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Monthly Archives: February 2018

Disregarded Entities with Foreign Ownership Face Challenges and Opportunities Filing 2017 Tax Returns by Andrew Leonard, CPA

Posted on February 28, 2018 by Andrew Leonard

While the media is rightfully paying significant attention to the U.S.’s new tax laws effective for the 2018 tax year, foreign persons with direct or indirect ownership in certain U.S. entities and structures should not forget that they have a significant new filing requirement effective for the 2017 tax filing season.

For taxable years beginning in 2017, foreign-owned domestic disregarded entities, including single-member limited liability companies (SMLLCs) must, 1) maintain a set of permanent financial records, 2) obtain from the Internal Revenue Service (IRS) an employer identification number (EIN) and 3) file both a U.S. corporate income tax return and IRS informational reporting Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business (Under Sections 6038A and 6038C of the Internal Revenue Code). Failure to file the return or maintain proper records could result in a penalty of $10,000 for each violation of the law.

Generally, the Internal Revenue Code (IRC) treats SMLLCs as disregarded for all tax purposes. This means that a SMLLC would not have any U.S. income tax or information-reporting requirements separate from its foreign owner. However, under the new rules, such disregarded entities owned by a foreign person are treated as a domestic corporation that must meet all of the reporting and recordkeeping requirements applicable to domestic corporations with foreign owners. This includes filing an income tax return even if the foreign owner is already filing a U.S. tax return to report the SMLLC’s activity. The tax return will provide only general identifying information, but the Form 5472 that must be attached includes disclosure of the SMLLC’s direct and indirect foreign owners and any transactions that occurred between the SMLLC and a related party (including but not limited to the owner).  For this purpose, a foreign owner includes a nonresident alien individual, foreign corporation, partnership, trust or estate.

It is likely too late for applicable taxpayers to avoid the domestic disregarded entity filing and recordkeeping requirements in 2017. However, taxpayers do have an immediate opportunity during the first few months of 2018 to plan ahead and change their structures.

For example, a SMLLC may elect to be treated as a corporation for U.S. income tax purposes in order to take advantage of the reduction in the U.S.’s corporate income tax rate from a high of 35 percent to 21 percent beginning in 2018. While this option may be acceptable and easy for some foreign owners of SMLLCs to do, it is not really a solution since it will not eliminate the need for filing a tax return, and Form 5472 may still be required.  If the SMLLC owns U.S. real property there may be FIRPTA issues.

Or, if the SMLLC is owned by a foreign corporation and holds personal use property, the LLC may be liquidated and avoid a U.S. corporate tax return filing requirement going forward until the property is sold. However, this option may also yield future tax implications, including foreign tax consequences, depending on the SMLLCs activities and whether the foreign corporation owns other assets.

Before making any decisions, it is vital that taxpayers engage the expertise of accountants and advisors to conduct a thorough review of their unique circumstances and a careful analysis comparing the options available to them.

The advisors and accountants with Berkowitz Pollack Brant work with domestic and foreign individuals and businesses to comply with international tax laws, maximize tax efficiency and reduce unnecessary compliance costs.

About the Author: Andrew Leonard, CPA, is an associate director with Berkowitz Pollack Brant’s International Tax Services practice, where he focuses on pre- and post-immigration tax planning for individuals from South America, Asia and Europe and helps U.S. residents with foreign interests meet their filing disclosure requirements. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at info@bpbcpa.com.

 

New Tax Law Overhauls Tax Benefits of Meals and Entertainment Expenses by Jeffrey M. Mutnik, CPA/PFS

Posted on February 27, 2018 by Jeffrey Mutnik

The Tax Cuts and Jobs Act (TCJA) makes it more costly for businesses to wine and dine prospects and clients with meals and entertainment beginning on Jan. 1, 2018. While the new legislation keeps a 50 percent deduction for the cost of meals and beverages, it completely eliminates the deduction for client entertainment expenses regardless of whether or not they are directly related to business activities.

