KLR Tax Blog - Providence, Rhode Island, Newport, Boston, Massachusetts

menu
in this section

Jul 24

What China’s FACTA Agreement means for US Companies

By Paul Oliveira, CPA

The recent agreement with China is the latest example of the United States’ success in making banking more transparent on a worldwide basis. Because of FATCA, the IRS is gaining information faster and more completely. This makes a US taxpayer’s ability to “hide” assets overseas less and less likely.

FATCA was enacted in 2010 and is intended to minimize tax evasion by United States taxpayers holding investments in offshore accounts. The reporting provisions of FATCA are been phased in over a number of years to require US taxpayers, as well as foreign financial institutions, to report directly to the IRS the ownership interests of certain financial accounts. Failure to do so could result in penalties ranging from $10,000 to $500,000, or even imprisonment.

It should be noted that US account holders who are currently not in compliance have the ability to come forward under the IRS’ Offshore Voluntary Disclosure Program (OVDP). This program generally carries with it a 27.5% penalty. However, effective July 1, the IRS introduced a Streamlined Program for those US taxpayers whose failure to comply was non-willful. If a taxpayer qualifies for the Streamlined Program, they could qualify for a significantly reduced penalty (5% for US taxpayers residing in the US; no penalties for US taxpayers residing outside of the US).”

Read more about China’s FACTA Compliance in this article from our affiliate Dezan Shira & Associates.

Jul 21

OECD Tax Conference Focuses on BEPS Project

By Paul Oliveira, CPA

The Base Erosion and Profit Sharing project (BEPS) was the focus of a recent two-day conference of the Organization for Economic Co-Operation and Development.
BEPS is a project centered around:

  • Tax planning strategies that aim to utilize loopholes to make profits vanish for tax benefits.
  • Shifting profits to locations where the taxes are lower so that little or no overall corporate tax is owed.

The project has attracted the attention of both political and business leaders, and their concerns about the implementation of the project. For more information on the conference, the project, and its critics, please read our article, “BEPS Project Takes Center Stage at OECD Tax Conference”.

 

Jul 17

IRS Changes Terms of Its Offshore Voluntary Disclosure Program

By Elizabeth Colagiovanni

The IRS has made changes to the terms of its Offshore Voluntary Disclosure Program (“OVDP”), effective July 1, 2014. Through the changes, the IRS intends to provide options to taxpayers that have “unknowingly” failed to disclose their foreign accounts or foreign interests and now want to correct their mistake.

What are the changes?

The “2014 OVDP”, as it is now called, features many changes, most notably to the former 2012 OVDP FAQs.
There are now four OVDP options available which have replaced several previous OVDP FAQs from 2012. Two of those options are:

  1. OVDP- For taxpayers who have knowingly failed to report foreign financial assets and need to pay taxes, interest and penalties due for the prior 8 tax years (the OVDP period).
  2. Streamline Filing Compliance Procedures- For taxpayers who have not disclosed the income under their accounts and need to adjust their returns and pay their tax and penalty obligations.

The changes are aimed at giving more reasonable taxes and penalties to taxpayers whose concealment was non-willful, and penalizing those who have willfully undisclosed their foreign accounts and holdings.

For a more detailed outline of the changes, read our whitepaper: Changes to the Offshore Voluntary Disclosure Program.

Jul 16

Employer Benefits of Providing Educational Assistance to Employees

By Andrew D’Aiello

Developing and training staff improves any business but educational fees can quickly add up, and before you know it, your company can be stuck with a hefty bill. Fortunately, the regulations under Internal Revenue Code 162 confirm that certain education expenses qualify as both ordinary and necessary trade or business expenses, which, when paid or incurred during the course of a taxable year are deductible.

What is considered ordinary and necessary?

Ordinary expenses are normally or likely to be incurred during the course of business activities.  They do not, however, have to be habitual or normal.
Necessary expenses are those considered appropriate and helpful under the circumstances.  This is a facts and circumstances based test.

What qualifies as an educational expense and when does it qualify as deductible?

