Taxation and accounting in the USA – What to pay attention to as a Hungarian entrepreneur

Entering the United States market offers huge opportunities for Hungarian entrepreneurs, however, taxation in the USA and without a thorough knowledge of the accounting system, we may face serious challenges. This is especially important from 2024, when the termination of the Hungarian-American double taxation agreement has significantly changed the tax environment. In this article, we provide a comprehensive overview of what you need to pay attention to if you, as a Hungarian entrepreneur, want to appear on the American market or are already present. We present the basic tax obligations, the problem of double taxation and accounting differences, as well as practical advice for a successful American business presence.

Taxation in the USA – Funds for Hungarian Entrepreneurs

The American tax system is radically different from the Hungarian one, and can therefore pose a serious challenge for Hungarian entrepreneurs entering the market. In the USA, taxation is two-tiered: obligations may arise at both the federal and state levels. It is important to know that these tax obligations may vary significantly from state to state.

The federal corporate tax rate is flat, at 91% since 2017, while in Hungary the rate is currently 91%. This may seem similar at first glance, but there are several additional taxes and regulations in the American system that can significantly affect the actual tax burden.

In the American tax system, choosing the right corporate form is particularly important, as it fundamentally determines your tax obligations. The most common forms include LLC (Limited Liability Company), S-Corporation and C-Corporation, which have different tax rules. As a Hungarian entrepreneur, it is important to understand the advantages and disadvantages of each corporate form and choose the one that is most suitable for you.

The American accounting system also differs from the Hungarian one, in the USA GAAP (Generally Accepted Accounting Principles) standards are used, while in Hungary businesses keep their accounts according to IFRS or the rules of the Hungarian Accounting Act. This difference can represent a significant administrative burden, especially when accounting and reporting obligations have to be met in both countries.

The impact of the end of the double taxation agreement – new rules from 2024

The double taxation treaty between Hungary and the United States of America ended on January 1st of last year, bringing fundamental changes for Hungarian entrepreneurs. This change means that income previously taxed in only one country is now potentially taxable in both countries, which could increase the overall tax burden and compliance costs.

The elimination of double taxation treaties could particularly severely affect income from capital investments. For example, if a Hungarian resident company receives dividend or interest income from the US, the US can deduct up to 30% of withholding tax from the payments. Although 90% of foreign tax can be credited against domestic tax liability, this can still represent a significant administrative burden and potential additional tax.

The lack of a treaty also affects individuals: for example, a Hungarian citizen working in the US now has to file tax returns in both Hungary and the US, even if this was not previously mandatory. This could mean significant additional work and potential tax burden for Hungarians living and working in the US, or having investments there.

The issue of tax residency

The issue of tax residency is central to international taxation. As a Hungarian citizen, you are generally considered to be a Hungarian tax resident, which means that your Hungarian tax liability is assessed on the basis of your worldwide income. The exception to this is dual citizens who do not have a place of residence or domicile in Hungary.

Tax residency determines which country can tax a given income. However, in the absence of a treaty, both the US and Hungary may now be entitled to tax the same income, which can result in double taxation. To avoid or reduce this, you can set off a certain portion of the tax paid abroad against your domestic tax liability.

Tax obligations in the USA – What, when and how?

Corporate taxation as a US business

If you are starting a business in the US, you need to be aware of both federal and state corporate taxation. The federal corporate tax rate is 21%, but you may also have tax liabilities at the state level, which vary from state to state. For example, the state of Delaware is a popular location to start a company because it offers favorable tax conditions for businesses.

When it comes to US corporate taxation, it is also important to consider the rules regarding the minimum tax base. In some states, if the company's profit or tax base is below a certain level, it may still be subject to tax based on a minimum tax base. This differs from the Hungarian system and may result in additional compliance burdens.

As an American entrepreneur, it is important to know that foreign-owned companies are strictly controlled in the USA and may be subject to special rules. One example is the so-called "FIRPTA" (Foreign Investment in Real Property Tax Act), which applies to foreign real estate investments and can result in a withholding tax of up to 15%.

