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Sep 18

New IRS Release on Foreign Partnerships and Trusts

By Paul Oliveira, CPA

As part of implementation of FATCA and an update to the initially published agreements, the IRS recently updated the Withholding Foreign Partnership (WP) and Withholding Foreign Trust (WT) agreements. The WP and WT agreements apply to foreign partnerships and trusts that are looking to enter into a withholding agreement with the IRS.

What’s included in the update?

The revised revenue procedure offers advice for entering into a WP or WT Agreement with the IRS. This allows the WP or WT to take on withholding and reporting responsibilities for payments of U.S. source income (like dividends, interest, and royalties) made to owners, partners or beneficiaries.

The changes include:

  • New application process for becoming a WP or WT.
  • Instructions for renewal of a WP or WT agreement.
  • Updated text of WP and WT agreements.

Important Dates

The updates apply for WP and WT agreements with effective dates on/after June 30, 2014. For calendar years after 2014, approved WP or WT applications received on or before March 31st of the calendar year will be effective January 1st of that year. Approved applications received on or after April 1st will be in force January 1st of the following year and WP agreement compliance must begin January 1st.

For more information on the updates, contact any member of our International Tax Services Group.

 

Sep 16

Don’t Forget the SALT!

By Paul McVay

When negotiating and structuring M&A transactions, don’t overlook state and local tax (SALT) issues. They can be complex, and tax laws vary dramatically from state to state. Even seasoned buyout veterans sometimes misjudge their importance.

SALT issues generally come into play in one or more of the following ways:

  1. The transaction itself may trigger state or local taxes. In a few states, for example, transfers of certain tangible personal property in connection with an M&A transaction are subject to sales and use taxes, causing a trap for the unwary. In many other states, these transfers avoid tax under an “occasional sale” or other exemption. Similarly, real property transferred in a transaction may be subject to real estate transfer taxes. Typically, these taxes apply in connection only with asset sales, not with stock sales. But some jurisdictions impose the tax on transfers of a controlling interest in a company that owns real estate. The point here is that the potential for these types of transactional taxes arising in your acquisition should be vetted as part of the due diligence and negotiation process.
  2. The buyer may incur successor liability for the seller’s unpaid taxes. Don’t assume that structuring a transaction as an asset purchase will avoid this liability. There are certain taxes that states will view as “trust fund” taxes. For example, many states impose successor liability for sales and use taxes as well as employer taxes on a buyer of substantially all of a seller’s assets. Special attention should be paid during the due diligence process for the existence of these liabilities, and, if necessary, sufficient amounts should be withheld from the ultimate purchase price to satisfy any amounts due to the states. The parties can also consider having the target company come forward and do a voluntary disclosure in states where it’s out of compliance. The advantage of negotiating a voluntary disclosure agreement with a state in anticipation of a transaction is that it brings certainty to the amount of tax and interest due, providing some closure for both buyer and seller on the extent of the liabilities and whether statutes of limitation have closed.
  3. The transaction may expand the buyer’s geographical footprint, exposing it to taxes in states where it was previously exempt. Generally, companies are subject to taxes in states with which they have a substantial economic connection, or “nexus.”

Buying a company that has nexus with other states may expose the buyer to those states’ sales and use, income, and franchise taxes. Again, a robust due diligence process will review nexus being created by current business operations and the impact that will have on the acquirer post-closing.

SALT issues may affect a transaction’s value or optimal structure, so it’s a good idea to address them as early as possible. For more information about how SALT issues could affect your upcoming deals — and how you can keep negative tax consequences to a minimum — please contact us.

Sep 8

Reduce Your Payroll Taxes by Offering More Fringe Benefits

By Loree Dubois

You know that benefits make up a substantial portion of an employee’s compensation package. You also know that payroll taxes further contribute to the cost of an employee. But did you know that providing certain benefits can reduce your payroll taxes?

