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Monthly Archives: July 2018

Taxpayers with expiring ITINs Should Renew Now to Avoid Rush Later by Andrew Leonard, CPA

Posted on July 26, 2018 by Andrew Leonard

This summer, more than 2 million U.S. taxpayers will receive notices advising them that the Individual Taxpayer Identification Numbers (ITINs) previously issued to them by the IRS will expire by the end of 2018. Affected taxpayers include those individuals whose ITINs have the middle digits 73, 74, 75, 76, 77, 81 or 82, as well as anyone who did not use an ITIN on a federal tax return at least once in the past three years.

The IRS issues ITINs to people who have U.S. tax-filing and/or income-reporting obligations but do not have or are not eligible to receive a Social Security Number (SSN). Once an individual qualifies for an SSN, he or she should contact the IRS to merge their ITIN tax account into the new account.

Notice CP-48 provides affected taxpayers with directions for renewing their ITINs in order for them to file U.S. tax returns in 2019 and avoid delays in receiving any potential tax refund. The first step in the process requires that taxpayers complete and submit to the IRS Form W-7, Application for IRS Individual Taxpayer Identification Number, along with supporting documentation that authenticates their identities. To expedite this process and saves taxpayers the hassle of mailing original documents to the IRS, consideration should be given to working with Certified Acceptance Agents (CAAs) throughout the country who are authorized by the IRS to verify ITIN applications.

The IRS recommends that taxpayers affected by this notice also renew the ITINs for their spouses and children during this time, even if the family member’s ITIN does not expire this year. However, because the U.S. new tax laws eliminate personal exemptions for tax years 2018 through 2025, spouses and dependents who reside outside the United States do not need to renew their ITINs unless they anticipate filing their own U.S. tax return in 2019.

Berkowitz Pollack Brant is a Certified Acceptance Agent (CAAs) authorized by the IRS to help foreign individuals apply for and renew ITINs. The CPA firm’s advisors and accountants have deep experience helping domestic and foreign individuals and businesses 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.

 

Florida Renews Annual Back-to-School Sales-Tax Holiday in 2018 with One Big Exception by Michael Hirsch, JD, LLM

Posted on July 24, 2018 by Michael Hirsch,

Florida families should mark their calendars for the first weekend in August when the state’s annual three-day back-to-school sales-tax holiday begins. Beginning on Friday, Aug. 3, through the end of Sunday, Aug. 5, families can reap significant savings and avoid paying state and local sales tax on in-store or online purchases of qualifying school supplies, including:

  • Clothing, footwear and certain accessories selling for $60 or less per item; and
  • Notebooks, pens, backpacks and other supplies selling for $15 or less per item.

Interestingly, printer paper, staplers, staples, masking tape and correction pens/fluids are taxable during the weekend. Also absent from the list of products qualifying for the sales-tax holiday in 2018 are personal computers, laptops, tablets and printer ink cartridges, which were exempt in 2017 up to $750. In addition, families may not exclude tax on books that are not otherwise exempt or the repair or alteration of eligible items. To see a detailed list of qualifying products, visit the Florida Department of Revenue’s website at http://floridarevenue.com.
In Broward County, where public school begins on Aug. 15, Florida sales tax is 6 percent. In Palm Beach and Miami-Dade counties, where the 2018-2019 school year begins on Aug. 13 and Aug. 20 respectively, sales tax is 7 percent.

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 business 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.

Now is the Time to do Some Reverse Estate Planning by Jeffrey M. Mutnik, CPA/PFS

Posted on July 23, 2018 by Jeffrey Mutnik

For decades, families with moderate-to-high net worth have employed a variety of tried-and-true estate-planning techniques to protect assets, transfer wealth to future generations and minimize their income and estate tax liabilities. However, with the changes to the tax laws that went into effect beginning in 2018, a strategy that worked as recently as last year may not achieve the same intended goals and objectives in the future. For example, the recent doubling of the federal estate tax applicable exclusion amount to $11.18 million for an individual, or $22.36 million combined for married couples, provides families with a window of opportunity to reconsider the current and future application of their existing estate-planning tools.

