The Participation Exemption Rules Available for Domestic Corporations to Avoid GILTI Inclusions and a Discussion Regarding the Anti-Hybrid Limitations to the Participation Exemption Rules

The Participation Exemption Rules Available for Domestic Corporations to Avoid GILTI Inclusions and a Discussion Regarding the Anti-Hybrid Limitations to the Participation Exemption Rules

Tax Law
By Anthony Diosdi Many domestic corporations own foreign corporations that result in significant Subpart F and/or global intangible low-taxed income (“GILTI”) inclusions. With proper planning, a domestic corporation can avoid Subpart F and GILTI tax liability on foreign source income received from a foreign branch or controlled foreign corporation (“CFC”). Prior to the 2017 Tax Cuts and Jobs Act, dividends from foreign corporations out of foreign earnings that had not been previously taxed by the United States were usually taxable to the shareholders. The 2017 Tax Cuts and Jobs Act resulted in the enactment of Internal Revenue Code Section 245A. This Internal Revenue provision allows for an exemption from certain foreign income of a domestic corporation that is a shareholder by means of a 100 percent dividend received deduction (“DRD”)…
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Why Should You Have a Lawyer Do Your Tax Prep?

Why Should You Have a Lawyer Do Your Tax Prep?

Tax Law
With tax deadlines coming up, you should be considering who is going to complete your tax preparation for you personally or for your business. You have many options - trying to do it yourself (not recommended), going to an accounting firm, or hiring a San Francisco tax attorney. Many people think that hiring an attorney will be too expensive and is not necessary for tax preparation. However, the reality is that hiring a skilled tax law firm can save you a lot of money in the long run. Avoiding Costly Mistakes Even seemingly minor errors on your tax returns can have expensive consequences. These mistakes might: Lead to you paying unnecessary tax liabilityCause you to undergo inconvenient and lengthy tax audits down the roadLead to civil penalties or even criminal…
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State of California Residency Considerations for Non-resident Corporate Executives that are Physically Present in California Part-Time

State of California Residency Considerations for Non-resident Corporate Executives that are Physically Present in California Part-Time

Tax Law
By Anthony Diosdi Just like many Americans, executives from foreign countries are drawn to California for its natural beauty, nearly perfect weather, and its economy. To take advantage of California’s economic opportunities and natural beauty, many foreign executives establish a “part-time” residence in California. This may result in the executive being classified as a California resident for income tax purposes and being subject to California state income tax on the executive’s worldwide income. This article will discuss the factors the California taxing authorities consider in determining whether “part-time” resident can be classified as a resident for state income tax purposes.In order to go through the various tests the California taxing authorities use to determine tax residency, we will utilize a hypothetical individual named Tom. Let’s assume that Tom and his…
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Can Holding or Blocker Company be Used to Reduce GILTI Tax Liability?

Can Holding or Blocker Company be Used to Reduce GILTI Tax Liability?

Tax Law
By Anthony Diosdi The GILTI or “global intangible low-taxed income regime under Internal Revenue Code Section 951(a) captures a significant amount earned by a controlled foreign corporation (“CFC”). The U.S. federal income tax liability associated with GILTI is dramatically different to an individual CFC shareholder compared to domestic subchapter C corporation. Individual CFC shareholders are subject to GILTI tax at federal rates of up to 37 percent (plus 3.8 percent medicare tax, applicable state and local taxes). Absent planning, individual CFC shareholders cannot claim indirect foreign tax credit to reduce U.S. federal income tax liability. On the other hand, domestic C corporations are typically only subject to tax on GILTI inclusions at a Federal rate of 10.5 percent. In addition, a domestic C corporation may utilize an indirect foreign tax…
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The Current State of the IRS OVDP and an Overview of the Pre-Clearance IRS CI Form 14457

The Current State of the IRS OVDP and an Overview of the Pre-Clearance IRS CI Form 14457

Tax Law
By Anthony Diosdi As most tax practitioners know, on September 28, 2018, the Internal Revenue Service ended the most recent interaction of the Offshore Voluntary Disclosure Program (“OVDP”). While the OVDP as we know it sunset on September 28, 2018, this does not mean that individuals with undisclosed foreign financial accounts and/or unreported foreign income no longer have an avenue to make a voluntary disclosure to the IRS. On November 20, 2018, announced a new way of disclosing previously undisclosed foreign assets and/or foreign income. Since November 20, 2018, individuals who wish to disclose previously undisclosed foreign financial accounts and/or unreported foreign will need to rely on traditional voluntary disclosure practices when making voluntary disclosures to the IRS. This article discusses the current state of the IRS offshore voluntary disclosure…
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The Different Ways an LLC Can be Taxed a Look at the Check-The-Box Regulations

