The Tax Cuts and Jobs Act aims to make it impossible for businesses to continue using net operating losses (NOLs) to reduce their corporate tax liabilities to zero over more than two decades.
For taxable years beginning after Dec. 31, 2017, NOL carrybacks are eliminated for most business (excluding farming and insurance businesses), and NOLs carryforwards are limited to 80 percent of the taxpayer’s taxable income. Moreover, the new law prohibits taxpayers from claiming business losses in excess of $250,000 for individual taxpayers and $500,000 for joint filers. The one bright spot is a new provision that allows taxpayers to carry NOL’s forward indefinitely to offset future taxable income.
Under the previous tax regime, taxpayers could deduct losses they incurred in an active trade or business from other income sources, including passive and investment income. Moreover, taxpayers were permitted to carry those NOLs back two years and forward 20 years to offset taxable income and either claim a refund for prior tax years or reduce tax liabilities in future years.
With the new regulations concerning NOLs, taxpayers should meet with advisors to understand how they should treat NOL’s generated prior to Jan. 1, 2018, and how they may carefully minimize the impact of any potential adverse tax and cash-flow issues in the future.
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 firstname.lastname@example.org.
In matters in which the IRS determines that a taxpayer is deficient in meeting his or her income tax liabilities, it is generally presumed that agency is correct. It is the taxpayer who bears the burden to prove the IRS wrong by a preponderance of evidence. In essence, the IRS can challenge any and all taxpayer claims to credits and deductions, even if the taxpayer is in fact entitled to them. Taxpayers must then show demonstrative proof to back up the tax treatment for which they claim they are entitled.
This was the issue before the U.S. Tax Court in February 2018 when the IRS challenged a Mississippi family’s deduction of $27,646 in expenses incurred to replace carpeting and make other routine maintenance repairs to rental units in real estate property that the family owned. The IRS issued the taxpayer a notice of tax deficiency and a related penalty contending that those repairs constituted a property “improvement” that the taxpayer should have written off and depreciated over time. The only proof that the taxpayer presented to prove that it properly deducted those expenses was a three-page list of its itemized repairs and associated costs.
The court subsequently ruled in favor of the IRS due to the taxpayer’s inability to meet its burden of proof and provide a preponderance of documents, records and other physical evidence to counter the IRS’s claim.
What could the taxpayer have done differently? According to the court, the taxpayer could have corroborated its position with records documenting the value of its properties before and after the repairs through appraisals, or inspection reports or lease contracts that stipulate the taxpayer’s requirement to make repairs in between tenants.
In light of the court’s decision, it behooves taxpayers to err on the side of caution and take extraordinary steps to prove their decisions to claim deductions, especially with regard to real property and the repair regulations. As a minimum, taxpayers should take before and after photographs and/or video of items that require repairs in order to demonstrate that the costs they incur are in fact a result of general property maintenance and not improvements, restorations and betterments to extend the property’s useful life or adapt it for a new or different use.
About the Author: Arthur Lieberman is a director in the Tax Services practice of Berkowitz Pollack Brant, where he works with real estate companies and closely held businesses on deal structuring, tax planning, tax research, tax controversies and compliance issues. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at email@example.com.
Berkowitz Pollack Brant directors Richard A. Pollack and Scott Bouchner were invited to join experts in the fields of accounting, economics, finance and law to write a chapter for a recently published guidebook about lost profits, damages and business valuations. Here is an excerpt of their contribution to “Lost Profits Damages: Principles, Methods, and Applications”, which Quickreads and The National Association of Certified Valuators and Analysts (NACVA) calls “a must have for aspiring and experienced lost profits damages experts.”
To order a copy of “Lost Profits Damages: Principles, Methods, and Applications”, visit http://www.valuationproducts.com/lostprofits/.
Mitigation of Damages in Lost Profits Calculations
The concept of mitigation of damages pertains to the legal principle that an injured party cannot recover damages that it could have otherwise avoided with reasonable effort. As discussed in the Restatement (Second) of Contracts,
- Except as stated in Subsection (2), damages are not recoverable for loss that the injured party could have avoided without undue risk, burden or humiliation.
