January 2018
2017 Tax Return Trap—More Reporting for Nonresident Taxpayers with Limited Liability Companies (LLC)
With recent tax reform dominating the news, many nonresident alien taxpayers may be unaware that other, older legislation has resulted in additional reporting requirements on their 2017 tax returns (and that failure to meet these requirements may result in steep penalties, of course). As part of the Protecting Americans from Tax Hikes (P.A.T.H.) Act of 2015,[1] new IRS regulations were issued and finalized under TD 9796[2] resulting in additional tax filing requirements for nonresident alien owners of U.S. disregard entities. In layman’s terms, this issue affects non-U.S. individuals who conduct business through a U.S. limited liability company (LLC) that is a disregarded entity for U.S. tax purposes. Typically, the income from these businesses is reflected on Schedule C or Schedule E of the Form 1040NR filing. Let’s look at some examples to understand how this works. Example 1: Taxpayer X is a G-4 dependent visa holder who is not employed. Her spouse, Taxpayer Y, is a G-4 visa holder working for an international organization in Washington, DC. Taxpayers X and Y live in the State of Virginia. Because Taxpayer Y is a full-time employee of an international organization, his days in the United States do not count toward the substantial presence test. For U.S. tax purposes, both spouses are considered nonresident aliens. Taxpayer X creates an LLC in Virginia on July 1, 2017. On the Application (Form SS-4[3]) for Employer Identification Number (EIN), Taxpayer X checks the type of entity as a “sole proprietor.” The LLC is a service business and at the end of 2017 has gross income. The LLC is treated as a disregarded entity and reported on Schedule C. For 2017, Taxpayer X must file a Form 1040NR and Schedule C to report the gross income of the LLC. Because Taxpayer X is using the LLC to conduct business, Taxpayer X must file a Form 5472[4] to report the transactions between the LLC and Taxpayer X on Page 2, Part IV. Taxpayer X must also provide an attachment describing the monetary transactions (articles of organization fee, registration fee, capital contributions, etc.) Taxpayer X conducted to form the LLC. Example 2: Let’s assume the same facts as Example 1, but now assume Taxpayer Y provides services to Taxpayer X’s business and is paid compensation for those services. As Taxpayer Y is the spouse of Taxpayer X, there is attribution between the two taxpayers. Now, both Taxpayer X and Taxpayer Y must file a Form 5472. Taxpayer Y, in particular, will report the compensation for services received on Form 5472, Page 2, Part IV, line 20. Example 3: Taxpayer Z is a nonresident alien with no U.S. ties living and residing in France. Taxpayer Z desires to purchase vacation property in Miami, Florida. To alleviate potential U.S. Estate Tax[5] issues related to nonresidents, Taxpayer Z is advised not to hold the property directly. Taxpayer Z forms a Foreign Corporation (FCo) in the British Virgin Islands and is the 100% sole owner. FCo then opens an LLC in the State [...]
UK Attorney Mark Summers Weighs In on U.S.-UK Tax Issues (Part 2)
On August 14, 2017, TWG International Tax Director Mishkin Santa interviewed UK advisor Mark Summers on hot topics in U.S.-UK taxation. In the first part of this two-part series, Summers addressed common tax planning considerations. In this second part of the series, Summers addresses steps that other countries are taking to exchange taxpayers' financial data with one another. What is CRS (Common Reporting Standard), and do you think it will have any effect on U.S. taxpayers and their overseas assets? SUMMERS: CRS is basically the Foreign Account Tax Compliance Act (FATCA) on a multilateral global scale: over 100 countries have agreed to start reporting to each other on the financial assets of people who are residents in the other country. There is no withholding tax like there is in FATCA. It is an automatic exchange of information on financial assets. It looks very, very similar to FATCA in the way that it operates. It basically means that there will be no hiding places on the globe very shortly for all people. In the same way that Americans now cannot really hide assets anywhere else, as they will be found under FATCA, CRS makes it difficult to hide assets for everybody else. U.S. Approach to CRS The U.S. has decided not to sign up to CRS because it has FATCA. This is a problem, because FATCA is not reciprocal with most countries in terms of the level of detail given, because the U.S. is not tooled up. The U.S. is very far behind the curve relative to the UK and the rest of the world when it comes to banking information exchange and its ability to gather information on financial ownership of entities, securities, and everything else. CRS Timeline Under CRS, the information exchange will begin, at the latest, early next year. The biggest thing is to make sure that your affairs are quite sufficiently obvious and transparent that they do not spur questions from home revenue authorities. How quickly does it all happen? The UK is going to be very quick on picking this up. They have an advanced super computer, military grade, called Connect that, although it is not perfect, by world standards it is very, very good at joining the dots on taxpayers and their assets, and things that do not add up. So once this global reporting really kicks in, we are probably going to see a lot of tax inquiries raised on all kinds of people. That will go for Americans resident in the UK, as well, especially when they have assets that are situated neither in the U.S. nor in the UK, and there are plenty of those. One hot topic in the tax world is foreign pensions. Specifically, U.S. taxpayers having interests in UK pensions and potentially rolling them over into a Qualifying Recognized Overseas Pension Scheme (QROPS). Can you give us your insights into this? SUMMERS: This is a very, very tricky area that Brexit is probably going to impact. For U.S. [...]
Do you need to report a repatriation tax on your 2017 return?
