Archive for September 25, 2013

Preface to Tax Risk Management – An International Special Report

TaxConnections Blogger Jerry Donnini posts internet sales tax principlesThis TRM™ tax-Radar™ 7 Steps Special Report is based on over 150 lectures presented to many multi-national corporations (MNE’s) and smaller businesses (SME’s) looking to minimize one of the largest financial risks facing them:  tax.

It looks at where they have failed to properly recognize the potential tax exposure they face.  The case studies in this Special Report are very real, and based on years of experience.  The names, places and specific details are not, so as to preserve the secrecy of the taxpayers.

One thing this Special Report will do for you is teach and guide you, step by step, that in matters of tax it is extremely dangerous not to be proactive.  No matter what anyone says, tax is always, and will always remain a large expense for any successful business.  States will always look to their most successful taxpayers to collect 80% of the tax from the 20% most successful taxpayers.  It makes commercial sense.  The balance of tax officials’ time will most probably be spent chasing after tax evaders. Read More

Written by | Posted in Africa • International

7 TRM Steps?

TaxConnections Blogger Jerry Donnini posts internet sales tax principles□ Step 1. Taxpayers tend to be reactive to tax risks and tax problems. This will translate into additional tax exposure through the imposition of tax penalties and interest, and lead to poor relationships with the Internal Revenue Service (“IRS”). Proactive tax risk management will eliminate the additional tax exposure, improve IRS relationships and place control of the tax risk management process back in the hands of the business, and not the IRS. This then translates into a golden opportunity to develop an ongoing tax planning process, to keep tax exposures under control, and in a proactive manner.

□ Step 2. Tax compliance departments in businesses try to cover their tax risk without outside professional assistance, except on a reactive basis. This contributes to Step 1; tax risk management becomes reactive. By creating a tax team that participates proactively in the TRM™ process, the business is able to expand its tax risk cover from 40% to 100%.

□ Step 3. Most businesses do not have a road map of how and where they are going with their tax risk management TRM™, other than blindly ensuring that they are “fully tax compliant”. Without a properly formulated TRM™ strategy in place, the goals and objectives, and the manner of executing a TRM™ process so as to minimize tax risk, cannot be achieved properly. An extensive and fully Read More

Written by | Posted in Africa • International • United States

Estate Planning You Should Do Right Now

TaxConnections Blogger Betty Williams posts estate planningThere is one simple estate planning tool you can accomplish immediately and without having to call a lawyer-updating your beneficiary designations.

Many assets, including bank, retirement, brokerage, company benefit plan, life insurance, and 529 college accounts are passed at death via a beneficiary designation. It is easy to name the beneficiary by completing the proper form provided by the financial institution. It’s also easy to forget to turn the form in or to make sure the beneficiary you designated when the asset was acquired is still your intended beneficiary. In most cases, the beneficiary form will overrule your will, trust, and even state law so it is important to make a periodic review of your designated beneficiaries.

The Supreme Court has faced this issue on at least two occasions. In 2001, the court ruled that a decedent’s ex-wife was the legal beneficiary of his pension benefits and life insurance proceeds because the decedent failed to update the beneficiary designations after their divorce. The Court ruled that the beneficiary designations overruled the state law that would have automatically disinherited the ex-wife and so the decedent’s children from a prior marriage received nothing. Egelhoff v. Egelhoff, 532 US 141 (2001). In another matter, the Court determined that the beneficiary Read More

Written by | Posted in Estate Planning Tax • Individual • United States

New York State Proposes to Regulate Tax Return Preparers

TaxConnections Blogger Harold Goedde posts about Regulating Tax Preparers in New YorkStepping into the void left when a federal court threw out the Internal Revenue Service’s registered tax return preparer program, the New York State Department of Taxation and Finance has proposed amendments to its Personal Income Tax Regulations and Procedural Regulations to regulate tax return preparers (N.Y. Comp. Codes R. & Regs, 20, proposed Part 2600). Currently, Section 32 of the N.Y. Tax Law requires tax return preparers to register with the state. The proposed rules would add to the requirements contained in Section 32 by imposing minimum standards on who can become a tax return preparer, instituting a continuing education requirement, and requiring a competency exam.

New York’s effort to regulate paid tax return preparers comes in the wake of a 2011 New York Department of Taxation and Finance task force report that cited “serious problems within the tax preparer industry and the impact of these problems on consumers of tax preparation and related services” (Report of the Task Force on Regulation of Tax Return Preparers, p. 3 (Sept. 28, 2011)). That report recommended that the state impose minimum qualification standards and require that return preparers pass a competency exam and meet continuing professional education requirements.

