Regarding That Disregarded Entity…

The Treasury Department has clamped down on a key reporting exemption that was previously enjoyed by foreign-owned, single-member limited liability companies (SMLLCs).  This cDisregard second thoughthange has significant impacts on any foreign person or entity with holdings in U.S. SMLLCs that are disregarded for federal income tax purposes.  Previously, these entities were exempt from the comprehensive record maintenance and associated compliance requirements that applied to 25% foreign-owned domestic corporations.  Now, substantially any transaction between U.S. domestic disregarded entities and their foreign owners, including any of the owner’s related entities, may be reportable.

These regulations are part of a larger effort by the Treasury Department to increase financial transparency.  Entities subject to these regulations will continue to be treated as disregarded for other federal tax purposes.  The Treasury Department explained that there is a class of foreign-owned U.S. entity (typically SMLLCs) that has no obligation to report information to the IRS or even obtain a tax identification number.  According to the government, these “disregarded entities” could be used to shield the foreign owners of non-U.S. assets or bank accounts.  By treating domestic disregarded entities that are wholly owned by a foreign person as a domestic corporation separate from its owner (for these limited reporting and compliance requirements), the regulations enable the IRS to determine the existence and magnitude of any tax liability and share information with tax authorities in other countries.

Requirements
Previously, certain disregarded entities and their foreign owners may not have had an obligation to file a tax return or obtain an Employer Identification Number (EIN).  The final regulations require foreign owned domestic disregarded entities to:

  • Obtain EINs from the IRS
  • Annually file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business
  • Identify “reportable transactions” between the LLC and any related parties, including the LLC’s foreign owner
  • Maintain supporting books and records

Regulations
These rules treat U.S. disregarded entities as stand-alone foreign-owned domestic corporations.  Therefore, they are now required to file Form 5472 with respect to reportable transactions between the entity and its foreign owner or other foreign related parties. Transactions are reportable as if the entity were a corporation for U.S. tax purposes. These entities also are required to maintain records sufficient to establish the accuracy of the information return and the proper U.S. tax treatment of such transactions.

Please see the regulations for examples of reportable transactions that require reporting, elimination of certain reporting exemptions, and overlap rules affecting controlled foreign corporations and foreign sales corporations.

Tax Year
The final regulations require the domestic reporting corporations to have the same tax year as their foreign owner if that foreign owner has an existing U.S. reporting obligation. If the foreign owner has no U.S. return filing obligation, then the domestic reporting corporation must report on a calendar year basis.

Effective Date
The final regulations are effective December 13, 2016, and apply to tax years beginning on or after January 1, 2017, and ending on or after December 13, 2017.


Jim Lennon Photographer 175-H2 Commerce Drive Hauppauge NY 631-617-5872

Lisa S. Goldman, CPA is Partner-in-Charge of Wealth Management at Raich Ende Malter & Co. LLP, with more than 20 years’ experience serving Fortune 500 corporations and privately-owned companies in the real estate, manufacturing, and consumer products industries. She specializes in international taxation and in providing services for high-net-worth individuals and their businesses. Ms. Goldman is a trust and estate practitioner (TEP) under the auspices of STEP and is a member of the NYSSCPA’s International Taxation Committee and the AICPA Tax Division. She frequently writes and lectures on international tax topics. Reach Lisa at 212-944-4433 or lgoldman@rem-co.com.

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End of the AMT? Good riddance

amt-article-anti-amt2Guest Post by Gigi Boudreaux, CPA, MBA

The time for year-end tax planning is over and a tax season with new due dates looms. Hopefully you have accelerated deductions, because in 2016 that is perhaps more important than the previous years as President Trump’s tax proposal forecasts significant cuts to tax rates. So, what deductions can we accelerate? The Internal Revenue Code allows for only a handful of deductions for individual taxpayers, the largest of which are state and local income taxes, real estate taxes, and mortgage interest. In New York, we pay among the highest state income taxes AND some of the highest property taxes in the country. My clients would love to take advantage of these burdensome taxes and deduct them early, but the dreaded Alternative Minimum Tax (“AMT”) dashes their hopes. What the heck is the AMT anyway?!

The AMT is an antiquated tax originally enacted in 1969 to prevent tax avoidance by wealthy taxpayers. Unlike the regular income tax, the AMT parameters were not indexed for inflation. As a result, with economic growth and inflation over time, more and more middle-income taxpayers find themselves paying the AMT. What does this mean? It means that those ridiculously high New York state income AND property taxes are not deductible. That’s right – you are getting zero benefit for the largest tax deductions you pay each year.