 

Under previous law, businesses could deduct 50 percent of “entertainment, amusement or recreation” expenses that were directly related to the active conduct of the taxpayer’s trade or business. With the passage of the TCJA, businesses can still deduct expenses for certain social events that benefit their employees. However, once these activities include clients, prospective clients or other non-employed persons, the deduction will disappear. This applies to tickets to sporting events, concerts and theatrical performances; golf and fishing outings; and membership dues to athletic, social and country clubs.

 

Despite the preservation of the 50 percent deduction for non-employee social activities, the new law puts a 50 percent deduction limit on the meals that businesses provide to their employees, either through an in-office cafeteria or catered meals. In 2026, this limited deduction is set to expire. Under prior law, as recently as 2017, these expenses were 100 percent deductible. In reality, all business meal expenses are now limited to 50% deductibility.

 

Taxpayers with an employer-operated dining facility should review expenses associated with the operation of such a facility, and determine if the limitation (and eventual denial) of a deduction for these expenses warrant a change in the taxpayer’s policy or practices with regard to the facility.  All businesses should review their chart of accounts to separate meals from entertainment expenditures as of Jan. 1, 2018.

 

With these changes in the tax law, businesses will need to reconsider whether their generosity and business-building social activities will be worth the potential tax hit they will incur.

 

Because the law reduces the federal corporate tax rate from 35 percent to 21 percent, the impact of the lost deductions may not be so severe for those businesses organized as C corporations. Owners of businesses organized as pass-through entities, will also benefit from reduced federal tax rates, but the rate reduction may not be able to offset the loss of entertainment deduction.

 

All types of businesses, regardless of the structure, must assess the impact the changes to the meals and entertainment (M&E) deduction will have on their bottom lines. At the same time, they must also consider that new law eliminates a number of other employer deductions.  For example, the TCJA removes an employer’s ability to deduct transportation expenses that subsidize workers’ commuting costs, and it limits the deductibility of employee achievement awards.

 

Businesses have a lot of decisions to make in 2018 that will affect their ultimate tax liabilities in the future. Making these assessments should be conducted under the guidance of experienced accountants and advisors who understand the nuances of the new tax law and how they will impact businesses and their owners.

 

About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director of Taxation and Financial Services with Berkowitz Pollack Brant Advisors and Accountants, where he provides tax- and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.

 

Are you Ready to File your 2017 Tax Returns? by Angie Adames, CPA

Posted on February 26, 2018 by Angie Adames

The IRS has begun accepting tax returns for the 2017 tax year, for which the agency expects to receive nearly 155 million returns. To ensure the smooth and efficient processing of your return and any refund you are due, the IRS recommends that taxpayers take the following steps:

Know the Deadlines

The 2017 individual tax-filing deadline is Tuesday, April 17, 2018. Taxpayers may request an extension by that date to file no later than Oct. 15, 2018.

Gather Documents

Before filing tax returns, individuals should take the time to ensure that they have all of the appropriate year-end statements in hand from their employers, their banks, their financial advisors and others who share income and tax information with the IRS. Following are just some of the most common forms taxpayers will need to file their tax returns for 2017. If you do not receive these forms by the end of February, contact the issuer, whether it be an employer, a bank or other financial institution, before reaching out to the IRS.

  • Employer Form W-2 reports the annual wages and benefits you receive as an employee as well as the taxes withheld from your pay and paid on your behalf directly to the IRS
  • Employer Form 1095-C reports whether or not you were covered by health insurance during every month of the year
  • Forms 1098-E and 1098-T details the amount of tax-deductible student loan interest and tuition and fees you paid, respectively
  • Form 1099-DIV reports the dividends your investments paid to you and the capital gains and distributions you received from those investments
  • Form 1099-INT is issued by banks and financial institutions to report any interest exceeding $10 that was paid to you from interest-bearing accounts.
  • Form 1099-MISC reports the amount of non-employee compensation you received from working as a freelancer or independent contractor as well as rent and royalties paid to you
  • Form 1099-R details the distributions you may have taken from pensions and retirement accounts

In addition to these tax-related forms, individuals should be gathering documentation to demonstrate charitable deductions, medical expenses and other items that may claim to reduce their taxable income for the year.