The Different Ways an LLC Can be Taxed a Look at the Check-The-Box Regulations

Tax Law
By Anthony Diosdi Probably one of the most frequent questions any tax professional receives from his or her clients is how should my limited liability company (“LLC”) be taxed. As usual in any area of tax planning, there is no one-size-fits-all approach. Each individual’s circumstances must be carefully considered in determining how an LLC should be taxed.An LLC is an entity formed under state law. Once an LLC is formed under state law, a determination must be made for federal (and in some cases for state tax purposes) how the LLC will be taxed. The Income Tax Regulations typically treat an LLC that has a single owner as a “tax nothing.” This means that a single-owner LLC is disregarded for tax purposes and treated as an extension of its owner.…
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The 2022 Guide to Income and Estate Taxation of Cryptocurrency and NFTs or Non-Fungible Tokens

The 2022 Guide to Income and Estate Taxation of Cryptocurrency and NFTs or Non-Fungible Tokens

Tax Law
By Anthony Diosdi Cryptocurrency has grown in popularity and ubiquity in the past few years. Cryptocurrency is a type of digital or virtual currency that uses cryptography for security. Virtual currency is a digital representation of value that functions as:1) A medium of exchange;2) A unit of account; and3) A store of value other than a representation of the United States dollar or a foreign currency.  Cryptocurrency allows parties to transact directly without an intermediary using blockchain technology, a shared distributed ledger that verifies, records, and settles transactions on a secure, encrypted network. Although some major retainers accept cryptocurrencies like Bitcoin, cryptocurrency is not money. Money means coin and paper money that Congress declares is legal tender. Cryptocurrency is also unlikely to be a “security,” with the possible exception of…
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Planning Options to Defer the Recognition of Subpart F or GILTI Income- Section 962 Election vs. High-Tax Exception: The Epic Showdown

Planning Options to Defer the Recognition of Subpart F or GILTI Income- Section 962 Election vs. High-Tax Exception: The Epic Showdown

Tax Law
By Anthony Diosdi Prior to the enactment of the 2017 Tax Cuts and Jobs Act, Controlled Foreign Corporations (“CFCs”) were able to defer the U.S. taxation of foreign source income through tax planning. The 2017 significantly reduced (but did not eliminate) a CFC’s U.S. shareholder’s ability to defer the U.S. taxation of foreign source income. This article will discuss two remaining options available to CFC shareholders to defer the recognition of U.S. tax on foreign source income. CFC shareholders can make either a so-called 962 election or a high-tax exception (also known as a Section 954 election) to defer the taxation on foreign income. This article will compare and contrast each of these elections.Section 962 ElectionInternal Revenue Code Section 962 allows an individual U.S. shareholder of a CFC to elect…
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Don’t Expatriate from the U.S. to Avoid the PFIC or GILTI and Subpart F Regimes- Keep Your U.S. Citizenship and Become a Resident of Puerto Rico Instead

Don’t Expatriate from the U.S. to Avoid the PFIC or GILTI and Subpart F Regimes- Keep Your U.S. Citizenship and Become a Resident of Puerto Rico Instead

Tax Law
By Anthony Diosdi U.S. shareholders of controlled foreign corporations (“CFCs”) or passive foreign investment company stock or (“PFICs”) stocks use various planning options to reduce or defer U.S. taxation on foreign source income. Few of these investors understand that they can relocate to a tax haven to avoid the taxes associated with being a CFC or PFIC shareholder. So, just where is this tax haven? The tax haven is Puerto Rico.Puerto Rico is an unincorporated U.S. territory. Since Puerto Rico is an unincorporated U.S. territory, Internal Revenue Code Section 933(1) excludes U.S. federal income tax income derived from sources within Puerto Rico. After enduring economic hardship, Puerto Rico enacted Act 60 which provides some U.S. citizens a 100 percent exclusion from Puerto Rican income tax for all interest, dividends, and…
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The Corporate Transparency Act- A New FinCEN Filing Requirement With Significant Delinquency Penalties

The Corporate Transparency Act- A New FinCEN Filing Requirement With Significant Delinquency Penalties

Tax Law
By Anthony Diosdi The Corporate Transparency Act (“CTA”) was enacted on January 1, 2021, as part of the National Defense Authorization Act (“NDAA”). It effectively creates a national beneficial ownership registry. The CTA requires certain business entities to report beneficial owners and “applicants” to FinCEN. CTA is intended to strengthen anti-money laundering laws and countering terrorism financing. Section 6403(a)(b) of the CTA requires that, starting in 2022, newly formed U.S. corporations, limited liability companies, and certain other entities classified as a “reporting company” must report their beneficial ownership to Financial Crimes Enforcement Network of the U.S. Department of the Treasury (“FinCEN”) at the time of formation or registration. Pre-existing reporting companies (those formed before the effective date of the CTA regulations), likely will start reporting in 2024, two years after…
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