- The injured party is not precluded from recovery by the rule stated in Subsection (1) to the extent that he has made reasonable but unsuccessful efforts to avoid loss.
Like breach of contract actions, this principle of mitigation is similarly applicable in tort cases, as discussed in Restatement (Second) of Torts.
- Except as stated in Subsection (2), one injured by the tort of another is not entitled to recover damages for any harm that he could have avoided by the use of reasonable effort or expenditure after the commission of the tort.
- One is not prevented from recovering damages for a particular harm resulting from a tort if the tortfeasor intended the harm or was aware of it and was recklessly disregardful of it, unless the injured person with knowledge of the danger of the harm intentionally or heedlessly failed to protect his own interests. 
Contrary to common understanding, there is no absolute “duty to mitigate” as an affirmative obligation. While the failure to do so could result in a reduction of the damage award, establishing liability and determining the gross damages award are not dependent upon the plaintiff’s efforts to mitigate. The plaintiff is required to act in good faith and take appropriate actions to overcome the damages purported caused by the defendant.
Also referred to as the avoidable consequences doctrine, mitigation “finds its application in virtually every type of case in which the recovery of a money judgment or award is authorized.”
The implications of mitigation in the computation of lost profits, however, are often overlooked or underappreciated by the damages expert. Plaintiff’s expert may focus upon analyzing plaintiff’s economic profits “but for” the alleged wrongdoing by defendant while substantially accepting plaintiff’s “actual” earnings as recorded for past damages computations or as projected for future damages calculations. Likewise, defendant’s expert may concentrate on rebutting the “but for” projections of plaintiff’s expert while also paying little attention to plaintiff’s recorded or projected post-injury economic profits. In contrast, the concept of mitigation is directed toward an analysis of whether plaintiff’s actual post-injury net economic profits could or should have been greater had plaintiff reasonably mitigated its losses. If so, plaintiff’s lost profits damages will be less when measured as the difference between the “but for” and successful mitigation-adjusted “actual” returns than if the mitigation adjustments were not performed. There may be circumstances, however, where the plaintiff’s efforts to mitigate its damages are unsuccessful, which could result in an increase in damages.
To the extent that the defendant is able to demonstrate that the plaintiff could have avoided or limited its damages by taking reasonable actions, it may be possible to reduce or eliminate the defendant’s obligation to pay for damages suffered by the plaintiff. Conversely, if challenged, the plaintiff should be able to offer evidence as to whether it was possible to mitigate its losses, what the costs of such mitigation efforts would have been relative to the potential benefits, what attempts, if any, were made to avoid losses caused by the defendant, and what were the results of these efforts. While the parties’ damages experts often address these issues, they may be better addressed in some instances directly by or in concert with industry experts and fact witnesses.
About the Authors: Richard A. Pollack, CPA/ABV/CFF/PFS, ASA, CBA, CFE, CAMS, CIRA, CVA, is director-in-charge of Berkowitz Pollack Brant’s Forensic and Business Valuation Services practice. Scott Bouchner, CMA, CVA, CFE, CIRA, is a director with the practice. Both professionals have served as litigation consultants, expert witnesses, court-appointed experts and forensic investigators on a number of high-profile cases. They can be reached at the CPA firm’s Miami office as (305) 379-7000 or via email at firstname.lastname@example.org.
 Restatement (Second) of Contracts § 350. St. Paul, Minn: American Law Institute, (1981)
 Restatement (Second) of Torts § 918. St. Paul, Minn: American Law Institute, (1977); See also National Communications Assoc. v. AT&T, 93 Civ. 3707 (LAP) (New York 2001) (which states that “A plaintiff who fails to take reasonable steps to avoid the alleged loss ‘has broken the chain of causation, and loss resulting to him thereafter is suffered through his own act[; i]t is not damage that has been caused by the wrongful act of the [defendant]”), citing McClelland v. Climax Hosier Mills, 252 N.Y. 347, 359, 169 N.E. 605, 609-10 (New York 1930)
 See Restatement (Second) of Contracts § 350 (1981), which states “It is sometimes said that it is the “duty” of the aggrieved party to mitigate damages, but this is misleading because he incurs no liability for his failure to act. The amount of loss that he could reasonably have avoided by stopping performance, making substitute arrangements or otherwise is simply subtracted from the amount that would otherwise have been recoverable as damages.” Also see In re Std. Jury Instructions-Contract & Bus. Cases, 116 So. 3d 284, (Supreme Court of Florida 2013), which states that “[t]here is no actual ‘duty to mitigate,’ because the injured party is not compelled to undertake any ameliorative efforts.”