This is how I explain the AMT to my clients: The AMT is an alternative taxing system that exists in the background to the regular taxing system. All taxpayers MUST pay the higher of the result of the two taxing systems. The regular taxing system, as we know, is a series of graduated rates (currently seven; Trump’s proposing only three) from as low as 10% to the highest of 39.6%. As your income increases, you pay a higher rate of tax. The AMT has only two rates (26% and 28%) and taxes a much broader income tax base. Both the regular tax and the AMT start in the same place by summing all sources of income. From there, the two systems differ. For regular tax, taxpayers can deduct dependency exemptions and itemized deductions, which include medical expenses, state and local income taxes, mortgage interest expense, charitable contributions, and, to a limited extent, miscellaneous deductions. For AMT, only charitable contributions and limited mortgage interest deduction are allowed. So for New York families whose largest deductions on their tax returns are personal and dependency exemptions and state and local taxes (including real estate taxes), will be paying AMT, a tax higher than their regular tax.

Here’s some good news. President Trump is proposing to eliminate the AMT. While Democrats and Republicans disagree on many of Trump’s proposals, I believe this is one that all Long Islanders can agree upon. According to tax estimates from the Tax Policy Center, last year approximately 27% of households nationwide with incomes between $200,000 and $500,000 were affected by the AMT. My estimation is that many of those households reside here in New York because those who are most vulnerable to the AMT are those taxpayers with large families (three or more children) living in high state and local tax states.

So, while experts agree that Trump’s proposed tax rate reduction will only help the wealthiest taxpayers, many New York taxpayers may see a reduction in tax if the AMT is repealed. Questions still remain on Trump’s proposal to limit itemized deductions, which may affect the tax savings on the elimination of the AMT. Other issues that may surface will be the AMT credit carryovers (the government attempt to ease the AMT burden) and the AMT interplay with net operating loss carryovers.

One thing remains certain: no one will be unhappy to see the AMT go away.


boudreaux_gigi-3Gigi Boudreaux, CPA, MBA is a Tax Partner in Raich Ende Malter & Co. LLP’s Long Island office. She primarily serves small business clients working in the real estate, distribution, manufacturing, and construction industries. She can be reached at gboudreaux@rem-co.com.

Worried About Your Undisclosed Foreign Assets? The Offshore Voluntary Disclosure Program May Offer a Solution

ovdp-article-globeAs I said before: Being a good tax citizen is important.  Sometimes it is difficult to navigate the stormy seas of compliance to achieve that end.  One such hazard is the difficulty of adhering to complex international reporting requirements.

I must pause here to note that if you do have significant international compliance issues, you should consult legal counsel in addition to a tax professional due to the many civil and criminal consequences imposed by the Department of Justice and Department of the Treasury.

Imagine a normal day in the life of a hard-working taxpayer.  She always files her tax return on time and doesn’t take any undue deductions.  One day she learns a wealthy relative left her interest in a profitable commercial property in Croatia.  How fortunate!  But wait, this wealthy relative left it to her a couple of years ago and it has been generating income this whole time.  Oh no!  There are full pages in the IRS instructions detailing penalties for the forms she didn’t file over that period that could amount in many thousands of dollars and even jail time.  What is our hard-working taxpayer to do?

The IRS, in an effort to provide a bridge to compliance, has enacted the 2012 Offshore Voluntary Disclosure Program (“OVDP”), modified effective July 1, 2014.  This program is designed to incentivize taxpayers (entities and individuals) to come to the IRS with undisclosed assets and accounts rather than the IRS having to hunt them down; it offers a reduction in penalties and potential elimination of the risk of criminal prosecution.  The penalties described in the Internal Revenue Code for failing to comply with foreign reporting are incredibly brutal; in some cases 100% of the highest value of an asset during a given year, plus other penalties, plus interest, plus criminal prosecution.  That, coupled with the increasing risk of being detected by the US Government by their new, more aggressive approach to treaties and policy, creates a very compelling argument for taxpayers to come forward.

This relief a taxpayer receives from this program is not completely painless.  Paying the offshore penalty of 27.5% plus the accuracy-related penalty of 20% is a hard pill to swallow, but when weighed against the alternative (potentially 100% and criminal prosecution), it should go down a little easier.