Tuition, student activity fees, textbooks and supplies necessary for enrollment or attendance at any eligible educational institution (college, university, vocational school or other postsecondary educational institution with a U.S. Department of Education student aid program) qualify as educational expenses.

The expenses above must maintain or improve the skills required by the employee to perform his/her function.

Expenses in question must also meet express requirements of the employer, laws or regulations applicable to the level of employment, or must be imposed as a condition of employment retention.

What work-related education does not qualify?

If either of the following applies, the employer cannot claim the deduction:

  • The education sought is part of a program that will qualify the employee for an entirely new trade or business.  For example, an auditor taking tax classes would qualify as deductible, as duties have changed within the framework of accounting, whereas an electrician studying dentistry would not qualify as deductible.
  • The education is needed to meet the minimum educational prerequisites for qualification for employment.

What are the benefits?

There are benefits for both employers and employees with respect to education expenses:

  • The cost of qualifying expenses is used to reduce trade or business income to the employer while increasing the knowledge base and expertise of the employee.
  • Provided a written plan exists, and other considerations are met, the first $5,250 of educational assistance provided to an employee is excluded from the employee’s gross income subject to tax.
  • Self-employed individuals also reduce the amount of income subject to self-employment tax.
  • Employees may be eligible for tuition credits or deductions, such as the American opportunity and lifetime learning credits, for expenses not paid for/reimbursed by the company and not otherwise excluded from gross income.

Providing an education assistance program stimulates employee loyalty while allowing employers to retain, develop and advance quality workers. Consider the qualifications for educational expenses and see if providing higher education to your employees could benefit the company.

For more information about deductible education expenses, please contact any member of our Tax Services group at 888-857-8557.

Jul 15

Improve your M&A Value through Tax Due Diligence

By Paul Oliveira, CPA

Take time to review your tax issues, they could greatly influence your merger and acquisition (M&A) transaction. In the due diligence process, make certain to consider the following tax matters:

1. Stock Purchase vs. Asset Purchase

In a company, selling stock is favorable for the sales person because it means that, with the purchase, the consumer takes on all of the business’ liabilities. In contrast, the consumer prefers to purchase assets because it permits him/her to avoid taking on all of the seller’s liabilities by singling out only the assets his/her company requires.

2. State and Local Taxes (SALT)

Compliance with sales and use tax laws for the applicable state is crucial. Things to keep in mind include “bulk sales” laws and the transaction’s potential effect on the purchaser’s tax liability. Also, if the seller owns a considerable amount of real estate, it is important to take into account the state, county and city tax laws on real estate transfers. There are also corporate income tax considerations. Federal taxable income typically influences these taxes, but this can vary.

3. International Tax Issues

International tax issues should be carefully examined if the seller is a foreign company or conducts business overseas. Issues like transfer pricing, sourcing of foreign and domestic income, and foreign non-income taxes are examples of issues unique to companies doing business in other countries.

Taxes can largely affect the outcome of your transaction, even the transaction itself could be taxable! Tax due diligence can improve the value of your M&A transaction in more ways than one.

 

Jul 14

Anti-Abuse Rule on CFC Investments

By Paul Oliveira, CPA

For companies with Controlled Foreign Corporations (CFCs) that are members of foreign partnerships, the IRS’s Office of Chief Counsel has given more detail on the anti-abuse rule. In Chief Counsel Advice 201420017, the IRS concluded that, by law, the parent of an affiliated group of CFCs must incorporate income loans made by a disregarded foreign entity to the CFC.

The anti-abuse rule, or Internal Revenue Code Sec. 956 states that stockholders of a CFC who own shares in that company on the last day of its tax year typically must include:

  • The excess of their pro rata share of the average amount of U.S. property owned by the CFC over that share of the CFC’s earnings and profits from amounts included in their gross income in the past.
  • The shareholder’s proportional share of the applicable CFC profit.

The Chief Counsel’s regulations suggest to U.S. multinationals that, when setting up financial structures offshore, it is important to use discretion. For more information and a more detailed explanation, please read our article, “IRS Clarifies Rule on Loans Involving CFC Investments”.

