28Jul 2020 by Anthony Diosdi
Top Audit Triggers of a CFC that Will Catch the Attention of the IRS. Part Two- Form 8993

Top Audit Triggers of a CFC that Will Catch the Attention of the IRS. Part Two- Form 8993

Tax Law
By Anthony Diosdi Introduction For those who are or will be involved in international business and investment transactions, it is important to have some basic understanding of the relevant tax laws. These series of articles are intended to warn individual shareholders of controlled foreign corporations (“CFCs”) (whether individual or corporate) of the mistakes that will likely catch the attention of the Internal Revenue Service (“IRS”) and trigger a potential costly audit. Over the several months we have noticed a number of IRS Form 8993 prepared incorrectly. In this article, we will discuss the Form 8993 and the mistakes on the form that will likely catch the attention of the IRS.The Section 250 DeductionEffective for taxable years of foreign corporations beginning after December 31, 2017 and to taxable years of U.S.…
Read More
23Jul 2020 by Anthony Diosdi
Top Audit Triggers of a CFC that Catch the Attention of the IRS. Part One- Calculating a Net Section 965 Tax Liability Incorrectly

Top Audit Triggers of a CFC that Catch the Attention of the IRS. Part One- Calculating a Net Section 965 Tax Liability Incorrectly

Tax Law
By Anthony Diosdi IntroductionFor those who are or will be involved in international business and investment transactions, it is important to have some basic understanding of the relevant tax laws. These series of articles are intended to warn individual shareholders of controlled foreign corporations (“CFCs”) (whether individual or corporate) of the mistakes that will likely catch the attention of the Internal Revenue Service (“IRS”) and trigger a potential costly audit.  We will begin this series by discussing the calculation of the Section 965 transition tax and why we believe it will be a target for the IRS. On December 22, 2017, Section 965 of the Internal Revenue Code was amended. As a result of the amendment, certain CFC shareholders were required to include in income an amount (a Section 965(a)…
Read More
22Jul 2020 by Anthony Diosdi
Calculating the Foreign Tax Credit and the CFC Netting Rule

Calculating the Foreign Tax Credit and the CFC Netting Rule

Tax Law
By Anthony Diosdi Because the United States taxes U.S. persons on their worldwide income, the foreign tax credit was enacted in 1918 to prevent U.S. taxpayers from being taxed on their foreign-source income by both the foreign country where the income was earned and by the United States. The foreign tax credit is intended to allow a U.S. taxpayer to reduce the U.S. federal tax on its foreign-source income (but not U.S. source income) by the foreign taxes paid on that foreign income.To be allowable under 26 U.S.C. Section 901(b), the foreign tax must be an “income, war profits (or) excess profits tax paid or accrued...to any foreign country or to any possession of the United States.” Credit also is allowed under Section 903 for a “tax paid in lieu…
Read More
22Jul 2020 by Anthony Diosdi
Understanding the High-Tax Kickout and its Impact on Foreign Tax Credits

Understanding the High-Tax Kickout and its Impact on Foreign Tax Credits

Tax Law
By Anthony Diosdi If you are involved in the preparation of international information returns, you may have noticed on Forms 1116 and 1118 line items for “high-tax kickout.” The instructions promulgated by the Internal Revenue Service (“IRS”) for Forms 1116 and 1118 do a poor job defining the term “high-tax kickout.” This article attempts to clarify the meaning of “high-tax kickout” and its impact on claiming foreign tax credits. By way of background, Internal Revenue Code Section 904 requires that foreign tax credits be calculated separately for each type of foreign-source income included in a particular category or basket. There are currently five baskets for calculating foreign tax credits. They are: 1) passive income; 2) general income; 3) foreign branch income; and 4) GILTI income. The high-tax kickout rule applies…
Read More
21Jul 2020 by Anthony Diosdi

Tax Refunds and Chapter 7 Bankruptcy

Tax Law
The extended 2020 tax deadline happened, and many people are now expecting tax refunds to be deposited in their bank accounts. However, even if a refund can provide slight financial relief for some households, many people still have concerns about unpaid and past-due debts. If you’re considering filing for Chapter 7 bankruptcy, you should discuss how it impacts your tax refund with a tax and bankruptcy lawyer in San Francisco. Can You Retain Your Refund? No one wants to receive a tax refund only to lose it to the bankruptcy court. If you receive your refund based on income you earned prior to filing for bankruptcy, your refund could be seized by the bankruptcy trustee. If you received the refund based on income earned following a case filing, you can…
Read More
17Jul 2020 by Anthony Diosdi
The General Rules Governing Currency Conversations for Computing Foreign Tax Credits and the Section 986 Election

The General Rules Governing Currency Conversations for Computing Foreign Tax Credits and the Section 986 Election

