Accounting and Tax Considerations for Expanding into the United States

Aug 2, 2021

By Steven D. Handler, CPA, CMC, GGMA – Partner

MichaelSilver works with many international companies looking to start or expand their business in the United States. Typically, these companies are successful in their home country. The owners know the United States is the land of opportunity as well as the land of tax traps and legal problems. We share the common goal of wanting these businesses to succeed in their endeavors in the United States and we help them navigate the complexities of the United States’ business world.

Here are some items to consider when expanding to the United States.

Professional fees in the United States are more expensive, so be prepared for sticker shock. Rates for lawyers and accountants are higher and the necessity for service is greater. There are more lawyers and more lawsuits here in the United States versus anywhere else in the world. MichaelSilver refers our clients to the right professionals who understand international business.

Financial reporting in the United States is completed using United States generally accepted accounting principles (U.S. GAAP) compared to most of the rest of the world that uses international financial reporting standards (IFRS). Unless your company is a public company or part of a regulated industry, there are no legal requirements to issue financial statements. The requirement is that the company maintains good accounting records to support income tax reporting. There may also be practical reasons that dictate the need for financial statements such as requirements of bank loans, partnership agreements, or materiality of United States operations to the parent company’s consolidated financial statements. There are three types of reports on financial statements varying in cost, complexity, and level of assurance: Compilations, Reviews and Audits. Many other countries only require audits.

The income tax system of the United States includes federal and state tax returns (for most states). Often more than one state return may be required. Depending on the other country (or countries), there is often a tax treaty between the United States and the other country (or countries) that covers various tax treatments, such as withholding on dividends or other related party payments. Also, there are numerous required disclosures of international related party payments and other matters that must be filed timely and accurately to avoid high penalties.

Transfer pricing (payments for goods and services among related multinational parties) is a world-wide issue that needs to be addressed. Proper documentation and fair pricing are a necessity. Both countries want their fair share of taxes. If the foreign parent (FP) charges its United States subsidiary (USS) too high of a price for goods to be resold in the United States, the Internal Revenue Service (IRS) will object. If FP charges USS too little of a price for goods to be resold in the United States, the FP’s home taxing authority will object. This same principal exists for other types of transactions such as rents, royalties, and management fees.

Each of the fifty United States have different state tax laws. Among these taxes are sales, payroll, and income taxes. Each time a company becomes subject to any of these taxes in a particular state, the company must register in that state. While sales tax has some similarities to value added tax (VAT) in other countries, they are not the same. Since all the states are hungry for additional tax revenue, the need for sales tax collection and reporting is increasing. Recent court cases have favored the states in their pursuit of additional tax revenues. The cost and penalties for noncompliance is also increasing.

Payroll taxes reporting of fringe benefits and independent contractor reporting are among other tax areas that need to be addressed.

Strategic planning is a necessary part of a business’s success in the United States. A detailed, written plan is a necessity. Often the absence of a written plan leads to greater cost, longer lead times, and even failure.

These are some of the unique aspects to be mindful of when expanding into the United States. The MichaelSilver international services team is knowledgeable in these areas and has helped numerous clients successfully expand into the United States. Please contact Steven Handler, CPA, CMC – Partner, at [email protected] or 847 213-2107 to discuss how we can help you with an expansion into the United States.