On January 18, 2018, several of our tax and consulting leaders presented an overview of the Tax Cuts and Job Act and offered thoughts on strategies for high-net-worth individuals, families, entrepreneurs and businesses. More than 300 clients and friends attended the programs and many have requested copies of the slides used by our presenters.
For convenience, we broke them into segments.
Tax Reform – Domestic High-Net-Worth Jan. 18, 2018
Tax Reform – Real Estate Companies Jan 18, 2018
Tax Reform- Pass-Thru Entities Jan 18, 2018
Tax Reform – Corporate and Business Deductions Jan 18, 2018
Tax Reform – International Outbound – Jan 18, 2018
Tax Reform – International Inbound Jan 18 2018
(C) Berkowitz Pollack Brant.
Information in the presentations is subject to change based on further interpretation of the law and guidance issued by the Internal Revenue Service.
The media is rightfully paying significant attention to the U.S.’s new tax laws effective for the 2018 tax year. However, foreign persons with direct or indirect ownership in certain U.S. entities and structures should not forget that they have an important and immediate new filing requirement effective for the 2017 tax-filing season, which begins in January 2018.
For taxable years beginning in 2017, foreign-owned domestic disregarded entities, including single-member limited liability companies (SMLLCs), must 1) maintain a set of permanent financial records, 2) obtain from the Internal Revenue Service (IRS) an employer identification number (EIN), and 3) file both a U.S. corporate income tax return and IRS informational reporting Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business (Under Sections 6038A and 6038C of the Internal Revenue Code).
Failure to file the return or maintain proper records could result in a penalty of $10,000 for each violation of the law.
Generally, the Internal Revenue Code (IRC) treats SMLLCs as disregarded for all tax purposes. This means that an SMLLC would not have any U.S. income tax or information-reporting requirements separate from its foreign owner. However, under the new rules, such disregarded entities owned by a foreign person are treated as a domestic corporation that must meet all of the reporting and recordkeeping requirements applicable to domestic corporations with foreign owners. This includes filing an income tax return even if the foreign owner is already filing a U.S. tax return to report the SMLLC’s activity. The tax return will provide only general identifying information, but the Form 5472 that must be attached includes disclosure of the SMLLC’s direct and indirect foreign owners and any transactions that occurred between the SMLLC and a related party (including but not limited to the owner). For this purpose, a foreign owner includes a nonresident alien individual, foreign corporation, partnership, trust or estate.
It is likely too late for applicable taxpayers to avoid the domestic disregarded entity filing and recordkeeping requirements in 2017. However, taxpayers do have an immediate opportunity during the first few months of 2018 to plan ahead and change their structures.
For example, an SMLLC may consider electing to be treated as a corporation for U.S. income tax purposes and take advantage of the U.S.’s new corporate income tax rate, which was has been reduced significantly from a high of 35 percent to 21 percent beginning in 2018. While this option may be acceptable and easy for some foreign owners of SMLLCs to do, it is not an ideal solution, since it will not eliminate the tax return filing requirement or, in some instances, the requirement to file Form 5472. In addition, if the SMLLC owns U.S. real property, there may be Foreign Investment in Real Property Tax Act (FIRPTA) issues.
Alternatively, if the SMLLC is owned by a foreign corporation and holds personal use property, the LLC may be liquidated and avoid a U.S. corporate tax return filing requirement going forward until the property is sold. However, this option may also yield future tax implications, including foreign tax consequences, depending on the SMLLCs activities and whether the foreign corporation owns other assets.
Before making any decisions, it is vital that taxpayers engage the expertise of accountants and advisors to conduct a thorough review of their unique circumstances and a careful analysis comparing all of the options available to them.
The advisors and accountants with Berkowitz Pollack Brant work with domestic and foreign individuals and businesses to comply with international tax laws, maximize tax efficiency and reduce unnecessary compliance costs.
About the Author: Arthur Dichter, JD, is a director of International Tax Services with Berkowitz Pollack Brant, where he works with multi-national businesses and high-net worth foreign individuals to structure their assets and build wealth in compliance with U.S. and foreign income, estate and gift tax laws. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at firstname.lastname@example.org.
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. 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 email@example.com.
Following the passage of the Tax Cuts and Jobs Act (TCJA), the IRS issued preliminary guidance to help multi-national businesses comply with the new law’s “deemed repatriation tax” on foreign profits that U.S. companies and their overseas subsidiaries hold offshore.
Effective for the last tax year beginning prior to Jan. 1, 2018, U.S. businesses will be subject to a one-time “deemed repatriation tax” of 15.5 percent on certain earnings they made since 1987 and invested in liquid assets held overseas and an 8 percent tax on foreign earnings invested in illiquid, fixed assets, such as plants and equipment. The tax due may be spread over an eight-year period and is due regardless of whether or not businesses actually bring foreign profits back to the U.S.
This provision replaces the previous tax regime, under Section 965 of the Internal Revenue Code, for which U.S. businesses were able to defer paying a 35 percent tax on repatriated earnings by stockpiling profits offshore. It aims to move the U.S. to a more territorial system in which U.S. companies would pay taxes in the future solely to the foreign governments where they earn profits.
The end result of the new law would be an immediate tax hit on corporate profits with the benefit of avoiding U.S. taxes in the future, even on earnings that businesses bring back to the States. However, it is important to note that these benefits are afforded solely to C Corporations and not to S Corporations or individuals. This may be a surprising result for some because, while the future benefits of a territorial regime only apply to C Corporations, the deemed repatriation of foreign earnings does, indeed, apply to S Corporations that do not elect to defer the income pick-up as well as to individuals, for which no election to defer the income pick-up is available.