Do you have a 10% or more interest in a foreign corporation? If so, then you may have a repatriation tax issue on your 2017 (not 2018!) tax return. Although the new tax legislation signed into law by President Trump on December 22, 2017, generally does not affect 2017 tax liabilities, this is one provision that does. Where does the repatriation tax come from? In the past, the United States taxed corporations on their worldwide income (with measures in place to mitigate double taxation of income taxed in other countries). Under the new legislation, the U.S. is shifting to a territorial system, where it taxes corporations primarily on the income generated within the U.S. Under the old system, corporations were able to defer their U.S. tax by reinvesting earnings overseas and keeping related cash offshore. Only when the cash was returned to the U.S. (“repatriated”) was it considered a taxable dividend to the U.S. corporation. Many corporations reinvested overseas, and consequently, much of their accumulated earnings have not yet been taxed in the U.S. In order to transition from the old system to the new, there will be a repatriation tax on the 2017 tax return to tax these accumulated earnings and provide a clean slate for the new system, which began on January 1, 2018. Who is affected by the repatriation tax? The rules are complex, but in general, two groups are affected by this tax: Individuals who, together with family members, own or control a foreign corporation (generally, have more than 50% ownership), and Individuals who have at least a 10% voting interest in a foreign corporation, assuming that at least one of the other 10% shareholders is a U.S. domestic corporation. How is the repatriation tax calculated? The new tax law sets the repatriation tax at 15.5% on cash or cash equivalents and 8% on all other earnings. At this point, however, it is unclear as to how the IRS will define “cash or cash equivalents,” and it is equally unclear what “all other earnings” will encapsulate. These details are currently being fleshed out. When is the repatriation tax due? At least 90% of the repatriation tax must be paid on or before April 17, 2018. Unless the new law is changed or adjusted, the payment is due by April 17 whether or not an extension is filed for the tax returns. Alternatively, one can elect to pay the repatriation tax in eight installments as follows: Years 1 through 5 – 8% of the net tax liability Year 6 – 15% of the net tax liability Year 7 – 20% of the net tax liability Year 8 – 25% of the net tax liability The election to pay installments must be made by the due date for the tax return, and installment payments must be made annually by the original due date (without extensions) for the tax return. Should one cease business, fail to make timely payments, liquidate or sell the company, or go into bankruptcy, then [...]
As an individual taxpayer, what should I know about the final provisions that made it into the new tax law?
On December 22, President Trump signed into law the most sweeping changes to the tax code in over 30 years. No one is left untouched. Individuals, corporations, sole proprietors, partnerships, S corporations, and multinational businesses are all affected. As the individual income tax debate raged in Congress, rates were uncertain, and all sorts of deductions and credits were on the chopping block. Would individuals be able to deduct medical expenses? Would Head of Household filing status go away? Would individuals be able to deduct state income taxes, property taxes, and sales taxes? If so, would there be limits? Would the Alternative Minimum Tax be eliminated? If an individual sold a house, how long would he or she have to have owned it and lived in it in order to exclude part of the gain from tax? These questions were being debated until the last minute, and the media reported each oscillation. As a result, many individual taxpayers have questions regarding which provisions were only discussed and which actually made it into the final legislation. To provide clarity on this matter, the following paragraphs examine a few of the most common tax areas of interest to individual taxpayers and explain the outcomes under the new legislation. Due to the length and breadth of the new legislation, we focus here only on certain highlights related to individual taxation, and we anticipate issuing future articles related to the treatment of sole proprietorships, pass-through entities, and other entities under the new law. It is important to note that most of the changes described below begin with the 2018 tax year and sunset after December 31, 2025. Future legislation will be necessary to extend these tax provisions; otherwise, they will revert to the rules in effect before the tax reform was passed. What happened with individual income tax rates? The new tax law has kept the 7-tax bracket structure, generally lowered tax rates, and increased the threshold for each tax bracket. For example, here are the Married Filing Jointly tax tables for 2018 before and after the new tax law passed. Were any filing statuses changed or eliminated? The new law does not change any filing statuses. The statuses remain: Single Married Filing Jointly Married Filing Separately Head of Household Qualifying Widow(er) with Dependent Child Can a personal exemption of $4,050 still be claimed for each person (taxpayer, spouse, and dependents)? For 2017, a personal exemption of $4,050 may be claimed as a deduction for the taxpayer, spouse, and each dependent, although this deduction is phased-out beginning at an adjusted gross income (AGI) level of $313,800 (Married Filing Jointly) and $261,500 (Single). For 2018 and future years, the new law completely eliminates the deduction for personal exemptions. Since the personal exemption is repealed, the phase-out is also repealed. What were the final changes to the standard deduction? An individual is allowed to deduct the greater of the “standard deduction” or itemized deductions. For 2017, the standard deduction is $12,700 for Married Filing Jointly and $6,350 [...]
The Repatriation Tax – 7 Takeaways
Do you have a 10% or more interest in a foreign corporation? If so, then you may have a repatriation tax issue on your 2017 (not 2018!) tax return. Under the new tax legislation, the United States is shifting international corporate taxation from worldwide taxation to a system resembling territorial taxation. The new system has been designated as Participation Exemption System Taxation (P.E.S.T.), and it began on January 1, 2018. To transition from the old system to the new, a repatriation tax may be due with the 2017 tax return. While extensions can be filed to extend the filing deadlines for U.S. corporate (Form 1120) and individual tax returns (Form 1040) until October 15, 2018,[1] the new law requires that 90% of the repatriation tax be paid on or before April 17, 2018 (assuming that no changes or adjustments are made to the new legislation). Understanding the Repatriation Tax To understand the how the repatriation tax works, one must look to the Conference Committee Report.[2] The conference committee starts discussion of the repatriation tax on PDF page 1000 (of 1097) of the report (or page 477 (of 560) of the bill). It references the repatriation tax as “deemed repatriation at two-tier rate…” On page 1012, it explains the treatment of the repatriation tax will follow the Senate amendment with several modifications. It then goes on to call the tax a “transition tax.” This is important because, as previously indicated, this is a one-time tax that transitions taxpayers from the old system to the new system. After we deal with the transition or repatriation tax, it will be crucial to understand how foreign corporations will be taxed in 2018 and future years. Here are the seven takeaways in the conference committee agreement: The provision applies to any U.S. shareholder of a “controlled foreign corporation,” not just multinational companies.[3] The provision also applies to all foreign corporations in which a U.S. person owns a 10% voting interest, but at least one of the U.S. shareholders must be a domestic corporation.[4] The repatriation tax will be based on the following tax rates:[5] 5% on cash or cash equivalents 8% on all other earnings “Earnings and profits” (E&P) will be measured based on the greater value as of either November 2, 2017, or December 31, 2017. It is important to note that the E&P will not be reduced by distributions made during 2017.[6] The conference committee has anticipated that taxpayers may engage in tax strategies to try to reduce E&P for measurement purposes. They have instructed the IRS to prescribe rules to prevent improper strategies from adjusting E&P for measurement purposes.[7] One can elect to pay the repatriation tax final determined liability in eight installments that break down as follows: Years 1 through 5 – 8% of the net tax liability Year 6 – 15% of the net tax liability Year 7 – 20% of the net tax liability Year 8 – 25% of the net tax liability The election to pay installments must [...]
