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End of Year Tax Concerns

End of Year Tax Concerns

tax planning
Once January 1 rolls around, you generally lose the ability to make any changes or elections that can impact the tax return for your previous year. Therefore, you must make any moves prior to the end of the year to put you in a better position when you file taxes. Otherwise, you can be hit with a large bill unnecessarily on tax day. Your ending income for the year can significantly impact your taxes. It can put you in a higher tax bracket or make you subject to the alternative minimum tax. Many taxpayers are hit with the surprise that their income makes them subject to the AMT, and they only learn it in the following year. You should consider ways of reducing your income in the current year or…
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Has the IRS Been Illegally Assessing 3520 Penalties all this Time? What to do If the IRS Unlawfully Assessed a 3520 Penalty Against You

Has the IRS Been Illegally Assessing 3520 Penalties all this Time? What to do If the IRS Unlawfully Assessed a 3520 Penalty Against You

Tax Law
By Anthony DiosdiUnder Internal Revenue Code Section 6677(a), if any United States Person beneficiary receives (directly or indirectly) a distribution from a foreign trust, that person is required to make a return with respect to such a trust using Internal Revenue Service (“IRS”) Form 3520, and show thereon the name of the trust, the amount of the aggregate distribution received, and any other data the IRS may require. A foreign gift, bequest, or inheritance that exceeds $100,000 must also be disclosed on a Form 3520. The IRS may assess an annual penalty equal to 35 percent of the gross value of the trust or 35 percent of the gross value of the property transferred from the trust if a Form 3520 is not timely filed. The IRS may also assess…
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What Foreign Nationals Relocating to the U.S. Needs to Know About the                                                      Check-the-Box Rules

What Foreign Nationals Relocating to the U.S. Needs to Know About the Check-the-Box Rules

Tax Law
 By Anthony DiosdiOnce a foreign national immigrates to the United States, he or she will likely become a U.S. person for income tax purposes. A U.S. person is subject to U.S. income tax on his or her worldwide income. He or she may also become subject to a comprehensive information reporting regime. This includes the filing of a Form 5471 for any foreign entities treated as a corporation for U.S. tax purposes. The Form 5471 is an incredibly complicated information return that can be costly to prepare. Sometimes an understanding of the U.S. check-the-box rules can result in significant reduction in U.S. tax on foreign holdings and tax compliance savings. We will begin with a discussion regarding the taxation of U.S. business entities. Foreign nationals may operate domestic entities through…
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Is a 962 Election the Cure for the Hardships Caused by GILTI or Subpart F Inclusions?

Is a 962 Election the Cure for the Hardships Caused by GILTI or Subpart F Inclusions?

Tax Law
By Anthony Diosdi IntroductionU.S. shareholders of a controlled foreign corporation (“CFC”) must include any subpart F income or global low-taxed income (“GILTI”) as ordinary income on their taxable income. The current highest federal tax rate applicable to individual CFC shareholders is 37 percent. Individuals receiving GILTI inclusions may also be subject to an additional Medicare tax of 3.8 percent. To make matters worse, individual CFC shareholders cannot offset their federal income tax liability with foreign tax credits paid by their CFCs. Under these circumstances, it is not too difficult to imagine scenarios where a CFC shareholder pays more in federal, state, and foreign taxes than the actual distributions they receive from the CFC. On the other hand, for federal tax purposes, domestic C corporations that are shareholders of CFCs are…
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The Separate Basket Limitations for Foreign Tax Credits

The Separate Basket Limitations for Foreign Tax Credits

Tax Law
By Anthony Diosdi U.S. taxpayers are generally subject to U.S. tax on their worldwide income, but may be provided a tax credit for foreign income taxes paid or accrued. The main purpose of the foreign tax credit is to mitigate the double taxation of foreign source income that might occur if such income is taxed by both the United States and a foreign country. An individual U.S. taxpayer may receive a “direct” foreign tax credit for foreign taxes that he or she pays to a foreign government. A U.S. corporation that owns at least 10 percent of stock in a foreign corporation (by vote or value) may receive an “indirect” or “deemed” foreign tax credit for foreign taxes paid by that subsidiary. Internal Revenue Code Section 901 limits the foreign…
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A Closer Look at the Form 5471 Filer Rules and the Upward and Downward Attribution Rules

