Tax reform’s aim to protect the US tax base and prevent domestic companies from shifting jobs, manufacturing and profits to lower tax jurisdictions overseas resulted in a significant benefit to export businesses. Not only does the new law preserve the preferential tax treatment of Interest Charge-Domestic International Sales Corporation (IC-DISC), it also introduces a new tax incentive for C corporations that sell American-made goods or services to foreign customers for consumption outside of the U.S.
Interest Charge-Domestic International Sales Corporation (IC-DISC)
U.S. businesses that sell, lease or distribute goods made in the US to customers in foreign countries may realize significant tax benefits when they create an IC-DISC to act as their foreign sales agent to which they pay commission as high as 4 percent of gross receipts or 50 percent of taxable income from the sale of export property.
Essentially, a qualifying business forms the IC-DISC as a separate US-based “paper” company, typically with no offices, employees or tangible assets, to receive tax-free commissions that the business can claim as deductions that ultimately reduce its taxable income. The amount of the tax savings the business may reap for the commission it pays to the IC-DISC can be as high as 37 percent, depending on its structure (21 percent for C corporations beginning in 2018) and its source of income. Only when the IC-DISC distributes earnings to shareholders will there be a taxable event. At that time, the shareholders will be liable for paying taxes on the IC-DISC earnings at lower qualified dividend rates not to exceed 23.8 percent.
While businesses that make IC-DISC elections are most commonly exporters and distributors of U.S.-manufactured products or their components, software companies, architects, engineers and other contractors who provide certain limited types of services overseas may also qualify to take advantage of this permanent tax benefit.
Foreign Derived Intangible Income (FDII)
To encourage U.S. corporations to keep their exporting operations and profits in the country, the TCJA introduces a new tax-savings opportunity in the form of a deduction of as much as 37.5 percent on profits earned from Foreign Derived Intangible Income (FDII).
This new concept of FDII is defined as income C corporations earn from (1) sales or other dispositions of property to a foreign person for a foreign use; (2) an IP license granted to foreign person for a foreign use; and (3) services provided to a person located outside of the U.S. The types of services that qualify for FDII are not severely restricted, like they are for IC-DISC applications.
Under the law, FDII earned after Dec. 31, 2017, is subject to an effective tax rate of 13.125 percent until 2025, when the rate is scheduled to increase to 16.046 percent for a total FDII deduction of 21.87 percent. That’s quite an incentive for domestic businesses to use the U.S. as its export hub and distribute products made in the country to foreign parties located outside the country!
It is important to note that like most provisions of the tax code, the FDII deduction is subject to a number of restrictions and calculation challenges. For example, it applies only to domestic C corporations, which under the TCJA are subject to a permanent 21 percent income tax rate beginning in 2018, down from 35 percent before tax reform. In addition, the amount of the deduction is reduced annually by 10 percent of the corporation’s adjusted basis of depreciable tangible assets used to produce FDII.
Corporate taxpayers that combine the benefits of an IC-DISC and the new FDII deduction may receive enhanced tax savings. However, every business entity is unique and not all businesses will qualify to apply the benefits of both export tax incentives. However, with proper planning under the guidance of experienced tax professionals, businesses can maximize the benefits that are available to them.
For example, an S corporation or LLC with an IC-DISC may not realize the added tax savings of the FDII deduction, which is only available to C corporations. While an S corporation may consider changing its entity structure to a C corporation to take advantage of the lower tax rate, it must first consider its unique business goals and weigh them in context against all of the new provisions of the new tax code, which will affect the tax liabilities of both the business and its shareholders.
Companies doing business across borders can successful plan around the new provisions of tax law with the strategic counsel and guidance of knowledgeable advisors and accountants with deep experience in these matters.
About the Author: James W. Spencer, CPA, is a director of International Tax Services with Berkowitz Pollack Brant, where he focuses on a wide range of pre-immigration, IC-DISC, transfer pricing and international tax consulting issues for individuals and businesses. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 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
With the tax year coming to an end, it is critical that business owners remember they have obligations to report by Jan. 31, 2019, the compensation they paid to employees and to all independent contractors and service providers during the prior tax year. This leaves businesses with limited time after an often hectic holiday season to review their records and issue Forms 1099-MISC to each non-employee to whom they paid more than $600 during the year.