Remember the New Tax Extenders

On February 9, the president signed into law a 2018 budget that retroactively extends into 2017 more than 30 tax provisions that expired at the end of 2016. Included on this list of tax extenders that individuals should address on their 2017 tax returns are an above-the-line deduction for qualified tuition and related expenses, and the ability to exclude from gross income the discharge of qualified principal residence of qualified principal residence indebtedness (often, foreclosure-related debt forgiveness).

Choose E-file and Direct Deposit

The safest and most accurate way to file a tax return is electronically. Similarly, using direct deposit will expedite the receipt of any tax refund directly into your bank account. Yet, the IRS reminds taxpayers claiming the Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTC) that they should not expect to receive a refund until after February 27.

Renew Expiring ITINs

Individuals who have U.S. tax filing or income reporting obligations but are not eligible for a Social Security number (SSN) are issued Individual Taxpayer Identification Numbers (ITINs) that must be kept up-to-date. ITINs with the middle digits 70, 71, 72 and 80 expired at the end of 2017. Affected individuals must file IRS Form W-7 to renew their ITIN before filing their tax returns for 2017 and note that the process could take as long as 11 weeks to receive an ITIN assignment letter.

Get Professional Tax Help

The tax laws are complicated and rife with a number of exceptions, limitations and other challenges that can make it difficult for individuals to file accurate annual returns and compute their tax liabilities. By engaging the knowledge and experience of a certified public accountant (CPA) and professional tax advisory firm, individuals can more easily comply with tax laws while minimizing their income tax liabilities.

About the Author: Angie Adames, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where she provides tax and consulting services to real estate companies, manufacturers and closely held business. She can be reached at the firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

 

How Income and Assets affect your Child’s Potential Financial Aid Award by Joanie B. Stein, CPA

Posted on February 23, 2018 by Joanie Stein

There is no denying that a college education is expensive. According to the College Board, the average tuition and fees at a four-year public university for the 2017-2018 school year university is $8,230 for in-state students and $33,450 at a private institution. When you add in costs for room, board, books and everyday living expenses, the amount can become overwhelming for families at most all income levels. Thankfully, there are a number of ways that students can receive financial assistance based on their academic achievements and/or their financial needs. Understanding how these processes work is not for the faint of heart; they require some advance planning.

The Dreaded FAFSA

Each Fall, the U.S. Department of Education encourages high school seniors to complete the Free Application for Federal Student Aid (FAFSA) online at www.fafsa.gov by the Spring deadline, which for 2018 is June 30. Despite this generous allotment of time, it is recommended that student complete the online form as early as possible since aid is typically given on a first-come, first-serve basis. In addition, some colleges require prospective students FAFSA information in advance of their college application deadlines.

As its name implies, the FAFSA asks for information to help the federal government, states and post-secondary schools determine a student’s eligibility for financial aid. Contrary to popular belief, there is no income cut-off or academic threshold to qualify for tuition assistance. In fact, the Department of Education emphasizes that even if students have poor grades and/or their parents make a lot of money, they should still fill out the FAFSA each year to potentially receive scholarship dollars. According to the most recent data from the National Center for Education Statistics, 72 percent of all students received some form of financial aid in 2016. Sixty-three percent of those students received grants, which included scholarships that were not based on financial need.

How does the FAFSA determine a Student’s Eligibility for Aid?

The FAFSA asks families to provide information about the income and assets of both students and their parents as reported on tax returns filed two years prior to the school year in which aid is requested. For example, students entering college in 2018 would use information from their families’ 2016 tax returns as the base year. After entering information about balances in checking and savings accounts, certificates of deposit, taxable brokerage accounts and trust accounts, the government will estimate an Expected Family Contribution (EFC), which is the minimum amount that a family should expect to contribute towards a child’s education.

