Taxation Law

• What are dividends and how are shareholders who receive dividends taxed?
• How is the basis of property determined for property acquired by gift?
• What is the generation-skipping tax and how is it calculated?
• What excise tax is imposed on the early withdrawal from retirement plans and how can it be avoided?
• How is the gain or loss determined on the sale of a capital asset?
• What are the tax consequences and reporting requirements upon the sale of a principal residence?
• What are the rules for deducting home office expenses?
• How is the source of income determined?
• What are the reporting requirements with respect to independent contractors?
• Which taxpayers are exempt from paying real estate taxes?
• When is a trade or business required to collect sales tax?
• Learn More: Taxation Law

What are dividends and how are shareholders who receive dividends taxed?

A dividend is a distribution of cash or property by a corporation to a shareholder paid out of the corporation's current or accumulated earnings and profits. Although Congress has not provided a comprehensive definition of earnings and profits, it is essentially an economic measure of a corporation's ability to pay dividends without distributing any of the capital contributed by either its shareholders or creditors. Earnings and profits include all items of income, gains, losses, and deductions resulting from the economic activities of the corporation since the later of the date of the corporation's inception or February 28, 1913 (the date the federal income tax was enacted).

In order to determine if a distribution is a dividend, distributions to shareholders are first deducted from current earnings and profits and then from accumulated earnings and profits. If the amount of the distribution exceeds both current and accumulated earnings and profits, the distribution will not be taxed as a dividend but as a sale or exchange of property.

Until recently, dividends have been taxable to a shareholder as ordinary income. Now, however, "qualified" dividends are taxed at the lower capital gains tax rate. Corporations issue shareholders an annual Form 1099, which reports dividends paid during the year. The shareholder reports the amount paid as income on Schedule B of the shareholder's return. The shareholder is required to report the dividend amount as income even if the dividend is reinvested in corporate stock. If the dividend is reinvested, the amount reported as income is added to the shareholder's cost or basis in the stock.

If an individual receives a distribution from a corporation that does not qualify as a dividend, the amount received will be reported as a sale or exchange of an asset on Schedule D of the shareholder's return. The gain reported will be equal to the distribution received less the shareholder's cost or basis in the stock. The gain will be either long term or short term depending on whether the shareholder held the stock for a year or more.

Certain credit unions report interest income as dividend income. Dividend income from credit unions should be reported as interest income on Schedule B.

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How is the basis of property determined for property acquired by gift?

The basis of property acquired by gift is the donor's (the gift giver's) adjusted basis in the property on the date of the gift, plus a portion of the gift tax paid as a result of the gift. Basis is usually determined with reference to the cost of an asset. Basis, however, is adjusted to reflect additional costs or improvements made with respect to an asset. For example, if the asset is real property, the beginning basis would be the cost of the property and then would increase to reflect costs incurred such as closing costs, architects' fees, building permits, and costs of capital improvements. The basis would be decreased for depreciation deductions claimed with respect to the property.

Basis is increased by the part of the gift tax paid that is due to the net increase in the value of the gift.

Example: If a taxpayer receives a gift with a fair market value of $20,000 and an adjusted basis of $10,000, the net increase in value is $10,000. The gift tax paid of $3,000 is allocated to the basis of the gift by multiplying $3,000 by a ratio of the donor's basis over the fair market value of the gift. In this instance, the gift tax allocable to the gift would be $1,500 ($3,000 multiplied by $10,000/$20,000). The donee's (recipient's) basis in the gift is $11,500 ($10,000 + $1,500).

For purposes of determining a loss on the sale of an asset acquired by gift, the basis is the lesser of the donor's adjusted basis in the asset or its fair market value on the date of the gift.

Example: If property has a fair market value on the date of the gift of $50,000 and an adjusted basis of $75,000, and the donee sells the property for $45,000, the donee can only claim a loss of $5,000 ($45,000 - $50,000). If the donee sells the same property for $80,000, the gain will be $5,000 ($80,000 - $75,000).

If a taxpayer receives a gift of a capital asset and subsequently sells the asset, the donee can "tack on" the holding period of the donor. If a taxpayer receives a gift and sells it three months later, the gain will be categorized as a short- or long-term gain depending on the total or "tacked" holding period of both the donor and the donee. Thus, if the donor held the property for at least ten months and the donee held the property for three more months before selling it, the gain will be characterized as a long-term capital gain (held for more than 12 months in total).

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What is the generation-skipping tax and how is it calculated?