December 2017
The U.S. Taxation of an American Princess – Meghan Markle
On November 27, 2017, the engagement of Prince Harry and Meghan Markle was announced to the press.[1] Prince Harry asked Markle to marry him in London, and the couple recently set the wedding date for May 19, 2018.[2] Ever since the engagement date was announced, U.S. tax enthusiasts have mused over the potential impacts of a union. As I am a U.S. tax enthusiast myself (not to mention a huge fan of the Netflix TV show The Crown, and the USA TV show Suits, and a big fan of Gabriel Macht and Gina Torres), I thought I would give a quick rundown of some of the tax issues for Markle’s entrance into royalty. Meghan Markle 1. The Engagement Ring – Reporting a Large Gift from a Non-Resident Alien In most states within the United States, an engagement ring will be considered a gift. The timing of the gift (for tax purposes) depends on when the gift is considered completed. Some states say that the gift is completed when given. Others say that the gift is completed when the couple gets married. For Markle, let’s make two assumptions. First, let’s assume the gift is completed when the engagement ring is given. Second, let’s assume the value of the ring is more than $100,000 (USD), as estimates place the value of the ring between $105,000 and $350,000.[3] While neither Prince Harry nor Markle would have to pay any tax due on this gift in 2017, Markle would need to file Form 3520 Part IV to report the gift from a non-resident alien. Form 3520 Part IV is due on or before April 15, just like a U.S. individual tax return, and the deadline can be extended until October 15 for the Form 3520, as well as the return. One difference here though is that the form and all required attachments (perhaps an appraisal) must be mailed to a special address in Ogden, Utah.[4] As an aside, one big issue to note here is if Prince Harry had proposed in Los Angeles and not in London, then there would be a gift tax due. For example, let’s assume that the ring is worth $350,000 and Prince Harry proposed in Los Angeles. When Markle accepted the ring, the gift tax would be as follows: Fair Market Value of the Ring = $350,000 Annual Gift Tax Exclusion = ($14,000) Amount Subject to Gift Tax = $336,000 As the saying goes, location, location, location…. 2. Wedding Gifts – Reporting Large Gifts from a Non-Resident Aliens Here once again, we must look at the aggregate value of gifts being given and at who is giving the gifts. I assume that all wedding gifts will be received by both Prince Harry and Markle as joint gifts. I also assume many gifts will be from non-resident aliens, i.e., non-U.S. people. Finally, I assume that if we were to aggregate the fair market value of the gifts, the total would exceed $100,000 (USD). Therefore, Markle may once [...]
Which State and Local Taxes to Prepay by 12/31/2017?
December 22, 2017 As you may know, today the President signed into law the most sweeping tax legislation in a generation. Among the changes, starting in 2018, the new legislation limits the amount of state and local taxes that individuals may deduct each year on their tax returns. As this new limitation is of particular interest at year end, we would like to provide greater clarification on the matter. Which state and local taxes are affected? For 2018, individual taxpayers’ deductions may be limited for both state and local income taxes and state and local property taxes. In addition, the deduction for foreign property taxes will be eliminated. (NOTE: the new limitations do not apply to property taxes paid on a rental property or deductible by a trade or business.) What is the new limit? Beginning in 2018, only up to $10,000 in combined state and local income taxes and property taxes will be deductible as an itemized deduction. Foreign property taxes will no longer be deductible. Does this affect me? If you usually claim the standard deduction, then this change will likely have little or no impact on your tax liability. If, however, you do itemize and usually claim more than $10,000 in state and local income and property taxes, then you are more likely to be affected by the new limits. If you file a non-resident tax return, then the change may only affect your deduction for state and local income taxes, not property taxes. Should I pre-pay my 2018 property taxes by December 31, 2017? A common tax planning technique for 2017 is to pay state income taxes and property taxes on or before December 31, 2017, in order to obtain a deduction in 2017, as opposed to delaying the payment/deduction to 2018, where it may be limited. Indeed, some U.S. counties are encouraging taxpayers to prepay their 2018 property taxes in 2017. However, in order for 2018 property taxes to be deductible in 2017, the 2018 property taxes must have been assessed and the prepayment of the 2018 property taxes must be paid by December 31, 2017. In addition, if you have an alternative minimum tax liability for 2017, the prepayment of 2018 property taxes may not provide you with any tax benefit (since property taxes are not deductible for purposes of the Alternative Minimum Tax). Should I pre-pay my 2018 state and local income taxes by December 31, 2017? The new law does not allow an individual to claim an itemized deduction in 2017 on a pre-payment of state and local income tax for 2018 or future years. If you still have an outstanding state income tax liability for 2017 (because you suspect you will have a balance due with your 2017 state return), then we suggest you consider pre-paying the 2017 tax liability by December 31, 2017. As with property taxes, if you are liable for the Alternative Minimum Tax in 2017, you may not receive a benefit for the 2017 payments of some [...]
