A deceptively simple prospect in tax reporting is a US citizen working abroad. There are many pervasive misundertandings in this area of US tax law. Generally speaking, gross income, for US tax purposes, does not include the foreign earned income and a “housing cost amount” of a qualified individual who makes the appropriate exclusion election. A “qualified individual” has a “tax home” in a foreign country and meets one of two tests. Under the first test, the person must be a U.S. citizen who establishes that he has been a bona fide resident of a foreign country or countries for an continuous period within an entire taxable year. Under the second test a person must be a U.S. citizen or resident who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days in that period. The election is made by completing Form 2555, “Foreign Earned Income.” There are a great many nuances and circumstances to be considered in this area as well. If you need assistance in this area or help in preparing your tax return that deals with Foreign Earned Income, please contact Paul for assistance by clicking here.
Form 1042-S is, conceptually, much like Form 1099 for US citizens and persons residing in the US. The difference being that the payments reported on Form 1042-S are amounts paid to foreign persons (including persons presumed to be foreign) that are subject to withholding, even if no amount is deducted and withheld from the payment because of a treaty or Code exception to taxation or if any amount withheld was repaid to the payee. Examples of payments to foreign persons include, but are not limited to: Corporate distributions; Interest; Rents; Royalties; Compensation for independent personal services performed in the United States; Compensation for dependent personal services performed in the United States (but only if the beneficial owner is claiming treaty benefits); Annuities; Pension distributions and other deferred income; Most gambling winnings; Cancellation of indebtedness; Effectively connected income (effectively connected income to the US); Notional principal contract income; and REMIC excess inclusions. To state the obvious, each situation is different and should be carefully analyzed. If you or your business needs assistance preparing Form 1042-S and 1042, or just discussing withholding requirements, contact Paul by clicking here.
A common practice in closely held businesses is to insure the life or lives of key employees or owners. When Congress enacted the Pension Protection Act in 2006, some requirements were imposed on these types of life insurance arrangements. First written notice must be given to any employee on whom a company purchases life insurance. If the proper notice is not given, then the insurance proceeds likely will be considered taxable. Employers are also required to file IRS Form 8925 annually with regard to these insurance policies. It seems that failing to report the policy on Form 8925 will likely result in the proceeds being taxable even if the Company did not deduct the premiums on its tax return. There are specific issues to consider with employer-owned life insurance policies. If you or your business need advice in this area, click here to contact Paul to discuss the issue.
The term “Inherited IRA” in the internal revenue code describes any IRA after the death of its owner. The beneficiary of the IRA is said to have inherited his or her ownership of the IRA. Inherited IRAs have special tax rules regarding Inherited IRAs. There different rules for surviving spouses from beneficiaries who are not the spouse of the decedent (children, grandchildren, etc.). If you have inherited an IRA an would like to know what your options are in terms of tax planning, click here to contact Paul to discuss your options.
Maintaining capital accounts for state law purposes and for tax purposes is a very complicated task. State law and federal tax law can conflict creating disputes about ownership and allocation of profits, losses, and especially in the liquidation of assets. On the tax side of capital account maintenance, IRC Section 704(a) provides that the partnership agreement should generally control the allocation of each partner’s distributive share of partnership tax items. The Internal Revenue Code recognizes that allocating all partnership items on the same basis to each partner may alter the economic reality of business transactions in the partnership. Partnership taxation has a valuable non-tax feature that permits conducting business with flexibility in allocating and reallocating certain sources of income or expense in disproportionate, contingent, straight-forward, or even undetermined ratios. Thus, if a particular partner in a partnership bears or benefits from a disproportionate economic share of a particular transaction, the Internal Revenue Code recognizes that the partnership should be able to adjust the tax consequences in a corresponding manner. There is also, however, a requirement to maintain substantial economic effect in the allocations that are made. As you can see partnership agreements or operating agreement play an essential role in maintianing capital accounts. The state law aspects of capital accounts is where significant issues can arise in determining and maintaining capital accounts. Disproportionate distributions can, under the laws of many states, dilute a business owner’s ownership in the partnership or LLC. This will generally come as a surprise to most business owners. The point here is that capital account maintenance is an important piece of business entity structuring and operations. If you would like more information about whether your business entity needs to assistance in this area click here to contact Paul.
A trust can be set up and used for various purposes–avoiding probate, protecting assets, efficiency in asset transfer, providing anonymity, conserving assets for a person that may waste the assets upon receiving them all at once, etc. Trusts are often set up with these intentions in mind, but often become ineffective or go unfunded because the administration or transfer of the assets to the trust is not handled properly. Paul can can assist you with your trust needs and follow through to ensure that you understand the proper funding, administration, and tax requirements of the trust. Click here to contact Paul to review or set up your trust or just to talk about whether a trust is something you need.
The Domestic International Sales Corporations (DISCs) is currently the only US export tax incentive. Foreign Sales Corporations and Extraterritorial Income incentives are no longer alternatives. Creating and utilizing an IC-DISC can create permanent tax savings. Apart from setting up the IC-DISC properly, there are several important agreements, such as Commission Agreements, Dividend Agreements, Export Promotion Expense Agreement, etc. that must be address to maximize tax benefits from the DISC. Contact Paul by clicking here to set up a DISC for your company or help maximizing the tax benefits of your current DISC.
A common question about transactions, especially those with high dollar amounts, is whether the gain on that transaction is subject to ordinary tax rates or capital gain tax rates. Basically if the item sold is a “capital asset” then the resulting gain or loss is a capital gain or loss. Everything else is taxed at ordinary tax rates. Although this seems to be a simple delineation, deciding whether the property sold is or was a capital asset can be very difficult. There are specific items excluded from the definition of a capital asset. There are also cases and other IRS rulings that give hints as to what a capital asset is. However, overall many practitioners and even professionals at IRS would agree the definition is unclear in many circumstances. If you would like some guidance as to your transaction, please contact Paul by clicking here.
With bank failures, foreclosures, mortgage frauds, and many other situations in today’s financial and real estate markets, borrowers are receiving 1099-C (income from cancellation of a debt) and 1099-A (acquisition or abandonment of secured property) from their lenders. Many taxpayers are confused as what they need to do when they receive one or both of these forms. Most taxpayers are concerned they will have to pay taxes on the entire amount reported on the forms. Contact Paul to help guide you through this process to determine what the consequences of these forms are to your individual tax situation. Click here to contact Paul.
Transfer pricing issues arise when a company sells or transfers goods, services, or intangibles to a related entity (usually a foreign entity). Section 482 of the Internal Revue Code give the IRS authority to adjust the income, deductions, credits, or allowances of commonly controlled taxpayers to prevent evasion of taxes or to “clearly reflect” their income. The IRS regulations under section 482 generally provide that prices charged by one affiliate to another, in an intercompany transaction involving the transfer of goods, services, or intangibles, should be consistent with prices that would have been charged if unrelated taxpayers had engaged in the same transaction under the same circumstances. If your business does business in foreign jurisdictions or utilizes a IC-DISC (Interest Charge Domestic International Sales Corporation), FSC (Foreign Sales Corporation) or a direct foreign subsidiary your business has transfer price issues. Currently the IRS has implemented the Advance Pricing Agreement (APA) Program. An APA is a binding contract between the IRS and a taxpayer by which the IRS agrees not to seek a transfer pricing adjustment under IRC § 482 for a covered transaction if the taxpayer files its tax return for a covered year consistent with the agreed transfer pricing method. Contact Paul for assistance and guidance in this complicated area of the law. Click here to contact Paul.