Payroll taxes can be costly. They include the employer portions of Social Security tax (6.2%) and Medicare tax (1.45%), as well as federal and state unemployment taxes. Employers must pay these taxes on their employees’ wages and on certain benefits (such as retirement plan contributions). But they don’t have to pay them on statutorily excluded fringe benefits.

Here are some examples of benefits that can qualify for this special treatment:

  • Term life insurance
  • Parking
  • Mass transit or van pooling
  • Certain meals on the employer’s premises
  • Moving expense reimbursements
  • Dependent care assistance
  • Education assistance
  • Retirement planning services
  • Cell phones

Keep in mind that dollar limits and additional rules apply to many of these benefits. Health insurance premiums also are exempt from payroll tax, but there are many additional issues to consider before you change your health care offerings, such as Affordable Care Act requirements.

You can still deduct the cost of statutorily excluded fringe benefits just as you would wages, bonuses and non-excluded benefits. Employees also reap tax savings that can make these benefits more attractive to them: They won’t owe the employee portion of payroll taxes on the benefits, and the benefits won’t be included in their taxable income. Another advantage to employees is that they might otherwise have to buy these items and services with their after-tax wages.

So if you’re looking to attract and retain employees, consider offering more fringe benefits rather than more cash (such as bigger starting salaries or larger raises or bonuses). The key to success is to offer benefits that your employees value.

To learn more about the tax treatment of fringe benefits, please contact us.

Sep 5

Tax Credits and Incentives for Manufacturers in Massachusetts

By Norman LeBlanc

Massachusetts has long provided tax benefits to corporations that are engaged in manufacturing activities within the state. The benefits include:
• An Investment Tax Credit of 3%
• A sales and use tax exemption for equipment and supplies used in manufacturing and R&D
• An exemption from local personal property tax

In addition, any corporation engaged in manufacturing will use single sales factor apportionment to determine its Massachusetts taxable income. This can provide a significant tax savings to taxpayers with substantial amounts of payroll and property in Massachusetts.

A corporation can qualify for manufacturing status if at least 25% of its gross receipts are from the sale of products manufactured in Massachusetts. A trend has developed in recent years to broaden the types of businesses that can qualify for manufacturing status.

Courts in Massachusetts have held that a business is not required to perform itself each step in the manufacturing process to be classified as a manufacturer. For example, a business which outsources the actual production of its product, but performs product development and product testing activities, can be classified as a manufacturer.

Another broadening of manufacturing status derives from the definition of “products”. When the Massachusetts sales tax law was changed to tax electronic delivery of prewritten (canned) software, the Department of Revenue said in a public pronouncement that development of prewritten software would be treated as a manufacturing activity. Therefore, many software development companies can be classified as a manufacturer.

Except for the property tax exemption, all of the benefits noted above can be claimed for a current or amended tax return by any corporation engaged in substantial manufacturing in Massachusetts. The property tax exemption is only available to corporations that file Form 355Q and are approved by the Department of Revenue. January 31, 2015 is the deadline for filing Form 355Q to be exempt from personal property tax for the state’s fiscal year beginning July 1, 2015.

To discuss how this might apply to your business or to take full advantage of the tax benefits available for manufacturers in Massachusetts please contact us.

Sep 2

New Healthcare Reporting Requirements

By Loree Dubois

With ACA deadlines approaching, look out for new requirements under ACA sections 6055 and 6056. HR Executives should expect questions and concerns from employees about how the ACA will affect their benefits.

When are the reports due?

Reporting requirements under section 6055 and 6056 do not begin until January 2016 for employees and March 2016 to the IRS but the data required to be reported is based on 2015. Employers should act accordingly; It is best to have the necessary information ready by January 2015. Though the IRS has not released the forms required for this reporting (forms are still in draft format), employers should prepare all their information, and make sure they are practicing appropriate record keeping.

What are the requirements?