 

Jul 11

Summary of Changes to Rhode Island Corporate Income Taxes

By Paul Oliveira, CPA

As part of the 2015 budget bill, some significant RI state tax law changes were enacted on June 19, 2014. Along with other modifications, significant changes impacting corporate income taxes were put in place.

10 Changes Beginning on or after January 1, 2015

For tax years beginning on or after January 1, 2015, the following changes will take effect:

  1. The existing corporate income tax rate will drop 2 percentage points (from 9% to 7%).
  2. The franchise tax will be repealed under the new law.
  3. RI law states that a company both organized as a C corporation and part of a combined group involved in a single business enterprise will be required to file a combined report with the state. The new law requires a corporation to report its own income and the combined income of the other corporations under common ownership on the RI tax return.
  4. Payments of estimated tax must equal 100 percent of the tax due for the previous year plus any added tax that is due to the combined reporting provisions.
  5. Under the single sales factor apportionment, RI corporations (except for subchapter S corporations, partnerships, and LLCs) will use sales as a single factor for apportionment purposes instead of the three factor apportionment formula.
  6. Rhode Island will begin to use a market- based sourcing of revenues, which states that receipts from transactions other than sales of tangible personal property are sourced to the market state. This will apply to businesses organized as C corporations whether or not the corporation is part of a combined group.
  7. Jobs Development Act. Eligible corporations can avail themselves of the income tax rate reduction, but it will also now apply to each eligible corporation that files a RI income tax return as part of a combined group.
  8. Life sciences rate reduction. The new law states that the corporate tax rate reduction is now available to eligible life sciences companies that file RI income tax returns as part of a combined group, as opposed to previous law which only allowed the reduction to eligible life sciences companies.
  9. Subchapter S corporations. As a result of the franchise tax repeal, subchapter S corporations will be subject to the annual minimum tax under the corporate income tax statute, in the place of the franchise tax statute.
  10. In efforts to resolve disputes between the Tax Administrator and the taxpayer, the Division of Taxation has been mandated to institute an independent appeals process with respect to the method of apportionment applied regarding the corporate income tax.

Additional Changes

  • For the fiscal year 2015, The Division of Taxation is required to add the equivalent of seven full time employees to its staff.
  • Under the new law, the Tax Administrator must develop a report which analyzes the policy and fiscal implications of all the modifications to the business corporation tax statutes combined reporting, single sales factor apportionment and market-based sourcing). The report is due on or before March 12, 2018.

In addition to these major changes affecting many taxpayers, the new law also includes changes to estate taxes, the gasoline tax, real estate conveyance tax, earned income tax credit, along with several other provisions. Visit the RI Division of Taxation to see the full summary of legislative changes. Please contact any member of KLR’s State and Local Tax Services Group with additional questions.

Read more about the estate tax changes in our blog: Changes in RI Estate Tax Exemption

Jul 10

Will the Section 1031 Exchange Benefit my Company?

By Loree Dubois

Will your company be selling business property that results in a gain? For companies exchanging property used in trade, business, or investment for property of a “like kind” used for the same purposes, section 1031 of the IRC Code allows investors to postpone paying tax on that gain.

What are the rules?

Under section 1031, owners of investment and business property may be eligible for a deferral on an exchange of property so long as they adhere to these rules:

  • The property must be recognized and the exchange must be finished no more than 180 days after the transfer of property.
  • You have 45 days from the day you sell the old property to find prospective replacement properties.
  • Both properties must be used in a trade or business or for an investment. Take note that personally used property does not qualify (i.e. vacation homes).
  • Both properties must be of the same nature, character, or class. Take note that property in the U.S. is not considered like kind to property in other countries.
  • The replacement property must be equal to or greater than the price of the old property.

Section 1031 does not apply to exchanges of:

  • Stock in trade
  • Inventory
  • Stocks, bonds, or notes
  • Other securities or debt
  • Partnership interests
  • Trust certificates

Qualified Intermediary

Another requirement under the section 1031 exchange is that taxpayers must have a qualified intermediary (QI) involved in the process. The QI:

  • Drafts 1031 exchange agreements that agree with the taxpayer’s objective.
  • Holds the exchange funds of the relinquished transaction. Note that if the taxpayer has access to the funds, the 1031 exchange is stopped.

