What the (F)?

Many companies will, at some point, decide that it makes sense to make some changes to its business structure to better align with its business purpose. Certain changes will trigger tax consequences, while other changes may not.  With proper analysis and planning, a company may be able to take advantage of one of several types of tax-free reorganizations offered under the U.S. federal income tax code and regulations to defer (or at least minimize) the recognition of any immediate taxes.

 Tax-free reorganizations can be classified into four distinctive groups:

 ·         Group 1 includes four types of reorganizations where one entity can merge into, consolidate with, or acquire another entity, and are commonly referred to as Type A, Type B, Type C, and Type D reorganizations.

·         Group 2 consists of three different occasions when part of a parent corporation’s assets or stock are used to form a new subsidiary or subsidiaries.  Reorganizations under this group also fall under a Type D reorganization.

·         Group 3 focuses on maintaining the overall organizational structure, while changing an entity’s capital structure, or moving an entity around the organizational chart.  Reorganizations under this group fall under either a Type E or Type F reorganization.

·         Group 4 involves the transfer of assets by a corporation to another corporation in a bankruptcy (or similar) case.  A reorganization under this group is referred to as a Type G reorganization.

 The focus of this discussion is on a Type F reorganization, which falls under Group 3, above.  A Type F reorganization typically involves “mere” or simple formality changes to a corporation. Such changes include a change in identity, in form, or in the location of the corporation. In 2015, the IRS issued final regulations to provide the public with clearer guidance and to clarify what qualifies as a “mere change” under an (F) reorganization.

 Under the final regulations, a corporation will have undergone a “mere change” if it meets the following six requirements:

 1.      All stock of the resulting corporation must be distributed in exchange for stock of the transferor corporation;

2.      The same person or persons own all the stock of the transferor corporation at the beginning of the potential F reorganization and all of the stock of the resulting corporation at the end, in identical proportions;

3.      The resulting corporation does not hold any property or have any tax attributes immediately before the potential F reorganization;

4.      The transferor corporation must completely liquidate in the reorganization;

5.      No corporation other than the resulting corporation may hold property that was held by the transferor corporation immediately before the potential F reorganization; and

6.      Immediately after the potential F reorganization, the resulting corporation may not hold property acquired from a corporation other than the transferor corporation if the resulting corporation would, as a result, succeed to and take into account the tax attributes of such other corporation.

 A simple illustration will tie together the above six requirements.  P1 and P2 are unrelated individuals that each hold a 50% membership interest in LLC, a limited liability company treated as a partnership for federal income tax purposes.  LLC, in turn, owns 100% of USCO, a U.S. C corporation.  P1 and P2 want to re-align the current business structure by moving the corporation from under LLC and instead hold the C corporation directly, in the same proportion as the partners currently hold their indirect interests in the corporation, namely, 50/50.

 On January 1, 2018, USCO transfers all of its assets to NEWCO in exchange for NEWCO stock.  USCO then transfers all of the NEWCO stock to LLC in exchange for USCO stock.  USCO subsequently liquidates completely.  P1 and P2 each continue to hold 50% membership interest in LLC, which in turn now owns 100% of NEWCO. 

 The above sequence of events should qualify as a tax-free reorganization, as follows: Under Code Section 361, there is no gain or loss to USCO on the transfer of its assets to NEWCO in exchange for stock of NEWCO in an F reorganization.  Under Code Section 354, there is typically no gain or loss to LLC upon the exchange of USCO’s stock for NEWCO stock.

 Requirements #1 and #2 under the regulations are satisfied because all of NEWCO’s stock are distributed to LLC in exchange for USCO stock, and LLC is the same shareholder that owns all the stock of USCO at the beginning of transaction, and all of the stock of NEWCO at the end, and owns such stock in identical proportions (i.e. 100%).

 #3 is satisfied because NEWCO does not hold any property or have any tax attributes immediately before the transaction, and #4 is satisfied because USCO completely liquidates in the reorganization.