Eligibility for the OVDP is contingent upon coming forward before the IRS is aware of the unreported foreign assets; if they find you, OVDP is off the table.  In some cases, a taxpayer may have already amended and submitted reports, referred to as a “quiet disclosure.”  These taxpayers still run the risk of full penalties and criminal prosecution if they don’t apply to the OVDP.

In our example, the hard-working taxpayer has the ability to compile all information on the property and the unreported income and then submit an application via Forms 14454 and 14457 to the IRS OVDP.  If accepted, original and amended tax returns accounting for the foreign income and forms reporting the foreign transactions and activity must be prepared and submitted. In addition, the taxes, penalties, and interest due must be paid or arrangement to pay must be made.  All this just to be a good tax citizen!

The Offshore Voluntary Disclosure Program offers a bumpy path to compliance that is not without its difficulties.  It is important for someone considering this path to enlist the counsel of professionals in law and accounting.


evan_2Evan Piccirillo is a Tax Supervisor in Raich Ende Malter & Co. LLP’s Long Island office. Evan specializes in high net worth individuals, as well as closely-held corporations, S-Corporations, and small businesses.
Contact Evan at
epiccirillo@rem-co.com or (516) 228-9000.

Trumping the Tax Code

New president street sign
iStock

I’m not sure if you heard, but a Presidential election happened this past year!

As with every inaugural year, there’s an expectation that the President will push certain talking-points into action sooner vs. later. This year is no different.

A big talking point within the Trump administration has been the urgency regarding tax reform and an indication that the reform could happen within 2017. With the Republicans controlling the White House and both houses of Congress, the expectation for tax reform to rapidly occur seems all the more likely.

With that in mind, it’s important to remember that the following is not fact, but rather a ‘guesstimate’ as to what President-elect Trump may push through as reform, as it is solely based on his stated agenda throughout the election process.

Individual Income Tax

As it’s referred to on President-elect Trump’s website (donaldjtrump.com/policies/tax-plan), the ‘Trump Plan’ calls for reducing the individual income tax brackets from the current seven to three (the following are for married-filing-joint):

  1. < $75,000 – 12%
  2. $75,000 – $225,000 – 25%
  3. > $225,000 – 33%

Most notably, the Trump Plan would look to repeal the alternative minimum tax (AMT) as well as the 3.8% Net Investment Income tax (which was created to help with Obamacare).

But, as we’ve all been taught, if there’s a yin, there must be a yang: while the Trump Plan aims to reduce individual income tax rates, several deductions will be lost as well; most notably, itemized deductions will be capped at $200,000 for married-filing-joint filers or $100,000 for single filers.

Corporate Tax

The Trump Plan also seeks to lower the corporate tax rate from 35% to 15% (and, similar to the individual plan, eliminate the corporate AMT).

In an effort to bring business from overseas, the Plan also calls for a one-time “amnesty” 10% tax on repatriation of corporate profits held offshore. This repatriation would be a significant draw for US corporations that own foreign corporations that conduct at least 25% of the group’s total business activity.

On the deduction side, the Plan would eliminate several business tax credits, most notably the domestic production activities deduction (Section 199 ‘DPAD’). Carried interest would be taxed as ordinary income, and the Research & Development credit would remain intact.

Additionally, the Plan would look to allow firms engaged in manufacturing within the US to elect to expense (rather than capitalize) capital assets, but lose the deductibility of corporate interest expense. The election could be revoked within the first three years of election; however, after three years, the election would be irrevocable.

Estate Tax

The Trump Plan seeks to repeal the ‘death’ tax entirely. However, any capital gains held until death and valued over $10 million would be subject to tax.

Since this could leave room for asset-shifting abuse, contributions of appreciated assets into a private charity established by the decedent (or their relatives) would be disallowed.

Childcare

The Plan also would allow an above-the-line deduction for children under 13 up to $5,000 of child care expenses (this deduction would be eliminated for married-filing-joint filers of $500,000 or a single individual of $250,000).

In addition, the Plan would propose Dependent Care Savings Accounts (DCSAs), which would allow parents to make annual contributions of up to $2,000 per year. All deposits and earnings would be free from taxation, with unused balances available to be rolled over from year-to-year.

As further incentive for the DCSA, the Trump administration would provide a 50% match on contributions (i.e. a $1,000 contribution by the government).

