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U.S. Employers May Be Eligible for Tax Relief if They Have Employees Working in Canada

Posted by Thomas R. Chiavetta on Thu, Jan 28, 2016 @ 09:25 AM

Important Opportunity for U.S. Employers with Employees in Canada

Canada_America.jpgSome employers may benefit by acting before March 1. 

(Extended from previous deadline of February 1.)

Under current Canadian law, U.S. employers are required to withhold and remit Canadian income tax for employees who work in Canada, no matter how short the assignment. Withholding is required even though there may be an exemption under the Canada-U.S. Tax Treaty. 

There’s good news, though. The Canadian Government has proposed legislation in place (expected to become law in 2016) for a new exception to its withholding rules. Here are the qualifications for the exception: 

  1. The employee working in Canada has to meet the criteria of a tax treaty with Canada to be exempt from income tax in Canada.
  2. The employee works in Canada for less than 45 days in the calendar year of the payment or for less than 90 days in any 12-month period that includes the time of the payment.
  3. The employee is employed by a non-resident Canadian employer, e.g. a U.S. employer.
  4. The employee is not seconded to Canada to work for a Canadian employer.
  5. The employee is not an economic employee of a Canadian employer.
  6. The U.S. employer must not carry on business in Canada through a permanent establishment.
  7. The U.S. employer must be certified by the Canada Revenue Agency (CRA) at the time that the payment is made. 

Even though the new rule is not officially law yet, the Canadian Revenue Agency (CRA) released a form, RC 473, that nonresident (U.S.) employers can use to obtain certification. Nonresident (U.S.) employers should file the form with the CRA at least 30 days before the employee begins working in Canada. To be certified effective January 1, 2016, a nonresident employer should file form RC 473 by March 1, 2016. (This is an extension of the February 1 deadline that CRA had previously announced for certification effective January 1, 2016.) If approved, the CRA will inform the nonresident employer by letter. The approval may be granted for up to two years. 

The CRA has indicated that if approved, a qualifying nonresident (U.S.) employer must: 

  1. Track and record the number of days a qualifying employee is either working or present in Canada.
  2. Determine whether the employee is resident in a country with which Canada has a tax treaty (For U.S. employers, a U.S. resident employee is a resident of a country with which Canada has a tax treaty).
  3. File a Form T4 Summary and Information Return for employees working in Canada (not required for those earning less than C$10,000).
  4. Obtain a Canadian business number and a program account number if required to remit amounts to the Canadian Government.
  5. File all applicable Canadian income tax returns for the calendar years in which the employer is certified by CRA. 
This is indeed good news for U.S. and other nonresident Canadian employers who have employees working in Canada. Now’s the time to contact Freed Maxick and review your situation to determine if you qualify for relief. Remember, the form RC 473 has to be filed by the extended deadline of March 1, 2016 (previously February 1,2016), in order to be effective on January 1, 2016. Otherwise, the form must be filed at least 30 days before the employee begins working in Canada. 

Topics: Income tax, Canada, Nonresident Canadian Employers

Know Before You Go—The 3 Ways That Nonresidents Incur U.S. Tax Obligations

Posted by Susan Steblein on Fri, Oct 23, 2015 @ 09:28 AM

You may think you’re just friends with Uncle Sam, but he may have a deeper commitment in mind…

Uncle_Sam_taxWe spend a lot of our time talking with non-U.S. residents who spend significant amounts of their time in the United States. Far too often, we wind up talking with people who incurred some type of U.S. tax or filing obligation without knowing it. Those conversations frequently include statements like, “Well, it’s not like I obtained my citizenship, or pledged allegiance or anything. I just spent the winter in Florida!” In some cases, that can be enough.

Are You a U.S. Tax “Person”?

To figure out whether you are required to file a U.S. tax return, you first need to determine if you are a “person” for U.S. tax purposes. Federal law describes 3 categories of individuals that qualify as “persons” for U.S. taxes:

  • U.S. CitizensYou would think that most people who incur a U.S. tax obligation because they are U.S. citizens would know that up front, and for the most part that’s true. However, every now and then, we do encounter people who may have been born in the U.S. and lived out of the country most of their lives, or someone with a parent who has U.S. citizenship. In some cases, these people may have an obligation without even realizing it.

