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.
Planning Opportunities
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 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
The rehabilitation tax credit that provides an incentive for real estate owners to renovate and restore old or historic buildings has been modified under the Tax Cuts and Jobs Act (TCJA) signed into law in December 2017.
Under the new law, taxpayers claiming a 20 percent credit for the qualifying costs they incur to substantially rehabilitate a building must spread out that credit over a five-year period beginning in the year they placed the building into service, which is the date on which construction is completed and all or a portion of the building can be occupied. Excluded from the credit are any expenses that taxpayers incurred to buy the structure.
In addition, the law specifically eliminates the availability of a reduced 10 percent rehabilitation credit for pre-1936 buildings. However, owners of certified historic structures or pre-1936 buildings may qualify for temporary relief under a transition rule when they meet the following conditions:
- The taxpayer owned or leased the building on Jan. 1, 2018, and he or she continues to own or lease the building after that date.
- The 24- or 60-month period selected by the taxpayer for the substantial rehabilitation test begins by June 20, 2018.
Qualifying for and claiming the rehabilitation tax credit can be a complicated process for which taxpayers should seek the counsel of professional tax advisors and accountants.
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.
The IRS issued its annual update to the daily rates that employers may use to reimburse employees for lodging, meals and other incidental expenses that workers incur while traveling for business purposes.
The per diem rates are fixed amounts that employers may use to more easily reimburse workers for ordinary and necessary business travel expenses without requiring the collection and calculation of actual costs incurred. These payments are not considered taxable income to employees as long as workers substantiate their claims with detailed expenses reports. However, should a business reimburse an employee for more than the per diem rate, the employee is responsible for paying taxes on that amount.
Effective Oct. 1, 2018, the per diem meal and incidental allowances for taxpayers in the transportation industry are $66 within the continental U.S. and $71 for travel outside of the region. These expenses include all meals, laundry and dry cleaning services, and tips provided to food servers, porters, baggage handlers and other hotel employees.
For purposes of the high-low substantiation method, the per diem rates are $287 for travel to a high-cost locality and $195 for travel to any other locality within the continental U.S. The per diem rates for solely meals and incidental expenses is $71 for travel to high-cost localities and $60 for any other area within the continental U.S. In addition, the IRS updated its list of localities, including New York City, San Francisco and Aspen, Colo., which have a high cost of living during all or a portion of the year and therefore have a federal per diem rate of $241 or more.
The per diem rates are especially important to workers in 2018 because the Tax Cuts and Jobs Act eliminates their ability to deduct unreimbursed job expenses and miscellaneous itemized deductions through 2025. Therefore, it behooves workers to speak with their employers and request reimbursements for those business-travel expenses in order to recoup even a portion of the money they personally lay out to pay for costs that are necessary for their jobs.
About the Author: Dustin Grizzle is an associate director of Tax Services with Berkowitz Pollack Brant, where he provides corporate structuring, tax-planning and compliance services to real estate developers, management firms and investment companies; manufacturing businesses with large inventories; and high-net-worth families. He can be reached at the CPA 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.
The passage of tax reform at the end of 2017 leaves many individuals in a better tax position than they were one year ago. Nevertheless, understanding how to maximize the potential tax-savings opportunities contained is the provisions of the new law is not a simple endeavor. To help avoid an unwelcome tax liability in April of 2019, taxpayers should take the time now to implement some tried-and-true year-end strategies as well as some new planning tips around the changes brought about by the Tax Cuts and Jobs Act (TCJA).
Check your Withholding and Estimated Tax Payments
The new withholding tables combined with expanded tax brackets and the elimination of certain deductions means that you may not have been paying your fair share of taxes on income earned during the year through quarterly estimated tax payments and/or the amount employers withhold from paychecks. If you haven’t done so already, contact your tax advisors to do a withholding checkup and project an estimate of your tax liability for 2018. To avoid a potential penalty for tax underpayments, you may request your employer increase the withholding on your last paychecks for 2018 or your year-end bonus. Alternatively, you can make a fourth-quarter estimated-tax payment to the IRS before Jan. 15, 2019, but doing so will be subject you to a penalty for failing to pay taxes as-you-go during 2018.
