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

10Jun 2020 by Anthony Diosdi

The Top Five Tax Planning Opportunities and Pitfalls that Should be Considered Before Contributing Stock of a CFC to a Holding Corporation to Reduce the U.S. Tax Liability on GILTI

By Anthony Diosdi Internal Revenue Code Section 951A requires US shareholders of a controlled foreign corporation (“CFC”) to include the corporation’s income determined to be in excess of specified return on investment in depreciable tangible personal property (i.e., GILTI). For most purposes, a GILTI liability operates for tax purposes in a similar manner as a subpart F inclusion. However, unlike subpart F income, GILTI was intended to impose a current year tax on income earned from intangible property subject to no or a low tax rate outside the US. GILTI is defined as the residual of a CFC’s income (excluding subpart F income or income that is effectively connected with a US trade or business) above a 10 percent return on its investment in tangible depreciable assets (defined as “qualified…

08Jun 2020 by Anthony Diosdi

Great Changes to PPP Loan Forgiveness Coming A Little Late For Some Small Businesses

Tax Law

By Lynn K. Ching Good news for (some) businesses slammed by the COVID closures! The Senate recently (June 3, 2020) passed the House version of changes to the Paycheck Protection Plan (PPP) loan, which - among other changes - now allows businesses to triple the time to spend the funds, and still qualify for forgiveness of the loans. The bill is headed to President Trump, who is expected to sign it. The upcoming changes, as set forth below, will hopefully allow more businesses to qualify for PPP loan forgiveness. For others, it may be a little late. Recap of PPP The PPP loan was available to qualifying small businesses to help mitigate the financial effects of the COVID pandemic. The loan was forgivable if certain criteria were met - over…

03Jun 2020 by Anthony Diosdi

Demystifying the Form 5471 Part 12. Schedule H Calculating the E&P of a Controlled Foreign Corporation

Tax Law

By Anthony Diosdi In order to provide the Internal Revenue Service (“IRS”) with a foreign corporation’s current earnings and profits (“E&P”) for US tax purposes, each year certain US person with interests in foreign corporations must attach a Schedule H to IRS Form 5471 otherwise known as “Information Return of U.S. Persons With Respect to Certain Foreign Corporations.” This is the 12th of a series of articles designed to provide a basic overview of Form 5471. This article is designed to supplement the IRS instructions to the Form 5471.Who Must Complete Schedule HForm 5471 and its schedules must be completed (to the extent required by each schedule) and filed by the following categories of persons:Category 1- US persons who are officers, directors or ten percent or greater shareholders in a…

03Jun 2020 by Anthony Diosdi

Demystifying the Form 5471 Part 11. Schedule E-1 Calculating a CFC’s E&P for Purposes of Reporting Foreign Tax Credits

Tax Law

By Anthony Diosdi IntroductionJust about all Controlled Foreign Corporations (“CFCs”) generate subpart F income and/or Global Intangible Low-Taxed Income (“GILTI”). In most cases, subpart F and GILTI income become reclassified as Previously Tax Earnings and Profits (“PTEP”). Each PTEP then needs to be placed into a separate Section 904(d) category basket. In addition, each PTEP is subject to a certain set of ordering rules that clarifies how distributions of such a PTEP is treated to each CFC shareholder.The classification of PTEPs and the ordering rules are important to calculate foreign tax credits and to determine the creditability of foreign taxes allocable to each Section 904(d) basket. It is also important to determine any Section 904(a) limitation with respect to each specific basket. For example, any foreign taxes paid or accrued…

03Jun 2020 by Lynn Ching

Schedule J of Form 5471- Preparing the Schedule Before and After International Tax Reform

Tax Law

By Anthony Diosdi In 2017, Congress enacted the 2017 Tax Cuts and Jobs Act. The 2017 Tax Cuts and Jobs Act dramatically changed the way cross-border transactions are taxed and reported to the Internal Revenue Service (“IRS”). Nowhere is this more true than with Schedule J of Form 5471. Schedule J is used to report accumulated earnings and profits (“E&P”) of controlled foreign corporations. This article will compare the pre-2017 Tax Cuts and Jobs Act Schedule J with the post-2017 Tax Cuts and Jobs Act Schedule J. I. Pre-2017 Tax Cuts and Jobs Act Schedule J Introduction Prior to 2018, Category 4 and 5 filers of a “controlled foreign corporation” (“CFC”) had to attach a Schedule J to their Form 5471. Section 957(a) defined a CFC as a foreign corporation…