  • U.S. Green Card HoldersOne of the most frequently asked questions from non-U.S. citizens who hold Green Cards is, “Do I have to file a U.S. tax return?” Basically, unless you relinquish the Green Card, you still need to file a Federal return even if you leave the U.S. You may not owe money, but the government will still be looking for a return from you as long as you hold the card.

  • The Substantial Presence TestMost non-U.S. citizens who unknowingly incur a tax obligation in the States qualify under this category. To meet the test, you must be physically present in the U.S. on at least:
    1. 31 days during the current year, and
    2. 183 days during the 3-year period that includes the current year and the 2 years immediately prior.

      The calculation of the 183 days is weighted toward the most recent days in the measurement period by counting:
      • All the days you were present during the current year,
      • 1/3 of the days you were present in the first year before the current year, and
      • 1/6 of the days you were present in the second year before the current year. 

Even if you meet the substantial presence test, it is possible that you may still not qualify as a U.S. tax “person.” Depending on the purpose of your visit and your visa status, you may qualify as an “exempt individual” on some or all of the days you were physically present in the U.S. Also, under certain conditions, you may be eligible for treatment as a nonresident alien if you qualify for an exception given to individuals with a “closer connection to a foreign country” or by reason of a treaty.

Review-of-US-and-state-tax-structuringIf you spend significant time in the United States, or you’re planning to do so in the near future, you should consult a tax professional who is familiar with the filing obligations of non-residents before you go. If you have spent significant time in the U.S. previously and haven’t filed any income tax returns, you should consult a tax professional who is familiar with U.S. rules quickly. People who have a filing obligation in the States but do not file a return or other informational filings that may be required, such as FBARs, can be subject to penalties and interest that grow larger over time. 




Topics: U.S. tax

3 Things Every Individual and Business Should Know About U.S. Income Tax Treaties

Posted by Bill Iannarelli on Wed, Oct 07, 2015 @ 09:28 AM

It’s important to understand the basics before you or your business crosses borders

Global_business_moneyIn today’s economy, many businesses wind up crossing international borders much sooner than they expected—often without even realizing it. It’s not uncommon for growth-oriented entrepreneurs to charge ahead believing that it’s easier to ask for forgiveness than permission, but that philosophy can lead to fines, penalties and taxes that could have been avoided when it comes to international taxes. If you understand these basic concepts about income tax treaties, you’ll be better equipped to understand when to ask permission and how to do it.

  1. Tax Treaties Have 2 Main Goals: In short, tax treaties provide guidance regarding potential tax benefits and reporting requirements when residing or doing business in a foreign country.
    • Avoiding Double Taxation: This may be hard to believe, but not every government thinks it’s entitled to tax all of your income. Nations negotiate tax treaties in order to determine where income should be taxed and to make sure that the same income is not taxed both at home and abroad.
    • Avoiding Tax Evasion: This goal sounds more like what you expect from governments. While treaties may ease a tax burden by preventing double taxation, they will almost always assign some sort of information reporting obligation to an individual or business when in a foreign country. A treaty also typically includes protocols that govern the sharing of tax information between governments.

  2. Residency: Step 1 when it comes to figuring out where you have to report information or file taxes is figuring out where you are a resident. Spoiler alert— For individuals, it’s not always where you live.
    • Individuals: Most treaties determine if an individual is a resident for tax purposes by counting the number of days spent in the country. At the same time, a treaty can also describe specific exceptions that allow someone to live abroad and maintain tax residency in the country that they think of as home. For example, Canadians who spend significant time in Florida may become U.S. residents for tax purposes, but the treaty between the countries will allow for a “closer connection” exception if one follows certain rules and files certain forms.
    • Businesses: Corporations and other types of businesses typically follow a more incremental process toward tax residency. Many enterprises first cross a border when they ship a product or deliver a service electronically into another country. Others might send a salesperson to a trade show in another country where that person closes deals on site. This can be followed by warehousing product in the second country, employing citizens of the country to manage operations there, and eventually opening an office or outlet that might establish tax residency for the business in the foreign country. A treaty can detail the obligations of the business at each of these stages.    