The generation-skipping transfer tax is imposed on a transfer of property to a person who is at least two generations below the transferor's generation. The purpose of the law is to tax transfers that split the benefits of property between generations. The tax is a flat rate equal to the maximum unified tax rate at the time of the transfer subject to an exemption of $1.5 million available to each transferor. The tax has no effect on trusts if the property never passes to a person who is two or more generations removed from the transferor. Thus, if transferor creates a trust for the transferor's child, and upon the death of that child the property passes to the transferor's grandchild, there is no generation-skipping transfer tax.

There are three generation-skipping transfers: taxable terminations, taxable distributions, and direct skips. Transferees are categorized as either skip or non-skip persons. Skip persons are transferees who are in a generation that is two or more generations beyond the transferor's generation. All other persons are classified as non-skip persons.

A taxable termination is defined as the termination of an interest in property held in trust unless immediately after the termination a non-skip person has an interest in the property or unless no distributions may be made thereafter to a skip person. If a parent leaves his property in trust for the benefit of his child and the property is distributed to the parent's grandchild upon the child's death, the child's death is a taxable termination.

A taxable distribution is any taxable distribution from a trust to a skip person. A direct skip is a transfer subject to estate or gift tax to a skip person. An outright gift to a grandchild, for example, is a direct skip. For purposes of determining direct skips, the descendants of a child who predeceases his transferor-parent are moved up one generation to take the place of a deceased parent.

The generation-skipping tax is generally based on the value of the property distributed as of the date of the generation-skipping transfer. The taxpayer liable for the tax depends on the type of distribution. The transferor is required to pay the tax in the case of a direct skip outside of a trust. The transferee is responsible in the case of a taxable distribution and the trustee in the case of a taxable termination or direct skip from a trust.

The tax rate is a flat rate of tax equal to the maximum estate tax rate multiplied by an inclusion ratio. The inclusion ratio reflects the amount of the GST (generation-skipping tax) exemption allocated to a trust. Every individual transferor is allowed a GST exemption of $1.5 million that may be allocated by the transferor to any property with respect to which he is the transferor. Once an allocation is made, it is irrevocable.

The generation-skipping tax is complicated and individuals with large estates need to consider the implications of the tax as part of their overall estate plan. The effect of the law is to impose an estate tax on each generation. If property passes from grandparents to grandchildren skipping a generation, the government collects the tax that would have been imposed on the intervening generation in the absence of the skip.

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What excise tax is imposed on the early withdrawal from retirement plans and how can it be avoided?

Distributions from qualified retirement plans are subject to an excise tax if they are made before the participant reaches the age of 59 1/2. The tax is in addition to the regular income tax. The excise tax does not apply to the following distributions:

• Distributions upon the death or disability of the participant,
• Distributions after separation from service that are part of a series of substantially equal periodic payments over the life of the participant,
• Distributions after separation from service if the separation occurred during or after the calendar year in which the participant reached age 55,
• Distributions not exceeding deductible medical expenses.

Early distributions from individual retirement accounts (IRAs) are also subject to the excise tax. The exceptions are similar to those applicable to other retirement accounts except that early retirement and medical expense exceptions do not apply.

The law has recently broadened the scope of exceptions applicable to (IRAs) to include withdrawals to pay expenses associated with health insurance premiums, educational expenses, and first-time home buying. In order to qualify for the health insurance premium exception, the taxpayer must use the withdrawal to pay for health insurance premiums while unemployed and eligible to collect unemployment compensation.

In order to qualify for the educational expense exception the withdrawal must be used to pay for qualified educational expenses. Qualified expenses include tuition, books, fees, supplies, and equipment expenses incurred at a post-secondary educational institution. If the student is a full time student, qualified expenses include reasonable costs for room and board. The qualified expenses must be for the individual making the withdrawal or for the individual's spouse, child, grandchild, or ancestor. The expenses would also qualify if incurred for the spouse's children, grandchildren, or ancestor.

In order to qualify for the first-time homebuyer exception, the distribution must be used by the individual to pay qualified acquisition costs with respect to a principal residence of a first-time homebuyer. The first-time homebuyer must be the individual taking the distribution, the individual's spouse or the individual's child, grandchild, or ancestor. The spouse's children, grandchildren, and ancestors are also qualified. A first-time homebuyer means an individual who has had no present ownership interest in a principal residence during the two-year period ending on the date of acquisition of the newly acquired principal residence. There is a lifetime limit on the first-time homebuyer's exception amount.