Under IRS Notice 2018-07, the agency has declared its plan to better define, in the near future, what constitutes liquid and illiquid assets held offshore for purposes of calculating the effective tax rate applicable to the deemed repatriation of foreign earnings. Furthermore, the Notice attempts to further explain and eliminate the double taxation issue that may arise when foreign corporations of a U.S. company have different tax years (e.g., one foreign corporation has a December 31 year-end and another has a November 30 year-end.)
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 firstname.lastname@example.org.
Operating a small business in the U.S. comes with a wealth of opportunities and an equally abundant set of complexities, including tax reporting, regulatory compliance and meticulous financial recordkeeping. For many entrepreneurs, hiring full-time professionals to oversee these functions in-house is simply unaffordable. Instead, many are turning to outsourced CFO services to receive on-demand assistance with a myriad of financial budgeting, reporting, planning and fraud-prevention services.
By outsourcing CFO functions to qualified and experienced certified professional accountants and auditors, business owners can more easily afford the financial and operational expertise of a CFO without incurring the expense of paying the high salary and benefits associated with hiring full-time candidates in-house. Yet, having these services available on a once-per-month, quarterly or as as-needed basis is not only cost effective, it also centralizes and expedites a small business’s decision-making processes.
While it is not uncommon for small business owners to hire part-time bookkeepers to record financial transactions and oversee payroll, the extent of these professionals’ expertise is typically limited to the specific tasks they perform. For example, bookkeepers may lack the skills required to analyze a business’s performance, profitability and cash flow. In addition, they may be unqualified to look beyond the numbers and provide overburdened owners with the strategic counsel required to establish and meet operational and financial goals, minimize risks and take advantage of market opportunities.
Following are five additional benefits business owners will receive when they outsource CFO services:
Financial Reporting Accuracy
It is critical that businesses maintain meticulous financial records for both tax-reporting and financial-analysis purposes. When businesses outsource this task to experienced professionals, they receive a second set of eyes to confirm the accuracy of financial data as well as a valuable resource to help train workers, including bookkeepers, on best practices for managing accounting and financial processes, procedures and technology. In addition, businesses gain the benefit of having a qualified expert on call to prepare with precision and on time the requisite financial documents that they need when seeking to secure loans or investment dollars from third-parties.
Profitability and Cash Flow Analysis
Entrepreneurs wear many hats and juggle multiple job responsibilities as they grow their businesses. It is not uncommon for them to become so mired in day-to-day tasks that they do not take the time to evaluate the facts behind their financial data. As a result, they may overlook potential issues that could turn into very real problems in the future or miss out on opportunities to improve profitability and cash flow. Are some products or services more or less profitable than others? Is cash flow in and out of the business managed efficiently? Are there areas where the business can cut costs or reallocate expenses in order to improve profitability? The answers to these questions are difficult to decipher from a spreadsheet. Rather, they require a higher level of understanding and knowledge of key performance metrics and the intricacies and interplay of corporate finance, tax efficiency and risk management.
Fraud Detection and Prevention
Both small and large businesses continue to suffer significant losses from occupational fraud committed by their own employees. However, according to the Association of Certified Fraud Examiner’s (ACFE), these losses typically have a far greater impact on smaller organizations that lack sufficient internal controls to prevent and detect fraudulent activities. An outsourced CFO can provide the keen eye and sharp skills required to identify not only red flags that point to fraud but also operational weaknesses that can foster and contribute to criminal mischief. For example, businesses can reduce employees’ opportunities to commit fraud by separating the duties and responsibilities of certain business transactions to different people within the organization.
Whether a business owner is seeking a loan or engaging in other forms of contractual negotiations, it is imperative that he or she fully understand the terms of the agreement, including their personal responsibilities to fulfill certain conditions. However, oftentimes a loan will involve standard covenants that may be difficult for a start-up or growing business with limited resources to satisfy. With the experience of an outsourced CFO, business owners can not only be assured that they understand the entirety of their contractual obligation, but they will also gain the benefit of a qualified and affordable representative to negotiate some of the terms on their behalf up front.
Short-Term Consulting and Long-Term Strategic Planning
The responsibilities of a CFO extend far beyond back-office number crunching and financial transactions. In today’s business environment, their analytic skills can be applied to all facets of an organization, from human resources and operations to sales and technology. Outsourcing these functions on an as-needed basis provides small businesses with a fresh perspective and high-level analysis of their financial, operational and tax efficiency at manageable fees. An outsourced CFO can examine a company’s balance sheet to establish workable budgets and compare them to actual results; identify problem areas; and recommend cost-cutting strategies, new technologies and new processes for improving efficiency. Their level of expertise also ensures immediate feedback to help businesses more quickly and effectively respond to changing market conditions and leverage new opportunities for future growth.
Berkowitz Pollack Brank Advisors and Accountants offers outsourced CFO services to help entrepreneurs run their domestic and international businesses more effectively and profitability. To learn more about these consulting services, please contact me directly.
About the Author: Anya Stasenko, CPA, is a senior manager with the Audit and Attest Services practice with the accounting and advisory firm of Berkowitz Pollack Brant, which has extensive experience helping foreign individuals prepare and implement tax-efficient plans for establishing residency and businesses in the U.S. Stasenko can be reached in the CPA firm’s Ft. Lauderdale, Fla. office at (954) 712-7000 or via email at email@example.com.