While it’s yet to be seen whether any or all of the above proposals become enacted, it is safe to say that some form of tax reform is headed our way. As tax practitioners and taxpayers, it’s important to stay updated on these issues, so as best to prepare and plan for the coming years ahead.

Our REMcycle team will keep you updated as developments unfold.


roer_david-8-1David Roer is a Tax Manager in Raich Ende Malter & Co. LLP’s New York City office. David specializes in high net worth individuals, as well as closely-held corporations, S-Corporations, and small businesses.
Contact David at
droer@rem-co.com or (212) 944-4433.

Escape From New York (Taxes): Excluding Worldwide Income from New York Taxation

traveling to new york
iStockPhoto

Do you live and/or work outside of the US but maintain a home in New York? New York residency rules may be costing you over 10% of your income unnecessarily. In today’s REMcycle, I’ll explore a tax break  referred to as the “548-Day Rule,” useful for New York domiciliaries who spend most of their time outside of the country.

New York is, and has been, one of the most desired states to live in for centuries. Rich and poor, American or immigrant, New York’s myriad opportunities draw taxpayers like a moth to the neon ATM sign outside of your favorite bodega. Unfortunately, that appeal translates directly into some of the highest living costs in the world, including high tax rates. Not only can New York income tax rates cap out at 8.82% with an additional 3.876% for New York City residents, but New York will tax your worldwide income if you are deemed a resident of the state. That means that income from foreign wages, real estate, investments, etc., will all be subject to these steep rates.

So what makes someone a “resident” of New York?

Domicile vs. Statutory Residence Issues

New York employs two different tests to determine if a taxpayer is a resident of New York and thus subject to taxation on their worldwide income: the Statutory Residence Test and the Domicile Test.

The Statutory Residence test, the quantitative view of residency, will sound familiar to taxpayers avoiding US residency status at the federal level due to the 183-Day Rule. Similar to the federal definition of a US resident, if a taxpayer spends more than 183 days in New York during the tax year, they have met one of the two tests to be classified as a statutory resident – the second and concurrent requirement being that the taxpayer maintains a permanent place of abode in New York. If you spend this much time in New York, the 548-Day Rule will not be able to save you.

Taxpayers defined as residents under the Domicile Test, however, have options. If you lived in New York previously and are attempting to break residency, the Domicile Test is a qualitative barrier to exit. New York auditors will review where you spend your time, where you do business, where you define your “home,” and a number of other items that can paint a subjective picture of money leaving your wallet. It can be very difficult to change your domicile away from New York if you maintain a home there.

Now that I’ve provided (over)simplified summaries of New York’s residency traps, let’s explore how the 548-Day Rule provides tax relief for those taxpayers deemed domiciliaries of New York.

548-Day Rule

First things first, why is it called the 548-Day Rule? Simple. The test allows a taxpayer to review 548 days (a year and a half) to determine if they are a resident of New York based on their physical presence during the chosen period. The period can be any 548 days the taxpayer chooses, as long as 365 of those days fall within the tax year in question. These 548 days chosen create the context for jumping through the three hoops necessary to avoid New York residency:

  1. The taxpayer must spend fewer than 90 out of 548 days inside New York;
  2. They must spend more than 450 out of 548 days outside of the country; and
  3. During the short period, or the section of the chosen 548 days that fall outside of the tax year under question, the ratio of days spent in New York divided by 90 cannot exceed the ratio of days in that short period divided by 548.

An important caveat to taxpayers’ reviewing these thresholds is that your spouse or minor children count in your stead. So if you head back to France to run Société Générale but leave your spouse behind to manage the home, your worldwide income will be taxed by New York.

Shifting the Scales

Minor algebra aside, the most important and complex facet of the 548-Day Rule is the ability to shift the 548-day period at will. As an example, if a 2015 tax year is under review, and the taxpayer spent 91 days in New York at the end of 2014 (failing the first test) but zero days in New York during 2015, the taxpayer can shift the 548-day period forward to include the first half of 2016 instead. This shift is a blessing in its ability to alleviate taxation, but a curse in its complexity, as it can trip up even seasoned practitioners.

I’ve only grazed the edges of New York’s complicated residency rules here. New York is one of the most aggressive residency auditors among the 50 states, and a prudent taxpayer will trust this issue to an experienced professional.


shane-masonShane Mason, CPA, CFP, MSA is a Tax Supervisor in the firm’s New York City office. He specializes in taxation of small and medium size businesses, their owners, inpatriates, expatriates, and high net worth individuals.