It is important to note that the above-described exceptions are exceptions to the excise tax. The distributions are still subject to regular federal and, where applicable, state income taxes. Taxpayers can claim an exemption from the excise tax by filing Form 5329 along with their annual income tax return or separately if the taxpayer is not required to file.

Taxpayers considering taking an early withdrawal from a retirement plan that does not qualify for an exception from the excise tax should consider taking a loan from the plan rather than an outright distribution. A loan is not subject to regular or excise taxes. Most plans allow participants to take a particular percentage of equity as a loan.

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How is the gain or loss determined on the sale of a capital asset?

A sale or exchange of a capital asset will produce a capital gain or loss. A capital asset is everything owned for personal or investment purposes, including stocks, bonds, household goods, cars, jewelry, coin collections, boats, cabins, and homes. Non-capital assets include business property, rental property, and inventory.

The gain or loss from the sale of a capital asset is determined by taking the amount realized less the cost or basis of the property. The amount realized on the sale of property is the amount of cash, property or other assets received in exchange for the item sold. Generally, the amount realized on the sale of a capital asset is cash but sometimes a taxpayer may receive property in exchange for the asset sold. If property is received as part of the exchange, the amount realized will be the fair market value of the property received. The basis of the property is generally the cost of the property. However, if the property was acquired by gift the property will have a basis equal to the donor's (gift giver's) basis. If the property was acquired by inheritance, the property will have a basis equal to the fair market value of the property on the date the decedent died.

If a taxpayer sells 100 shares of stock, the gain or loss will be calculated by taking the amount realized (sales price less commission) less the basis in the stock (purchase price plus commission). The amount of tax will then depend on the holding period of the stock. If the taxpayer held the stock for more than one year, the gain will be subject to the capital gains tax rate. The capital gains tax rate depends on a taxpayer's regular tax bracket. The maximum long-term capital gain rate is 28% of the gain.

If a taxpayer has both long- and short-term gains and losses, the taxpayer is required to net the short-term capital gains and losses; then net the long-term capital gains and losses. The net short-term capital losses are netted against the long-term capital gains. If there is a net loss, the taxpayer can only claim $3,000 of the loss in the current year. The excess capital loss can be carried forward to subsequent years until it is exhausted.

Special rules apply to particular types of property that may affect the amount of gain or loss recognized. Examples of such special rules apply to wash sales, related-party transactions, small business stock, and section 1256 straddles. A wash sale occurs when a taxpayer sells stock at a loss and repurchases the same stock within 30 days of the sale. The taxpayer cannot take a loss on the sale but the basis of the repurchased stock is increased by the amount of the disallowed loss. The holding period of the new stock includes that of the stock sold.

A taxpayer is denied a loss on the sale of property between related parties. A related-party is a family member who is a sibling, spouse, ancestor, or lineal descendant of a taxpayer. If property acquired by a family member is later sold to an unrelated party, gain is recognized only to the extent that it is more than the loss not allowed from the previous transfer.

Qualified small business stock is also subject to special rules. Qualified small business stock is stock in a domestic corporation if at the time the stock was issued the corporation was a small business corporation. A corporation is treated as a small business corporation if the aggregate amount of money and other property received by the corporation for stock, as a contribution to capital and as paid-in surplus, does not exceed $1 million. If a taxpayer sells qualified small business stock at a loss, the loss in treated as an ordinary loss and is not subject to the $3,000 limitation. The loss, however, is limited to $50,000 for single taxpayers and $100,000 for married taxpayers filing joint returns.

Futures, options, and foreign currency contracts are known as section 1256 contracts. These transactions often remain open at the end of the tax year. Generally, positions in these types of contracts are treated as if they were sold on the last day of the year. Any capital gains or losses are treated as if they were 60% long term and 40% short term, without regard to the holding period.

There are other rules that may also affect the computation of gain and imposition of tax on the sale of capital assets. The most frequent exception is that applied to the sale of a principal residence. It is important to check the rules to determine if any special rules apply to a particular class of property.

Although taxpayers are required to report the gain and pay the required tax on the sale of a personal asset, taxpayers are not entitled to claim any loss on the sale of personal assets. Thus if a taxpayer sells his car at a gain, the gain must be reported and the corresponding tax paid. If the taxpayer sells his car at a loss, the taxpayer cannot report the loss and claim a corresponding reduction in taxes as a result of the loss.

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What are the tax consequences and reporting requirements upon the sale of a principal residence?