November 2017
Tax Reform Update
November 15, 2017 As this article went to press, the Senate was modifying its tax reform bill, which is now expected to include repeal of the Affordable Care Act's individual mandate. Additional tax changes are also expected, including full repeal of the estate tax. -- As the year draws to a close, tax reform remains a priority of both President Trump and Congressional Republicans. With the introduction of the Tax Cuts and Jobs Act legislation in the House and Senate, both the President and leaders in Congress have made clear their intent to enact broad individual income tax reforms. The House version of tax reform would, among other things: Tax Rates Create individual income tax brackets of 12%, 25%, and 35%, while maintaining a 39.6% bracket for incomes over $1,000,000 for joint filers, or over $500,000 for singles, and would impose a phase out for high income taxpayers of the tax benefit of the 12% bracket; Set the standard deduction at $24,400 for married couples, $18,300 for unmarried individuals with at least one qualifying child, and $12,200 for all other taxpayers (subject to inflation), but repeal personal exemptions; Repeal the alternative minimum tax; Principal Residence Exclusion Make the ownership and use tests more restrictive for the exclusion of gain from the sale of a principal residence and set an adjusted gross income phaseout beginning at $250,000 ($500,000 for married taxpayers filing jointly); Itemized Deductions Preserve the mortgage interest deduction for existing mortgages, but allow deduction of mortgage interest only on the first $500,000 of mortgage debt for purchases after November 2, 2017, limited to debt incurred to purchase the taxpayer's principal residence; Repeal the deduction for state and local income taxes and state and local sales taxes; Allow a deduction of up to $10,000 for state and local real property taxes; Repeal the medical expense, alimony, and moving expense deductions; Repeal the deduction for tax preparation fees; Repeal the overall limit on itemized deductions; Credits Increase the child credit to $1,600 ($1,000 of which would be refundable), create a $300 nonrefundable credit for non-child dependents, and provide a temporary $300 nonrefundable credit to non-child, non-dependent taxpayers (both spouses for joint returns), and increase the income amounts at which the combined credit amount is phased out; Repeal some nonrefundable credits, but preserve the adoption credit; Consolidate the existing education credits into one enhanced American Opportunity Tax Credit and repeal other education-related deductions and exclusions; The Senate has released its description of the “Chairman's Mark” of the Tax Cuts and Jobs Act reflecting many similar changes to that of the House. The Senate would: Tax Rates Create new additional individual income tax brackets, but of 10 percent, 12.5 percent, 22.5 percent, 25 percent, 32.5 percent, 35 percent, and 38.5 percent for incomes over $1,000,000 for joint filers, or over $500,000 for unmarried individuals, and would be adjusted for inflation; Increase the standard deduction, but to $24,000 for married couples, $18,000 for unmarried individuals with at least one qualifying child, and $12,000 for single filers, [...]
September 2017
The IRS Is Peaking behind Bitcoin’s Mask
The U.S. Internal Revenue Service (IRS) has been raging a battle against Coinbase[1] to obtain the identities of users of convertible virtual currencies (CVCs), like Bitcoin.[2],[3] This battle is being closely watched worldwide, as it touches on hot button issues—privacy of Bitcoin holder accounts, U.S. income taxation of CVCs, and international informational reporting of CVCs, to name a few. More troubling, CVCs have been used for a host of illicit and illegal activities.[4] The message from the U.S. Government is clear: the Department of Justice, Financial Crimes Enforcement Network, and the IRS will continue to monitor this area very closely and tighten their enforcement net. In this blog post, I thought I would summarize everything we know to date about CVCs from a U.S. tax perspective. Then, I’ll explain why CVC users should care about the IRS’s recent measures to obtain the identities of CVC users. A Brief History of Convertible Virtual Currencies (CVCs) To begin, let’s go over the history. CVCs were created by a person or group of people called Satoshi Nakamoto on Halloween 2008.[5] The first CVC network was released to the general public in January 2009, and CVC users are now estimated to number between 2.9 and 5.8 million worldwide.[6] Although there are hundreds of types of CVCs on the market, the most commonly known are Bitcoin, Ethereum, and Bitcoin Cash. For other CVCs, the details on potential valuation, circulating supply, and other matters are less widely known. The Top Five CVCs To help provide clarity, here is a snapshot of the top five currencies courtesy of CoinMarketCap: U.S. Tax Issues Raised by CVCs From a U.S. tax perspective, as the use of CVCs has become more mainstream, two big questions have arisen: How will CVCs be taxed under U.S. law? What type of international informational reporting (if any) is required for individuals, businesses, or trusts that hold CVCs in foreign financial accounts? How will CVCs be taxed under U.S. law? First, let’s look at the U.S. income tax consequences. Surprisingly, the IRS has provided guidance via Notice 2014-21 on this topic, and it is quite extensive. In addition, both the Treasury Inspector General for Tax Administration[7] and the Financial Crimes Enforcement Network[8] have done so, as well. Here are the big picture takeaways from the IRS on how convertible virtual currencies are taxed: Convertible virtual currency (CVC) is property. CVC has a value when you acquire it (i.e., basis) and value (i.e., fair market value at the point of sale) when you sell it. The gain or loss can be capital or ordinary. The test here is whether you have a capital asset. CVC is not a currency. So, there are no foreign currency gains or losses. But note here that the IRS specifically says, “Under currently applicable law…” This could be subject to change in the future. “Mining” CVC is an income recognition event. Receiving CVC for the sale of goods or services is an income recognition event. If a business pays an [...]
Professional Spotlight – Eliot Norman at Williams Mullen
Founded in 1909, Williams Mullen has 230 attorneys, a national and international practice and a focus on representing foreign companies in connection with their direct investments in the United States, whether by acquisition (M&A), joint venture or the setting up of a U.S. subsidiary. Our offices are in Virginia, North Carolina, South Carolina and Washington D.C. Eliot Norman has focused his practice on U.S. immigration law and related Foreign Direct Investment (FDI) matters since 1986. He frequently works with the M&A team at Williams Mullen on acquisitions and joint ventures to help foreign companies enter and accelerate their growth in the U.S. market. He also handles EB-5 Green Cards for high-net-worth investors, in addition to various other employment-based Green Cards such as EB-1, EB-2, and EB-3. He advises on transfers of intra-company personnel using L-1 visas, as well as advises investors on attainment of E-2 visas and the use of E-2 visas to transfer eligible employees to the U.S. Finally, he advises companies on how to retain global talent using various Green Card strategies. He received a Bachelor of Arts degree from Yale University and a Juris Doctor degree from Boston College Law School, cum laude. In addition, he holds a certificate from the Institut d'Etudes Politiques in Paris, France. He is fluent in French and regularly travels to France to meet with French and other European clients.