Personal income taxation and the obligations of Hungarian citizens

If you work or earn income in the US as a Hungarian citizen, you may be subject to tax liability in both the US and Hungary. With the termination of the agreement, this double burden has become even more pronounced. You must pay US federal and state personal income tax on your earned income in the US, but under Hungarian rules you must also file a tax return and potentially pay tax in Hungary.

It is important to know that 90% of the tax paid abroad, but not more than the amount determined by the domestic tax rate on the income, can be included in the Hungarian tax liability. This means that if the US tax burden exceeds 16.7% of the income, then no further personal income tax has to be paid in Hungary. However, if the US tax is less, the difference must be settled in Hungary.

The situation is even more complex in the case of capital income (dividends, interest, exchange rate gains). The US can deduct up to 30% of withholding tax from payments, and although this can be included in the Hungarian tax liability, in the case of separately taxable income, at least 5% of tax liability arises in Hungary.

FATCA and reporting obligations – Don't ignore them!

In the US tax system, compliance with appropriate reporting obligations is particularly important. One example is FATCA (Foreign Account Tax Compliance Act), which requires US taxpayers to report their foreign financial accounts and assets. Hungary was the first Central European country to join FATCA, which means that Hungarian financial institutions report the accounts and transactions of US clients to the IRS (Internal Revenue Service).

Of particular importance among the reporting obligations are the so-called FBAR (Foreign Bank Account Report) and Form 8938. These must be completed if you have foreign bank accounts or other financial assets that exceed a certain threshold. The FBAR must be filed with the Treasury Department and Form 8938 with the IRS. Failure to do so can result in severe penalties.

As a Hungarian citizen, it is important to know that Hungarian financial institutions also report your accounts to the US authorities if you are a US tax resident. At the same time, the Hungarian tax authorities also receive information about your US accounts. This bilateral exchange of information helps tax authorities in the fight against tax evasion, but also requires greater transparency from entrepreneurs.

Accounting Differences and Requirements – How to Comply with Both Systems?

The US and Hungary have different accounting standards and requirements. While the Accounting Act and IFRS rules are the governing rules in Hungary, accounting in the US is based on GAAP (Generally Accepted Accounting Principles). This difference can pose a significant challenge for Hungarian entrepreneurs, especially when they have to comply with their reporting obligations in both countries.

The American accounting system places greater emphasis on transparency of financial statements and investor information. American accounting standards and tax filing processes use different terminology and formats, which can be difficult for Hungarian entrepreneurs. In addition, financial statements often have to be prepared for multiple authorities, which creates an additional administrative burden.

Language barriers can also be significant. Interpreting the technical terms of American financial statements and tax returns, as well as the relevant laws, can be particularly difficult for non-native English speakers. This problem can be even more pronounced for Hungarian entrepreneurs, as Hungarian financial jargon differs significantly from American terminology.

Hungarian accounting firm or American professional?

To successfully participate in the American market, the right expert support is essential. The question is whether to choose a Hungarian accounting firm that is familiar with the domestic regulations, or American professionals who are familiar with the local system. The best solution is often a combination of the two: a service provider that is familiar with the regulations of both countries and can provide bilingual support.

There are many accounting firms with Hungarian roots in the US that provide services specifically to Hungarian entrepreneurs and individuals. These providers not only help overcome language barriers, but are also aware of the regulations and cultural peculiarities of both countries. MiklosCPA, for example, specializes specifically in US-Hungarian business relations and provides full-service accounting and tax advisory services to both individuals and businesses.

Tax Optimization Strategies – How to Legally Reduce Tax Burdens?

Tax optimization can be crucial for companies doing business internationally. Although the lack of a double taxation treaty makes the situation difficult, there are still opportunities to legally reduce the tax burden.