A Closer Look at the Form 5471 Filer Rules and the Upward and Downward Attribution Rules

Tax Law
By Anthony Diosdi Form 5471 is used by certain U.S. persons who are officers, directors, or shareholders in respect of certain foreign entities that are classified as corporations for U.S. tax purposes. The Form 5471 and schedules are used to satisfy the reporting requirements of Internal Revenue Code Section 6038 and 6046 along with the applicable regulations.Substantively, it backstops various international sections of the Internal Revenue Code including Sections 901/904 (Code Section 901 and 904 provide rules governing foreign tax credits), Section 951(a) (Section 951a provide rules governing Subpart F income and Section 956. Section 956 is an anomaly and operates differently than the rest of subpart F. Generally, a U.S. shareholder of a foreign corporation must include in income his or her pro rata share of the foreign corporation’s…
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The Impact of Revenue Procedure 2019-40 on GILTI and Subpart F Inclusions

The Impact of Revenue Procedure 2019-40 on GILTI and Subpart F Inclusions

Tax Law
By Anthony Diosdi In the CFC context, Section 958(b) provides that the constructive ownership rules of Section 318(a), with certain modifications, apply for purposes of determining whether: 1) a U.S. person is a U.S. shareholder (within the meaning of Section 951(b)); 2) a foreign corporation is a CFC under Section 957; 3) the stock of a domestic corporation is owned by a U.S. shareholder of a CFC for purposes of Section 956(c)(2); and 4) a corporation or other person is related to the CFC for purposes of Section 954(d)(3). Prior to the enactment of the 2017 Tax Cuts and Jobs Act, Section 958(b) provided a taxpayer friendly rule, in Section 958(b)(4), which disallowed so-called downward attribution. Specifically, Section 958(b)(4) provided the Subparagraphs (A0, (B), (c) of Section 318(a)(3) shall not…
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When Should I Call a Tax Attorney?

When Should I Call a Tax Attorney?

Tax Law
There are high stakes involved anytime that you are involved in a tax dispute. The federal government can assess tax penalties, and they may even refer you for criminal prosecution. You should be careful about dealing with the IRS on your own because bad things can happen. The IRS will send you a notification that you are being audited. They may have already done work on their own and determined that you owe money. If you are being audited, you are in potential danger. The IRS may request additional information and documentation underlying your return. Problems can grow worse based on what the IRS finds. Preferably, you should have an attorney interface with the IRS on your behalf. You may also need to reach a compromise with the IRS if…
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A Walk through the Cost Sharing Arrangement and Platform Contribution Rules

A Walk through the Cost Sharing Arrangement and Platform Contribution Rules

Tax Law
By Anthony Diosdi Multinational corporations usually engage in a variety of cross-border intercompany transactions. A common arrangement is for a U.S. parent corporation to license its intangibles to a foreign subsidiary for exploitation abroad. When such a transfer takes place, a “transfer price” must be computed in order to satisfy various financial reporting, tax, and other regulatory requirements. Internal Revenue Code Section 482 governs the transfer pricing rules and provides that multinational corporations must allocate their worldwide profits among the various countries in which they operate. To this end, Section 482 and its regulations adopt an arm’s-length standard for evaluating the appropriateness of a transfer price. To arrive at an arm’s-length result, a multinational corporation must select and apply the method that provides the most reliable estimate of an arm’s-length…
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The High-Tax or Section 954 Election for Multinational Corporations

The High-Tax or Section 954 Election for Multinational Corporations

Tax Law
By Anthony Diosdi For many years, U.S. multinational corporations were able to utilize a high-tax election to defer Subpart F income. However, when the global intangible low-tax income (or “GILTI”) taxing regime was announced in late 2017, a corresponding high-tax election was not available. Shortly after the enactment of the GILTI taxing regime, U.S. multinational corporations and their advisors began lobbying the Department of Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) to issue regulations to permit the use of a high-tax election for GILTI income. On July 20, 2020, the Department of Treasury (“Treasury”) promulgated final regulations which permit a high-tax election for global intangible low-taxed income (“GILTI”). This was welcome news to many U.S. multinational corporations and their advisors. In general, the Final Regulations enable U.S. multinationals to…
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