 #5 is satisfied because only NEWCO holds property that was held by USCO immediately before the transaction.

 Lastly, #6 is satisfied because immediately after the transaction, NEWCO does not hold any property acquired from any other corporation that would result in NEWCO taking into account the tax attributes of such other corporation.

An Introduction to Qualified Opportunity Zones and Qualified Opportunity Funds


On December 22, 2017, as part of the enactment of the 2017 Tax Act, Congress added Internal Revenue Code Sections 1400Z–1 and 1400Z–2, which designated certain low-income communities as “qualified opportunity zones.” This new law allows taxpayers a temporary deferral of realized gains if the taxpayers timely reinvest the gains in eligible property (referred to as “opportunity zone properties”) that is located in an opportunity zone.

Taxpayers may organize either a partnership or a corporation (a “qualified opportunity fund”) for the purpose of investing in opportunity zone properties. In other words, such partnership or corporation is organized as a “qualified opportunity zone business.” A qualified opportunity zone business can generally be any active trade or business in which substantially all of the tangible property owned or leased by the trade or business is through the opportunity fund and treated as qualified opportunity zone business property.

The one caveat is that the Code section provides a list of certain businesses that will not be treated as qualified opportunity zone businesses. Specifically, businesses that are considered a “sin business” will not qualify as an opportunity zone business, and include:

•           Golf courses

•           Country clubs

•           Massage parlors

•           Hot tub facilities

•           Suntan facilities

•           Racetracks or other facilities used for gambling

•           Any store where its principal business is the sale of alcoholic beverages for consumption off premises.

Compliance Requirements and the Qualified Opportunity Fund Asset Test

 For compliance purposes, the IRS has confirmed that taxpayers can self-certify and become a qualified opportunity fund by completing a form and by attaching that form to the taxpayer’s federal income tax return for that taxable year. The form itself is not yet available but it is expected that the IRS will soon issue a sample of this form, to be released later this year.

In addition to the initial self-certification to become a qualified opportunity fund, the taxpayer must also meet an asset test on a semi-annual basis. If a qualified opportunity fund fails to meet this test, that fund may be subject to a penalty for each month that it fails to meet the stated percentage requirement.  The penalty is the differential between the percentage of assets invested in a qualified opportunity zone property and the 90 percent of assets amount, multiplied by the underpayment interest rate.

Temporary Deferral of Gains

In order to qualify for the temporary deferral of realized gains, the taxpayer must (1) reinvest their gains from the sale to, or exchange with, an unrelated person of any property held by the taxpayer in a qualified opportunity fund, and (2) the taxpayer must do so within 180 days from the date of the sale or exchange.

In the year that the taxpayer later sells or exchanges the investment, the taxpayer must include the amount of gain in the gross income for that year, and in any case, if the taxpayer has not sold or exchanged the investment by December 31, 2026, the taxpayer must include the amount of gain in the gross income for 2026.  

Investments Held for 5, 7, or 10 Years

Any investment held by the taxpayer for at least 5 years will receive an increase in the basis of such investment by 10 percent of the gain that was deferred. Any investment held by the taxpayer for at least 7 years will receive an increase in the basis of such investment by an additional 5 percent of the gain that was deferred.

Any investment held by the taxpayer for at least 10 years will receive a step up in the basis of such property to the fair market value of the investment on the date that the investment is sold or exchanged. Because the 10-year mark will not be reached until after the temporary deferral period has already ended in 2026, taxpayers who are still holding their investments in an opportunity fund on December 31, 2026 are required to recognize and pay taxes on any deferred gain at that time (subject to any basis adjustments that have been made). After 2026, if the taxpayer holds the investment for the full 10 years (or longer), any potential increase in the fair market value of the investment will receive a step up in its basis upon its sale or exchange.

In order to take advantage of this special 10-year rule, the taxpayer must make an election under IRS Code Section 1400Z-2(c). More guidance is expected on how the taxpayer can make this election.