 See Sedgwick on Damages, 9th ed., sec.204, p. 390; 15 Am. Jur., sec. 27, p. 420; 25 C.J.S., Damages, sec. 33, p. 499.
The high times are over for cryptocurrency investors who thought their gains and profits from Bitcoin, Etherium, Ripple and other firms of virtual money could escape the watchful eye of Uncle Sam.
The IRS has made it clear that it considers digital money to be a physical asset subject to U.S. income taxes, and it will take all necessary efforts to uncover and criminally pursue digital currency tax evaders. In a recent development, Coinbase, the cryptocurrency exchange platform, announced it will comply with a 2017 district court ruling requiring it to share with the IRS the records of more than 13,000 of its customers who since 2013 bought, sold, transferred and stored more than $20,000 in digital currency for which an unreported tax liability may be due. As the IRS and other government agencies focus on regulating cryptocurrency, investors must understand how the tax code treats virtual money, and they must commit to meet their related tax responsibilities or risk criminal prosecution.
Taxable Events with Cryptocurrency
Cryptocurrency’s treatment as a capital asset means that taxes will apply whenever an investor does any of the following:
- sells digital currency for a gain
- converts it to cash
- trades it for another digital currency, or
- uses it like cash to buy a product or service at a point in time in which its value is more than the investor initially paid to acquire it.
The applicable tax rate depends upon several factors, including the holding period, which is the amount of time between when an investor acquires the asset and when the taxable event occurs.
For example, if an investor bought Etherium in 2016 and holds it for at least one year before selling it in 2018, he or she will be subject to a 20 percent long-term capital gain tax on the difference between the purchase price and the value of Etherium at the time of the sale. However, if the same investor cashes in his or her Etherium during the same year as acquisition, the realized gain would be subject to ordinary income tax, which, depending on the investor’s annual earnings and tax bracket, could be as high as 37 percent.
It is important that investors consider the wide fluctuations in cryptocurrency value that can occur before making any decision to use, sell or trade their Etherium, Bitcoin or Ripple tokens. Not only can timing help to minimize tax liabilities when investors sell or cash out their virtual money, it can also help investors avoid the mistakes of incurring taxes and paying outlandish prices when they use cryptocurrency to make purchases. For example, consider an investor who bought 100 Bitcoin on Jan. 1, 2016, when the value of one bitcoin was equal to approximately U.S. $433. If the investor purchases airline tickets with Bitcoin via Expedia on March 2, 2018, when one Bitcoin was equal to more than $11,000, he or she should first be concerned about overspending for the flight. In addition, he or she will also be exposed to capital gain tax on the $105,670 difference between his or her original cost basis and the value at the time of the taxable sale.
Conversely, individuals who invested in Ripple at the start of 2017 and maintained their holding without using, trading or cashing it in by the end of the year, will have reaped 36,018 percent tax-free returns on their investment. However, as soon as individuals use their digital money, they may realize a gain and be required to pay taxes on that amount.
Cryptocurrency Treatment as 1031 Exchange Property
Historically, taxpayers could defer capital gains tax on the sale of appreciated property when they reinvested sale proceeds from one asset into a similar, like-kind property within a specific time period. Under Section 1031 of the Internal Revenue Code, this tax treatment was available to real estate investors as well as to collectors of art, jewelry and other highly appreciated assets. Investors in cryptocurrency had also assumed that 1031 treatment would apply to them when they traded one cryptocurrency for another.