To help your business expedite this process and meet the filing deadline, consider working with Berkowitz Pollack Brant’s Accounting Intelligence team. Our advisors can help you identify and gather information about contactors and vendors to whom who have a reporting obligation. Subsequently, we will prepare the required IRS forms and submit them on your behalf to both the government and each vendor who receives compensation from you. If you are required to file more than 250 information returns, which include W-2s and 1099s, you must file electronically or you will be subject to significant IRS penalties.
In addition, with the prospect of the New Year, it is a good time to review your accounting records and ensure that you have on file Forms W-9 for each and every vendor you pay. This will help enable you to more easily determine which vendors should receive Form 1099-MISC from you next year.
To learn more about how we can help you to ease the administrative burden of your information reporting requirements, please contact one of our Accounting Intelligence team members at (954) 712-7066.
About the Author: Laurence Bernstein, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant and the leader of the firm’s Accounting Intelligence group.
He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at firstname.lastname@example.org.
Businesses today are challenged by what may be considered the most rapid pace of change in history. New technological advancements and accelerated economic swings are creating a perfect storm for which organizations have little time to prepare and adapt for survival, let alone for success. However, the one beacon of light that an organization can rely on to guide it through these treacherous waters and protect it from irreparable damage is its organizational culture. The question then becomes, what is an organizational culture and how can an entity develop and hone it to serve as its lighthouse in a storm.
Organizational culture can be defined as the collective norms, values, attitudes and work habits that the members of an organization share and agree to uphold. To put it another way, if a company’s brand is its face, its organizational culture is its soul. It reflects the formal and informal behaviors, interactions and underlying traditions, beliefs and processes that tie individuals to an organization and keep them there, whether they be loyal employees, clients, business partners or even donors. It is how individuals would describe the organization, its structure, unique attributes and vision, under oath, using both tangible and intangible concepts. In this sense, an organization’s culture must align with its vision and subsequently be woven into its strategy.
Yet, unlike the fact-based economic and contractual nature of business, corporate culture is both subjective and objective, and therefore much more difficult for an organization to standardize. While a culture can change based on the influence of internal and external sources, including the behaviors of an organization’s leadership, a CEO or business owner cannot dictate or will a cultural change without backing up his or her words with action.
Following are eight strategies that organizations can rely on to build and strengthen organizational trust and a cohesive culture that becomes the motivation and rallying cry for its success and the success of its individual employees.
Create a Compelling and Shared Vision
A vision helps an organization identify what it hopes to be famous for and connects workers to that shared goal. Not only does it encourage employees to work together, but it also centers them around a common purpose that inspires them to learn, grow and give their best efforts every day. When you involve employees in the vision-planning process, you allow them to have a voice and contribute to creating something special and meaningful. Consequently, they are more likely to be engaged in their jobs and loyal to their employers.
Define the Culture to Support Business Strategies
Businesses must invest in policies and practices that facilitate employees’ efforts to integrate the demands of their professional work with the obligations of their personal lives. Special care should be taken to help employees avoid a tug of war between work and family, which will ultimately undermine the goals of the organization and lead to higher incidence of employee burnout and turnover. Instead, select a set of guiding behaviors to define the desired culture and reinforce them through a variety of measurable team-building and team-training programs.
Spend Quality Time Together.
Most working professionals spend the majority of their time on the job, whether that be in an office or out in the field with coworkers, clients or business partners. While this requires workers to get along, it does not always translate to lasting friendships, which ultimately affect loyalty and culture. Instead, organizations should look for opportunities to gather together employees and their family members outside of the work environment, where they can interact on a more social level and create strong emotional connections that tie workers to each other and to the organizations themselves.
Create Quality Traditions
Organizations can strengthen genuine connections and reinforce loyalty by developing high-quality and consistent traditions, practices and other experiences that members of an organization share on a regular basis. For example, a business may employ a policy of dress-down Fridays, host an annual bring-your-child to work day or encourage workers to bring their pets to the office. Similarly, organizations can help workers build deep connections in their communities by organizing teams to participate in charitable fundraising events or volunteering their time to help others in need. The more these traditions involve family members, the more fun workers will have and the more emotional their connections will be to the organization.
