New Tax Law Justifies Re-examination of Choice of Entity (S or C Corporation, Partnership, Single-member LLC)

On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (“TCJA”) which provides a series of new tax benefits to different entities in the form of lower tax rates (21% federal income tax rate for C corporation) or additional tax deductions (20% qualified business income deduction for non-C corporation entities).  These tax benefits offer a once-in a lifetime benefit to taxpayers and require careful study to determine the optimal outcome for each organization, i.e., achieve lowest income tax rate and/or liability. For all U.S. entities and those that intend to invest in the US, the examination required focuses on the business’ characteristics and future plans. As expected, the complex nature of the tax law changes justifies a more than a cursory review of the rules to ensure that an organization captures of the full benefits of the TCJA.  Each of the tax benefits includes a number of requirements and limitations that require careful study to conclude an entity can fully enjoy the obvious benefits.  A high-level review might not reveal the TCJA imposed limitations on the various tax benefits that can lead to a different conclusion as to the entity selection.

After ensuring an entity qualifies for the benefit, then additional analysis should be undertaken to assess whether an alternative entity(ies) may in fact yield more benefits. A number of factors may affect the ultimate selection of the entity-type or formation of a group of entities (hybrid) including:

·      Industry and lines of business(es)

·      Capital investment and reinvestment needs of business

·      Financial interests of the owners

·      Domestic versus international operations

·      Other business requirements (future exit, etc.)

Wells Tax possesses a team ready to help make sense of these new laws for you and prepare a tax model of potential tax benefits that a company and its owners may enjoy.   With the significant change made to the US tax laws, it is the perfect time to review and consider whether your current organization is operating in the right entity structure and learn the breadth of the benefits available.  Please contact me at 703-303-7898 to discuss this further.

NOT TOO LATE to Stay Off IRS List and Secure Relief for Prior Nonreporting of Foreign Accounts and Other Assets (FBAR)

Santa is not the only person checking its list this time of year. The IRS also has announced recently that it is indeed checking its list for taxpayers that have not filed various required disclosure forms for reporting foreign interests and assets. Several provisons incorporated in the U.S. tax code and the Bank Secrecy Act impose additional filing obligations upon individuals and entities that either own or have signature authority over foreign assets. These filing obligations can be duplicative at times, but once studied, then become easy to administer going forward. However, many U.S. individuals (including Green Card holders) either are unaware of the obligation and many tax preparers never asked the questions necessary to determine whether any additional filing obligation applies. As a consequence, many individuals have not satisified the filing obligation and may also owe additional tax, interest, and penalty associated with the non-compliance. A draconian penalty regime applies to the non-compliance. In some cases, the non-filing coupled with a failure to report income may rise to the level of a criminal matter. The good news is that the IRS wants taxpayers to resolve their obligations and provided an incentive to resolve them through various voluntary disclosure programs. The bad news is that Congress has conferred additional power upon the IRS to discover those tax filers that have not shown the initiative to become compliant. It is not too late.

Owning assets in foreign accounts is not by its very nature a bad thing, but failing to disclose the interest on the appropriate form has become a lighting rod for controversy upon IRS examination of individual and corporate tax returns. Many individuals accumulate foreign assets by any number of means, e.g., a devise from a relative’s estate, living in a foreign jurisdiction, investment decision, etc. The IRS has a catalog of forms, including four primary forms, that it expects taxpayers to attach to their individual tax return as appropriate or file separately. 

1. Statement of Specified Foreign Financial Assets (Form 8938)--Report Financial accounts held at foreign financial institution
2. Report of Financial Bank Account and Financial Accounts (“FBAR” and "FinCen Form 114")--Report financial accounts held at foreign branch of US and foreign financial institution
3. Annual Information Return of Foreign Trust With a U.S. Owner (Form 3520-A)-- Report foreign trust with a U.S. owner required to file form. U.S. owner ultimately responsible to ensure such filing completed.
4. Information Return of U.S. Persons With Respect To Certain Foreign Corporations (Form 5471)--Report of certain U.S. citizens and residents who are officers, directors, or large (25% or more) shareholders in certain foreign corporations. 

Please note the IRS has many other forms. Please consult with a tax professional for a full analysis appropriate to your tax filing facts. The penalties for non-filing are rather severe and may go as high as 50% of the highest account balance when the violation is deemed "willful" in nature. In addition, criminal penalties may apply.