While taxpayers can argue such a claim, in theory, they will be surprised to learn that 1031 treatment is not so easy to apply in reality. For one, taxpayers are required to track and report 1031 exchanges on their federal tax returns and back up their claims with documentation. Therefore, an investor who bought and sold virtual currency multiple times throughout the year would need to file with their tax returns an equal number of Forms 8824 reporting their like-kind exchanges. If an investor had 500 transactions during the year, he or she would need to file 500 forms.
Secondly, with the passage of the Tax Cuts and Jobs Act overhauling the U.S. tax code, the government has made it clear the only asset that will qualify for tax-deferred 1031 exchange treatment beginning in 2018 is real estate. As a result, investors who trade Etherium for Bitcoin or Ripple for Litecoin will need to report those trades to the IRS, even if they do not realize a gain or loss. When a trade results in an actual gain, the difference will be subject to tax. Should a trade result in a loss, taxpayers may, under certain circumstances, use that deficit to offset capital gains of the same type and potentially reduce their overall taxable income for the year.
As U.S. and foreign governments rush to regulate the cryptocurrency craze and grab their share of taxpayers’ extreme market gains, investors should err on the side of caution and prepare to report all of their virtual currency transactions to taxing authorities. It is far better to be forthright and self-report than it is to be exposed by a government-authorized release of investor information.
The advisors and accountants with Berkowitz Pollack Brant work with U.S. and foreign individuals and business to help them comply with tax laws while maximizing tax efficiency across borders.
About the Author: Dustin Grizzle is an associate director of Tax Services with Berkowitz Pollack Brant, where he provides tax-planning and compliance services to high-net-worth individuals and businesses in the manufacturing, real estate management and property investment industries. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at email@example.com.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.
The Tax Cuts and Jobs Act (TCJA) that the president signed into law in December 2017 calls for the elimination of tax deductions for alimony payments made to a former spouse beginning on Jan. 1, 2019. Similarly, alimony recipients will no longer be required to include those payments as taxable income on their annual tax return filings. The law applies to divorce and legal separation agreements executed after Dec. 31, 2018. Taxpayers with alimony orders in place prior to Dec. 31, 2018, will not be affected, and payors will continue to receive preferential tax treatment for the spousal support they pay. However, it is important to note that the alimony provisions of the TCJA will apply to future modifications of support orders in place prior to Dec. 31, 2018.
The TCJA upends settlement strategies in divorces. Because the individual who pays alimony is traditionally in a higher tax bracket than the alimony recipient, the tax savings on the payor’s deduction is currently worth more than the amount of tax paid by the recipient. Essentially, because each dollar of alimony paid to a recipient costs less to the payor, the payor could afford to pay more in alimony. The elimination of the alimony deduction beginning in 2019, reduces the overall dollars a family has to divide.
This TCJA’s repeal of the alimony tax deduction combined with the law’s temporary through 2025 repeal of dependency exemptions and increase in standard deduction will eliminate the need for divorcing couples to argue over who may claim a dependent child as a deduction in future years. However, it is possible that the new law’s treatment of spousal support will create a sense of urgency for couples, especially high-earning spouses, to expedite a divorce in 2018 and take advantage of the tax break under current law.
As the government works to develop guidance for applying the new tax law, couples considering a divorce should recognize that the entirety of the law is subject to modification and even repeal under a new presidential administration or a change in the congressional majority. As a result, it behooves taxpayers to consult with professional advisors to understand the law in its current state and address in divorce settlements any potential changes that may impact former spouses’ future income and tax liabilities.
About the Author: Sandra Perez, CPA/ABV/CFF, CFE, is director of the Family Law Forensics practice with Berkowitz Pollack Brant, where she works with attorneys and high-net-worth individuals with complex assets to prepare financial affidavits, value business interests, analyze income and net-worth analysis and calculate alimony and child support obligations in all areas of divorce proceedings. She can be reached in the CPA firm’s Fort Lauderdale, Fla., office at (954) 712-7000 or via email firstname.lastname@example.org.
