The United States levies taxes on the worldwide income of its citizens, residents, and business entities. The United States, the Netherlands, and Germany are some of the few countries that impose taxes on the basis of worldwide income; most other countries tax income only if it is earned within their territorial borders. For U.S. tax purposes, an individual is considered a
U.S. resident if the person (1) has been issued a resident alien card (green card); (2) has been physically present in the United States for 183 days or more in the calendar year; or (3) meets the cumulative presence test: this test may be met if the foreign individual was present in the United States for at least 183 days out of the three-year period ending in the current year. In establishing cumulative presence, days present in the current year are added to one third of the days present in the preceding year and one sixth of the days in the second preceding year. An alien is treated as a resident if the total equals or exceeds 183 days.
Example of cumulative presence test: If Jim (a U.K. citizen) was in California for 66 days in 2010, 33 days in 2011, and 162 days in 2012, he would be considered a U.S. resident for 2012 (162 + 33/3 + 66/6 = 184 days). Jim may, however, rebut this presumption by showing that he has a closer connection to the United Kingdom than the United States or that his regular place of business is in the United Kingdom.
A company incorporated in the United States is subject to tax on its worldwide income, as are U.S. citizens and residents. A partnership is not treated as a separate legal entity, and, hence, it does not pay taxes. Such income is taxed in the hands of the individual partners, whether natural or legal entities.
Suppose Joan, a U.S. citizen, has an export-import business as a sole proprietor and also works as manager in a fast-food restaurant. The profit from the business is added onto her employment income. If the business operates at a loss, the loss will be subtracted from her employment or other income, thus reducing the tax payable.
As illustrated in example 3.1B, a corporation’s income is subject to double taxation, first at the corporate level and then on the individual income tax return. Such incidences of double taxation are often reduced when deductions and other allowances are applied against taxable income. If earnings are left in the business, the tax rate may be lower than what would be paid by a sole proprietor. If the export-import business is incorporated as an S corporation, earnings are taxed only once, at the owner’s individual tax rate. Payment of Social Security tax is also avoided by withdrawing profits as dividends.
Source: Seyoum Belay (2014), Export-import theory, practices, and procedures, Routledge; 3rd edition.