In the absence of an exclusion, the gain on the sale of a principal residence is subject to tax. The tax is computed by determining the gain on the sale, which is generally the amount realized on the sale (contract price less selling costs) less the cost of acquiring the home plus capital improvements to the home. If the home were held for more than one year, the gain would be taxed as a long-term capital gain.

The law provides an exemption from tax if a taxpayer has owned and lived in a home as the taxpayer's primary residence for two of the last five years before the sale of the property. Single taxpayers can exclude up to $250,000 of the gain. Married taxpayers filing a joint return can exclude up to $500,000. The exclusion can be used once every two years.

If a taxpayer sells a principal residence at a gain and qualifies for the exclusion no reporting is required. If a taxpayer sells a principal residence at a gain and does not qualify for the exclusion, the taxpayer will report the gain as a capital gain on Schedule D of Form 1040. Similarly, if a taxpayer sells a principal residence at a gain and the gain exceeds the exclusion amount, the taxpayer will report the excess gain on Schedule D.

Even if the sale of a home qualifies for exclusion, if part of the home was used for business, any depreciation that was allowable for its business use must be recaptured to the extent of the gain at the time of sale.

Example: If taxpayer had a gain of $20,000 on the sale of a home and previously took allowable depreciation deductions of $5,000 related to the taxpayer's business use of the property, the taxpayer is required to recapture the $5,000 of allowable depreciation as income in the year of the sale. The remaining $15,000 of gain would fall within the exclusion.

If a taxpayer fails to meet the ownership and use requirements due to a change in place of employment, health, or other hardship, the taxpayer will be allowed to exclude a pro rata portion of the gain based on a ratio of the number of months the property was owned and used over twenty-four months.

Example: If a single taxpayer purchased and occupied a home for eleven months and subsequently sold the home to take a new job in another state, the amount of gain he could exclude would be $114,583 ($250,000 multiplied by 11/24).

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What are the rules for deducting home office expenses?

The deduction of home office expenses has been the subject of frequent tax disputes. In order to qualify for the deduction, the part of the home used for business must be for the exclusive and regular use of the trade or business. The home office must also be one of the following: the taxpayer's principal place of business, a place where the taxpayer meets with patients, customers or clients in the normal course of the trade or business, or a separate structure (not attached to taxpayer's home) used in connection with the trade or business. The requirements impose further restrictions on an employee's use of a home office. An employee must also use the home office for the convenience of the employer and the employee cannot rent the home office to the employer.

Exclusive use requires use of a specific room or separately identifiable space for business purposes only. If the home office is used for some other purpose, it will not qualify for the home-office deduction. Exceptions apply for storage space and day care facilities.

Regular use denotes use of the home office on a continuing basis. The taxpayer will not meet the regular use test if the business use is occasional or incidental even if it does meet the exclusive-use test.

The home office must be used in connection with a trade or business. If the home office is used to carry on activities related to investments, for example, it will not qualify as used in connection with a trade or business.

Although a taxpayer can have more than one business location, the home office must be the principal place of business. The principal place of business is determined based on the relative importance of the activities and time spent at each location. If the business requires the taxpayer to meet or confer with clients or patients, for example, the place where the contact occurs will be given great weight in determining the principal place of business. If the relative importance of activities does not clearly establish the principal place of business then the time spent at each location will be determinative.

The definition of principal place of business has been expanded to include exclusive and regular use for administrative or management activities of a trade or business where the taxpayer has no other fixed location to conduct substantial administrative or management activities incidental to the trade or business. This rule arises from a case involving an anesthesiologist who performed his most important work in hospital operating rooms but conducted related administrative duties from a home office. The taxpayer in that instance had no other office or place in which to perform the administrative aspects of his profession.

If a taxpayer's use of a home office qualifies as business use of the home, the taxpayer can deduct an allocable portion of depreciation, insurance, rent, repairs, security systems, and utilities and services paid with respect to the home. The amount deducted is limited to the amount allocable to the home office.

Example: If a taxpayer pays $10,000 total for expenses related to the home and 25% of the home is used for business purposes then $2,500 of the expenses are deductible. Similarly, if depreciation on the total structure is $5,000 per year, $1,250 (25%) is deductible. Although home mortgage interest and real estate taxes are deductible in any case, the amount attributable to the home office should be reported as an expense for business use of the home.

If a taxpayer incurs a cost directly related to the home office, the total cost is deductible. If a taxpayer has the home office painted, for example, the entire cost of painting the office will be deductible.

The taxpayer cannot take an expense for business use of the home that exceeds the net income arising from the related trade or business.