For self-insured employers, Section 6055 requires reports filed with the IRS that include information on each individual who received minimum health coverage. Those individuals must complete a statement each year for tax filing purposes that discloses this information by month covered.

Employers must report health coverage provided to full time employees to the IRS under Section 6056. Statements must be sent to employees for this as well. 

Challenges

Perhaps the greatest difficulty involved in this process is that the IRS has not yet released forms for this reporting, so it is difficult for employers to prepare adequately. There are other challenges as well, including:

  • Different systems: Collecting all the required data could be difficult as the information could be on different systems administered by different vendors. Employers have to make sure records match up for hours worked, and coverage availability, for example.
  • Personal information: Employers could be required to acquire personal information from employees under the new requirements, which employees could find invasive. Questions about Medicaid eligibility and social security numbers for dependents are sensitive pieces of information that employees may be reluctant to release.

Get ahead of the game

It is a good idea for employers to start gathering the relevant information to prepare for the report. To ensure that you are preparing to the best of your ability, make sure to:

  • Form a strong working relationship with your broker.  Brokers are able to work with companies to ensure that they are developing the appropriate materials to connect with employees and are administering the required compliance.
  • Assign leadership to HR. HR execs must ensure that communication and compliance work with vendors is managed properly. Employees will wonder why they are receiving letters, so there should be coordination between HR and vendors and consultants.

As long as employers show that they are complying with the new requirements to the best of their ability, the federal government is expected to be flexible and understanding. The information in this new form will have relevant and necessary information that employees will need to properly file their tax returns. Early preparation for this will ensure that HR executives will have an easy time working with the new reporting process. For more information, contact Loree Dubois, CPA or any member of our Healthcare Services Group.

 

Aug 29

IRS Phone Fraud Calls Increasing

By Paul Oliveira, CPA

The Internal Revenue Service and the Treasury Inspector General for Tax Administration continue to hear from taxpayers who have received unsolicited calls from individuals demanding payment while fraudulently claiming to be from the IRS. I was even recently surprised when my wife received one of these calls and was told that the police were on their way with an arrest warrant!

There have been over 90,000 complaints to date and more than 1,100 victims who have lost an estimated $5 million from these scams.  There are some clear warning signs about these scams that you should be aware of. Educating yourself and learning what to listen for can save you time and money if confronted by a scammer.

  • Calls from the IRS, especially your first contact with the agency are never out of the blue. This is done via official correspondence through the mail. If you receive a random call from someone saying they are with the IRS and you have not received a notice in the mail, which is a huge red flag!

Additionally, it is important to note that the IRS will:

  • Never ask for credit card, debit card or prepaid card information over the telephone.
  • Never insist that taxpayers use a specific payment method to pay tax obligations.
  • Never request immediate payment over the telephone and will not take enforcement action immediately following a phone conversation. Taxpayers usually receive prior notification of IRS enforcement action involving IRS tax liens or levies.

Many callers in the IRS scam have told victims that they owe money that must be paid immediately to the IRS or that they are entitled to big refunds. When unsuccessful the first time, sometimes phone scammers call back trying a new strategy.

Be on the lookout for some of these scam tactics:

  • Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
  • Scammers may be able to recite the last four digits of a victim’s Social Security number.
  • Scammers spoof the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.
  • Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
  • Victims hear background noise of other calls being conducted to mimic a call site.
  • After threatening victims with jail time or driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.

If you get a phone call from someone claiming to be from the IRS, here’s what you should do:

  • If you know you owe taxes or you think you might owe taxes, call the IRS at 1.800.829.1040. The IRS employees at that line can help you with a payment issue, if there really is such an issue.
  • If you know you don’t owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above), then call and report the incident to TIGTA at 1.800.366.4484.
  • If you’ve been targeted by this scam, you should also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov. Please add “IRS Telephone Scam” to the comments of your complaint.