  3. Immigration: Corporations rarely face immigration issues applicable to the business, but they almost always face immigration issues when employees work in other countries. A tax treaty can spell out what special visas and work permits may be needed in order for an employee to work in the host country. As for acquiring those visas and permits, an attorney who focuses on immigration issues may be the best resource for a business sending workers into another country.

review-of-us-and-state-tax-structuringThe United States currently has tax treaties with about 60 countries. If you are a businessperson in the U.S. or one of those countries, it’s critical to understand the requirements of the relevant treaty before doing business that crosses the border. If you have operations in a country without a U.S. treaty, it’s important to understand how the Internal Revenue Code will treat the income you generate--both in the U.S. and abroad. As noted above, this is an area where engaging professionals before you start can save you money and hassles, while seeking forgiveness after the fact can lead to significant fines and penalties in addition to taxes. A consultation with an international tax professional is a must for any business with plans to operate across borders. 

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Topics: Income tax, international tax

International Taxes Are No Day at the Beach

Posted by Bill Iannarelli on Fri, Sep 25, 2015 @ 09:12 AM

What you have to report and what you have to pay all depends on if and when you take the plunge.

Beach_moneyInternational tax issues can sometimes be categorized by how differently people frolic at the beach. Here are some examples:

“Treaty Filing:” Just the toes.

Lots of the folks at the beach never go in any deeper than getting their feet wet. Could be a kid who sticks a toe in and gets freaked out by the waves, or a more mature person who wanders to the water’s edge to cool off just a bit then heads back to the comfort of a beach chair.

These folks are like businesses that may ship products or sell services into another country without ever establishing a more permanent presence. The obligations of the business in the country where the products or services are used will be governed by a tax treaty, if one exists, between its home government and the destination country. For businesses selling into the U.S., these activities typically will generate an information-reporting obligation at the federal level. Those businesses also need to be aware of potential state tax obligations that may be triggered by their activities, if sales cross certain thresholds.  

“Branch Filer:” Wading in a bit deeper.

Other people will wade in about waist- or chest-deep and go no farther. Maybe they don’t want to get their hair wet, or they don’t want water in their ears. It could be that salt water stings their eyes too much. Whatever the reason, they know their limits and stay within them.

These swimmers are similar to businesses that might lease or build some type of warehouse or other permanent structure in the U.S. or have some other type of significant presence in the states (such as an office or employees), but not create a separate legal entity in the country. They would treat the operations in the U.S. as a “branch” for tax purposes. Branch treatment typically isn’t the ideal situation for most businesses. When it does make sense, the key is to plan from the outset to treat U.S. operations as a branch and operate accordingly going forward. This operation will usually face tax obligations at the federal and state level in the U.S.

“U.S. Legal Entity:” Taking the plunge.


Most folks who head for the water eventually get comfortable enough to take the plunge and dive in. For many who enjoy the beach, the plunge is the whole reason for going.  

Top 100 CPA firm Freed Maxick assists international businesses as they expand into the U.S. Contact us to learn about how we can help you avoid the pitfalls and realize the benefits of doing business in the U.S.Most businesses that are growing across borders are best served by planning for the plunge from the start and executing on that strategy as operations ramp up. For a non-U.S. business establishing a presence in the U.S., there are 3 main reasons why forming a U.S. entity beats operating a U.S. branch. First, a U.S. entity is better positioned to handle U.S. employment issues. Second, a U.S. entity can often manage legal liability more effectively than a branch. And lastly, the tax rules for U.S. entities are somewhat less complicated than those that apply to branch operations.

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Topics: tax reporting, international tax

FBAR Was Due June 30: Do You Know Where Your Filings Are?

Posted by Susan Steblein on Wed, Jul 15, 2015 @ 09:28 AM

Missing the deadline doesn’t have to cause a midsummer night’s nightmare, but you do need to wake up and get into compliance.

FBAR complianceIt’s July. Some of you have celebrated Independence Day. Others have celebrated Canada Day. A lucky few may have made time to celebrate both. If your fiscal year ended on June 30, it’s time for your fresh fiscal start. If you’re on a calendar year, it’s time to assess progress toward annual goals and make any necessary mid-course corrections. But there’s another group out there who may have just realized they might have a U.S. Foreign Bank Account Reporting (FBAR) obligation that should have been filed by June 30.

Who Has to Report?

Here’s a quick look at who needed to report by June 30, 2015, and steps you should take if you were required to report but haven’t yet.

If you are a:

  • United States person that has a
  • Financial interest in or signature authority over
  • Foreign financial accounts,

You must file an FBAR if:

  • The aggregate maximum value of those foreign financial accounts
  • Exceeds $10,000
  • At any time during a calendar year.

