San Francisco Tax Blogs | Diosdi, Ching, & Liu, LLP

08Feb 2022 by Anthony Diosdi

Demystifying the New 2021 IRS Form 5471 Schedule E and Schedule E-1 Used for Reporting and Tracking Foreign Tax Credits

Tax Law

By Anthony Diosdi Schedule E and Schedule E-1 of Form 5471 is used to report taxes paid or accrued by a foreign corporation for which a foreign tax credit is allowed and taxes for which a credit may not be taken. This article will dive into each column and line of the new 2021 Form 5471 Schedule E and Schedule E-1. We will also attempt to provide guidance as to how to prepare this incredibly complicated return. Who Must Complete the Form 5471 Schedule EAnyone preparing a Form 5471 knows that the return consists of many schedules. Schedule E is just one schedule of the Form 5471. Whether or not a taxpayer is required to complete Schedule E depends on what category of filer he or she can be classified…

02Feb 2022 by Anthony Diosdi

An Overview of the California Water’s Edge Election for State International Tax Purposes

Tax Law

By Anthony Diosdi Many California corporations also have foreign subsidiaries. This often leads to complex tax situations, including the issue of determining income for the unitary group of corporations (typically consisting of a U.S. parent corporation and one or more foreign subsidiary corporations). There are two approaches to dealing with unitary group members that are incorporated in a foreign country or conduct most of their business abroad. One approach is a worldwide combination, under which the combined report includes all members of the unitary business group, regardless of the country in which the group member is incorporated or the country in which the group member conducts business. The alternative approach is a water’s-edge combination, under which the combined report excludes group members that are incorporated in a foreign country or…

02Feb 2022 by Anthony Diosdi

Planning Opportunities Available for Foreign Persons to Eliminate or Significantly Reduce Taxable Real Estate Gains through Shared Appreciation Loans and Income Tax Treaties

Tax Law

By Anthony Diosdi Foreign investors generally have the same goals of minimizing their income tax liabilities from their U.S. real estate as do their U.S. counterparts, although their objective is complicated by the very fact that they are not U.S. persons. That is, non-U.S. investors must be concerned not only with income taxes in the United States, but also income taxes in their home country. U.S. tax law contains the following two-pronged territorial system for taxing the U.S.-source income of nonresident individuals and foreign corporations: 1) U.S. trade or business profits- If a nonresident alien individual or foreign corporation is engaged in a trade or business within the United States, the net amount of income effectively connected with the conduct of that U.S. trade or business is taxed at the…

02Feb 2022 by Anthony Diosdi

Been Assessed Penalties by the IRS for Failing to Report a Foreign Pension Plan or Retirement Plan on Forms 3520 or 3520-A? Consider Requesting Relief Under Rev. Proc 2020-17

Tax Law

By Anthony Diosdi In an increasing global economy, workers are experiencing unprecedented mobility. As a result Americans and foreign nationals that become green card holders often participate in a pension or retirement plan in the foreign country. In most cases, the model resembles the one in the United States: Pretax money is contributed into retirement accounts where it accumulates tax-free until retirement. Unknown to many participants of these plans, the Internal Revenue Code often requires U.S. tax filers to disclose these plans on Internal Revenue Service (“IRS”) Form 3520 and/or Form 3520-A. The penalties for failing to disclose a foreign pension or foreign retirement plan on a Form 3520 and/or 3520-A can be substantial. Fairly recently, the IRS promulgated Rev. Proc. 2020-7. This revenue procedure provides an exemption from filing…

31Jan 2022 by Anthony Diosdi

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”)…

31Jan 2022 by Anthony Diosdi

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…

28Jan 2022 by Lynn Ching

The Good, The Bad and The Unknown Inherited Family Property In California How Much Will Proposition 19 Cost Your Children?

Tax Law

By Lynn K. Ching In the State of California, real property is reassessed at market value if it is sold or transferred and property taxes can sometimes increase dramatically as a result. However, prior to November 2020, children could inherit their parents’ primary residence and a second home (or rental property) without triggering a reassessment of the property. This was a boon to families. Parents were able to leave their primary residence (no value limit) and $1 million in any real property to their children, without a property reassessment. The children were about to take over the inherited property, without a big increase in property taxes. No longer. All of that changed when Proposition 19 was narrowly passed by California voters in November 2020. Now, children who inherit their parents’…

27Jan 2022 by Anthony Diosdi

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…

27Jan 2022 by Anthony Diosdi

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…

26Jan 2022 by Lynn Ching

Has the IRS Assessed You a Penalty for a Late Filed Form 3520-A? You May Be Eligible For an Abatement of Penalties Assessed or a Refund of Penalties Paid

Tax Law

By: Lynn K. Ching Penalties For Failure to File Form 3520-A. A foreign trust (including a foreign retirement trust) with a U.S. owner must file Form 3520-A in order for the U.S. owner to satisfy its annual information reporting requirements under IRC 6048(b). Failure to timely file the Form 3520-A may result in significant penalties. However, U.S owners of certain foreign tax favored retirement trusts, and eligible foreign tax favored non-retirement trusts established almost exclusively to provide or to earn income for the provision of medical, disability, or educational benefits, may be eligible for an exemption and an abatement of penalties assessed or a refund of penalties paid. IRS Says Certain Tax Favored Retirement Trusts Are Exempt From 3520-A Reporting Under IRS Revenue Procedure 2020-17 (“Rev Proc 2020-17”), certain U.S.…