Key Considerations Pending Treasury Regulations

While the IRS has issued an IRS Notice, IRS Bulletin, and a list of Frequently Asked Questions, there are still many more unanswered questions relating to compliance matters, including:

·               Can investors obtain the benefits of deferral if they sell the underlying property or investment, rather than the sale of their interest in the opportunity fund itself?

·               How long can a qualified opportunity fund hold cash after the disposition of an asset before the cash needs to be reinvested?

·               If the opportunity fund is organized as a partnership, can the partnership realize gains on behalf of its investors and reinvest the gains in a new partnership, while achieving the benefits of deferral? 

·               Will land be treated as qualified opportunity zone property?

In order for property to be treated as opportunity zone property, the property must be an “original use” property by the opportunity fund, or the property must be “substantially improved” by the fund. However, the terms original use and substantial improvement have not been clearly defined.

The Treasury Department is expected to issue specific regulations and guidance later this year, which will hopefully help to clear up many of the outstanding questions and uncertainties.

Online Retailers Beware: The State Sales Tax is Here

On June 21, 2018, the U.S. Supreme Court decided that physical presence is no longer necessary for a state to collect sales tax on internet retail sales (see South Dakota v. Wayfair, Inc.).  This major decision overturned two prior Court decisions and will greatly affect those online retailers that will be facing an increase in the administrative and compliance costs associated with the change in the law.

A little background on this case.  The main issue stemmed from a South Dakota state law which required out-of-state sellers to collect and remit sales tax to the state, including those sellers that did not have a physical presence there (i.e. no employees or real estate in South Dakota).  The law applied to sellers that deliver more than $100,000 of goods or services into the state annually or engage in 200 or more separate transactions for the delivery of goods or services into the state.  

The Court’s holding was based on the idea that the physical presence test has proven to be a test that is both impractical and difficult to enforce.  In addition, the Court determined that there have been estimates in which the two prior cases, now overturned, have caused states to lose between $8 and $33 billion in revenue every year.  South Dakota estimates its revenue loss at $48 to $58 million annually.  Moreover, because South Dakota has no state income tax, its proportional reliance on sales and use taxes as sources of state revenue is further augmented.  Notably, sales and use taxes account for over 60 percent of the state’s general fund. 

The Court’s ruling is based on the reasoning that, first, there is no violation of the Commerce Clause so long as there is a substantial nexus with the taxing State.  Second, the Court compares the nexus requirement to the due process requirement that there be “some definite link” or “some minimum connection” between a state and the person, property or transaction it seeks to tax.  Third, the due process requirements are deemed to be met regardless of whether a physical presence test has been met.  Finally, the Court concluded that physical presence is not necessary to create a substantial nexus. 

Although this ruling is not favorable for online retailers, there may be some mitigating options available.  The Marketplace Fairness Act of 2017 authorizes each member state under the Streamlined Sales and Use Tax Agreement (a multistate agreement adopted in 2002 to administer and collect sales and use taxes) to require all sellers to collect and remit sales and use taxes with respect to remote sales under the Agreement.  What makes this Act attractive is that, first, sellers with less than $1 million in annual sales is exempt from collecting and remitting taxes (a much higher threshold than under the Wayfair case).  Second, the Agreement must contain certain basic requirements for the administration of the tax, of audits, and of streamlined filing.  In essence, this Act sets some boundaries and limits as to how far states can reach in compelling its state tax collection.

Member states must agree to a set of simplified rules that aim to lighten the burden of compliance and reduce the risk of discrimination by the states.  They are to provide software free of charge to remote sellers that would calculate sales and use taxes due on transactions and relieve sellers from any penalties if a liability is the result of an error or omission made by a certified software provider.  Finally, the Marketplace Fairness Act would ensure that any state law changes will not have a retroactive effect on retailers.  To date, there are 23 Member states participating under the Agreement.