Information contained in this article is subject to change based on further interpretation of the law and subsequent guidance issued by the Internal Revenue Service.
Tax season is unfortunately also the time of year that criminals step-up their efforts to swindle consumers for their own financial gain. In the latest twist on an old scheme, scammers are stealing taxpayer’s personal information to file fraudulent tax returns and have refunds electronically deposited into taxpayer’s actual bank accounts. Subsequently, these criminals pose as IRS agents or debt collectors and contact their victims demanding the return of the refunds erroneously deposited in taxpayers’ accounts. Often, criminals will use scare tactics, such as the threat of arrest, to trick victims into compliance.
While there is little that taxpayers can do to prevent this fraud from occurring, there are important steps they can take to resolve it as quickly as possible and avoid interest accruing on the erroneous refund.
Should taxpayers receive an unexpected direct deposit tax refund, they should first contact their accountants to communicate with the IRS then call the Automated Clearing House (ACH) department of the bank/financial institution to have the funds returned to the IRS. In most cases, taxpayers should also consider closing their accounts to prevent any further fraud.
If the fraudulent refund is in the form of a paper check, the IRS advises taxpayers to write “Void” in the endorsement section on the back of the check and mail it within 21 days to the IRS office in the city listed on the bottom of the check.
Finally, taxpayers should remember that the only way that the IRS will communicate with them is through notices sent via U.S. postal mail; at no time will the IRS contact them by telephone or email. Therefore, there is no reason taxpayer should ever share personal information, such as Social Security number of bank account information, over the phone or via email.
About the author: Joseph L. Saka, CPA/PFS, is CEO of Berkowitz Pollack Brant, where he provides a full range of income and estate planning, tax and business consulting and compliance services, and financial planning expertise to entrepreneurs, high-net-worth families and family companies and business executives in the U.S. and abroad. He can be reached at the firm’s Miami office at (305) 379-7000 or via e-mail at email@example.com.
U.S. citizens and resident aliens have an obligation to annually report their financial interest in or signature authority over foreign bank accounts, securities or other financial accounts with an aggregate value exceeding $10,000 at any time during the tax year.
The deadline for taxpayers to electronically file a report of foreign bank and financial accounts (FBAR) for the 2017 tax year is April 15, 2018. Should taxpayers need additional time, they may take advantage of an automatic six-month extension to file an FBAR by Oct. 15, 2018. Taxpayers do not need to file an extension form to receive the additional time to file their FBAR for 2018.
Because FBAR reporting applies to individual taxpayers, married couples and their children will need to file and report the value of all joint accounts separately for each family member. Failure to file may result in a fine of $10,000 per unreported account per year. In addition, taxpayers who file a fraudulent FBAR or who intentionally fail to file will be penalized the greater of $100,000 or 50 percent of the balance in the unreported accounts as well as criminal charges.
In addition to the FBAR filing requirement, certain U.S. individuals and certain corporations, partnerships and trusts also have an obligation to file Form 8938, Statement of Specified Foreign Financial Assets when they have specified foreign financial assets (SFFAs) with an aggregate value of more than $50,000 on the last day of the taxable year, or $75,000 at any time during the tax year.
Different thresholds apply to individuals and married couples filing joint returns who live abroad. A “specified individual” includes anyone who is either a U.S. citizen, a resident alien of the United States for any part of the tax year, a nonresident alien (NRA) who makes an election to be treated as a resident alien for purposes of filing a joint income tax return, or an NRA who is a bona-fide resident of American Samoa or Puerto Rico.
To understand tax reporting requirements and avoid penalties for noncompliance, individuals should consult with U.S. tax advisors and/or certified public accountants (CPAs). The advisors and accountants with Berkowitz Pollack Brant have extensive experience working 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 firstname.lastname@example.org.
Posted on March 14, 2018 by
In consideration of the recent winter storms along the U.S.’s eastern seaboard, the IRS has granted businesses located in affected areas an extra five days to request an automatic filing extension.