The term “U.S. person” may cover more people than you think. It includes U.S. citizens, Green Card holders or U.S. residents, but it can also apply to foreign nationals. For example, a Canadian citizen or resident with U.S. citizenship may be required to file, as well as a Canadian citizen who is treated as a U.S. citizen for tax purposes due to the amount of time spent in the United States.

Another important thing to note in the definition is “signature authority.” Even if it’s not your money, you may have a filing requirement if you have the authority to move money in and out of the accounts. For instance, if you have signature authority over foreign accounts at work, you may have an FBAR reporting requirement.

What If I Was Supposed to Report But Didn’t?

The penalties that may be assessed for the failure to file an FBAR can be severe, so it’s important to consult with a professional who is experienced in the area and understands the process in order to avoid some pitfalls for the unwary. At Freed Maxick, our first step to get you back in compliance is a fact-finding call to learn the specifics of your situation and help determine the appropriate path to get you back into compliance

Depending on your circumstances, the proper path to come back into compliance with FBAR rules could be to enter into one of the programs the IRS has made available, such as the “Offshore Voluntary Disclosure Program” (OVDP) or one of the two Streamlined Filing Compliance Procedures programs. 

It could also be filing the reports under the delinquent FBAR submission procedures. Your accountant should work with you to choose the program best suited for your specific facts and circumstances. 

Then, the next steps would be to gather the necessary info, coordinate the US tax filing positions with any tax filings in foreign jurisdictions that may be involved, and get all of the required filings prepared and submitted. If the failure to file stretches back several years, FBARs may be required as far back as 8 years (depending on the program used for submission), and there may also be an additional Foreign Account Tax Compliance Act (FATCA) obligation as far back as 2011.

FBARProfessional representation at this point is critical to make sure that you avoid a “quiet disclosure,” which could lead to significant unintended consequences with the IRS. It is important to get back in compliance with the law as quickly as possible, but if you don’t take some of the steps in the proper order you can wind up causing additional difficulty. Using a professional to guide you through the process is highly recommended, especially when the stakes are so high.

Topics: FBAR, U.S. Foreign Bank Account Reporting

U.S. Business Reporting Requirements: Payments to Foreign Contractors or Individuals

Posted by William Iannarelli on Thu, Mar 19, 2015 @ 09:17 AM

3 Questions that Define Reporting and Withholding Obligations  

Reporting Requirements for Payments to Foreign ContractorsMost U.S. businesses understand that payments to U.S. contractors trigger reporting obligations at the end of the year. Once the amount paid to a contractor crosses certain thresholds, a Form 1099 is prepared and sent both to the business that performed the services and to the IRS. As the economy has become more global and work can easily be performed virtually from around the world, some U.S. businesses have been slow to realize that payments to foreign contractors may trigger similar reporting obligations.

It’s important to note that payments to foreign contractors may trigger reporting and withholding obligations on the part of the U.S. payor—but not in all cases.  The reporting and withholding requirements on the U.S. payor depend on the answers to 3 questions.

    1. Is the payee a U.S. person or business?

      It’s never safe to assume that a contractor is or is not a U.S. person. The Internet makes it easy for a business to create a virtual presence almost anywhere. The only safe way to determine whether or not the contractor is a U.S. person is to ask. If the contractor replies that the business is a U.S. business, most payors know to have that contractor fill out a Form W-9 to provide the information that will be used to report payments to the IRS.

      If the contractor is not a U.S. business, the payor should require a Form W-8BEN-E (for entities) or Form W-8BEN (for individuals). Once the U.S. business receives this form, it does NOT forward it to the IRS. The U.S. payor simply maintains the form in its records. In the event of an audit, the form will substantiate why payments were not reported.

        2. Where did the payee perform the services?

          If the U.S. payor has one of the Forms W-8BEN on file and the contractor performed all services outside of the U.S., it is likely that no reporting or withholding obligations exist regarding the payments made by the U.S. payor to the foreign contractor.

          If the foreign contractor performed some or all of the work related to the contract in the U.S., the payor may have a reporting and withholding requirement related to those payments.