What are the advantages to the exchange?

  • Postponing the tax leaves more room for investment.
  • You can replace your burdensome property with one that takes less maintenance.
  • Federal rates could go down in the future, so it may be a profitable time to defer the gain, particularly if the assets are held in a C corporation with the potential for corporate tax reform in the future.

Potential Drawbacks

  • Note that this exchange only postpones tax, it does not eliminate it.
  • Time constraints- Many investors have difficulty finding a replacement property in the 45 day limitation.
  • There are a number of rules and procedures that you are required to follow under the 1031 exchange.

If your company is exchanging property used in trade, business, or investment for property of a “like kind” this exchange could be very beneficial for your business. For more information on 1031 exchanges please contact, please contact us.

Jul 8

Your Seasonal Workers Could Trigger the ACA’s Play-or-Pay Provision

By Loree Dubois

The Affordable Care Act’s “play-or-pay” provision is set to take effect Jan. 1, 2015. You may not think it applies to your company because you don’t employ enough workers, but if you use seasonal workers, you could be in for an unwelcome surprise.

The Play-or-Pay Provision

The play-or-pay provision imposes a penalty on “applicable large employers” that don’t offer a “minimum value” of “affordable” health care coverage to their full-time employees if just one full-timer enrolls in a qualified health plan through a government-run Health Insurance Marketplace and receives a premium tax credit.

For 2015, an applicable large employer generally is one with at least 100 full-time employees or a combination of both full-time and part-time employees that’s equivalent to at least 100 full-timers.You’ll use information about your 2014 workforce to determine if you’re an applicable large employer for 2015.

The Role of Seasonal Workers

Seasonal workers are taken into account when determining whether you hit the 100-employee threshold. The good news is that if your workforce exceeds 100 full-time employees (or the equivalent) for 120 days or less during the relevant calendar year (2014 for 2015) — and the employees in excess of 100 during that period were seasonal workers — you won’t be considered an applicable large employer.

Seasonal workers for this purpose are defined as workers who perform labor or services on a seasonal basis. The IRS says employers can apply a reasonable, good faith interpretation of the term.

Plan Carefully

If you employ a seasonal workforce that puts you over the 100-employee threshold part of the year, take steps to ensure that these workers are on board for no more than 120 days in the calendar year. Otherwise, you could end up being considered an applicable large employer and subject to the play-or-pay provision.

Also keep in mind that the 100-employee threshold is scheduled to drop to 50 for 2016 and subsequent years — and, in some cases, the 50-employee threshold can apply in 2015.
To learn more about whether you could be subject to the play-or-pay provision in 2015, please contact us.

Jul 7

Call for Tax Code Reform after Pfizer Fails to Acquire AstraZeneca

By Paul Oliveira, CPA

Pfizer’s recent, yet so far unsuccessful attempt, to take advantage of lower corporate tax rates in the U.K. by acquiring the drug company AstraZeneca, has provoked a need to update the current tax code. President Obama and other Government officials are seeking changes to the tax code that would make U.S. corporate tax rates globally competitive.

There are many advantages to this corporate inversion, including:

  • A corporate inversion allows the company to avoid U.S. tax on foreign operations and on distributions to the foreign parent.
  • It presents the opportunity to reduce taxable income from U.S. operations through disbursements of fees, interest, and royalties to the foreign entity.
  • Under this method, Pfizer could benefit from the 21%  UK corporate tax rate.

Not everyone supports this inversion tactic, however, leading to companion bills under the Stop Corporate Inversions Act of 2014. Due to the strong political reaction against the corporate inversion, there are conflicting methods in reforming the current tax code. Stay tuned for updates.

Read our article: “Pfizer’s failed Takeover Bid Sparks Calls for Tax Code Reform” for a more detailed explanation of the pros and cons of the corporate inversion, and other approaches to tax code reform.

 

See all Tax Blog articles in the archives.