Your Unpaid IRS Taxes Could Jeopardize Your Passport’s Validity

Effective January 2018, the IRS will begin to implement a new Internal Revenue Code section, which involves the ability by the IRS to make a Section 7345 certification and notify the Department of State of any such certification involving an individual with a seriously delinquent tax debt.  The term “seriously delinquent tax debt” for the year 2018 means any unpaid, legally enforceable federal tax debt of more than $51,000 (note that this figure includes all interest and penalties) and this threshold amount is indexed yearly for inflation.

Code Section 7345 was enacted under the Fixing America’s Surface Transportation (FAST) Act, Pub. L.114–94, back in December 4, 2015. Under the FAST Act, upon receipt of a Section 7345 certification regarding an individual from the IRS, the State Department will generally deny an application for an issuance or a renewal of a passport from that individual.  Furthermore, the State Department may revoke or limit a passport previously issued to the individual. 

Let’s revisit what is considered a seriously delinquent tax debt.  This is a federal tax liability for which either of two events have already occurred.  One possibility is that the taxpayer has already received a notice that a federal tax lien has been filed under section 6323 and that the taxpayer’s right to a hearing under section 6320 has been exhausted or lapsed.  The other scenario is that a tax levy has been issued under section 6331. 

By way of clarification, Section 7345 does not consider the following to be a seriously delinquent tax debt: debt that is part of a timely paid, IRS-approved installment; debt that is timely paid under an IRS-accepted offer in compromise; debt that is timely paid under a Department of Justice settlement agreement; debt in connection with a levy for which collection action has been suspended during the procedures involving a collection due process hearing; and debt for which collection is suspended as a result of an innocent spouse election or a request for innocent spouse relief.

Furthermore, a taxpayer’s passport will not be affected if any of the following apply: the taxpayer is in bankruptcy; taxpayer has been identified by the IRS as a victim of tax-related identity theft;  IRS has deemed the taxpayer’s account to be currently not collectible due to hardship; taxpayer is located within a federally declared disaster area; taxpayer has a pending installment agreement with the IRS; or taxpayer has a pending offer in compromise with the IRS.  Finally, IRS certification of a taxpayer’s seriously delinquent tax debt will be postponed while that individual is serving in a combat zone or participating in a contingency operation.

Section 7345 requires the IRS to notify the individual when that individual has been identified for certification or reversal of a certification.  Notice CP508C “Notice of certification of your seriously delinquent federal tax debt to the State Department” will explain the amount due, the due date, what the taxpayer needs to know, and what the taxpayer needs to do to prevent the State Department from denying, revoking, or limiting their passport.  If the taxpayer believes that the certification was made in error or if the taxpayer does not agree with the amount due, the taxpayer should first call the number listed on the top right corner.  If the taxpayer is unable to resolve the disagreement but still disagrees with the IRS’ certification or failure to reverse a certification, that individual has a right to a judicial review by filing a claim with the U.S. Tax Court or the U.S. district court.  If the court rules in favor of the taxpayer, the court may order the IRS to notify the State Department that the certification was in error.  Unfortunately, this is the only recourse that a taxpayer has as there is no IRS administrative process in connection with the IRS certification process. 

If the IRS erred in making a certification, the IRS is required to reverse the certification and notify the State Department of such reversal (e.g. if the debt has been fully paid, falls below the threshold amount, or becomes unenforceable).  Section 7345 provides details regarding the timing required for IRS to notify the State Department of any such reversals.  The State subsequently removes the certification in connection with the debt from the State’s records.

What happens to a taxpayer who has been certified by the IRS and who later applies for a passport?  The State Department will generally provide that individual with 90 days to resolve the tax delinquency (e.g. pay off the debt, enter into an installment agreement, or enter into an offer in compromise with the IRS).  If the debt remains unresolved, the State Department will deny the application.

One of the mistakes that some taxpayers make is to ignore correspondences from the IRS until the problem escalated to the lien or levy filing stage.  Although it is never pleasant to receive any notices from the IRS, you should consult with a tax attorney if you have any concerns or questions as soon as they arise.  Taking action now will reduce or possibly eliminate the stress and administrative procedures down the road.