It is important to note that the government does not weigh all of a family’s income and assets equally. Assets owned by students or in custodial UGMA/UTMA accounts for the benefit of a child count against the family more than assets owned by the parents. More specifically, for every dollar in a child’s account, the government will subtract 20 cents from a potential financial aid award. Assets held in a parents’ name will lose 5.64 cents of every dollar. Yet, 529 college savings plans in which a parent is an owner/custodian would count as the parents’ assets. When 529 accounts are owned by grandparents, they are completely excluded from the EFC calculation until a student takes a distribution to pay college-related expenses. At that point, the distribution is considered income to the student.

In addition, the EFC calculation excludes the value of a small business with 100 or fewer employees, the equity in a primary family residence and balances held in qualified retirement accounts, such as 401(k)s, Individual Retirement Accounts (IRAs), Roth IRAs and SEP IRAs. However, investments in real estate other than the family home and contributions to retirement accounts made during the base year will count in the EFC calculation.

Each college will interpret a family’s EFC differently, and some will also require applicants to complete a profile for the College Board’s College Scholarship Service (CSS) to determine financial aid awards. In general, the CSS requires the disclosure of more financial detail and weighs income and assets differently than the FAFSA.

With these details in mind, families at all income levels should take the time to apply for financial aid. In addition, advance planning under the direction of experienced financial advisors can help to improve a family’s chances of receiving financial aid and easing the burden of paying for children’s college education.

 

About the Author: Joanie B. Stein, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where she works with individuals and closely held businesses to implement sound strategies that are intended to preserve wealth and improve tax efficiency.  She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

 

 

 

 

Tax Reform Eliminates Kiddie Tax Complexity by Jeffrey M. Mutnik, CPA/PFS

Posted on February 21, 2018 by Jeffrey Mutnik

Congress first introduced the Kiddie Tax in the 1980s to prevent high-net-worth families from paying overall lower taxes on their investment income by transferring income-generating assets to their young children in a lower tax bracket. For example, during the 2017 tax year, unearned income that exceeds $2,100 from investments held by children age 19 and younger, or full-time students under the age 24, is taxed at the parent’s marginal tax rate, which could be as high as 39.6 percent. However, under the Tax Cuts and Jobs Act (TCJA) that the president signed into law in December 2017, the parent’s income and marginal tax rate are disregarded.

Instead, beginning in 2018 and through the end of 2025, a dependent child’s unearned investment income (from capital gains, dividends and interest) in excess of $2,100 is subject to the trust income tax rates, which are capped at 37 percent on income above $12,500. In addition, earned income for wages, salaries and other compensation a dependent child receives for providing personal services is subject to taxation at the single taxpayer rates, which can be as high as 37 percent on income exceeding $500,000. While this modification makes the taxation of such income simpler, there are other important factors that families should consider in their tax planning.

For example, under the TCJA, the highest 37 percent tax brackets for trusts and estate in 2018 kicks in at $12,500, a much lower threshold than the top 37 percent rate that would have applied to parents with $600,000 in taxable income before the new law was enacted. As a result, the benefits of the new law will depend on the amount of a child’s unearned income during a tax year. In most cases, transferring substantial investment assets into children’s names will potentially lower a family’s overall federal income tax liabilities in 2018 and through 2025, when this provision is set to expire. However, families should be mindful of the gift tax and asset control issues they may face when contemplating transfers to family members.

 

The advisors and accountants with Berkowitz Pollack Brant work with U.S. and foreign families to protect wealth and maintain tax efficiency while complying with complex global tax laws.

 

About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director of Taxation and Financial Services with Berkowitz Pollack Brant Advisors and Accountants, where he provides tax- and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.