Scam Targets Taxpayers by Impersonating the FBI and IRS
Equifax, one of the leading consumer credit reporting companies, recently revealed that it fell victim to a cyber attack earlier in the year. Early reports indicate the data breach compromised over 140 million individuals’ confidential information. This was a big one. Stealing confidential information is a big business, and the bad guys are consistently improving their methods to accomplish this end. One example of a creative attack vector currently making the rounds targets U.S. taxpayers by leveraging the Internal Revenue Service (IRS) and Federal Bureau of Investigation (FBI) brands. If you receive an email purporting to be from the IRS or FBI, do not click on any links or attachments! Here is a more detailed description of the scam: “The scam email uses the emblems of both the IRS and the Federal Bureau of Investigation. It tries to entice users to select a “here” link to download a fake FBI questionnaire. Instead, the link downloads a certain type of malware called ransomware that prevents users from accessing data stored on their device unless they pay money to the scammers. The IRS does not use email, text messages or social media to discuss personal tax issues, such as those involving bills or refunds. For more information, visit the “Tax Scams and Consumer Alerts” page on IRS.gov. Additional information about tax scams is available on IRS social media sites, including YouTube videos.” Please be aware of this and other “phishing” schemes in general. Do not click on links or open attachments from people you do not know. Even if an email comes from a known contact, only open a link or attachment if it is something you are specifically expecting from that contact. Otherwise, the data on your computer could be held hostage for a hefty ransom!
New Regulations Affect U.S. Nonresidents (Including G-4 Visa Holders) with LLCs
Are you a U.S. nonresident? Do you own a U.S. Limited Liability Company (LLC)? Are you the only owner of the LLC? If so, under new IRS regulations, you may have to file Form 5472 annually with the IRS—even if you do not normally have to file a U.S. tax return. What changed under the new regulations? In the past, sole owners of LLCs could simply record the income and expenses of the LLC on their individual tax returns. The LLC was treated as a “disregarded entity,” meaning that it was ignored for income tax purposes, unless taxpayers made an election to treat the LLC as a corporation. No other forms were needed to be filed for the LLC. Under the new rules, these individual taxpayer LLC owners will continue to report any income and expenses of the LLC directly on their individual income tax returns, but now, for calendar year 2017, the LLC may have to file Form 5472, “Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business,” and maintain records for “reportable transactions.” Why is this change a big deal? First, this change affects many U.S. nonresidents. Although the change was likely intended to target nonresidents who contribute high-priced real estate to LLCs in order to mask the true ownership of the property, the new reporting requirements affect a broader population. For instance, many nonresidents (including G-4 visa holders) create LLCs for their consulting businesses or to hold rental real estate. Under the new regulations, these nonresidents may also need to file Form 5472. Second, the penalty for failing to file the Form 5472 is $10,000. Do all nonresidents with LLCs have to file Form 5472 now? The new filing requirement generally applies when the LLC has “reportable transactions.” Reportable transactions mostly include financial transactions—of any amount—between the LLC and its owner (or other “related party”). This means that when an owner creates or dissolves an LLC, pays any expenses for the LLC or the property it contains, contributes additional property to the LLC, or partakes in the income of the LLC, then a reportable transaction has occurred. Therefore, most nonresident LLC owners will have to file this form. Does this apply immediately? The new tax filing requirement applies to tax years beginning January 1, 2017. This means that for LLCs with a December 31, 2017 year-end, the first Form 5472 should be filed in early 2018. One other big hurdle: you will need to apply for an EIN To file the Form 5472, the LLC must obtain an Employer Identification Number (“EIN”) by completing a Form SS-4. The SS-4 requires responsible party (usually the owner) to submit certain information, including his or her social security number (SSN), individual taxpayer identification number (ITIN), or EIN, as well as the owner's name. A nonresident who does not have an ITIN or SSN must apply for an ITIN, which can often take several months. In practice, this means that the [...]
UK Attorney Mark Summers Weighs In on U.S.-UK Tax Issues
On August 14, 2017, TWG International Tax Director Mishkin Santa interviewed UK advisor Mark Summers on hot topics in U.S.-UK taxation. In the first part of this two-part series, Summers addresses common tax planning considerations. What are some common tax planning strategies for U.S. citizens going to the United Kingdom? SUMMERS: As U.S. citizens, you are taxable on your worldwide income in addition to being subject to worldwide foreign financial asset informational reporting. Once you become a tax resident in the UK, you are potentially subject to the tax regimes of two different countries. Consequently, a lot of strategy is damage limitation—avoiding double taxation and keeping income and assets out of UK taxation. The UK uses a system of taxation based on remittance for people who are resident but non-domiciled (i.e., for people who do not regard the UK as their permanent home). This allows Americans to defer certain non-UK income and realized gains. Common Tax Traps Two big tax traps for Americans relate to trusts and limited liability companies (LLCs). For U.S. citizens who have a trust, the moment they step off the plane at Heathrow with the intention of being a UK resident, they have just brought all the trust assets into the UK tax system. They cannot benefit from the special taxation system of deferring non-UK income and capital gains outside the UK. Also, once they determine they want to leave the UK, they could be subject to the UK exit tax, which is a mark-to-market tax on all the assets in that trust. U.S. LLCs are regarded as real corporations in the UK and not as pass-through entities. Therefore, if any members or managers of these LLCs become UK tax residents, then the LLC will be subject to UK corporation tax on its profits. Upon leaving the UK, you may once again be subject to the mark-to-market exit tax on the assets in that LLC. Before U.S. citizens arrive in the UK, they should work with a UK tax advisor to review the trustees, members, and managers of these various entities. With proper planning, modifications to these structures can keep these assets out of the UK tax net for income tax, inheritance tax, and so forth. A lot of the standard U.S. estate planning can also be very good for the UK if you tailor it before you move. If you fail to do that, it can be a horrible mistake. What should U.S. green card holders going to the United Kingdom look out for? SUMMERS: U.S. green card holders (GCH), just like U.S. citizens, are taxable on their worldwide income, as well as being subject to worldwide foreign financial asset informational reporting. The classic mistake is the scenario in which a U.S. GCH gets ahold of a UK or U.S. tax advisor who does not know the international rules very well. The advisor mistakenly believes and advises that the person should take a position as a resident in the UK and nonresident of the U.S. [...]