You can learn more about IRS tax topic regarding the revocation or denial of passport here and here.

IRS guidance (Notice 2018–01) for the implementation of new Code Section 7345 can be found here.

To learn more about Notice CP508C, go here.

The Internal Revenue Service Will End the Offshore Voluntary Disclosure Program before October 2018

On March 13, 2013 the Internal Revenue Service announced that it will end the 2014 Offshore Voluntary Disclosure Program (OVDP) on Sept. 28, 2018.  This means that taxpayers have approximately 6 months left if they wish to participate in the program.

The OVDP is a voluntary disclosure program that offers taxpayers an opportunity to report foreign financial assets for prior undisclosed tax years.  The disclosure period is defined as the most recent eight tax years for which the return due date has already passed.  Nondisclosure by taxpayers means that they may be exposed to potential criminal liability.  They are also exposed to substantial civil penalties if the IRS determines that the taxpayer was engaging in willful failure to report foreign financial assets and to pay all taxes due with respect to such assets.  

The benefits of participating in the OVDP include minimize the risk of criminal liability.  If a taxpayer is accepted in the OVDP and ultimately resolves outstanding issues by way of a closing agreement, the IRS Criminal Investigation division will not recommend criminal prosecution to the Department of Justice for the relevant tax periods up to the date of the disclosure.  Another benefit to the OVDP is by entering into agreed-upon terms, the taxpayer can resolve outstanding issues in connection with the additional taxes that are owed and the civil tax penalties that will be due.

Taxpayers should consult with a tax attorney to determine whether the OVDP is the right program for them.  If it is determined that this option is not appropriate, taxpayers should consider other alternatives, including Streamlined Filing Compliance Procedures, Delinquent FBAR submission procedures, or Delinquent international information return submission procedures.

For more information on each of these options, visit the IRS website at: https://www.irs.gov/individuals/international-taxpayers/options-available-for-u-s-taxpayers-with-undisclosed-foreign-financial-assets

Will the New Tax Act Affect You? Part Four

In my last post, I discussed how the Tax Cuts and Jobs Act may impact an individual’s decisions regarding estate planning.  In this post, I will briefly survey several significant changes affecting the U.S. international tax realm.

Part Four: International Tax Reform

New Dividends Received Deduction

The Act enacted a new Code Section 245A which provides for a 100 percent deduction for dividends received by a U.S. shareholder of foreign corporate stock, provided that the foreign corporation is a 10 percent-owned foreign corporation, is not a passive foreign investment company, and meets all other relevant requirements under the Code Section. 

The key takeaway of this code section is that for those multinational corporations that qualify for the new deduction, they will no longer be subject to the tax on dividends they receive from their foreign subsidiaries. 

New tax on Global Intangible Low Tax Income

A new Code Section 951A creates a sub-category of income (GILTI income) that is formula-driven and creates a minimum threshold for income that will be subject to U.S. taxation.  For tax years 2018 through 2025, U.S. corporations can deduct 50 percent of GILTI income, resulting in a 10.5 percent effective tax rate. 

While this new tax aims to reduce the incentive for U.S. companies to shift assets offshore, it is less clear why the Act imposed 10 percent as the minimum threshold figure.  Furthermore, due to the formula-driven nature of this new rule, U.S. corporations will have planning opportunities aimed at minimizing their exposure to the GILTI income that will be subject to tax.

New Deduction for Foreign-Derived Intangible Income

This is essentially a relief provision to the newly-enacted GILTI rules.  The Act allows a deduction under new Code Section 250 for a U.S. corporation’s foreign-derived intangible income (FDII) of 37.5 percent for tax years 2018 through 2025, and 21.875 percent for tax years after 2025.  Corporate taxpayers can also use up to 80 percent of foreign tax credits against their GILTI income. 