Under N.Y. Tax Law Section 32, a “tax return preparer” is an individual who prepares a substantial portion of any return for compensation. It includes enrolled agents or employees of a tax return preparer or a commercial tax return preparation business who prepare returns for clients of that preparer or preparation business, and partners who prepare returns for clients of a partnership engaged in a commercial tax return preparation business. Attorneys, Read More

Written by | Posted in State And Local Tax (SALT) • United States

S Corporation Shareholder Compensation – How Much Is Reasonable?

squeeze businessA shareholder-employee’s compensation from an S corporation is often subject to IRS scrutiny because S corporation flow-through income enjoys an employment tax advantage over that of sole proprietorships, partnerships and LLCs. This advantage finds its genesis in Revenue Ruling 59-221, which held that a shareholder’s undistributed share of S corporation income is not treated as self-employment income. In contrast, earnings attributed to a sole proprietor, general partner or many LLC members are subject to self-employment taxes.

As employment tax rates have climbed, this advantage of operating as an S corporation has become magnified. Because S corporation income is not subject to self-employment tax, there is tremendous motivation for shareholder-employees to minimize their salary in favor of distributions, which are also not subject to payroll or self-employment tax.

So how does a taxpayer or more likely his advisor determine what is “reasonable compensation” for an owner/employee of an S Corporation? Read More

Written by | Posted in Corporate • United States

A View of The IRS Through Corporate Insider Eyes – Corporate Tax Audit Survival – Part 5

Reference Cliff Jernigan's eBook Corporate Tax Audit SurvivalThis is Part [5] of a series of a Chapter in the eBook “Corporate Tax Audit Survival- A View of The IRS Through Corporate Insider Eyes” by Cliff Jernigan.

You can download the entire eBook here.

Sample From Chapter 4: “The System”

One of my first IRS assignments was to co-manage a project associated with updating the corporate tax return filing system.

Together with another LMSB executive, I met with a group of IRS employees who had been detailed to a design team for this purpose. An outside consulting firm had been hired to assist the IRS team.

The design team and outside consultant had been discussing options for several weeks. Every wall of the meeting room was plastered with large sheets of paper listing the pros and cons of the project. I asked if they had arrived at any conclusions, and they said they had gotten so mired down in the project details that they were having trouble making any recommendations.

The group asked us to review a report that they were writing to management. We suggested they compose an executive summary to the document in order to help crystallize their thinking. They went back to work and returned with a ten-page executive summary for a 50-page report. Furthermore, the report contained no conclusions. They simply had not been able to identify the major issues. Read More

Written by | Posted in Corporate • Federal • Individual • IRS • North America • TaxConnections

Small Businesses Owe Big

TaxConnections Blogger Betty Williams Post California's Small Businesses owing bigLast December, the Second District Court of Appeal for California ruled in Cutler v. Franchise Tax Board that a California business incentive program violated the United States Constitution’s Commerce Clause. The program was enacted twenty years ago to allow investors selling stock in a qualified small business to be taxed at half of the state’s capital gains rate or to roll the proceeds into a new qualified small business within sixty days of the sale. In order to qualify for the tax break, 80% of the business’s payroll at the time the stock was purchased must have been within California and 80% of assets and payroll must have been within California during the taxpayer’s holding period. This tax incentive was designed to encourage the establishment of small businesses in California. The Court found California’s tax incentive unconstitutional saying it discriminated against out of state businesses.

In response to the Court’s ruling, the Franchise Tax Board issued FTB Notice 2012-3, which states that similarly situated taxpayers should all be treated alike and therefore, the deferral provision is invalid for taxable years beginning on or after January 1, 2008 (within the four-year statute of limitations). Procedurally, the Notice states that accepted returns and returns that are currently in audit, protest, claim for refunds, or pending appeals will have the above-mentioned remedy applied by FTB staff. Furthermore, taxpayers may proactively self-assess any additional tax and remit the amounts to the FTB.

Not surprisingly, small business investors descended upon the California legislature to avoid having to pay nearly $120 million of taxes they never expected to owe. In May, the California Senate passed 34-3 a bill reducing the Read More

Written by | Posted in State And Local Tax (SALT) • United States

Tax Provisions Of The 2012 American Health Care Act – Part 2

TaxConnections Blogger Harold Goedde posts about the affordable care act

This article will discuss the tax provisions enacted as part of the Act and its implications and hardships that will be created for businesses and individuals.