The use of family limited partnerships (FLPs) as a viable estate-planning tool has become ubiquitous as older generations live longer, the stock markets surge forward, and the equity taxpayers have built up in their homes has turned into substantial real estate investment assets. FLPs are legal structures in which families typically hold appreciated assets, including, but not limited to, portfolio investments and real estate. The FLP itself is not subject to tax on the assets it holds. Rather, the FPL’s partners report on their income tax returns their annual share of the entity’s income and deductions in proportion to the interest they hold. Whereas general partners (GPs) have complete control over how an entity manages and invests its assets, limited partners (LPs) hold a minority, non-controlling stake in the partnership and therefore qualify to receive a discount on their interest in the pro-rata value of the partnership’s underlying assets. Taxpayers may leverage this lack of marketability and control over FLP interests by conducting one or more transactions to convert direct ownership of select assets into indirect ownership of those assets through LP interests or non-managing limited liability company (LLC) interests. Depending on the structure, this reduction in the value of the limited partners’ interests could even eliminate their gift and/or estate tax liabilities.

The transfer of assets to a limited partnership also allows for centralized management of those assets and provides LPs with the benefit of asset-protection from potential future creditors, both of which become more important as the elder family members continue to live longer. Despite these benefits, the transformation of ownership interest does have one significant income tax-related drawback: lower tax basis of the inherited LP interest. When LP die, instead of passing their original assets at their full date-of-death value, they pass their discounted LP interest to named beneficiaries, whose tax basis will be the discounted date-of-death value of such interest. Consequently, beneficiaries will most likely not be able to liquidate a decedent’s assets without an income tax consequence.

Before the tax code allowed decedents to pass their unused estate tax exemption to a surviving spouse, most families were more concerned with receiving a discount to reduce the value of their taxable estates than a lower basis of those inherited assets. However, this concept of portability combined with the increase in the estate tax exemption between 2018 and 2025 should persuade families to review, rethink and even reverse some, or all, aspects of their existing estate plans.

As an example, consider what would happen if the LP interest became a GP interest. Could the risk of potentially losing asset protection be outweighed by the potential increase of the basis inherited without a discount? Individuals must consider a myriad of factors when reviewing their estate plans under the new tax laws, including, but not limited to federal and state-level estate tax, income tax and other taxes to which individuals may be exposed. If a family has enough assets they want to preserve, but not enough to trigger a federal estate tax liability, it is appropriate that they question whether their current estate plans continue to achieve their short- and long-term goals.

The advisors and accountant with Berkowitz Pollack Brant have deep experience navigating treacherous tax laws and developing comprehensive estate plans tailored to meet the unique challenges and needs of U.S. and multinational families.

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.

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.

When was the Last Time you Assessed your Business’s Cyber-Security Risk? Now is the Time to Get Started by Steve Nouss, CPA, CGMA

Posted on July 20, 2018 by Steve Nouss

The frequency and sophistication of cybersecurity attacks continue to intensify leaving businesses, governments and not-for-profits with an ever-present risk of falling victim to data breaches. Cyberattacks not only disrupt normal business operations, they also erode public trust and can lead to irreparable reputational damage, loss of customers and intellectual property, litigation, and significant fines and penalties. Even as businesses race to invest in the latest technologies to improve operational efficiencies and protect critical information assets, many are woefully lacking formal programs to communicate with and reassure stakeholders of the effectiveness of their cybersecurity risk-management activities. To change this, the American Institute of Certified Public Accountants (AICPA) has developed a standard cybersecurity risk-management reporting framework for entities in all industries across the globe to use in the future.

Cybersecurity Risk Management Reporting Framework
The new AICPA Cybersecurity Risk Management Reporting Framework focuses on 19 criteria categories that businesses must address to demonstrate that they are effectively managing cybersecurity threats and have in place suitable policies, processes and controls to protect data and to detect, respond to, mitigate and recover from a security breach. It builds upon the globally accepted internal control framework established by the Committee of Sponsoring Organizations (COSO) and is incorporated into the new system and organization controls (SOC) reporting guidance that helps entities build trust with their constituents, and document their efforts to protect and secure information and technology. Its intent is to help businesses ensure that all of their stakeholders, including senior management, members of the board of directors, business partners and customers, have documentation to help them understand and make informed decisions based on how an organization manages its cybersecurity risks. Investors and analysts may also benefit from receiving this insight into the potential threats to an organization’s operational, reporting and/or compliance objectives, which, subsequently, can affect the business’s value.