The net effect of all of the deductions, foreign tax credits, and gross-ups is that the effective tax rate on FDII is 13.125 percent for tax years 2018 through 2025 and 16.406% after 2025.

New Base Erosion Minimum Tax

The new “base erosion and anti-abuse tax” (BEAT) operates as a limited-scope alternative minimum tax, which is applied by adding back to taxable income certain deductible payments made to related foreign persons.  Note that this new tax, imposed under Code Section 59A, applies to taxpayers with an average annual gross receipts for the last 3 taxable years of at least $500,000,000.

The new minimum tax rate is 5 percent for tax year 2018, 10 percent for tax years 2019 through 2025, and 12.5 percent for tax years after 2025.  Taxpayers now must calculate their tax liability under the new rules to determine whether they are subject to the BEAT. 

One-Time Transition Tax

Finally, a transition tax imposed under Code Section 965 applies to U.S. shareholders on deferred foreign earnings as part of the transition to the new participation exemption system of taxation under the Act.  Deferred foreign earnings refers to the accumulated post-1986 deferred foreign earnings.  Such foreign earnings that are held as cash or cash equivalents are taxed at a rate of 15.5 percent and all other earnings are taxed at 8 percent.  U.S. shareholder may elect to pay the transition tax in eight installments.

Will the New Tax Act Affect You? Part Three

In my last post, I discussed some key changes of the Tax Cuts and Jobs Act that will be affecting business entities. In this post, I will discuss how the Act will impact an individual’s decisions on estate planning.

Part Three: Estate Planning

Unlike some of the tax law changes that affect corporations (as discussed in Part Two) which are permanent, the changes to estate tax, gift tax, and generation-skipping transfer tax are effective in tax year 2018 and set to expire after 2025. 

Beginning 2018, the Tax Cuts and Jobs Act increased the exemption amount (the amount that an individual can gift or own at death without being subject to gift or estate tax) from $5,490,000 (for 2017) to $11,180,000.  The exemption amount is $22,360,000 for a married couple.  The generation-skipping transfer tax exemption has also been increased to the same amounts for individuals and married couples and also set to expire after 2025.

While the change may not affect estate planning considerations for individuals or married couples with estates below the pre-Tax Act exemption amounts, those who are at or above the pre-Act exemption should re-evaluate their estate plan accordingly.

One of the starting points is to consider both the income tax consequences and the estate tax consequences in the assessment of your estate plan.  For example, an individual who currently holds an asset with a low adjusted basis and that asset has significantly appreciated in value (and is expected to continue to appreciate throughout the individual’s lifetime) may want to hold the asset until death in order to obtain a step-up in the basis of the asset.  At death, the basis of the asset will be treated as equal to its fair market value, thereby resulting in income tax savings on the gains of the asset.  While the value of the asset in includible in the gross estate of the decedent, the increase in the estate tax exemption may eliminate the concern of triggering the estate tax liability for those individuals and married couples below the newly-increased exemption amounts.

Individuals and married couples with estates that are above the increased exemption amounts should consider making gifts to irrevocable trusts up to the exemption.  By doing so, the value of those assets transferred over to the irrevocable trusts will be removed from the decedent’s gross estate and will not be included in the calculation of the estate tax liability.  Furthermore, the irrevocable trusts may be drafted in such a way as to allow the transferred assets to grow tax-free while the trusts are administered for the benefit of loved ones. 

There are different estate plan considerations for a U.S. citizen who wishes to provide for a non-U.S. citizen spouse.  While one U.S. citizen spouse can gift and bequest to another U.S. citizen spouse an unlimited amount of assets free of tax, a U.S. citizen spouse may not do the same with a non-U.S. citizen spouse (even if that spouse is a U.S. resident or a U.S. green card holder).  Rather, an annual exclusion amount ($149,000 for 2017) is allowed for transfers from a U.S. citizen spouse to a non-citizen spouse.  As a result of the temporary increase in the exemption amount, however, the U.S. citizen spouse may now have more flexibility to gift assets to the non-citizen. 