Tax Planning Considerations to Mitigate the NII

[Blake E. Christian, “Planning for the Medicare Tax on NII”, The Tax Adviser, on line, December 13, 2012]

(1) any interest income from shareholder loans (imputed or otherwise) will be subject to the new surtax. This is the case whether or not the taxpayer’s underlying trade or business is passive or non passive. In the current low-interest-rate environment, taxpayers may be in a position to reduce the interest rate on their related-party loans, potentially reducing the tax liability resulting from the surtax. Another strategy to avoid future interest income is to convert the loan to a contribution to capital.

(2) paying dividends from closely-held corporations. To the extent shareholders and respective businesses have the means to pay a dividend, it may make sense to accelerate payments into 2013. This is especially true if the company feels it has retained cash that the IRS may view as being subject to the accumulated earnings tax under Sec. 531.

(3) S corporations may have accumulated earnings and profits (E&P) from a prior C corporation tax year, which may be distributed before amounts from the accumulated adjustments account (AAA), provided certain elections are made. Additionally, tax-deferred income of domestic international sales corporation (IC-DISC) may be available for Read More

Written by | Posted in Corporate • Individual • United States

“U” is for Unqualified Options

TaxConnections Picture - Letter U“U” is for unqualified options.  Does this mean the options are not qualified, but not qualified for what?  They don’t qualify for the incentive stock option treatment.  Unqualified or non-qualified stock options result in taxable income to the recipient when they are exercised.  If the stock is worth $50 a share and the option is to purchase at $32 a share, then a gain of $18 per share is recognized when the option is exercised.  These are relatively easy to track and simple to account for because the company can deduct the value ($18 per share) that is income to the taxpayer.

The incentive stock options or qualified stock options are a bit more complicated.  There is no income on the grant date or the exercise date of the option, but when the stock is eventually sold it will qualify for capital gains.  That sounds great, but of course there is an important detail.  On the exercise date, the FMV less the option price is an AMT adjustment for the individual.  This can cause a huge amount of AMT which is only reversed when the stock is sold.  The need for cash to pay the AMT tax at least partially offsets the benefits of the capital gain treatment, so keep an eye out for that.

Taxes A to Z – still randomly meandering through tax topics, but at least for 26 posts in an alphabetical order.

Written by | Posted in State And Local Tax (SALT) • United States

Tax Provisions Of The 2012 American Health Care Act – Part 1

TaxConnections Blogger Harold Goedde posts about the affordable care actThe 2012 “American Health Care Act – the Affordable Health Care Act” (Obama Care) [The Act] contains many provisions that affect both large and small businesses. The Act will have many ramifications, particularly for small businesses in determining if they are required to cover employees with health insurance and penalties for failure to do so. Even businesses that provide insurance today may get caught up under the mandate because they must offer coverage that meets the minimum requirements {Michael D. Tanner, “No [Obama Care]: It will Make It Harder For Small Firms to Grow”, The Wall Street Journal, August 19, 2013}. The Act affects individuals starting in 2014 and businesses starting in 2015, but there are still uncertainties regarding implementation of the Act because the IRS has not released final regulations.

This article will discuss the tax provisions enacted as part of the Act and its implications and hardships that will be created for businesses and individuals.

Tax Information Required to be Disclosed

The IRS regulations list information that may be disclosed to the U.S. Department of Health and Human Resources (HHS) to determine if a taxpayer is eligible to enroll in an exchange and is eligible for government assistance to pay for health care. The IRS can provide HHS with the following taxpayer information: Read More

Written by | Posted in Affordable Healthcare Act • Tax Provision/Tax Reporting • United States

Emerging Transfer Pricing Issues For China and S.E. Asia

TaxConnections Tax Blog - China and Southeast Asia Transfer Pricing IssuesLocation Specific Advantages (LSAs)

Tax authorities in emerging markets such as China and South East Asia are paying more attention to LSAs.

LSAs generally refer to location savings on the supply side  and market premiums on the demand side.

Location Savings

In the context of transfer pricing (TP), ‘‘location savings’’ generally refer to (net) cost savings realized by an MNE (multinational enterprise) as a result of relocating  some of its operations from a ‘‘high cost’’ to a ‘‘low cost’’ location.

Market Premiums

On the other hand, market premiums refer to location specific ability to sell products at a higher price.

In a United Nations Transfer Pricing (“TP”) Manual released in 2012  China’s State Administration of Taxation (“SAT”) indicated that China would promote the LSA concept in future practice.

Current  challenges include how to identify, quantify and allocate LSAs. Read More

Written by | Posted in Asia • Transfer Pricing
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