Tax returns and requests for filing extensions for calendar-year partnerships and S Corporations are typically due on Thursday, March 15, 2018. However, with the IRS extension, business taxpayers located in the northeast and Mid-Atlantic states where winter storms Quinn and Skylar hit over the past few weeks will have until Tuesday, March 20, 2018, to file Form 7004 requesting an automatic six-month filing extension. While electronic filing of Form 7004 is the easiest and fastest option, businesses that choose to file on paper should write “Winter Storm Quinn” or “Winter Storm Skylar” on their extension requests.
The advisors and accountants with Berkowitz Pollack Brant work with domestic and international businesses across a broad range of industries to comply with tax laws while maximizing tax efficiency.
About the Author: Flor Escudero, CPA, is a senior manager of Tax Services with Berkowitz Pollack Brant, where she provides domestic and international tax guidance to businesses and high-net-worth individuals. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at email@example.com.
While many provisions of the Tax Cuts and Jobs Act (TCJA) will not be reportable by U.S. taxpayers until they file their 2018 tax returns in 2019, individuals and businesses with overseas operations must prepare now and, in some instances, apply provisions of the new law to their 2017 tax returns. Following are two important and timely provisions of the law that require immediate attention and planning.
Deemed Repatriation Tax
The TCJA introduces an immediate, one-time “deemed repatriation tax” on income that U.S. businesses earned and were previously allowed to hold overseas as untaxed profits since 1987. More specifically, the law requires businesses to presume they brought foreign earnings back to the U.S. in 2017 and pay taxes on that amount. The tax on these deemed repatriated earnings tax is 15.5 percent on liquid assets (or 17.5 percent on those liquid assets held by individuals) and 8 percent on investments in illiquid assets, such as plants and equipment (9.05 percent when the tangible assets are held by U.S. individuals).
Because the deemed repatriation tax is effective immediately, it requires taxpayers to quickly assess their tax liability on as much as 30 years-worth of foreign earnings through 2017, and convert those foreign earnings from local accounting and tax standards to U.S. tax standards and, ultimately, also into U.S. dollars.
While the law does allow U.S. taxpayers to elect to pay this obligation over an eight-year period, the first installment is due on the same day as the taxpayer’s federal income tax filing deadline without regard to extension. For example, an individual with foreign, untaxed earnings subject to this rule would need to make the first installment payment on April 16, 2018, even if the taxpayer receives a six-month filing extension. Should the taxpayer miss the initial installment due-date, he or she may lose the option to pay the deemed repatriation tax over the next eight-year period and instead be compelled to pay the entire tax liability up-front in one lump-sum payment.
This leaves U.S. multinationals with a very limited window of time to determine not only the amount of earnings they hold offshore under U.S. tax principles but also the tax rates that should apply to that income based on the liquidity of their foreign-entity balance sheets. Making this determination and deciding whether to allocate overseas earnings to liquid or illiquid assets for purposes of calculating the tax will be a time-consuming, burdensome process. For example, according to the law, stock held in a publicly traded company is a liquid asset because taxpayers may easily sell their shares for cash. Conversely, shares in a private company are considered illiquid assets, which would be subject to the lower repatriation tax rate of 8 percent or 9.05 percent.
Accuracy is key when calculating the deemed repatriation tax, and businesses should be prepared to substantiate their calculations with supportable facts in the event the IRS challenges their estimates. A good starting point for many businesses to comply with this law would be an earnings and profits (E&P) study on their untaxed accumulated offshore earnings and profits. An E&P study looks at the historical foreign earnings reported under local tax principles and recalculates those amounts under U.S. tax principles with the support necessary to pass IRS audit procedures.
Once an E&P study is complete, taxpayers should consider what other benefits may be available to lower their deemed repatriation tax liabilities. As an example, the law permits taxpayers to apply E&P deficits from one foreign company against the earnings of another. In addition, the law allows for taxes paid by the foreign corporation to partially reduce the deemed repatriation tax if the U.S. taxpayer is a C corporation. Generally, U.S. individual shareholders who in invest in foreign corporations are not allowed to take credit for foreign taxes paid at the foreign-entity level, but they may be able to do so by making certain elections. As such, it behooves businesses to engage professionals to appropriately and accurately calculate and support the required repatriation tax.