For example, the U.S. citizen can make a gift (up to, or even more than, the annual exclusion amount) to an irrevocable life insurance trust for the benefit of the non-citizen spouse.  The trust then purchases a life insurance policy on the life of the U.S. citizen spouse.  The death proceeds do not have to qualify for the marital deduction because the death benefits will generally be excluded from the insured’s estate.  Alternatively, the life insurance policy could be owned by the noncitizen spouse.  Again, the proceeds do not need to qualify for the marital deduction because the death benefit generally will be excluded from the U.S. citizen’s estate.

Whether you currently have an existing estate plan, or you are considering whether to create one, please visit the five common misconceptions you should avoid and talk to an estate planning attorney to determine the best strategy that will most benefit you and your love ones.

Will the New Tax Act Affect You? Part Two

In my last post, I discussed some key changes of the Tax Cuts and Jobs Act that will be affecting individuals.  In this post, I will discuss how the Act will impact a business owner’s decision to structure an entity as either a C corporation or an S corporation.

Part Two: Business Entities

Perhaps the most talked about changes to our tax law involve these two numbers: 21% and 20%.  These numbers hold very different purposes and incentives with varying degrees of permanence. 

The 21% figure represents a drop in the maximum federal corporate income tax rate (down significantly from a previous top rate of 35%).  Unlike the rate changes that affect individuals and pass-through entities (which will be discussed later), this drop in the top rate is permanent. 

At the heart of the Tax Cuts and Jobs Act is a pointed intention to create jobs both domestically and to bring jobs back from overseas.  Congress believes that by lowering the income tax rate for C corporations, it will inject a surge of competitive energy to the U.S. economy by encouraging more business activities, investments, and operations at the corporate level.  Of course, skeptics have pointed out that lowering the corporate rate to 21% is not going to make a big difference from an internationally competitive standpoint because, they point out, the foreign corporate rates are still lower than the new U.S. rate.  Furthermore, nothing is stopping those foreign countries (within the constraints of those countries’ laws) from further lowering their rates to maintain a business advantage. 

Nevertheless, it is undeniable that at the very least, many new and existing corporate entities will assess and make business decisions based on a dramatically lower top U.S. corporate rate than in previous years.  It is worthwhile to point out that there are also numerous other changes in the law that must be taken into account when determining whether incorporating is the best option.  For example, a company’s net operating losses can no longer be carried back under the new tax law and are also now limited to 80% of taxable income.  However, they may be carried forward indefinitely (where the old rules allowed loss carry forwards for 20 years). 

Similarly, net business interest expense has been limited to 30% of adjusted taxable income, with the definition of “adjusted taxable income” set to be more restrictive for tax years beginning in 2022 (read: unfavorable to taxpayers).  However, the Act boosts a company’s ability to fully deduct qualifying property, though this boost is only fully applicable between September 27, 2017 through 2021.  Beginning in 2022, that benefit will begin to phase out and will be fully phased out by the end of 2026. 

It can reasonably be interpreted that while Congress wants to push businesses toward growth and production, it also imposes clearly defined constraints.

Let us now discuss the significant of that second number: 20%, which represents a newly allowable deduction on qualified business income that is earned by pass-through entities.  On its face, this much-talked about deduction under Section 199A could spur growth in many industries of those businesses that elect to be taxed as flow-through entities.  However, the initial excitement and buzz over this deduction has since been subdued.  Although it is not entirely clear whether Congress intended to do so, this new rule indeed favors certain selected industries.  I will not go into the technical mechanics of the rule but by way of example: an ideal candidate who would - and could - take advantage of the 199A deduction is a company organized as an S corporation and doing businesses in one of these industries: architecture, engineering, small breweries and distillers, farming, plumbing, mining, and restaurant.  However, I would like to add one note on restaurants.  As the 50% deductibility for costs incurred to entertain prospective clients is now eliminated, and as meals provided to employees are now only 50% deductible (and completely eliminated beginning 2026), how will the restaurant industry react and prepare for these changes?