A withholding checkup is equally important for retirees to ensure that the government withholds enough taxes from Social Security, and they are prepared to pay the tax liabilities on the distributions they receive from retirement accounts, including 401(k)s and traditional IRAs. It may make sense to withhold income tax on retirement account withdrawals. Such withholding can also be used to reduce or avoid a penalty for not paying enough estimated tax that was due earlier in the year. If the distribution is not otherwise required or needed, it can be rolled over into another retirement account within 60 days to avoid any additional, unwanted tax exposure, including funds to replace the amount of withholding.
Will you be Able to Itemize or will you take the Standard Deduction?
It is expected that far more taxpayers will claim the higher standard deduction in 2018 due to the elimination and/or limitation of many of the tax breaks that they previously itemized on their returns, including a $10,000 cap on property, state and local taxes, restrictions to the deduction for mortgage interest on new loans executed after Dec. 31, 2017, and the elimination of deductions for miscellaneous expenses, such as tax preparation and other professional service fees. However, high-net-worth taxpayers may still have an opportunity to maximize their itemized deductions before the end of the year by accelerating their charitable contributions into 2018 or making more visits to the doctor and scheduling last-minute procedures on order to exceed the standard deduction threshold of $12,000 for single taxpayers or $24,000 for those married filing jointly. Also, consideration should be given to bunching your charitable deductions in January and December of the same year to maximize the use of the standard and itemized deductions over a multi-year period.
Max Out Retirement Plan Contributions, Remember RMDs
One of the few deductions that survived tax reform are the contributions that taxpayers make to their retirement-saving plans. For 2018, you can contribute as much as $5,500 to a traditional IRA ($6,500 if you are age 50 or older) or $18,500 to a 401(k) plan ($24,500 if you are age 50 or older) and reduce your taxable income by that amount. If you are an employee, you have until Dec. 31, 2018, to increase your 2018 401(k) contribution through salary deferral. If you are a business owner, you have until April 15, 2019, to make a pre-tax contribution to your solo 401(k) and apply it to your 2018 tax return. The deadline for making contributions to IRAs, including ROTH IRAs, is April 15, 2019.
If you are 70 ½ years of age or older and you did not work in 2018, you must take a taxable required minimum distribution (RMD) from your 401(k) and/or IRA by Dec. 31, 2018. If you fail to take the RMD, you or risk a penalty of 50 percent of the undistributed amount. If you are still working, you may postpone the RMD until the year in which you actually retire. If you turned 70 ½ years old this year, you have a one-time option to defer your initial RMD until April 1, 2019. While this will allow you to effectively defer 2018 taxable income into next year, it will also require that you take two RMDs in 2019 and essential double your income for that year.
Make use of FSA Funds
Check on the balance in your flexible spending account (FSA) because you will lose any remaining funds that you do not use by the end of the year. If you have money left in your FSA, schedule doctors’ appointments, visit the dentist, refill subscriptions or buy new glasses before Dec. 31.
Harvest Capital Losses
To minimize your exposure to capital gains taxes, you should consider selling underperforming investments before the end of the year to generate a tax loss that can reduce your taxable income. Tax losses can be used to offset gains of matching holding periods (e.g. short-term losses can offset short-term gains and long-term losses to offset long-term gains) and allow investors to maximize the use of their personal tax attributes. However, investors should be careful to avoid the wash-sale rules that could disallow the use of a realized loss, as well as consider whether or not the sale of an asset makes sense in relation to their existing investment strategy. Disposing of an asset solely for a tax benefit may disrupt and derail your long-term financial goals.
Along the same lines, taxpayers who sold cryptocurrency, such as bitcoin, in 2018 should be prepared to pay taxes on any gains resulting from those transactions.
Defer Capital Gains
The tax code offers a few opportunities for taxpayers to defer or even eliminate capital gains from the sale of certain assets. For example, investors can defer taxes on the sale of real estate by completing a 1031 exchange and reinvesting those gains in similar like-kind real property. In addition, the new tax law’s Opportunity Zone program allows taxpayers to defer or even eliminate capital gains tax when they reinvest the proceeds from an asset sale into a business or property located in any of the nation’s more than 8,000 opportunity zones.