28May 2020 by Anthony Diosdi

Making a Section 962 Election to Reduce Income Taxes Associated with a GILTI Inclusion? Don’t Forget About the Second Layer of Tax and the Ordering Rules

Tax Law

By Anthony Diosdi Internal Revenue Code Section 951A requires US shareholders of a controlled foreign corporation (‘CFC”) to include the corporation’s income determined to be in excess of specified return on investment in depreciable tangible personal property (i.e., GILTI). For most purposes, a GILTI liability operates in a similar manner as a subpart F inclusion. To offset GILTI inclusions, Internal Revenue Code Section 250 allows US C corporate CFC shareholders to deduct a portion (currently 50 percent, but decreases to 37.5 percent for taxable years beginning after December 31, 2025). The current Section 250 limitation may result in US C corporate CFC shareholders being subject to federal tax on a GILTI inclusion at a rate of only 10.5 percent. Typically, US C corporations are taxed at a rate of 21…

15May 2020 by Anthony Diosdi

An Overview of Classifying Earnings and Profits Reported on Form 5471 Schedule J Before and After 2017 International Tax Reform

Tax Law

By Anthony DiosdiGenerally, U.S. shareholders of a controlled foreign corporation or CFC are required to include in their U.S. income: 1) their pro rata share of subpart F income under Internal Revenue Code Section 951(a) (such as passive income and certain foreign sales and service income); 2) their pro rata share of CFC’s earnings from investments in U.S. property as defined in Internal Revenue Code Section 956; and 3) after the enactment of the 2017 Tax Cuts and Jobs Act, other items of global intangible low-taxed income (“GILTI”) as defined in Internal Revenue Code Section 951A. The U.S. shareholder is taxed even if the CFC does not make an actual distribution to the shareholder. To avoid double taxation, Internal Revenue Code Section 959 provides that previously taxed earnings and…

13May 2020 by Anthony Diosdi

Can an Item of Foreign Source Income be Double Taxed Under Both the Subpart F and GILTI Rules?

Tax Law

By Anthony Diosdi The 2017 Tax Cuts and Jobs Act or international tax reform introduced significant changes in the way the U.S. taxes cross-border transactions. In particular, international tax reform introduced the global intangible low-taxed income (“GILTI”) regime under Internal Revenue Code Section 951A. International tax reform also eliminated the Section 902 indirect foreign tax credit which previously allowed certain domestic corporations to deduct foreign income taxes paid by foreign subsidiaries. Perhaps the greatest impact of international tax reform is how Controlled Foreign Corporations (“CFCs”) calculate their taxable income. Under the Tax Cuts and Jobs Act require CFCs to calculate their foreign source taxable income under three related but separate tax regimes:1. The subpart F tax regime.2. The Section 951A GILTI rules.3. The Section 245A rules which allows for an…

11May 2020 by Anthony Diosdi

What to Do if You are Facing a Tax Audit

Tax Law

Unless you are receiving a refund or stimulus payment, no one wants to receive communications from the IRS. In many cases, such unexpected letters include notices of an audit for either your personal or business taxes. Some audits are random and could never be predicted, while others are triggered by discrepancies or suspected inaccuracies on your tax returns. If you receive notice of an audit, the coming weeks can be inconvenient, as you will need to gather a significant amount of information. It can be tempting to ignore the notice and hope the issue disappears, though it will not disappear, and failing to address and handle an audit properly can have serious consequences. You should contact an experienced tax audit attorney in San Francisco as soon as you learn about…

08May 2020 by Anthony Diosdi

Demystifying IRS Form 3520-A

Tax Law

By Anthony Diosdi IntroductionUnited States persons with foreign assets are subject to an ever expanding universe of reporting requirements. A prime example of this can be found in Internal Revenue Code Section 6048(b). This Internal Revenue Code Section provides that a foreign trust owner must file Internal Revenue Service (“IRS”) Form 3520-A. Each U.S. person is treated as an owner of any portion of a foreign trust under the grantor trust rules (Internal Revenue Code Sections 671 through 679) is responsible for ensuring that the foreign trust files Form 3520-A and furnishes the required annual statements to its U.S. owners and U.S. beneficiaries. The penalty for failure to file IRS Form 3520-A will be imposed directly on the U.S. owner of the foreign trust. The penalty is equal to five…