Improve Organizational CommunicationA strong and resilient culture cannot develop in a vacuum. Organizations must work diligently to create a two-way street of open, honest and transparent communication between all of its members. Moreover, they must recognize when there are weaknesses in this open flow of information and take steps to repair them. Not only should organizations create open discussion forums for their CEOs or presidents, but they should also expect and even encourage workers to ask questions and receive answers.
Help Employees Build Their SkillsPeople want to be a part of organizations that are interested in their development as individuals. A healthy organizational culture provides a stimulating environment that emphasizes and encourages employees’ professional and personal growth. This may involve investment in employee training and education, mentoring and other leadership-development programs as well as annual reviews of worker performance.
Monitor Employee Satisfaction
To gauge the effectiveness of their culture-building strategies, organizations need to look no further than its front-line employees. Are workers satisfied? The only way to answer this question is to ask. By monitoring employee satisfaction on a frequent and consistent basis, organizations can more quickly identify and respond to areas that need improvement.
Make Culture an Ongoing Organizational Commitment
Because an organization’s culture will radiate outside of its workforce to its clients and its bottom line, it is critical that culture programs receive high priority. In fact, a half-hearted commitment to developing and cultivate culture can be far worse than no commitment at all. The goal should be to inspire employee engagement and build genuine connections based on trust, rather than requiring employees to grudgingly comply with a laundry list of top-down rules and regulations.
Creating the right organizational culture is crucial to an entity’s long-term success and profitability. It is the only distinctive and sustainable long-term competitive advantage available to businesses. It starts at the level of internal policies and procedures and extends to how leaders interact with employees and demonstrate their commitment to workers’ individual successes. From there it radiates outside of the organization’s physical walls, affecting the level of services it provides and the reputation that it needs to project to attract and retain quality workers and develop trusted relationships with clients.
About the Author: Richard A. Berkowitz, JD, CPA, is founding and executive chairman of Berkowitz Pollack Brant and Provenance Wealth Advisors (PWA), where he provides business consulting, growth strategies and succession-planning consulting to entrepreneurs and companies. He can be reached at the firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at email@example.com.
The Internal Revenue Code allows a deduction for 50 percent of the cost of a meal at which business is discussed. The language contained in the 2017 Tax and Cuts and Jobs Act reforming the U.S. tax code appeared to imply that businesses could no longer deduct expenses for client meals enjoyed at entertainment events, such as sporting events, concerts, theatrical performances, golf and fishing outings, and cruises. According to the IRS, however, businesses can continue to take advantage of this valuable tax break in 2018, even when they cannot write off the costs of the entertainment activities.
In its most recently issued guidance, the IRS said that companies can continue to deduct 50 percent of the costs they incur for meals with clients at entertainment events, as long as those meals are not lavish, and they are considered ordinary and necessary for the active conduct of the taxpayer’s trade or business. The only other criteria businesses must meet to qualify for the 50 percent meal deduction is to have a receipt demonstrating that they paid for the meal separately from all other entertainment-related expenses, which, in and of themselves, are no longer deductible under the new law.
For example, if a businesswoman treats a client to tickets to a baseball game where she also buys the client a hot dog and drinks, she may not deduct the entertainment expenses of the tickets. However, she can deduct 50 percent of the costs for the food and drinks purchased separately. Yet, if a businessman invites a prospective client to join him at a suite at a basketball game where food and drinks are provided, both the tickets and the food are considered entertainment expenses that are not deductible under the law. The only way the taxpayer can deduct half of the food and beverage expenses is if he has an invoice separating out those costs from the non-deductible entertainment costs of tickets.
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 firstname.lastname@example.org.
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 reform law that went into effect beginning in 2018 expands the definition of small businesses that can now qualify to use the cash method of accounting and ultimately defer the recognition of income and payments of tax liabilities to later years. Unlike other changes contained in the Tax Cuts and Jobs Act (TCJA) that are set to expire in future years, these changes are permanent. As a result, more businesses will be able to ease their record-keeping burdens and potentially receive tax benefits from adjustments in when and how they account for income and expenses.