SOC cybersecurity exam reports, which must be prepared by certified public accountants (CPAs) to provide independent and unbiased assessments of a risk management program’s effectiveness, include three sections:

  1. Assertion of Management, which describes an entity’s cybersecurity risk-management program and its inherent limitations;
  2. Independent Accountant’s Report detailing the entity’s risk-management responsibilities, the responsibilities of the accountant preparing the report, and his or her opinion on the entity’s program;
  3. Management’s Description of an entity’s cybersecurity risk-management program, including details about how the entity “identifies its information assets, the ways in which it manages the cybersecurity risks that threaten it, and the key security policies and processes implemented and operated to protect the entity’s information assets against those risks.” The report can focus on “a point in time” initially and subsequently cover a longer 12-month “period of time.”

Readiness Review Provide Short-Term Cybersecurity Risk Assessment
SOC reports should reduce entities’ communication and compliance burdens, minimize their risk of vulnerabilities and provide a vehicle for sharing this information with a broad range of stakeholders. Nonetheless, businesses that do not want to invest the time or dollars into a thorough audit or SOC report have a short-term option to evaluate their existing cybersecurity processes and consider steps they may need to take to enhance and bolster those controls.

A “readiness review” is more of a cursory check-up of the security, availability and confidentiality of an entity’s existing information and technology based on more than 230 “points of focus” identified by the AICPA to measure the effectiveness of an organization’s internal controls. The informal evaluation aims to detect potential weaknesses and recognize opportunities to enhance security by employing a broad range of best practices when designing, implementing and initiating an effective cybersecurity risk-management program that meets their unique needs, objectives and business structure.

No longer can the responsibility to protect confidential business data be relegated solely to an information technology expert or a single team. Cybersecurity must be an enterprise-wide priority involving every level of an organization, including senior management, members of the board of directors and even individual employees who regularly connect to the network and have access to an organization’s knowledge base. While it is nearly impossible to eliminate the threat of a cyberattack, businesses can be proactive and take steps to minimize their risk of falling victim to these security breaches and putting their brands and reputations in danger. Time is of the essence.

The professionals with Berkowitz Pollack Brant’s Business Consulting Group have deep experience working with businesses to address the rising challenges of cybersecurity risks and help them to instill confidence and security among their vendors, customers and business partners. The firm holds certification on completion of cybersecurity training and is registered with the AICPA to provide service businesses with SOC audits and reports that help improve transparency and build trust among service organization’s current and prospective customers.

About the Author: Steve Nouss, CPA, CGMA, is a director with Berkowitz Pollack Brant’s Consulting Services practice, where he provides profit-enhancing CFO services, operational reviews, enterprise risk management, internal audit and anti-fraud services for businesses of all sizes. In addition, Nouss is a System and Organization Controls (SOC) specialist who holds AICPA certification in cybersecurity. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.

Tax Reform Makes Cost Segregation Studies more Important than Ever for Real Estate Businesses by Joshua P. Heberling

Posted on July 19, 2018 by Joshua Heberling

The Tax Cuts and Jobs Act (TCJA) brings a broad range of potentially significant tax savings to individuals and businesses involved in the construction, acquisition and renovation of commercial real estate. Property developers, owners and investors seeking to leverage these benefits will need to engage in advance planning and put into place appropriate strategies and structures in order to maximize their savings opportunities. This is especially true when considering how cost segregation studies may complement the expanded depreciation deductions that the new law allows taxpayers to apply to their investments in newly constructed or acquired commercial property as well as renovations or improvements to existing properties.

Bonus Depreciation and Section 179 Property Expensing
One of the easiest ways that businesses can increase cash flow is to accelerate depreciation deductions for the wear and tear, deterioration, or obsolescence of property and equipment used for business or income-producing purposes. The faster a business can claim the deductions, the faster they can recover the basis, or purchase price, of that property.

There are two provisions in the TCJA that can expedite taxpayers’ recovery period and expand their ability to accelerate depreciation deductions for tangible property used in a trade or business, including, but not limited to, machinery, equipment, furniture, computers and off-the-shelf software.