 

 

 

States Provide Penalty Relief to Qualifying Businesses with Unpaid Tax Liabilities by Michael Hirsch, JD, LLM

Posted on February 12, 2018 by Michael Hirsch,

Most U.S. states offer businesses an opportunity to potentially avoid penalties when they voluntarily report and pay previously unpaid liabilities of state and local taxes. In addition, many states establish temporary tax amnesty programs that also allow certain taxpayers to avoid the interest and penalties that accrued on their delinquent taxes. Taking advantage of these programs requires taxpayers to understand their eligibility to participate and the time frame in which the program will apply.

It is not uncommon for businesses to unintentionally forget one of the many tax-reporting responsibilities they are exposed to when doing business in a state, including, but not limited to, state-level sales and use tax, corporate tax, gross receipts tax, franchise tax, and/or motor and other fuels taxes. In addition, thanks to complex tax laws, businesses may overlook or miscalculate their true tax liabilities within those states where they operate. For example, a business headquartered and based in Florida may overlook filing corporate income tax returns in other states in which it rents commercial property.

Generally, Voluntary Disclosure Programs apply only to businesses that have not previously been contacted by a state taxing authority about an outstanding liability and whose delinquencies are neither intentional nor obvious.  Where states differ in their application of these programs is the number of years they will “look back” at a business’s tax liabilities after making the disclosure. For example, Florida looks back three years, whereas California relies on a longer six-year look-back period.

Once businesses report and pay their outstanding tax and interest liabilities through a Voluntary Disclosure Agreement (VDA), all penalties will be waived. However, as state governments continue to look for ways to bolster their budgets, many offer qualifying businesses a brief window of opportunity to also avoid paying interest on delinquent tax liabilities when they voluntarily comply with state and local tax laws. These tax amnesty programs not only help states close revenue gaps, they also help broaden their tax base by allowing previously unidentified taxpayers to enter and remain in the system.

For taxpayers, interest and penalty relief will apply when they voluntarily come clean within the applicable time frame. For example, both Ohio and Rhode Island have tax amnesty programs in place until Feb. 15, 2018. In Texas, delinquent businesses will have an opportunity to qualify for amnesty from interest and penalties on unreported state tax liabilities when they come into compliance between May 1 and June 29, 2018. The program applies to periods prior to Jan. 1, 2018, and includes only previously unreported liabilities.

Businesses with operations in multiple states should engage the services of State and Local Tax (SALT) professionals to regularly assess their tax reporting and payment responsibilities, assist in complying with voluntary disclosure programs and avoid potential risks of double taxation.

About the Author: Michael Hirsch, JD, LLM, is a senior manager of Tax Services with Berkowitz Pollack Brant’s state and local tax (SALT) practice, where he helps individuals and businesses to meet their corporate, state and local tax reporting requirements. He can be reached at the CPA firm’s Fort Lauderdale, Fla., office at (954) 712-7000, or via email at info@bpbcpa.com.

2017 Tax Filing Deadline Set for April 17, 2018 by Adam Slavin, CPA

Posted on February 12, 2018 by Adam Slavin

The IRS announced that the deadline for taxpayers to file their federal income tax returns for the 2017 tax year will be Tuesday, April 17, 2018.  The filing deadline is extended because the traditional due date of April 15 falls on a Sunday, and Monday is a legal holiday in the District of Columbia. April 17 is also the deadline for taxpayers to request a filing extension if needed.

In addition, the IRS said that that it will begin accepting taxpayers’ 2017 federal returns on Jan. 29, 2018, a few days later than last year, to ensure its systems are prepared to respond to any impact that tax legislation will have on 2017 returns.

Due to the passage of the Tax Cuts and Jobs Act, which went into effect on Jan. 1, 2018, the returns that taxpayers file this year for 2017 should, for the most part, reflect the tax code that was in existence prior to the tax reform law.

About the Author: Adam Slavin, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practices, where he provides tax planning and consulting services to high-net-worth individuals and closely held business.  He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at info@bpbcpa.com.