Taxpayers should be aware that there are other unrelated scams (such as a lottery sweepstakes) and solicitations (such as debt relief) that fraudulently claim to be from the IRS.
Be vigilant against any phone calls you may receive from the IRS.

The IRS will never contact taxpayers via email for personal or financial information. If you receive an email that contains this information, do not click on any of the attachments and forward it immediately to phishing@irs.gov. For more information or guidance on IRS communications contact any member of our Tax Services Group.

 

Aug 25

4 Ways to Reduce Your Liability for the 3.8% NIIT

By Dave Desmarais

Since last year, the net investment income tax (NIIT) has applied to some or all net investment income of taxpayers with modified adjusted gross income (MAGI) exceeding the applicable threshold:

  • $200,000 singles and heads of households
  • $250,000 married couples filing jointly and qualifying widow(er) with dependent child
  • $125,000 married couples filing separately

For NIIT purposes, investment income may include — but isn’t limited to — interest, dividends and capital gains. If you meet the applicable MAGI threshold, the NIIT equals 3.8% of the lesser of the amount by which your MAGI exceeds the threshold or your net investment income.

Fortunately, there are ways to reduce your NIIT liability:

  1. Plan your gains — and losses. Generally speaking, appreciation on investments isn’t included in net investment income until you sell the investment and recognize capital gains. So you can minimize NIIT by waiting to sell an appreciated investment until a year when you have capital losses to absorb the gains. What if you’ve already recognized some large gains this year? Then look for unrealized losses in your portfolio and consider selling those investments by Dec. 31 to offset your gains.
  2. Make gifts to loved ones. If you transfer highly appreciated assets to family members who won’t be subject to the NIIT because their incomes are too low, they can sell the assets and your family as a whole will save NIIT. But beware of the “kiddie” tax that may apply on the sale if the recipient will be under age 24 on Dec. 31 (although there would still be some tax savings because there is no NIIT kiddie tax). Also be sure to consider the gift tax consequences.
  3. Take advantage of retirement plans. Pretax or deductible contributions to retirement plans reduce your MAGI and, thus, potentially reduce or eliminate your NIIT liability in the contribution year. Alternatively, consider Roth accounts. Contributions aren’t pretax or deductible, but qualified distributions will be excluded from MAGI, and thus could minimize NIIT liability in retirement. In either case, having the assets in retirement plans allows the assets to grow tax deferred (and, in the case of Roths, tax free), so the interest and dividends being generated in the plans are not currently contributing to your MAGI.
  4. Buy municipal bonds. Municipal bond income is not part of the calculation in determining MAGI, so they can help to keep you under the threshold before you fall into being subject to NIIT. Further, municipal bond interest isn’t included in the income subject to NIIT. So municipal bonds have two benefits here (in addition to others mentioned in my previous blog).

These are only some of the ways you can keep your NIIT liability to a minimum. For more NIIT-reduction ideas — or information on what is and isn’t subject to the NIIT — please contact us.

Aug 25

EU Cracking Down on Multinational Firm Tax Loophole

By Paul Oliveira, CPA

The European Union (EU) is closing a loophole that has allowed multinational companies to reduce their tax responsibilities. Companies like Starbucks and Apple have been able to dodge taxes on certain profits under the current loophole by using certain equity and debt combinations in their tax planning.

New Changes and Developments

New developments that the EU will be correcting or changing by the end of 2015 include:

  • Unanimity Among Member States- While multinational companies were previously able to open subsidiaries in other member states so that they paid little or no tax, EU tax law now requires unanimity among member states.
  • “Patent Box”- A tax planning tool known as a “patent box” is under close scrutiny. Countries use this to assign lower tax responsibility to their companies so that the companies may concentrate on research and development projects.

This is not expected to be an easy task for the EU as companies are resisting the changes however, more developments are expected in the near future. For a more detailed explanation of the EU’s changes, read our article “EU Closing Tax Loophole for Multinational Firms”.