Beginning in 2018, businesses may qualify for bonus depreciation and immediately write off 100 percent of the costs they incur for both new and used tangible business property purchased or financed after Sept. 27, 2017. It is important to point out that the new rules make used property eligible for bonus depreciation. Under the old rules, bonus depreciation was limited to new properties only. This has provided taxpayers with an expanded avenue for deduction acceleration when they plan accordingly. In addition, the law increases the amount that certain businesses may elect to deduct for qualifying new and used Section 179 property from $500,000 to $1 million, while also expanding the definition of qualifying property to include non-structural components attached to commercial buildings and improvements made to a building’s roof, air conditioning/heating, fire protection and security systems.

While both of these provisions can yield significant and immediate tax savings, there is another way for business taxpayers to recoup even more of a buildings’ value in a shorter period. Enter the cost segregation study.

Benefits of a Cost Segregation Study
Under U.S. tax laws, the depreciation period for a commercial building is typically 39 years, whereas personal property, including plumbing, lighting, electrical systems, machinery and other assets that cannot be removed from the building, can be depreciated in as little as five, seven and 15 years. In order to identify the parts of a building that may qualify as tangible personal property eligible for accelerated depreciation deductions, taxpayers must engage qualified professionals to conduct what is known as a cost segregation study.

Engineers involved in a cost segregation study will typically conduct a thorough and in-depth analysis of a building’s blueprints and site plans to break down all of the assets and costs involved with the construction, purchase or renovation of a property into separate components with different costs basis and recovery periods. Taxpayers may use the final report to document asset classification and substantiate to the IRS any claims they have to depreciate some of those assets over a shorter life than the building itself.

As an example, consider the benefits of a cost segregation study on a commercial rental building purchased for $975,000 in 2018 (net of purchase price allocated to land). Typically, a taxpayer in the highest tax bracket of 37 percent for 2018 would be able to depreciate the property straight line over 39 years for an annual depreciation deduction of $25,000. This yearly depreciation would provide the taxpayer with a reduction in his or her taxable income, which, in turn, would reduce his or her tax liabilities by an estimated $9,250 in 2018.

However, a cost segregation study may help the taxpayer identify portions of the building that are eligible for depreciation at accelerated rates. For example, the study may be able to divide the purchase price of the property into $100,000 as 5-year tangible property, $50,000 as 15-year land improvements and the remainder as 39-year real property. In addition, the study may identify that the 5-year and 15-year property are eligible for bonus depreciation. Not only will this result in a new annual depreciation of $21,153 ($825,000/39 years), the taxpayer will also receive an immediate bonus deduction of $150,000 during 2018. All told, with the benefit of a cost segregation study, the taxpayer may increase his or her 2018 deduction to $171,153 from an original amount of $25,000 and reduce his or her taxes by $63,327 for the year. While a cost segregation study does not change the overall depreciation deduction over the life of the property, it does change the timing of the deduction, which the taxpayers can accelerate into the current period as opposed to spreading it over a longer life. This acceleration of deductions creates current tax savings, which, in turn, increase cash flow to taxpayers and provide a time value of money savings.

Cost segregation studies are practical and beneficial for businesses that own or lease recently acquired, constructed or substantially improved or renovated commercial property. However, planning for a cost segregation study should begin prior to the construction or remodeling process with the understanding that it is never too late to perform a cost segregation study in the years after the property is placed in service. A typical report will identify a percentage of a building that can qualify for shorter recovery periods, often in the first year of the study, which can yield taxpayers significant deductions, reduced tax liabilities and increased cash flow as well as catch-up deductions when performed in a year after the asset was placed in service.

The best way for taxpayers to know if a cost segregation study is right for them is to consult with qualified tax accountants and advisors with experience in commercial real estate.

About the Author: Joshua P. Heberling is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where he focuses on tax planning and compliance services for high-net-worth individuals and businesses in the commercial real estate, land development and office market industries. He can be reached at the firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at info@bpbcpa.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.

New Tax Credit for Employers Offering Family and Medical Leave Benefits to Workers by Adam Cohen, CPA

Posted on July 17, 2018 by Adam Cohen

The Tax Cuts and Jobs Act created a new tax credit for businesses that voluntarily offer their employees up to 12 weeks of paid family and medical leave in tax years 2018 and 2019.  Here are all of the details that employers need to know about claiming the credit.

How can Businesses Qualify for the Tax Credit?