Tax Law
By Anthony Diosdi During this extended tax season we received a significant number of questions regarding computing the proper exchange rate for purposes of claiming foreign tax credits. Many international tax practitioners are perplexed by the rules governing currency conversions and foreign taxes.This article is designed to provide guidance regarding translating foreign taxes into U.S. dollars.Under Internal Revenue Code Section 986, a taxpayer that uses the accrual method to account for foreign taxes for purposes of the foreign tax credit generally translates foreign income taxes accrued into U.S. dollars at the average exchange rate for the tax year to which the taxes relate (rather than at the exchange rate for the date of payment). See IRC Section 986(a)(1)(A). This rule does not apply to 1) any foreign income taxes paid…
Read More
17Jul 2020 by Anthony Diosdi
The IRS Has Yet to Issue Final Regulations for Section 987 Foreign Currency Branch Transactions

The IRS Has Yet to Issue Final Regulations for Section 987 Foreign Currency Branch Transactions

Tax Law
By Anthony Diosdi Internal Revenue Code Section 987 states the rule for dealing with a foreign branch that is a Qualified Business Unit (“QBU”) which utilizes a foreign functional currency. On December 6, 2019, the U.S. Department of the Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) announced Notice 2019-65 stating that they intend to amend the final Section 987 regulations. As of this date, the Treasury and IRS have yet to issue final regulations to Section 987. This means that in the meantime taxpayers must compute Section 987 gains or losses under a reasonable method. A reasonable method would be to utilize the regulations that were previously promulgated by the Treasury and the IRS. This article will walk through a basic QBU foreign currency transaction utilizing the regulations previously…
Read More
15Jul 2020 by Anthony Diosdi
Demystifying the Form 1118 Part 9. Schedule G Reduction of Taxes Paid, Accrued, or Deemed Paid by a CFC

Demystifying the Form 1118 Part 9. Schedule G Reduction of Taxes Paid, Accrued, or Deemed Paid by a CFC

Tax Law
By Anthony Diosdi In order to provide the Internal Revenue Service (“IRS”) with the information necessary to claim a foreign tax credit, a U.S. corporation claiming a foreign tax credit must attach Form 1118 otherwise known as “Foreign Tax Credit - Corporations,” to its tax return. This is the ninth of a series of articles designed to provide a basic overview of the Form 1118. This article is designed to supplement the instructions for the Form 1118 promulgated by the IRS.Introduction to Schedule GSchedule G of Form 1118 is designed to report any reductions of the deductibility of foreign credits claimed by a domestic corporation.  Part 1- Reduction AmountsLine A. Reduction of Taxes Under Section 901(e)Line A asks the preparer to reduce taxes under Section 901(e). Internal Revenue Code Section…
Read More
15Jul 2020 by Anthony Diosdi
Form 8993 and Claiming the Section 250 Deduction

Form 8993 and Claiming the Section 250 Deduction

Tax Law
By Anthony Diosdi IntroductionPublic Law 115-97 (Tax Cuts and Jobs Act of 2017) enacted Internal Revenue Code Section 250 for the allowance of a deduction for the eligible percentage of Foreign-Derived Intangible (“FDII”) and Global Low-Taxed Income (“GILTI”). Form 8993 is utilized to determine the amount eligible for a deduction against FDII and GILTI under Section 250. All domestic corporations (and U.S. individual shareholders of controlled foreign corporations (“CFCs”)) making a Section 962 election must use Form 8993 to determine the allowable deduction under Section 250. This article will go line by line through the Form 8993 to determine how a Section 250 deduction is determined. This article is based on the Internal Revenue Service (“IRS”) instructions to Form 8993.Internal Revenue Code Section 250 DeductionEffective for taxable years of foreign…
Read More
09Jul 2020 by Anthony Diosdi
Demystifying the Form 1118 Part 8. Schedule F-3 Determining the Tax Consequences of Tax Deemed Paid by Third, Fourth, and Fifth-Tier Foreign Corporations Under Section 902(b) Prior to Tax Reform

Demystifying the Form 1118 Part 8. Schedule F-3 Determining the Tax Consequences of Tax Deemed Paid by Third, Fourth, and Fifth-Tier Foreign Corporations Under Section 902(b) Prior to Tax Reform

Tax Law
  By Anthony Diosdi In order to provide the Internal Revenue Service (“IRS”) with the information necessary to claim a foreign tax credit, a U.S. corporation claiming a foreign tax credit must attach Form 1118 otherwise known as “Foreign Tax Credit - Corporations,” to its tax return. This is the eighth of a series of articles designed to provide a basic overview of the Form 1118. This article is designed to supplement the instructions for the Form 1118 promulgated by the IRS.Introduction to Schedule F-3Claiming Foreign Tax Credits Through Multiple TiersSchedule F-3 is designed to report foreign taxes deemed paid with respect to dividends from certain fourth, fifth, and sixth-tier controlled foreign corporations (“CFC”s”) out of earnings accumulated in tax years beginning after August 5, 1997. An indirect foreign tax…
Read More