 

Aug 18

For Now, Taxpayers Do Not Have to Report Bitcoins on FBARS

By Paul Oliveira, CPA

Virtual currency, or a digital representation of value that functions as a medium of exchange, is becoming popular in mainstream international transactions. In March, the IRS addressed the tax treatment of virtual currency and how it is affected by Foreign Bank Account Report (FBAR) requirements.

Why the debate?

The debate as to whether virtual currency such as Bitcoins should be included under FBAR reporting is a topic in the financial and tax community. Since the IRS decided that virtual currency is treated as property for U.S. federal tax reasons, tax principles for property transactions could apply. Some of the requirements under the FBAR that virtual currencies could be subject to in the near future include:

  • On Schedule B, Part III of an individual tax return, a U.S. citizen or U.S. entity is required to reveal any financial accounts they are involved in.
  • Taxpayers who neglect to file their FBARs on a timely basis can suffer a penalty of 50% of the balance in the undisclosed bank account for each year they fail to file the report.

There are a number of others who are required to file FBARs, so many are wondering if Bitcoin’s and other virtual currencies will be subject as well. The answer is still up in the air as of now, but the IRS urges you to stay tuned for updates. For a more detailed explanation of virtual currency and the debate, please read our article, “IRS official: Taxpayers don’t have to report virtual currency on FBARs — yet”.

 

Aug 14

Governor Deval Patrick Signs Economic Development Bill

By Robert D’Andrea, Tax Principal

Yesterday, Governor Deval Patrick signed an “An Act to Promote Economic Growth in the Commonwealth,” aimed at building on the investment of education, innovation and infrastructure.

A major component of the economic development law is its noted expansion of the research-and-development tax credit and its multiple initiatives to accelerate job growth. The research-and-development tax provision in the economic development bill creates an Alternative Simplified Credit (ASC) as an alternative to the traditional tax credit. ASC provides the option to claim a credit equal to 10 percent of any research expenses that exceed a base amount calculated over a period of three years. Current law allows credits only for incremental R&D spending over a set base period. For many business the base period could go back to the early 1980s; making it extremely difficult or impossible (due to the lack of records going back that far) to calculate and take advantage of the credit.

Between 2007 and 2011 there has been a 19.3 percent decline in R&D spending among Massachusetts employers to which this initiative is aimed at improving. The vast majority of research and development in Massachusetts takes place not in urban innovation districts, but in advanced manufacturing, medical device, defense and bio pharma companies throughout the commonwealth. Lawmakers are hoping that with this update and push towards R&D credits in Massachusetts this will increase and stimulate the kind of innovation that drives economic growth.

Along with signing the bill, Governor Patrick also included a number of vetoes and amendments including (but not limited to):

  • A new “live theater” tax credit. This new tax credit is designed to encourage more productions of pre-Broadway and pre-Off Broadway Theater in Massachusetts.
  • A provision to give local governments across Massachusetts control over the number of liquor licenses in their jurisdiction.
  • $12 million for the middle skills job training grant fund to support advanced manufacturing, mechanical and technical skills at vocational-technical schools and community colleges.
  • The Workforce Competitiveness Trust Fund will receive $1.5 million to prepare Massachusetts residents for new jobs in high-demand occupations, helping close the middle-skills gap and creating a seamless pathway to employment.

Initiatives to expand the Commonwealth’s world class innovation economy including:

  • Expansion on the Commonwealth’s international tourism and marketing efforts, capitalizing on new connections overseas, helping to bring more businesses and jobs to Massachusetts and more tourists to our world class destinations;
  • A job creation incentive under the Economic Development Incentive Program (EDIP), allowing business to receive a tax credit up to $1,000 per job created, or up to $5,000 per job created in a Gateway City, so long as the total credit per project does not exceed $1 million.

For more information on the Economic Development Bill or how this will impact R&D credits and your tax savings please contact us. Click here to read the full legislation.

 

See all Tax Blog articles in the archives.