Employers must voluntarily provide qualifying full-time employees with a minimum of two weeks of paid family and medical leave per year with a benefit of at least 50 percent of the worker’s normal wages, pursuant to a written policy. For part-time workers, employers must also provide a proportionate amount of paid leave based on the number of hours those employees work.

Who is a Qualifying Employee?

Businesses must have employed a worker for at least one year and paid him or her a certain amount in compensations. For 2018, businesses seeking to claim the credit must have paid the worker less than $72,000 in 2017.

How Much is the Credit Worth?

Employers that provide workers with the minimal leave benefit of 50 percent of normal compensation may claim a tax credit of 12.5 percent of that benefit amount. This credit can increase up to a maximum of 25 percent based upon a percentage of the normal compensation the employer pays to the employee above 50 percent.

The employer must reduce its deduction for wages or salaries paid or incurred by the amount determined as a credit. Any wages taken into account in determining any other general business credit may not be used toward this credit.

What Circumstances Qualify for Paid Family and Medical Leave?

A business may qualify for the tax credit when it has an employee who takes a leave of absence for any of the following reasons:

  • To care to his or her newborn child,
  • To care to his or her newly adopted child or a for a foster child placed under the employee’s care,
  • To care to his or her child, spouse or parent who has a serious health condition,
  • To care for a child, spouse,  parents or next of kin who serves in the military
  • He or she has a serious health condition that prevents him or her from performing his or her job,
  • A qualifying event occurs in which his or her child, spouse or parent is on or called for covered active duty in the Armed Forces.

About the Author: Adam Cohen, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where he works with closely held businesses and non-profit charities, hospitals and family foundations to maintain tax efficiency and comply with federal and state regulations. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via e-mail at info@bpbcpa.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.

New Rules for Tax Treatment of Motor Vehicle Use in 2018 by Flor Escudero, CPA

Posted on July 11, 2018 by

The use of a motor vehicle can sometimes provide individuals and businesses with tax benefits. Here is what taxpayers need to know for 2018.

Increased Standard Mileage Rates

Taxpayers have the option to deduct the actual use of their cars, vans, pickups and panel trucks for multiple purposes or, they may simply apply the standard mileage rates, which the IRS resets annually. Following are the standard mileage rates for 2018:

  • 54.5 cents for every mile driven for business purposes,
  • 18 cents per mile driven for medical purposes, and
  • 14 cents per mile driven in service of a charitable organization, including travel to and from volunteer work

Taxpayers may not use these rates for more than four motor vehicles they use simultaneously. Nor may they use the business travel rate if they previously used a depreciation method under the Modified Accelerated Cost Recovery System or after they claimed a Section 179 deduction for that vehicle.

Temporary Elimination of Deductions Other Vehicle Expenses

Between Jan. 1, 2018, and Dec. 31, 2025, the IRS will not permit taxpayers to deduct job-related moving expenses, including the miles a taxpayer travels in his or her automobile as part of the move, unless the taxpayer is a member of the Armed Forces of the United States.

In addition, the Tax Cuts and Jobs Act temporarily eliminates all un-reimbursed employee expenses such as uniforms, union dues and the deduction for business-related meals, entertainment and travel. Therefore, taxpayers may not apply the business standard mileage rate to claim an itemized deduction for un-reimbursed employee travel expenses.

Increased Depreciation Limits

The Tax Cuts and Jobs Act increases the depreciation limitations for passenger automobiles placed in service after Dec. 31, 2017, for purposes of computing the allowance under a fixed and variable rate plan. The maximum standard automobile cost may not exceed $50,000 for passenger automobiles, trucks and vans placed in service after Dec. 31, 2017. Previously, the maximum standard automobile cost was $27,300 for passenger automobiles and $31,000 for trucks and vans.

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 info@bpbcpa.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.

Taxes Related to Selling a Home by Adam Slavin, CPA

Posted on July 10, 2018 by Adam Slavin

The sale of a family home comes with a long list of tax liabilities and some opportunities of which sellers should be aware.

Taxable Gains and Non-Deductible Losses

The IRS allows certain individuals who sell their homes for a profit to exclude up to $250,000 of that gain from their taxable income, or $500,000 when the homeowners are married filing joint tax returns. When the exclusion amount covers the entirety of a taxpayer’s gain, he or she does not need to report the sale on his or her federal income tax return unless he or she chooses not to claim the exclusion. Should a taxpayer involved in a real estate transaction receive IRS Form 1099-S, Proceeds from Real Estate Transactions, he or she must also report the sale on their tax return.

