Federal and State Corporation Taxes Guide for US Businesses – A Guide for Overseas Americans

Running a US business from abroad as an expat is both liberating and challenging, building something across borders. When tax season arrives, though, questions abound. US federal and state corporate taxes can feel like a maze for any business owner, especially if you’re overseas. The good news is that with the right advice and strategy, you can plan with confidence and keep more of your profits.

Why US C corporations face two levels of tax

Businesses incorporated in the US need to comply with both federal and state tax rules. Federal income tax applies for all US businesses (as well as foreign businesses owned by Americans), while state taxes depend on where your business has ties, or “nexus.” In this article, we’ll look at how both work.

Federal corporate income tax basics

At the federal level, C corps pay a flat 21% rate. That rate has remained steady since the 2017 Tax Cuts and Jobs Act. Deductions and credits are available however, which can reduce the total amount you’ll owe.

Some of these include:

• Depreciation deductions – You write off the cost of equipment and other assets over time.
  
• Research and development credits – Companies that invest in innovation often qualify for substantial savings.
  
• Foreign tax credits – These reduce double taxation if your business earns income abroad.
  
• Net operating losses – Past losses can offset future profits and lower taxable income.

For Americans based overseas running a US business, these credits and deductions should be maximised where possible..

Furthermore, after the corporation pays 21% tax on profits, shareholders face personal income tax when dividends are distributed. For Americans abroad, their country of residence often also taxes dividends. Put together, profits can shrink quickly, so it’s important to seek optimization advice from a cross-border US tax specialist.

Alternatives to the C corp

Many small business owners choose S corps or LLCs to avoid paying both corporation and personal taxes on profits. With these entity types, profits flow straight through to the owners and get taxed once. The right structure depends on your ownership mix, situation and long-term goals.

The State corporation tax landscape

State corporate taxes vary substantially from state to state. Some states, like Nevada and Wyoming, impose no corporate income tax at all. Others, like New Jersey and Pennsylvania, set some of the highest rates in the country.

Your business often has state tax liability if it has ‘nexus’ in a state. Nexus can arise in several ways:

• Registration – If your business is registered in a state.
  
• Physical presence – Offices, warehouses, or retail locations create clear nexus.
  
• Employees – Staff working in a state generally trigger liability.
  
• Sales activity – Many states now set thresholds based on sales volume or revenue.
  
• Services – Providing services across state lines can also create filing obligations.

Expats often overlook state requirements if they’re not physically in the US. If your corporation has physical infrastructure, sells to US customers or employs US staff however, you likely have state exposure, even if it’s registered in a no-tax state.

Franchise and gross receipts taxes

Texas and Delaware use franchise taxes rather than corporation taxes, which are often based on assets, net worth, or a flat fee. Other states, including Washington and Ohio, apply gross receipts taxes. These taxes apply to revenue, not profit, which can sting if you run a low-margin business.

Choosing a state for incorporation

States such as Delaware and Wyoming often come up in conversations about incorporation. Delaware is popular for its strong legal system and predictable courts. Wyoming offers low fees and no corporate income tax. Both have benefits, but the state of incorporation rarely eliminates obligations elsewhere. So if your business has nexus in California, for example, you still owe California tax even if the company is registered in Delaware.

Federal filing requirements

Every C corp has to file IRS Form 1120. This form is for reporting income and claiming deductions and credits. If your business has overseas subsidiaries, you may also have to file Form 5471 to report controlled foreign corporations.

For expats with a foreign business, as well as Form 5471, GILTI rules (Global Intangible Low-Taxed Income) are especially important. They ensure US owners pay tax on certain foreign profits, even if those profits never return to the US. Without planning, GILTI can produce a nasty surprise at filing time.

State filing requirements

Every state sets its own filing rules. Some states closely mirror federal definitions of income, while others have different rules. Most states also use apportionment formulas to divide income among different jurisdictions.

These formulas typically combine property, payroll, and sales. Over time, states have shifted toward sales as the main factor. If you sell widely across the US but have little property or staff in each state, you may face tax in multiple states.

International considerations for expat entrepreneurs

Living abroad does not remove US tax obligations. If you own a foreign corporation or a foreign subsidiary of a US corporation, you may have to deal with:

• Controlled foreign corporation rules – US shareholders with majority ownership must report income and activity.
  
• GILTI – Certain foreign profits get taxed in the US each year, regardless of local rules.
  
• Subpart F income – Passive or mobile income often faces immediate US tax.
  
• Foreign tax credits – These help offset double taxation but require careful coordination with local filings.

Balancing US and local corporate taxes takes careful planning, so always seek advice from a cross-border US expat tax specialist.

Payroll taxes and employee obligations

If your corporation employs people, you’ll also have to pay US payroll taxes at a total of 15.3%. US payroll taxes cover Social Security and Medicare. States may also require unemployment or disability contributions. When US corporations hire abroad, foreign payroll rules may apply as well.

Estimated taxes and penalties

Corporations that expect to owe at least $500 in federal corporation tax must pay quarterly estimates. Missing payments or underpaying leads to penalties. States generally have similar systems, though thresholds and deadlines vary by state. Keeping up with estimated taxes is one of the simplest ways to avoid unnecessary costs.

Smart strategies for reducing taxes

Common tax optimization planning strategies for US businesses include:

• Choosing the right entity – The structure determines how profits are taxed.
  
• Balancing compensation – Salaries and dividends get taxed differently and affect both corporate and personal liability.
  
• Timing income and expenses – Adjusting when your business recognizes income or incurs expenses can help manage fluctuations in taxable income from year to year.
  
• Structuring international operations – Using foreign subsidiaries strategically can cut overall global tax.

A holistic plan may require advice from both US and foreign tax professionals.

Common pitfalls for expat business owners to avoid

Expats running corporations abroad often repeat the same mistakes:

• Assuming incorporation in a no tax state eliminates state tax – Nexus rules may still apply if you have infrastructure, employees or sales in other states..
  
• Ignoring foreign reporting of subsidiaries – Form 5471 and related filings catch many by surprise.
  
• Forgetting quarterly estimates – Late payments bring avoidable penalties.
  
• Mixing personal and business funds – This creates red flags with the IRS.

Avoiding these mistakes lets you focus on growth rather than audits.

US corporate tax requirements can feel intimidating, especially if you live overseas. There’s a lot more to it than the federal 21% headline rate if you want to stay both compliant and tax optimized. State taxes, franchise fees, and international reporting can all affect the bottom line. For overseas based Americans, these rules matter not just for the corporation but also for personal filings. With the right structures and strategies however, you can stay compliant, reduce risk, and keep more of what your business earns.