Example: If the trade or business has a net income before allocation of expenses related to use of the home of $10,000 and expenses related to business use of the home of $11,000, only $10,000 of the expenses related to use of the home will be deductible. The excess expenses can be carried forward and claimed in a subsequent year.

If a taxpayer uses part of the home for business purposes and subsequently sells the home, a portion of the home may not qualify for the exemption from gain upon the sale of the qualified principal residence because any depreciation previously taken will have to be recaptured.

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How is the source of income determined?

The source of income is a key issue in determining whether a nonresident alien is subject to U.S. income tax. A nonresident alien usually is subject to U.S. income tax only on U.S. source income. U.S. source income is income from sources within the United States and on certain income connected with the conduct of a trade or business in the United States.

The source of income varies with the type of income involved. The source of compensation for personal services, for example, is determined based on the place where the services were performed. Thus, amounts earned as a result of work performed in the United States are sourced to the United States even if paid in another country. The source of dividends and interest are determined by the residence of the paying corporation or bank. The source of rental income or gain from the sale of real property is based on where the property is located. The source of pension income is based on where the services were performed. The source of income from the sale of purchased inventory is where the property is sold, and the source of income from the sale of personal property is the seller's home country.

Although income may be U.S. source income, it may still be excluded from gross income for tax purposes, because nonresident aliens are allowed exclusions from gross income for certain income items. The most common exclusions are for U.S. source interest income, certain compensation paid by foreign employers, and gains on the sale of stocks and bonds in U.S. corporations.

U.S. source interest income that is not connected with a U.S. trade or business is exempt from income if it is from deposits with banks, credit unions, insurance companies, or with persons in the banking business. Foreign nationals with funds on deposit in U.S. banks are not required to pay U.S. tax on interest earned on such accounts unless the account is connected with a trade or business within the United States.

Compensation paid by foreign employers for worked performed in the United States may be excluded from gross income in certain limited circumstances. If a foreign national performs services as an employee of a foreign business in the United States for a period of less than 90 days during the tax year and the pay for such services is not more than $3,000, the compensation earned is not considered U.S. source income and is tax exempt.

Certain nonresident alien students and exchange visitors present in the United States with a student or trainee type visa can exclude compensation earned within the United States from U.S. taxation if the compensation is paid by a foreign employer. The student and exchange visitor exclusion is limited and is subject to time restrictions.

U.S. tax treaties may modify the sourcing rules and the tax implications of U.S. source income. For example, many treaties provide that a taxpayer will be taxed in his home country for services performed in the United States if the taxpayer is present in the United States on a temporary basis as a visiting professor and continues to be paid by a foreign university. In that case, the amount earned in the United States will be exempt from U.S. tax. The professor, however, would be required to file a U.S. return and disclose the amount earned and the fact that he is claiming a treaty exemption.

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What are the reporting requirements with respect to independent contractors?

Business owners, including individuals engaged in any type of trade or business, are required to file Form 1099-MISC, Miscellaneous Income to report payments to independent contractors of $600 or more during the year for services performed for the business by independent contractors. The forms must be filed with the Internal Revenue Service by February 28 of the year following the year in which the payment was made. For example, if an independent contractor performs services on March 15, 1999, the Form 1099-MISC must be filed by February 28, 2000.

It is important when hiring independent contractors to request the contractor's full name or business name, address, and social security or federal identification number. It is the business owner's responsibility to file the Form 1099 reporting the amount on miscellaneous compensation and the information noted above.

The Internal Revenue Service cross-references amounts reported on the Form 1099 to the contractor's tax return. The contractor must report amounts earned as an independent contractor as taxable income and as income subject to self-employment tax.

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Which taxpayers are exempt from paying real estate taxes?

Although the rules governing the collection of real estate taxes vary from one taxing jurisdiction to another, most, if not all, taxing jurisdictions exempt churches and other religious institutions from the payment of real estate taxes. The exemption is rooted in the constitutional requirement of separation of church and state. Some jurisdictions also exempt public property, charitable organizations, cemeteries, hospitals, colleges, and universities.

Beyond religious institutions and certain nonprofit organizations, the list of exempt taxpayers varies widely. Some jurisdictions allow limited exemptions to widows, veterans, and disabled taxpayers. Other jurisdictions may provide a reduction in property taxes based on the income of the taxpayer.

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When is a trade or business required to collect sales tax?