To qualify for this benefit, you must have owned the home you intend to sell and lived in it as a primary residence for at least two of the five years prior to the date of sale. If you own multiple homes, the exclusion may be applied only to the sale of the one property where you lived for the majority of your time, unless you have a disability or are a member of the U.S. military. Any realized gains from the sale of other vacation homes will be subject to tax. Only under certain circumstances, including divorce or death of a spouse, may you qualify for a partial exclusion on the gain from the sale of a home that does not meet the two-year ownership and use requirement.

However, if you sell your primary residence for less than the amount you paid for it, you may not deduct the loss from your taxable income.

Transfers of Ownership Between Spouses

Generally, if you transferred all or a share of your home to a spouse or ex-spouse as part of a divorce settlement, you have neither a reportable gain nor loss unless your spouse or ex-spouse is a nonresident alien.

Mortgage Debt

When home sales result from a foreclosure or when lenders rework, forgive or cancel a homeowner’s mortgage debt, the seller must report those amounts as income on their tax returns in the year of the home sale.

Report Address Changes

After selling your home, it is critical that you update your address with your insurance providers, professional advisors, accountants, banks and financial institutions. It is equally important that you take the time to alert the IRS and Social Security Administration of any changes to your mailing address. For assistance, please contact your tax advisor.

 

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 Offers Filing, Penalty Relief to Multinational Businesses Subject to New Repatriation Tax by Andre Benayoun, JD

Posted on July 05, 2018 by Andrè Benayoun, JD

The Tax Cuts and Jobs Act introduces a one-time “deemed repatriation tax” on the previously untaxed profits that U.S. individuals, businesses and foreign corporations owned by U.. shareholders earned and left overseas. Under the law, foreign earnings held overseas in the form of cash and cash equivalents are taxed at a rate of 15.5 percent rate, whereas foreign earnings invested in illiquid, fixed assets, such as plants and equipment, are subject to an 8 percent tax rate.

While the law allows taxpayers to make a timely election to pay the transition tax over an eight-year period, the IRS has clarified some of the initial questions that arose following the enactment of the hastily drafted new law. Following are three key points that taxpayers should plan for under the guidance of experienced tax advisors and accountants:

  • Individuals who already filed a 2017 return without electing to pay the transition tax in eight annual installments can still make the election by filing an amended tax return by the extended filing deadline of Oct. 15, 2018.
  • In some instances, the IRS will waive an estimated tax penalty for taxpayers subject to the transition tax who improperly attempted to apply a 2017 calculated overpayment to their 2018 estimated tax as long as they make all required estimated tax payments by June 15, 2018.
  • Individuals with a transition tax liability of less than $1 million who missed the April 18, 2018, deadline for making the first of the eight annual installment payments may receive a waiver of the late-payment penalty if they pay the installment in full by April 15, 2019. A later deadlines applies to certain individuals who live and work outside the U.S. The language of the law previously led taxpayers to believe that if they missed the April 18, 2018, initial installment payment deadline, they would be required to pay the entire transition tax liability immediately, rather than over an eight-year period.

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 profit repatriation; 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 info@bpbcpa.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.

Avoiding the Tax Traps of Gifts from Foreign Sources by Lewis Kevelson, CPA

Posted on July 02, 2018 by Lewis Kevelson

A common planning challenge faced by multinational families is the U.S. taxation of gifts from foreign, non-U.S. family members to their relatives who are U.S. citizens and U.S. tax residents.  For example, if a husband is a non-U.S. citizen who lives and works in foreign country X, what is the best way for him to transfer money to his wife and family living in the U.S.? What does U.S. tax law require the wife to report to the IRS on an annual basis to prevent those cash gifts from becoming subject to U.S. income tax and/or penalties? What are the reporting requirements and how can a U.S. family member avoid penalties when he or she receives a large inheritance from a relative who was a non-U.S. person at the time of passing?

