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

27Apr 2021 by Anthony Diosdi

A Deep Dive Into IRS Form 5471 Schedule P

Tax Law

By Anthony Diosdi IntroductionSchedule P of Form 5471 is used to report previously taxed earnings and profits (“PTEP”) of a U.S. shareholder of a controlled foreign corporation (“CFC”). The term PTEP refers to earnings and profits (“E&P”) of a foreign corporation. This article will dive into each column and line of the new 2020 Form 5471 Schedule P. We will also attempt to provide guidance as to how to prepare this incredibly complicated return. Who Must Complete the Form 5471 Schedule P?Anyone preparing a Form 5471 knows that the return consists of many schedules. Schedule P is just one schedule of the Form 5471. Whether or not a shareholder of a CFC is required to complete Schedule P depends on what category of filer he or she can be classified…

23Apr 2021 by Anthony Diosdi

A Deep Dive into the IRS Form 5471 Schedule J

Tax Law, Uncategorized

By Anthony Diosdi Schedule J of Form 5471 tracks the earnings and profits (“E&P”) of a controlled foreign corporation (“CFC”). In most cases, special ordering rules under Section 959 of the Internal Revenue Code apply in determining how E&P is reported on Schedule J. Shortly after the Tax Cuts and Jobs Act was enacted in 2017, the Internal Revenue Service (“IRS”) and the Department of Treasury (“Treasury”) announced they will withdraw the proposed regulations for Internal Revenue Code Section 959. As a result of these changes, the IRS dramatically changed Schedule J of Form 5471 for the 2018 tax year. The following columns or categories were added to Schedule J:1) Post-2017 E&P Not Previously Taxed (post-2017 Section 959(c)(3) balance.2) Hovering Deficit and Deduction for Suspended Taxes.3) PTI from Section 965(a)…

22Apr 2021 by Anthony Diosdi

A Deep Dive Into Form 5471 Schedule H “Calculating the E&P of a Controlled Foreign Corporation”

Tax Law

By Anthony Diosdi Schedule H is used to report a foreign corporation’s current earnings and profits (“E&P”) for US tax purposes to the Internal Revenue Service (“IRS”). Recently, Schedule H was revised. This article is designed to supplement the IRS instructions to the Form 5471.Who Must Complete Schedule HAnyone preparing a Form 5471 knows that the return consists of many schedules. Schedule J is just one schedule of the Form 5471. Whether or not a CFC shareholder is required to complete Schedule H depends on what category of filer he or she can be classified as. For purposes of Form 5471, CFC shareholders are broken down by the following categories:Category 1- US persons who are officers, directors or ten percent or greater shareholders in a foreign personal holding company. Category…

16Apr 2021 by Anthony Diosdi

Navigating the Rules for Gain Recognized on a Shareholder’s Disposition of CFC Stock with Untaxed Accumulated E&P

Tax Law

By Anthony Diosdi As a result of the Section 965 “transition tax,” few controlled foreign corporations (“CFCs”) have untaxed offshore earnings and profits (“E&P”). With that said, there are still a number of strategies available to CFCs to defer offshore E&P. In certain cases, these strategies leave CFC shareholders with large pools of untaxed offshore E&P. This article will discuss how untaxed offshore E&Ps is taxed when a CFC shareholder disposes of such stock. Under Section 1248(a) of the Internal Revenue Code, gain recognized on a U.S. shareholder’s disposition of stock in a CFC is treated as dividend income to the extent of relevant accumulated E&P while the stock was held. When a corporation sells shares of a CFC, the conversion of gain into a dividend typically results in an…

16Apr 2021 by Anthony Diosdi

Cross-Border Debt Planning with the Portfolio Interest Exemption Rules

Tax Law

By Anthony Diosdi Most forms of U.S.-source income received by foreign persons that are not effectively connected with a U.S. trade or business will be subject to a flat tax of 30 percent on the gross amount received. Sections 871(a) (for nonresident aliens) and 881(a) (for foreign corporations) impose the 30-percent flat tax on interest income. This interest income is part of the regime often referred to as “FDAP income.” The collection of the 30-percent tax is affected primarily through the imposition of an obligation on the person or entity making the payment to the foreign person to withhold the tax and pay it over to the Internal Revenue Service (“IRS”). The tax collected is, therefore, often referred to as a “withholding tax.” Tax treaties generally provide for the reduction…

09Apr 2021 by Anthony Diosdi

Many Fortune 500 Companies Use Foreign Subsidiaries to Avoid Paying U.S. Tax- Here is One Way Your Foreign Corporation Can Avoid Paying U.S. Income Tax

Sales Tax

By Anthony Diosdi The Internal Revenue Code provides that a U.S. shareholder of a controlled foreign corporation (“CFC”) is subject to tax on the CFC’s subpart F or global intangible low-taxed income, called “GILTI.” For many years, U.S. multinational corporations and other CFCs were able to utilize a high-tax election to defer the recognition of Subpart F income. However, when the 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…

09Apr 2021 by Anthony Diosdi

Facing a 965 Transition Tax Audit? Maybe a 962 Election Can Save the Day

Tax Law

By Anthony Diosdi In August of 2020, the Internal Revenue Service (“IRS”) launched a compliance campaign that targets the individual compliance with the Section 965 transition tax through examinations and correspondences. In October of 2020, the IRS announced it will be expanding Section 965 examinations. Our experience with Section 965 audits indicates that the IRS is focusing on the earnings and profits (“E&P”) calculations, the calculation of foreign tax credits, foreign tax pools, and transactions used to reduce E&P. It has also been our experience that a significant number of CFC shareholders facing a transition tax audit could greatly benefit by making a late 962 election. This article discusses the 965 transition tax and the possibility of making a 962 election. A Section 962 election could be a very useful…

09Apr 2021 by Anthony Diosdi

Fighting IRS Form 3520 Penalties- Your Best Defense is Your Offense

Tax Law

By Anthony Diosdi IntroductionUnder 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…

09Apr 2021 by Anthony Diosdi

A Closer Look as to How FDII Can Reduce the Effective Corporate Tax Rate to 13.125%

Tax Law

By Anthony Diosdi Foreign Derived Intangible Income (“FDII”) deduction was enacted as part of the 2017 Tax Cuts and Jobs Act. Under this tax regime, a U.S. C corporation may claim deduction of up to 37.5 percent on a portion of the corporation’s FDII income. Because the current U.S. federal corporate income tax rate is 21 percent, a FDII deduction can result in an effective tax rate of only 13.125 percent (21% - 37.5% = 13.125%).A FDII deduction can be extremely beneficial to U.S. exporters of goods, services, and intellectual property such as the sale of software or apps, and the streaming of audio or video. A FDII deduction is not available for income received from financial services, any domestic oil and gas extraction, activities performed through a branch, and…

06Apr 2021 by Anthony Diosdi

Attention All Home Buyers Part II: FIRPTA and the Statute of Limitations

Tax Law

By Kerrin N.T. Liu This article is a followup to our previous article entitled “Attention All Home Buyers.” In our previous article, we introduced Foreign Investment in Real Property Tax Act of 1980 (hereinafter “FIRPTA”); what it is, who it applies to, exemptions, and the consequences of noncompliance. In this article we discuss the possible application of the statute of limitations in cases where unwitting U.S. buyers of a noncompliant FIRPTA transaction are subjected to a lien on their purchased property. Options Moving Forward and the Statute of Limitations. The most straightforward way of taking a tax lien off of a title is to pay the tax lien in full. However, this is not an equitable result for many buyers since the tax should have been paid by the foreign…