Give Gifts to Charity and Family
By making gifts of money or property, either to charities, family members or friends, you may be able to reduce the amount of your income that is subject to tax. For example, donations to qualified charitable organizations are fully deductible (up to certain income thresholds) against both income taxes and the alternative minimum tax (AMT), as long as you mail or charge the donation to your credit card before Dec. 31, 2018. Furthermore, you may donate up to $100,000 of your 2018 RMD directly to a charity by December 31 to avoid including that amount in your taxable income.
In addition, you may have an opportunity to reduce your future taxable income and protect your assets from exposure to estate and gift taxes if you give gifts of $15,000 or less to as many people as you wish before Dec. 31, 2018. For married couples, the maximum amount that may be excluded from taxes in 2018 is $30,000. It is important to remember that there is no annual limit on the amount you may gift tax-free to your spouse unless he or she is not a U.S. citizen. Similarly, you may pay as much as you like directly to an educational or medical institution to cover the costs of tuition or medical expenses for another person without gift tax implications. Gifts above the statutory threshold will require you to file a gift tax return, but they will not cause taxation until you have exhausted the enhanced individual lifetime exclusion of $11.18 million, $22.36 million for married couples.
Look for Opportunities to Minimize Business Tax Liabilities
The TCJA reduced the corporate tax rate to 21 percent and introduced a potential deduction for qualifying pass-through business entities. To be eligible for the full benefit of the 20 percent pass-through deduction, businesses should assess their lines of business, the ways in which they pay wages to workers and whether they own or lease the property they use to generate business or trade income. In addition, business owners may consider purchasing expensive equipment before the end of the year in order to claim a full deduction for those costs in 2018 and/or make improvements to nonresidential property to qualify for an additional deduction of up to $1 million.
Protect your Assets
The entity you select to hold your personal and business assets will have far-reaching effects on your exposure to income, estate and gift taxes; privacy; protection from creditors; and control over distributions of assets. The end of the year is a good time to meet with professional advisors to review the assets holding structures you currently have in place and make adjustments, as needed, to align with changing life circumstances.
The advisors and accountants with Berkowitz Pollack Brant and its affiliate Provenance Wealth Advisors work with U.S. and foreign citizens and businesses to develop tax-efficient solutions that meet regulatory compliance and evolving financial needs.
About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director with the Taxation and Financial Services practice of 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 in the CPA firm’s Ft. Lauderdale office at (954) 712-7000 or via email at info@bpbcpa.com.
When taxpayers prepare their annual returns, they must select a filing status, which determines their eligibility for certain credits and deductions and ultimately influences the amount of federal income tax they owe. For some individuals, the selection is decided for them based on whether or not they are married on the last day of the calendar year. However, under certain circumstances, taxpayers may qualify for more than one filing status. When this occurs, taxpayers may choose the one that results in the lowest tax liabilities they owe to the federal government. Making this determination may require the guidance of professional accountants who can calculate taxpayers’ obligations under each qualifying filing status.
Following are descriptions of the five filing statuses available to taxpayers:
- Single. Taxpayers are not married or they are divorced or legally separated under state law.
- Married Filing Jointly. Taxpayers are married couples who file a joint federal tax return. This filing status also applies to widows whose spouses passed away in the tax year covered for a filed return.
- Married Filing Separately. Married couples can choose to file two separate tax returns when each spouse wishes to be responsible solely for his or her own tax liabilities. In addition, married couples may choose to file separately when doing so will result in less tax owed than if they file a joint tax return.
- Head of Household. This status applies to unmarried taxpayers who meet certain rules, such as having paid more than half the cost of keeping up a home for themselves and for another qualifying person. It is important for taxpayers to review the rules and make sure they qualify to use this status.
- Qualifying Widow(er) with Dependent Child. A taxpayer who has a spouse that died during one of the previous two years, and they have a dependent child may qualify for this filing status.
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.
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.