Reporting Requirements

The IRS requires U.S. taxpayers to file Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, to report receipts of large gifts and inheritances that meet the following thresholds:

Gifts or bequests valued at more than $100,000 received from non-US individuals or foreign estates, including non-US persons related to the non-US individual or foreign estate,

  •  Gifts valued at more than $16,111 in 2018 from foreign corporations or foreign partnerships, including foreign persons related to those foreign entities,
  • Gifts in the form of distributions of loans from a foreign trust, regardless of the amount.

The $100,000 threshold is based on the aggregate value of all gifts a U.S. taxpayer receives in a given year from a foreign estate or from a non-U.S. person and his or her family members. Therefore, if a U.S. citizen receives $50,000 from her non-U.S. mother and $60,000 from her non-U.S. father, she will have a requirement to file Form 3520 and report to the IRS the aggregate value ($110,000) of both gifts.

Form 3520 is due by April 15th following the year of the gift and can be extended to October 15th if additional time is needed. Failure to timely file and report a gift or inheritance from a foreign person will result in a penalty as high as 25 percent of the amount of the foreign gift or bequest. This penalty may also apply when the information contained on a taxpayer’s Form 3520 is inaccurate or incomplete. The IRS will waive penalties for late filing if there is reasonable cause.

Avoiding Penalties and Tax Traps

U.S. citizens who expect to receive gifts from foreign sources have an opportunity to minimize their U.S. tax liabilities when they take the time to plan under the guidance of experienced tax accountants and advisors. With some advance planning preparation, it is possible for U.S. persons to receive gifts or inheritance free of U.S. taxes.

For example, foreign family members should not make “gifts” to their U.S. family members from a foreign corporation, since the IRS will consider such transfers to be taxable corporate dividends that cannot qualify as tax-free gifts. There is a similar concern with distributions received from foreign partnerships, which the IRS would also presume to be taxable distributions.

Another potential tax trap can occur when U.S. persons receive as “gifts” shares in a foreign corporation that owns assets that produce passive income. This may include an offshore company that owns a portfolio of stocks and bonds or passively managed rental real estate. The primary tax concern is that these gifts of corporate shares could ultimately trigger a U.S. tax liability to the new U.S. owner, even if no actual cash was distributed. U.S. persons are also susceptible to taxation in connection with distributions or loans they receive from certain foreign trusts. For example, a U.S. beneficiary who receives a distribution from a foreign non-grantor trust could be subject to U.S. income tax and an interest charge on the distribution amount.  While beneficiaries of foreign trust distributions and loans cannot avoid the IRS’s reporting requirement (also on Form 3520) they may be able to minimize their income tax exposure on these transfers when they plan ahead and properly structure the trust and the distributions.

In each of these situations, multinational families have the opportunity, with advance planning, to restructure their holdings and/or develop appropriate gifting strategies to maximize tax efficiency for U.S. family members.

Similarly, U.S. persons should be careful of their susceptible to taxation in connection with distributions or loans they receive from certain foreign trusts. For example, a U.S. beneficiary of a foreign non-grantor trust who receives a distribution or loan from the trust could be subject to income tax and an interest charge on the distributed amount. While the U.S. beneficiary cannot avoid his or her IRS reporting requirement on Form 3520, he or she may minimize his or her income tax exposure on these transfers when the trust and distributions are properly structured far in advance.

Some Tax Relief for Married Couples

Under U.S. tax laws, special rules apply to gifts between U.S. citizens and their non-U.S. spouses. In general, married couples who are both U.S. citizens may make unlimited tax-free gifts to each other during life and at death. This is known as the marital deduction. Similarly, a U.S. citizen may receive from a non-U.S. spouse an unlimited amount of tax-free gifts.

However, the unlimited marital deduction does not apply when the spouse receiving a gift is not a U.S. citizen. Under these circumstances, a U.S. tax citizen spouse must report to the IRS any gift exceed $152,000 in 2018 that he or she makes to a nonresident alien spouse.

The advisors and accountants with Berkowitz Pollack Brant work with multinational families to comply with complex international tax laws and maximize tax efficiency across borders.

About the Author: Lewis Kevelson, CPA, is a director with Berkowitz Pollack Brant’s International Tax practice, where he assists cross-border families and their advisors with personal financial planning and wealth management decisions. He can be reached at the firm’s West Palm Beach, Fla., office at (561) 361-2050 or via email at info@bpbcpa.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.

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