Accounting for Income and Expenses
How a business will account for gross income and expenses is typically among the first decisions an entrepreneur will make when setting up a new company. However, in many instances, the decision is determined for the business owner by the tax code, such as when a business produces inventory, when the taxpayer enters into long-term contracts, or when the company is in a particular industry.
Under the cash method of accounting, a business recognizes income at the point in time that it physically receives payment, and it deducts expenses when it pays money out to cover those costs. Conversely, a business using the accrual method of accounting will record income and expenses when a transaction occurs, such as when it sends out an invoice or ships a product, regardless of whether or not the business actually receives or makes a payment at the time the transaction occurs. The business will adjust the income and expenses in the future when payment is made or performance is complete in full or in part.
Traditionally, the cash method of accounting is preferable for businesses with receivables that exceed their payables, such as professional services firms, because it allows them to recognize income when they actually have payment in hand rather than before they receive payment. Conversely, the accrual method of accounting is more suitable for businesses that buy goods or services on credit from suppliers or that receive payments up front from customers before performing services or delivering goods and, therefore, will most likely have payables that are greater than their receivables.
Changes under Tax Reform
For tax years prior to Dec. 31, 2017, businesses with average annual gross revenue of $5 million or less during the prior three-year period qualified to use the cash method of accounting. However, the TCJA increases this gross receipt threshold to $25 million or less, beginning in 2018, while also carving out exceptions for taxpayers who were previously required to use certain accounting rules related to how to account for inventories, how to capitalize costs and how to treat certain long-term contracts.
In addition, as long as a business falls below the $25 million or less gross receipts test, it may treat inventories as non-incidental materials and supplies or move to a method of accounting that conforms to its “applicable financial statement” method, rather than being required under prior law to follow uniform capitalization rules (UNICAP) and capitalize expenses as part of their inventory costs for tax purposes. As a result, taxpayers that produce real or tangible personal property as inventory for resale may ultimately expense items of inventory in the year of acquisition rather than waiting for it to be sold. When taxpayers qualify, they may deduct non-incidental materials and supplies in the year in which they first use or consume those materials in their operations. In addition to exempting the UNICAP rules to inventory, the new law provides taxpayers with gross revenue below at or below the new $25 million threshold with relief from the other aspects of Section 263A, including with respect to self-constructed assets.
The TCJA’s provisions relating to a change in accounting method also have a significant impact on real estate businesses that now meet the larger gross receipts test of $25 million or less. More specifically, the law expands the universe of developers and home construction businesses that are considered “small contractors” and that are now exempt from using the percentage-of-completion method for accounting for construction contracts that they expect to complete within a two-year period. This change in accounting method provides real estate businesses with the ability to defer income until the point in time that they complete the contract, rather than requiring them to recognize income before construction is finished.
Requesting an Automatic Accounting Change
In an effort to reduce paperwork and ease administrative burdens, the IRS has a streamlined process for eligible taxpayers to request an “automatic” change in the timing of when they may recognize items of income and when they may take deductions. All taxpayers need to do is to complete an application using IRS Form 3115 by the September extended tax-filing deadline for partnerships and S Corporations, or the October extended deadline for C Corporations. There is no fee required for requesting an automatic change from the IRS, and by filing an automatic change in accounting method, taxpayers who meet the income limits do not need to wait for written approval from the IRS.
The expansion of the gross revenue test under the TCJA opens the door for a greater number of businesses to ease their recordkeeping requirements and qualify for an automatic change to the cash method of accounting for federal income tax purposes. The benefits of deferring income, coupled with the tax law’s reduced corporate and individual tax rates, amplify the time value of money that qualifying taxpayers will receive under the new law. However, this provision of the tax reform is not without complexity. As a result, taxpayers should meet with qualified tax advisors and accountants to understand and realize the benefits and potential tax savings they may reap from the new law.
About the Author: Richard E. Cabrera, JD, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where he provides tax planning, consulting, and mergers and acquisition services to businesses located in the U.S. and abroad. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 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.