Optimization of corporate form

In the US, choosing the right corporate form can significantly affect your tax burden. For example, choosing an LLC (Limited Liability Company) allows for so-called “pass-through” taxation, which means that the profits of the business are directly reflected in the personal income tax of the owners, avoiding the corporate tax level. This can be particularly beneficial for smaller businesses.

Cost optimization

The US tax system offers a number of ways to write off business-related expenses, such as deducting home office expenses, business-related travel expenses, or a portion of your health insurance premiums. However, it is important that these expenses are real and well-documented, as the IRS strictly monitors them.

Retirement savings and other tax benefits

In the US, there are various retirement savings options (e.g. 401(k), IRA) that offer tax benefits. These savings can reduce your tax base and result in significant tax savings in the long run. In addition, other tax benefits are available, such as educational expense allowances or deductions for medical expenses.

How to choose the right accountant and tax advisor in the USA?

Choosing the right accountant and tax advisor is critical to your U.S. business success. The ideal professional will not only be familiar with U.S. tax and accounting rules, but also be aware of Hungarian aspects and be able to provide bilingual support.

Expertise and experience

Look for a professional or firm that specializes in international taxation, especially the relationship between the US and Hungary. The right expertise and experience are essential for handling complex tax situations. Check the references of potential partners and ask about their previous experience in serving similar clients.

Communication skills and availability

Tax and accounting issues are often urgent and require complex explanations. It is important that the chosen professional or firm is easily accessible and able to communicate complex concepts clearly. Language skills are particularly important in this context: ideally, the professional is fluent in both languages.

Technological background and modern solutions

Modern accounting and taxation are increasingly digital. Choose a partner that uses up-to-date software and technology solutions, which not only makes work more efficient, but also reduces the possibility of errors. Online accounting systems allow real-time access to financial data, which can be especially useful for international business activities.

Summary

Understanding the US tax and accounting system and developing the appropriate strategy is crucial for Hungarian entrepreneurs who want to successfully operate in the US market. Here are the most important aspects:

• Avoiding double taxation: Due to the agreement being terminated in 2024, it is particularly important to develop an appropriate tax strategy
• Choosing the right corporate form: LLC, S-Corp or C-Corp form significantly affects taxation
• Expert support: Hiring a bilingual accountant and tax advisor who is experienced in both countries
• Reporting obligations: Accurate and timely submission of FATCA, FBAR and other reports
• Tax optimization opportunities: Reduce your tax burden through legal means
• Accounting Differences: Pay Attention to the Differences Between GAAP and Hungarian Accounting Rules
• Up-to-date information: Follow changes in tax legislation in both countries

When entering the US market, proper preparation and expert support are not just a cost, but an investment in future success. Establishing good tax and accounting practices from the start will help you avoid costly problems and penalties later. 🚀

How can USAAccelerator help with this?

USAAccelerator's team of experts has years of experience in the field of US-Hungarian business relations. We provide comprehensive support to Hungarian entrepreneurs entering the US market, including tax and accounting issues. Our services include company formation, tax consulting, accounting, payroll and strategic business consulting.

Our experts are familiar with the regulations of both countries and provide bilingual support, helping to bridge language and cultural differences. Whether you are a start-up or an existing company in the US, we offer customized solutions that meet your unique needs and goals.

Contact us today and start your American business adventure on a solid footing! 👉 https://www.usaaccelerator.com/

Sources used:

1. MiklosCPA – USA California Hungarian Business Tax & Bookkeeping
2. MKVKOK – Taxation of US-sourced employment income
3. Kerkering Barberio – Helping Hungarians with FATCA Disclosures
4. Klein Accounting Office – Important rules during an American assignment
5. Helpers Finance – US-Hungarian double taxation treaty canceled – what to watch out for?
6. Accountants.hu – American-Hungarian double taxation
7. PwC Tax Summaries – Taxes on corporate income – Hungary
8. ICTEuropa – Accounting, payroll, US taxation support