Beware: The IRS is Establishing a New International Tax Enforcement Group
The IRS appears intent on the continued crackdown of U.S. persons who have failed to properly report their full worldwide income and foreign financial assets to the U.S. government. Consolidation of Elite Specialists in Foreign Asset and Income Reporting On August 2, the IRS Criminal Investigation (IRS-CI) Chief Don Fort announced that the IRS-CI is putting together a new international tax enforcement group, which is expected to be fully operational by October 1. The group will consist of elite special agents who will investigate and pursue international tax cases. According to Fort, “What we are essentially doing is consolidating some of our foremost experts in these international tax cases who are really the nationwide experts in this field and putting them under the umbrella of one focused operational group.” The group will be based out of a Washington, DC, field office, and it will target taxpayers who have not fully reported their worldwide income and foreign financial assets. Advanced Use of Data Analytics To Identify Noncompliant Taxpayers Not only will the new group bring together national experts for the first time, but it will also have additional new tools at its disposal. One of the new tools is a nationally coordinated investigation unit that will have a heavy data analytics component. Fort said, “This particular unit is going to report directly to our frontline executives here in Washington D.C. The goal of the unit is to really use all of the data that we have available to us to help identify and develop areas of noncompliance.” In recent years, the IRS has compiled a wealth of data from Foreign Bank Account Reports (FBARs) and from amnesty programs, including the Offshore Voluntary Disclosure Program (OVDP). Furthermore, foreign financial institutions have started to send the IRS data as required under the Foreign Account Tax Compliance Act (FATCA), and this data sharing is only expected to increase. With the formation of the new IRS-CI enforcement group and investigation unit, the IRS is adding another weapon to its arsenal of detecting noncompliance.
Will the IRS TKO Conor McGregor?
The Mayweather–McGregor boxing match concluded this past Saturday night with Mayweather winning in the 10th round by TKO. After the fight, USA Today published an article on McGregor’s use of an audit team to track his financial earnings related to the match. Estimates indicate that McGregor will receive 30% of the boxing purse, or roughly $72 million. This may be considered personal services income (i.e., income produced from the skills or efforts of an individual). Further estimates indicate that McGregor will receive another $30 million in royalty income for merchandise sales, sponsorship, and pay-per view sales. McGregor, an Irish fighter, fought the match on U.S. soil, and his case offers an interesting exercise in U.S. nonresident taxation. It reveals income tax, withholding tax, and tax treaty implications that can apply to foreign athletes and U.S. nonresident aliens. So, what exactly are the tax implications to McGregor as a non-U.S. person? Assumptions Before I analyze his case, let me mention a couple caveats. First, this analysis is not meant to be comprehensive, authoritative, or highly analytic. Rather, it is meant to be more of a high-level exercise that illustrates tax implications for foreign athletes and U.S. nonresident aliens. Second, I have no specific knowledge as to the exact facts and circumstances of Conor McGregor. Instead, I’ll make some assumptions. For this hypothetical exercise, let’s assume the following: McGregor has not previously possessed, nor does he currently possess, a U.S. Green Card McGregor does not satisfy the U.S. substantial presence test to be considered a U.S. tax resident for tax year 2017 or any previous tax years McGregor is not a U.S. citizen, and for U.S. tax purposes, he is a nonresident alien McGregor is a citizen of Ireland and an Irish tax resident (i.e., not a resident of Northern Ireland, which is part of the United Kingdom) As a citizen of Ireland, McGregor has his domicile in, lives in, and resides in Ireland proper McGregor does not have any U.S. domestic or foreign entities that represent him in his contracts or act as intermediaries to receive income; he is an individual in all contracts for personal services and royalty income McGregor will convert all his U.S. source income from U.S. dollars to euros McGregor will receive US$72,000,000 for U.S. personal services income McGregor will receive US$30,000,000 for U.S.-based royalty income The income stated above is McGregor’s only U.S.-sourced income for 2017 Note: we will ignore any State, Sales, Use, or VAT taxes for purposes of this discussion. What’s the process for identifying the relevant income and withholdings? For non-U.S. persons, it’s important to systematically consider a number of factors in order to accurately identify the income that will be taxable in the U.S. and the withholdings that apply. First, we determine a person’s tax residency status. Per the assumptions above, McGregor is an Irish tax resident and a nonresident alien for U.S. tax purposes. Second, we determine the source of income. For this analysis, all of the fight income stated above [...]
August 2017
Americans are Relinquishing U.S. Citizenship at a Dramatic Rate
Aug 8, 2017 Synopsis Last week, the IRS published the names of individuals who had relinquished their U.S. citizenship or their long-term residency status (green cards) over the last quarter. The report showed that Americans are continuing to give up their citizenship at a dramatic rate, as 1,759 people expatriated between April and June 2017. This is the second highest quarterly number on record (after the fourth quarter of 2016). There are dangerous tax traps for those wishing to exit the U.S. The Wolf Group highly recommends that those individuals who are considering relinquishing their citizenship or green cards understand all the tax implications involved before doing so. The Issue If you are considering leaving the United States for good, you must be concerned about whether you will be subject to the so-called Exit Tax. The Exit Tax may apply to you if you have a worldwide net worth of greater than $2 million or if you have an average annual income tax liability for the previous five years of $162,000 or more. If you become subject to the Exit Tax, the IRS will treat you as if you had sold all your property at its fair market value, and any gain (less an exemption) will be taxed at capital gains rates in your final U.S. tax return. You may also be subject to U.S. Exit Tax on your ownership of Individual Retirement Accounts and foreign pensions. The Wolf Group's Perspective In our practice, we see a myriad of reasons as to why Americans or green card holders wish to relinquish their citizenship or green cards. Even if the reasons you are leaving have nothing to do with taxation, you still may be subject to a large punitive Exit Tax. The Wolf group has assisted dozens of clients with the tax implications of exiting the United States by helping them to understand the relevant factors, properly time their departure, calculate the tax impact of different scenarios, and mitigate the tax cost and risk of expatriation. Contact For more information about our Exit Tax planning services, please click here, or contact our New Client Lead, Fan Chen, CPA, at fanchen@thewolfgroup.com or 703-502-9500 x137 to learn how we can help.