The asset reporting threshold for many of these forms is not substantial, and can be as little as $10,000 in the case of FBAR. However, the penalty for non-filing might be large in relation to the actual balance. No penalties will be imposed to the extent a taxpayer can demonstrate the non-filing or failure to comply resulted from reasonable cause, not willful neglect. The courts have sided with the IRS on many cases seeking to define and apply this standard. Nonetheless, the IRS has offered a number of programs that differentiate taxpayers and provide relief, including complete relief in some cases, i.e., no penalty. These programs commonly referred to as Offshore Voluntary Disclosure Program (“OVDP”). The OVDP offers several tracks which provide different levels of penalty relief for non-filing of the FBAR and Form 8938 which differentiates between different groups and the enumerated relief. The following factors determine what program a non-compliant taxpayer may enter into and receive the designated relief:

·      State of mind – willful or non-willful

·      Outstanding tax liability – yes or no

·      U.S. resident or non-U.S. resident (in any of the 3 prior tax years)

The OVDP tracks typically require the taxpayer to declare any outstanding tax liabilities and amend certain income tax filings for a series of years, generally 3 years. The taxpayer also needs to disclose fully the facts for the non-filing when there is an outstanding tax liability and generally provide 6 years of the outstanding FBARs or other required filing.

The IRS has begun to focus more of its enforcement budget and resources on non-compliant taxpayers, especially non-filers of the above forms, and has developed additional tools to risk assess individuals and identify potential targets, including:

·      Whistleblower Program (persons with knowledge of non-filer’s assets)

·      Tax Information Exchanges with Foreign Taxing Authorities

·      Tax Information Exchanges with Foreign Financial Institutions

·      Selection for IRS Examination

To avoid falling into the IRS enforcement net and minimize potential penalty assessments, taxpayers should actively pursue and verify that their worldwide income has been properly reported on their U.S. returns and ensure that their U.S. return properly reports any non-US assets. If there is a problem, then the time to resolve the issue is before the IRS gathers the information from an information exchange with a foreign institution, or other means, and begins an audit or sends a notice asking why the information was omitted from a FBAR prior filing. A discussion with an attornery or certified public accountant to determine eligibility for participation in the OVDP should be also pursued. The ultimate goal is to return to the compliant list and off the IRS' "non-compliant list." Otherwise, the IRS will confer something much worse than coal on the taxpayer.

Yearend Also Brings End to Startups Opportunity to Elect to Monetize R&E Income Tax Credit as Payroll Tax Credit for 2016

The Protecting Americans from Tax Hikes Act of 2015 introduced Code § 41(h) which offers small businesses an opportunity to utilize research & experimentation (“R&E”) income tax credit against the employer portion of the old-age, survivors, and disability insurance (“OASDI’”) tax,  commonly known as employer FICA.  Generally, the R&E income tax credit allows businesses to reduce their entity level taxes (corporate or pass-through to owners).  In many cases, a start-up is in pre-revenue stage and won’t be able to benefit from an R&E income tax credit until it reaches profitability which may take a number of years to achieve.  The Payroll Tax Credit (“PTC”) allows start-up businesses to monetize the R&E benefit while in the pre-revenue stage and immediately offset its employer payroll costs.  The PTC amount is treated as a payment on the employer’s next filed Quarterly or Annual Federal Tax Return, Form 941.

IRS and Department of Treasury provided operational rules for 2016 that allow at least for the 2016 tax year an extension of time for taxpayers to make the election on or before December 31, 2017 to treat R&E tax credits as a Payroll Tax Credit and claim the benefit against the next payroll tax filing.  It is expected that for subsequent years, eligible small businesses must make the election by the tax return date (including extensions). 

Eligible taxpayers that have not made an election and claimed the PTC for 2016, but desire to do so, should move quickly to do so before yearend.  Otherwise, any R&E benefit for 2016 must be treated as an income tax credit, not a PTC.  However, the failure to elect the PTC in 2016 does not impact subsequent tax years, i.e., a PTC generated solely from qualified activities undertaken in 2017, etc.

An eligible start-up may elect to claim up to $250,000 per year as a Payroll Tax Credit.  There are a number of requirements and taxpayers should consult a tax professional to determine what, if any, benefit may be claimed. 

Contact the author at gwells@wellstaxconsultingllc.com.

2016 Corporate Tax Season

WtC can help your company by providing a valuable resource and peace of mind that your company will complete its corporate income tax returns.  The tax deadline for calendar year filers is fast approaching and the addition of a WtC experienced tax person(s) to your team will go a long way to ensuring that the federal and state return(s) filed are both timely and accurate. Also, the addition of a WtC resource will help ensure that your company can maintain the work-life balance for the tax team. Let WtC help you figure out how we can help you by contacting us at gwells@wellstaxconsultingllc.com.