 

IRS Helps Taxpayers to More Easily Calculate Personal Casualty Losses from 2017 Hurricanes by Arkadiy (Eric) Green, CPA

Posted on February 06, 2018 by Arkadiy (Eric) Green

Individual taxpayers who suffered losses to their homes and personal belongings during the 2017 hurricane season should be aware that the IRS introduced safe harbor methods to calculate those losses on their 2017 income tax returns that they will file in April of this year.

 

Under the IRS guidance issued in December 2017, taxpayers with casualty losses of $20,000 or less may use an Estimated Repair Cost Method by using the lesser of two repair estimates prepared by two separate, independent and licensed contractors to determine a property’s decrease in fair market value (FMV). The estimates must detail the itemized costs required to restore the property to the same condition it was in immediately before the casualty event. Any improvement costs that would increase the property’s value above its pre-casualty condition must be excluded from the calculation.

 

For casualty losses to personal-use residential real property and personal belongings of $5,000 or less, taxpayers may rely on a De Minimis Safe Harbor Method under which they may use a good faith estimate of the cost of repairs required to restore the real property to its pre-casualty condition and the decrease in the fair market value of the individual’s personal belongings. Under this method, taxpayers must maintain meticulous records describing the affected real and personal property and detailing the methodology used for estimating the loss.

 

The Insurance Safe Harbor Method allows taxpayers to rely on reports from their homeowners’ or flood insurance companies that estimate the amount of losses they sustained to personal-use residential real property.

 

In addition to these safe harbor methods, individuals who suffered casualty losses to personal-use residential property as a result of a federally declared disaster may use the following methods: (1) the Contractor Safe Harbor Method under which the taxpayers may rely on contract price for the repairs specified in a binding contract prepared by a licensed independent contractor and signed by the individual and the contractor, or (2) the Disaster Loan Appraisal Safe Harbor Method, which allows taxpayers to use the estimated loss contained in appraisals prepared for the purpose of obtaining a Federal loan or loan guarantee from the Federal Government. To determine the amount of casualty or theft losses for personal belongings located in a federally declared disaster area, individuals may also use a Replacement Cost Safe Harbor Method that relies on a table that values the property based upon such factors as the amount of time the individual owned the property prior to the casualty event.

 

In a separate IRS announcement, the agency detailed safe harbor methods to specifically help victims of Hurricanes Harvey, Irma and Maria determine the amount of losses these storms inflicted on their homes located in Texas, Louisiana, Florida, Georgia, South Carolina, Puerto Rico, and the U.S. Virgin Islands. The calculations are based on cost indexes that consider the size of a home as well as the location and extent of its damages.

 

It is important to note that the IRS issued this updated guidance in December 2017, just prior to the passage of Tax Cuts and Jobs Act, which overhauls the tax code beginning on Jan. 1, 2018. The new law limits the tax break for personal casualty losses to those damages that result from a disaster declared by the president of the United States. On the surface, it appears that victims of major disasters, such as hurricanes and other federally declared disasters, would still be allowed to deduct personal casualty losses in the future, while homeowners affected by fires, flooding, winter storms and other casualty and theft events may no longer benefit from this form of tax relief. However, the actual implications of the new law will not be fully known until later this year when the IRS issues technical guidance on how it will address the provisions of the new tax law.

 

With offices in South Florida, Berkowitz Pollack Brant is well aware of the complicated tax and insurance issues individuals and businesses face when preparing for and recovering from natural disasters, such as hurricanes. Our advisors and accountants work closely with clients to insure and support claims of business interruption and assess of damages to property and businesses for purposes of claiming casualty loss tax deductions.

 

About the Author: Arkadiy (Eric) Green, CPA, is a director of Tax Services with Berkowitz Pollack Brant, where he works with real estate companies, commercial and residential developers, property management companies, real estate investors and high-net-worth individuals to structure investments and complex transactions for maximum tax efficiency. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at info@bpbcpa.com.

 

 

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