Bitcoin splits into Bitcoin Classic and Bitcoin Cash.
In a hard fork, Bitcoin splits into two derivative currencies, Bitcoin Classic (BTC) and Bitcoin Cash (BCH).
June 2017
The Wolf Group Recognized for "Best Newsletter" by Association for Accounting Marketing
June 28, 2017 | Washington, DC The Wolf Group is pleased to announce that the firm is the recipient for the best “Content Marketing – Newsletters” award by the Association for Accounting Marketing (AAM). AAM is the accounting industry’s premier marketing organization. Every year, it holds a prestigious gala where it recognizes the accounting industry’s “best of the best” marketers. With about 100 entries to choose from, the AAM judges shared that the competition was fierce and the entries were of the highest quality. AAM also had this to say about The Wolf Group’s newly re-designed newsletter: “Extremely well-thought out effort and an exceptional way to overcome a common problem.” Regina Wahab, Wolf Group Strategic Initiatives Director, attended the AICPA Engage Conference in Las Vegas in June to accept the award at AAM’s Annual Awards Gala. The Wolf Group’s marketing team implemented content marketing strategies that are engaging to capture and increase readers’ interest in the firm’s newsletter. The re-designed newsletter received a 120% increase in readership and positive feedback from clients and other professionals. To view the Firm’s award-winning newsletters, visit http://www.thewolfgroup.com/insights/newsroom/ About The Wolf Group The Wolf Group is a global financial services firm that specializes in meeting the growing tax needs of the international community since 1983. With offices in Virginia, DC and New York, the firm provides tax compliance and planning services to a wide range of clients, from American expatriates and foreign nationals living in the U.S., to small and mid-sized businesses with cross-border needs. The firm is a proud and active member of Nexia International, a global network of independent accountancy, tax, and business advisors with 600 offices in over 100 countries. This network provides the firm with the resources and expertise to effectively and efficiently address the global tax and business needs of its clients. Follow the firm on Twitter at @TheWolfGroup
Trump and Taxes – An Update
President Trump recently published his tax reform outline, “2017 Tax Reform for Economic Growth and American Jobs” – and his outline proposes tax cuts as well as tax simplification. Although the provisions in Trump’s outline is his wish list for tax reform, it is not certain at all whether much or anything that he is promoting will be able to withstand the legislative process. The Wolf Group expects that the President will lobby Republicans in the House of Representatives, since all tax bills must begin their journey in the House and work their way to the Senate. Finally, when both legislative bodies pass a tax reform bill, it will ultimately be either signed into law by the President or vetoed. This process is likely to take many months and according to Dale Mason, The Wolf Group International Tax Director, “I don’t expect the final tax reform bill - if any - to look much like the President’s outline proposal and I expect the bill’s final push to run up against the Christmas recess.” Nevertheless, The Wolf Group shares some of the President’s reform items below to keep its clients abreast of potential tax changes that may impact them. Accordingly, the President would replace and lower the current individual tax rates reducing them from seven brackets to three. Under the proposal, the three brackets would be 10%, 25% and 35%. Currently, the highest individual income tax rate is 39.6% The President also proposes to double the standard deduction. Itemized deductions Under the White House proposal, all itemized deductions would be eliminated except for the mortgage interest and the charitable contributions deductions. Capital gains The President's outline appears to keep the current capital gains rate and qualified dividend tax rate at the top rate of 20%. Net Investment Income Tax Under current law, the Net Investment Income (“NII”) imposes a 3.8% tax on the investment income of certain higher-income taxpayers. The President’s proposal repeals the net investment income tax. Estate Tax The current federal estate tax is 40% of assets transferred at death in excess of a $5.49 million exemption (2017 amount). The President calls for an elimination of the federal estate tax. Alternative Minimum Tax Under the president's proposal, the Alternative Minimum Tax would be repealed. The AMT is a parallel tax regime and is intended to ensure that higher income individuals pay at least some income tax. International taxation of US citizens Although calling for a territorial tax regime for corporations, the president has not made any comments regarding the global taxation of U.S. citizens. This area of the law is of particular interest to The Wolf Group and we will keep clients abreast of developments accordingly. Timing Treasury Secretary Mnuchin said that the Administration is “going to move as fast as we can” on tax reform. He has also said that tax reform will be accomplished by the end of 2017. If you would like to discuss your particular tax position and the potential implications of President Trump’s proposed tax plan with [...]
Professional Firm Spotlight: dhpg
The Wolf Group is an active member of Nexia International, a global network of independent accounting and tax advisors with in over 100 countries. One of the firm’s Nexia partners is dhpg in Germany. With over 500 employees in ten offices, dhpg provides its clients with audit, tax and legal services. Whether a company is a medium-scale enterprise or a global market leader, the owner-managed dhpg offers a variety of services to leverage business opportunities and avoid risks in growth and transition periods. Consultants at dhpg work not only in a multi-disciplinary, but also an inter-disciplinary manner: auditors, tax advisors, attorneys and IT specialists develop optimum solutions in close cooperation with each other. This is why dhpg has been named one of the top 15 auditors and tax consultancies in Germany for many years. Norbert Neu, Partner at dhpg, specializes in taxation of employees on international assignments. Neu commented, “When it comes to cross-border employments, The Wolf Group is our reliable partner with a profound knowledge in entry, tax and financial strategies, giving clear recommendations for further activities.”