A trade or business that sells goods to the public is required to collect sales tax if there is a sufficient connection between the business and the state to support the state's imposition of a registration and collection requirement. The connection sufficient to support the requirement to register and collect the tax is called nexus.

A seller with an office, manufacturing facility, or retail outlet within a state is clearly required to register with the state and collect the requisite sales tax. Nexus has also been found to exist if a seller has employees, agents, or other offices involved in unrelated businesses within a state. The question of whether a seller is required to collect sales tax, however, becomes more problematic when the seller does not have any tangible presence within a state but merely solicits sales within the state through the use of catalogs or web sites and ships goods by common carrier within the state to customers who have purchased goods.

There have been a number of court cases that have addressed the question of whether sufficient nexus exists in the absence of any connection with a state other than solicitation through the mail and shipment of goods within the state. These cases have held that the nexus is insufficient to require registration on the part of a mail order seller if there is no connection to the state other than the solicitation of sales.

States continue aggressively to pursue sales tax revenue. With the growth of electronic commerce, states will fight to expand the definition of nexus to include the regular and continuous solicitation of business in a state. Both the courts and commentators have suggested that Congress should provide some guidance in this area.

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Learn More: Taxation Law

Taxation Law is an increasingly complex area involving a variety of distinct categories. Taxation involves various levels of governmental involvement and regulation from the federal government to the local school district. Each governmental entity imposes some type of taxation requirement in order to raise the revenue required to fulfill its governmental function. Moreover, with the globalization of the economy, tax practitioners must consider foreign government taxation in international transactions.

Corporate taxation involves the imposition of federal, state, and local income taxes on corporations, which are separate legal entities subject to taxation. Corporations are also required to pay property taxes and excise taxes, if applicable. Although corporations pay income tax on corporate taxable income, shareholders also are required to pay tax on corporate distributions. To avoid this double taxation, some eligible corporations elect to be taxed as an "S" corporation. The income of an "S" corporation is generally taxed to the shareholders and not to the corporation itself.

The federal government and some states tax the transfer of wealth through estate and gift taxation. The estate generally pays the estate tax. A donor (gift giver) is required to file a gift tax return if the donor makes a gift of over $11,000 to any one individual in a particular year. The donor will pay tax on the gift if the donor has no remaining unified credit amount.

Excise taxes encompass a wide variety of taxes imposed by federal, state, and local taxing authorities. The federal government alone imposes excise tax on over twenty different types of manufacturing, retail, or miscellaneous transactions. These taxes cover a wide range of activities including but not limited to a tax on diesel fuel, heavy trucks and trailers, sport fishing equipment, bows and arrows, and firearms. An excise tax is imposed on manufacturers manufacturing tires, gasoline, aviation fuel, coal, and certain vaccines. An excise tax is also imposed on golden-parachute payments, early withdrawal of retirement funds, and the investment income of qualified charitable organizations.

Income taxation relates to the taxes imposed on taxable income. Individuals, corporations, estates, and trusts pay federal and, where applicable, state and local income taxes on taxable income. A complex set of rules is applied to determine taxable income. Generally, taxable income is determined by calculating total income less certain allowable adjustments, deductions, and exemptions to arrive at taxable income. Once taxable income is determined, progressive tax rates applicable to the taxpayer are applied to calculate the amount of tax due.

International taxation applies to U.S. businesses and individuals who conduct business outside the United States and to foreign businesses and individuals who conduct business within the United States. Generally, U.S. businesses and individuals that conduct business outside of the United States are subject to tax in foreign jurisdictions. Likewise, foreign businesses or individuals that conduct business within the United States are subject to U.S. taxation. U.S. tax laws, foreign tax laws, and international tax treaties apply to determine the overall tax burden associated with international business.

Payroll taxes are generally comprised of U.S. federal income tax withholding, state and local withholding, if applicable, social security withholding and federal and state unemployment taxes. Employers are required to withhold and remit payroll taxes. Employers are also required to pay social security and unemployment taxes on behalf of an employee.

Property (ad valorem) taxes are taxes imposed on the owners of certain types of property. The tax is based on the value of that property. Most states or local governmental units require an annual property tax on real estate based on the value of the subject property. Some states also tax certain types of tangible personal property and intangible property. Property taxes are based on value and are thus termed ad valorem.

Sales and use taxes are generally imposed by state and local taxing authorities. A sales tax is collected at the time of sale to a consumer and is based on the cost of the item sold. A use tax is generally a substitute for a sales tax. If an item was not taxed at the time of sale, its use will be taxed when the item is used within the taxing jurisdiction.

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