of the CFC’s total net income (apart from certain specified categories, such as Subpart F income and income effectively connected with a US trade or business), less a deemed 10% return on the CFC’s tangible assets.

The full amount of GILTI is includible in the US shareholder’s income, and generally is then reduced through a 50% deduction in tax years beginning after 31 December 2017 and before 1 January 2026, and a 37.5% deduction in tax years beginning after 31 December 2025. A corporate taxpayer generally also can claim a credit for 80% of the foreign taxes associated with GILTI.