Serving Clients Globally: Nexia Asia Conference
As the sole United States delegate, Mishkin Santa, a Tax Director with The Wolf Group, represented the firm at the Nexia International Asia Pacific Conference in April 2017. International professional services firms from all over the world met at the Conference to network and share information and ideas on how to better serve their clients and to share innovative, cross-border solutions for clients. Mishkin said “The wealth of knowledge presented about current tax developments and updates on a country-by-country basis was exceptional and will be helpful in serving The Wolf Group’s clients navigate tax requirements both inside and outside the United States.” The firms in attendance at the Conference came from countries including Australia, Bangladesh, China, Hong Kong, India, Indonesia, Japan, Malaysia, Mauritius, Nepal, Singapore, South Korea, Thailand, and Vietnam. Delegates were provided tables by country for business to business meetings to facilitate networking sessions and to leverage synergies among the firms. The delegates also participated in presentations related to digitization, strategy updates, and cyber security, among others. “The relationships and insights gained at the conference will help me further differentiate The Wolf Group in the service we provide our clients for both compliance and consulting purposes. I not only have a deeper appreciation of the various cultures represented at the Conference but also a substantial network of contacts through Nexia that I can refer The Wolf Group clients to if they need assistance in their home country,” said Mishkin.
May 2017
EB-5 Investors: Tax and Law Firms Collaborate on Implications to Investors
Jigsaw with American flag showing through missing piece With proposed legislative changes on the horizon for the EB-5 investor program, it is critical that investors understand the tax and immigration laws that could impact their investments and the status of their U.S. residency. As a provider of premier EB-5 tax services, The Wolf Group partners with select immigration firms to ensure there is frequent collaboration between tax experts, such as the Wolf Group, and immigration firms who are specialized in EB-5 immigration programs. Accordingly, The Wolf Group’s Fan Chen, CPA, met with immigration attorney, Sarah Schroeder, from Diraimondo & Schroeder LLP to discuss the certain legal and immigration aspects of the EB-5 program. The Wolf Group: The EB-5 program has various investment options. Which option should an investor select? Schroeder: The investment options for the EB-5 program include Regional Center Investment, Direct Investment and Pooled Direct Investment. The most ideal option depends on the type of investor and the investor’s investment goals. The Regional Center Investment option involve organizations designated by the United States Citizenship and Immigration Services (USCIS) that sponsor qualified EB-5 capital investment projects. It is best suited for investors who have little to no desire to be involved in the business. The primary objective for this investment type is to obtain a Green Card. It can also be an option for those already working and living in the U.S. under a nonimmigrant visa, as an alternative method of obtaining U.S. residency. The Direct Investment/Franchise Investment option requires investors to directly invest in qualified EB-5 projects and be actively involved in the operation of the business. Naturally, this option would be more appealing to investors who are entrepreneurial and who are interested in running a business in the U.S. The Direct Investment type certainly requires more time and effort compared to the Regional Center Investment option but affords the investor more day-to-day control over the investment. For individuals who don’t want to pursue a Regional Center Investment but also do not have a pre-determined business to start in the U.S., using a Franchise as their EB-5 investment vehicle is often a popular direct investment choice. Lastly, the Pooled Direct Investment option provides a means for multiple investors to invest in direct investment projects that are not Regional Centers but that rather meet the EB-5 requirements through pooled capital investments. Investors who select this option often are looking for a higher return than what the Regional Centers offer. They prefer more involvement and control in investments, but compared to Direct Investment, these investors may have no need or desire to engage in the day-to-day operations of the business The Wolf Group: How long does EB-5 Program typically take, from the beginning of the process to obtaining a Green Card? Schroeder: Processing time depends on multiple factors and it varies widely. Obtaining a Green Card through Direct Investment is generally faster than obtaining one through Regional Center Investment. There are two steps to this process, the first is [...]
Norway’s Skandiabanken recognizes cryptocurrency as an investment class.
Skandiabanken, Norway’s largest internet-based bank, recognizes cryptocurrency as an investment class.
April 2017
Have Foreign Accounts? OVDP Program to Mitigate Penalties May End in 2017
Potential Changes to the IRS Offshore Voluntary Disclosure Program (OVDP) U.S. taxpayers who have foreign bank and/or financial accounts should be watching the clock. The window to voluntarily report foreign accounts in order to mitigate IRS penalties may be at the end of 2017. Like all IRS amnesty programs, the Offshore Voluntary Disclosure Program (OVDP) was not meant to be left open indefinitely. While the voluntary disclosure programs have been proven to be quite effective and lucrative for the IRS, there are four significant reasons the program will likely come to an end in 2017. The Wolf Group takes an in-depth look at the reasons for the program’s potential closure and what taxpayers with foreign bank and financial accounts should be doing now to mitigate the penalties that they may otherwise be subject to after the end of 2017. Amnesty programs generally end – listed below are some examples[1]: What is OVDP? OVDP is an amnesty program that falls under IRS voluntary disclosure practice (see IRM 9.5.11.9)[2] . The program provides taxpayers with a path to resolve previous omissions, errors, and unreported forms while mitigating the potential penalties of continued non-compliance. Under normal IRS procedures, once detected, a taxpayer would be placed under audit procedures, assessed penalties for all failure to file informational reports such as FBARs, and taxes, interest, and all associated penalties for failing to report associated income such as interest, dividends, and capital gains from the foreign financial account(s). If the error has a basis of criminality, the taxpayer may be referred to Criminal Investigations for criminal penalties and/or prosecution. This can be quite expensive for both the IRS and the taxpayer. Additionally, the IRS has identified that the number of individuals that could have issues that fall within this realm is substantial (i.e., well beyond the 105,099 disclosures submitted to date). In lieu of this, if the taxpayer voluntary comes forward and discloses this information under OVDP, then the associated penalties to the taxpayer will be far less than if they were detected and undergone a full audit. Why It Is Likely That OVDP Is Ending Having serviced some of the most complex OVDP cases and navigating the tangled rules of OVDP compliance since the program’s inception, The Wolf Group takes a look at the four significant reasons why the OVDP program will likely come to an end in 2017. 1. The IRS does not have sustainable staffing on its present and prospective budgets. President Trump recently called for a $239 million cut to the IRS budget in 2018. The proposed spending cut is similar to a reduction proposed in the House last year and represents about 2% of the budget. This alone is not enough but taken in conjunction with recent historical budget cuts and/or lack of increased budgets the IRS staffing has decreased 30%[3] over the last couple of years. The average OVDP takes roughly 2 years to complete from submission to receipt of the closing form 906. There are multiple administrative, examination, technicians, [...]
