US Business Tax Guide

U.S. Business Tax Guide

Scope & audience

This page summarizes core federal rules for common U.S. business entities—C corporations, S corporations, partnerships/LLCs taxed as partnerships, and certain foreign corporations with U.S. connections. It also flags frequent state & local items (sales/use tax, franchise/income tax). It is general guidance; specific facts and state law can change outcomes.

Accounting methods (cash vs. accrual)

Business income is reported under a consistent accounting method. Many small businesses may use the cash method; larger or more complex businesses often use accrual. “Small business taxpayer” thresholds under IRC §448(c) are indexed for inflation (for example: $30M average annual gross receipts for tax years beginning in 2024; $31M for 2025). Aggregation rules can combine related entities for the test. Under accrual, income is recognized when earned and expenses when incurred to match to the proper year.

Entity classification & who pays the tax

• C corporation (Form 1120): pays federal income tax at a flat 21% rate on taxable income. Shareholders are taxed again on dividends (double taxation).
• S corporation (Form 1120-S): generally a pass-through; items flow to shareholders (Schedule K-1/K-3). Eligibility and one-class-of-stock requirements apply.
• Partnership / multi-member LLC (Form 1065): pass-through; items flow to partners (K-1/K-3). Self-employment and basis/at-risk/passive rules apply.
• Single-member LLC (SMLLC): by default disregarded for income tax (reported by the owner), but may have separate reporting (e.g., Form 5472 when foreign-owned) and separate employment/excise obligations.

Domestic vs. foreign corporations

A domestic corporation is created or organized in the U.S. or under a U.S. state’s law. A foreign corporation is any corporation that is not domestic. Domestic corporations are subject to U.S. corporate tax on worldwide income (with numerous sourcing, expense allocation, credit, and treaty rules).

Foreign corporations: ECI vs. FDAP (Form 1120-F)

Foreign corporations with U.S. connections are taxed differently depending on the income:

• ECI (effectively connected income with a U.S. trade or business): generally taxed on a net basis at corporate rates via Form 1120-F.
• FDAP (fixed/determinable annual/periodical) that is not ECI: generally subject to gross-basis withholding at 30% unless reduced by treaty or statute, reported to recipients on Form 1042-S by withholding agents.

Information returns for foreign ownership (Form 5472)

A 25% foreign-owned U.S. corporation and a foreign corporation engaged in a U.S. trade or business may need to file Form 5472 for reportable related-party transactions. In addition, a foreign-owned U.S. disregarded entity (e.g., many single-member LLCs) often must file a pro-forma Form 1120 with Form 5472 attached when it has reportable transactions—even if it otherwise has no income tax return requirement. Penalties for late/incomplete filings are significant.

Return types & due dates (calendar-year, unless noted)

• Form 1120 (C corp): due the 15th day of the 4th month after year-end (Apr 15 for calendar-year). Exception: fiscal years ending June 30 file by the 15th day of the 3rd month after year-end.
• Form 1120-S (S corp) & Form 1065 (partnership): due the 15th day of the 3rd month after year-end (Mar 15 for calendar-year).
• Extensions: Form 7004 generally provides a 6-month filing extension (it does not extend time to pay).

State & local taxes (SALT)

Most states impose corporate income or franchise taxes and minimum fees; pass-throughs may face entity-level taxes in some states (including elective PTE taxes). State residency/nexus rules, apportionment, and credits differ widely.

Sales & use tax (no federal VAT)

There is no federal VAT. States and many localities levy sales/use tax on taxable goods/services. After Wayfair, many states apply economic nexus thresholds to remote sellers and marketplace facilitators. Registration, collection, filing, and exemption certificate management are state-specific.

Employment taxes & information reporting

Payroll tax registration and deposits (Forms 941/940, state withholding and unemployment) are separate from income tax filings. Payments to certain vendors require 1099-NEC/MISC reporting; backup withholding can apply if payee TIN documentation is missing/incorrect.

Records, elections & penalties

Choose methods and elections carefully (e.g., method of accounting, depreciation, §163(j) limitation, inventories, S-election). Maintain books/records supporting income, deductions, transfer pricing, and related-party transactions. Late/incorrect filings can trigger penalties, interest, and loss of favorable treatments.