How all of these new rules will unfold, and how they may impact businesses organized as C corps, S corps, LLCs, or proprietorships, is yet far from clear.  What is clear is that it is the job of the tax attorney to stay up-to-date with changes in the tax law, rules and regulations, and to communicate and explain such changes to businesses and the owners that may be affected.

A New Year, a New (Tax) Resolution

Lady Bird is a film that will affect and move its audience members. The film centers around Christine "Lady Bird" McPherson, a young woman in her last year of high school, and chronicles the events during that year as she confronts her relationships with her family and friends, her romantic relationships, her connection to her hometown, and ultimately, her own identity.  The movie will unambiguously hit the nerves of those who identify with any of the characters or regard themselves as part of the middle class.  It unabashedly portrays the struggles that Lady Bird’s mother goes through in order to financially sustain the family that she so deeply loves. We learn early on that Lady Bird’s older brother, a graduate of UC Berkeley, was unable to find a full-time job and instead lives at home and works as a cashier at the local supermarket.  That same year, Lady Bird finds out from her mom that her quiet, good-natured father recently lost his job, which further heightened the depression that he has been secretly battling for years.

Although the film is set in Sacramento in 2002, the issues that the family must deal with and the film’s underlying message transcend that particular period in history and becomes relatable for many families today.  In one poignant scene, Lady Bird’s mom suggests they do their “favorite Sunday activity”: checking out open houses of their dream homes.  In another scene, Lady Bird describes her own house as from “the wrong side of the tracks.”  In yet another scene, she was forced to confess to a friend that the charming blue heritage house in an affluent neighborhood was not her real home but was, rather, her Dream Home.

On November 16, 2017, the U.S. House of Representatives passed a major tax reform bill, H.R. 1, the “Tax Cuts and Jobs Act,” to amend the Internal Revenue Code of 1986. The U.S. Senate, on December 2, 2017, approved its version of tax reform legislation.  The bill calls for the elimination or reduction of several tax deductions. For instance, it proposes to fully eliminate state and local income tax deduction, which is the single biggest itemized deduction for many taxpayers.  As a result, it would effectively render itemized deductions irrelevant for more than 90 percent of all households.  Furthermore, both the House and Senate plan to cap property tax deductions at $10,000.  In addition, the House proposes a cap on mortgage interest deductions by limiting new home loans to no more than $500,000, while the current cap is twice that amount, at $1 million.  The latest updates suggest that the House and Senate are likely to compromise on this point by capping the amount at $750,000.

There are speculations abound that once the dust settles, the proposed tax bill will ultimately result in a very small tax cut for low- and middle-income families.  For many families and prospective first-time homeowners, their plans may be an adjustment to their budget, or worse, an untimely and indeterminate delay in making the purchase.  As we near Christmas Day (the administration’s unofficial tax reform bill deadline), it is still difficult to definitively conclude how the tax bill will affect the middle class.  There will be discussions, negotiations, and debates between the House and Senate to come to terms with the final numbers.  What we do know, however, is that a major tax reform will be heading into 2018 with us.  If you have any questions about how the new law will affect you and your family’s ability to afford a home, be it your Dream House or not, you should consult a tax attorney to help you navigate the changes and properly plan for the upcoming years.

Did You File Your FBAR Completely and Accurately? District Court Clarifies the Ambiguous IRS Willfulness Standard

While a non-willful violation may result in a penalty of up to $10,000, a willful violation may lead to a much larger penalty and potential criminal prosecution.  As more taxpayers travel the world and transact in different countries, their compliance with the IRS international tax rules and regulations become critical for a taxpayer’s peace of mind as well as for the pocketbook.

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Estate Planning Tips If You Have Assets Outside of the U.S.

Do you have foreign assets in a foreign jurisdiction?  Local wills or will substitutes, beneficiary designations, or certain ways of holding title may be appropriate to most effectively achieve you overall estate planning goals.

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