Looking beyond the deemed repatriation tax, the new tax law provides a participation exemption for C corporations to effectively exclude from future income those dividends they receive from certain foreign corporations. For example, distributions of earnings to a C corporation by its long-held foreign subsidiary may not be subject to a second level of tax upon repatriation of those earnings to the U.S. Yet, U.S. corporations will not be able to deduct or claim a credit on their federal U.S. income tax returns for any withholding tax that they pay abroad on those future dividends. With this in mind, U.S. individual taxpayers with an interest in a foreign corporation may consider establishing or converting an existing LLC to a C corporation to bring dividends from abroad to a U.S. corporation free of U.S. taxation. It is also worth noting that imposing a C corporation between a U.S. individual and a foreign corporation may result in a lower rate of tax upon ultimate distribution to the U.S. individual if the foreign entity is organized in a country that does not have an income tax treaty with the U.S.
Global Intangible Low-Taxed Income (GILTI)
One provision of the new tax law that will not go into effect until 2018 is the new anti-deferral regime known as Global Intangible Low-Taxed Income (GILTI). In an effort to prevent U.S. businesses from shifting profits offshore to low-tax countries, the TCJA imposes an annual tax on foreign income that exceeds 10 percent of a taxpayer’s return on all foreign depreciable assets, including plants, equipment and real estate. The law excludes from this calculation some items of income, most notably income that is subject to a local tax rate above 18.9 percent that would otherwise be treated as Subpart F income (Subpart F income is a currently existing anti-deferral regime). The effective GILTI tax rate through 2025 is 10.5 percent for C corporations and as high as 37 percent for individuals and S corporations. Beginning in 2026, the rate is scheduled to increase to 13.125 percent for C corporations and remain at 37 percent for individuals.
Again, due to this preferential treatment afforded to C corporations, partnerships and other pass-through entities might consider converting to a C corporation in 2018 to avoid a potentially higher tax liability come 2019.
The provisions of the tax law that relate to outbound international matters are complex and will require further guidance from the IRS in the coming months. It is critical that U.S. taxpayers with overseas interest meet with qualified tax professionals to assess the entirety of their domestic and foreign operations and develop strategies to improve global tax efficiency going forward.
About the Author: Andre Benayoun, JD, is an associate director of International Tax Services with Berkowitz Pollack Brant, where he works with inbound and outbound multinational businesses and nonresident aliens on a variety of matters, including structuring for mergers, acquisitions and liquidations; planning for repatriation of profits ; treaty analysis; tax-efficient debt financing; and pre-immigration tax planning. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at firstname.lastname@example.org.
Taxpayers with “seriously delinquent” unpaid federal income tax debt in excess of $51,000 may have their passports revoked in 2018.
Under the Fixing America’s Surface Transportation (FAST) Act of 2015, the State Department, upon notice from the IRS, is required to deny passport applications and passport renewals for individuals who have unpaid tax liabilities and for whom a federal tax lien has been filed. Excluded from the law are taxpayers who are located in a federally declared disaster area, who are in the midst of bankruptcy proceedings, or who the IRS identified as a victim of tax-related identity theft.
To avoid a potential passport issue, the IRS urges U.S. citizens traveling or living outside the country to determine if they have delinquent U.S. tax liabilities and, if they do, to take one of the following actions:
• Immediately pay the tax debt in full,
• Make timely payments under the terms of an installment agreement with the IRS,
• Pay the tax debt under an accepted offer in compromise or under the terms of a settlement agreement with the Department of Justice,
• Pay a levy and request a pending collection due-process appeal, or
• Make an innocent spouse election or request innocent spouse relief to suspend collection efforts.
Once the tax deficiency is resolved, the IRS will notify the State Department within 30 days to remove any restriction on an existing and pending passport application. The accountants and advisors with Berkowitz Pollack Brant help individuals and businesses maintain tax efficiency while meet their U.S. and foreign tax reporting responsibilities.
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 email@example.com.