            3. If the payee performed services in U.S., what does the payor do?

              If the foreign contractor did some or all of the work related to the contract in the U.S., the payor has additional obligations under IRS rules. Typically, the U.S. payor will have to report the payments related to the U.S.-sourced work to the IRS on a Form 1042. The payor is expected to not only report the amounts paid to non-U.S. contractors for work done in the U.S. but also to withhold U.S. taxes (typically 30%) from those payments. Note, the 30% rate could potentially be reduced if the payments are made to a country with which the U.S. has a treaty. Like other withholding requirements, failure to comply with them can subject the U.S. payor to penalties and interest. Failure to withhold also could entitle the IRS to go after the payor for the amount of tax that should have been withheld. Depending on the amount of U.S.-sourced work a company pays foreign contractors to perform, failure to properly withhold can quickly snowball into a significant tax obligation.

              We’ve provided a quick overview here of the rules that apply when U.S.-based businesses make payments to foreign contractors. If your business engages contractors who may be based outside of the United States, it’s important to consult with a professional who is familiar with the details of the reporting and withholding rules. Contact us for help navigating complex U.S. and international tax rules.

              Topics: Reporting Requirements for Payments to Foreign Ind, Reporting Requirements for Payments to Foreign Con

              3 Types of Common Prohibited Transactions (and Penalties) Made by Employee Benefit Plan Fiduciaries

              Posted by Holly Hejmowski on Thu, Mar 12, 2015 @ 09:24 AM

              Education on Fiduciary Responsibilities are Key to Avoiding Civil and Tax Penalties

              Employee benefit plan fiduciairy responsibilitiesOffering a retirement plan can be one of the most challenging, yet rewarding decisions an employer can make. All those involved, including employees, beneficiaries, and the employer benefit from having a plan in place. However, employers and plan fiduciaries have specific responsibilities they should be aware of in administering a plan and managing its assets. These responsibilities help employers and fiduciaries stay within the laws and regulations of the plan.

              What is a Prohibited Transaction?

              A prohibited transaction is a transaction between a plan and a disqualified person that is prohibited by law. Disqualified person(s) are those who, by virtue of their relationship to the plan, may be in the position to self deal. Disqualified person(s) cover a range of people including fiduciaries, employers, unions (and officials), employee organizations, and persons providing services to the plan such as lawyers and accountants. Prohibited transactions are exactly that, a prohibited transaction of a plan.

              A plan fiduciary shall not cause the plan to engage in a transaction that generally includes the following:

              • A fiduciary’s act by which they deal with the plan income or assets in their own interest;
              • Sale, exchange, or leasing of any property between a plan and a disqualified person;
              • Lending of money or other extension of credit between a plan and a disqualified person;
              • Furnishing of goods, services, or facilities between a plan and a disqualified person;
              • Transfer to, use by, or for the benefit of a disqualified person, of any assets of the plan;
              • Acquisition or holding, on behalf of the plan, of any employer security or employer real property that would be in violation of the plan; and
              • The receipt of any consideration for the personal account of a fiduciary from any party dealing with the plan.

              Most Common Prohibited Transactions

              The most common prohibited transaction is the failure of plans to timely deposit employee deferrals and loan repayments to the plan.  The timely deposit of employee deferrals has been a highly publicized issue for the Department of Labor (DOL). The DOL’s audit procedure is to review the Plan sponsor’s pattern for depositing deferrals. If, for example, a sponsor is able to deposit deferrals within three business days after the pay date, but deposits one pay date’s deferrals ten business days after the pay date that payroll is deemed to be a prohibited transaction. The DOL reasons that the sponsor has shown an ability to deposit the money within a shorter time frame, therefore the funds for that one pay date were not deposited “as soon as reasonably segregable.”  

              When this occurs, the DOL deems the Plan sponsor to have taken a loan from the Plan. This loan is prohibited under ERISA’s party-in-interest rules and has ramifications, which are different from other compliance errors. Prohibited transactions are required to be disclosed in a supplemental schedule to the Plan’s audited financial statements.

              As such, the Plan sponsor is required to file Form 5330 and pay an excise tax on the amount of earnings lost by the Plan due to the loan. Finally, the Plan sponsor must ensure that the employee deferrals are remitted to the Plan, along with the earnings lost by the Plan due to the loan. 

              Multi-employer plans may meet the same fate as employee deferrals regarding timeliness of contributions. Multi-employer plan fiduciaries are required to collect all contributions owed to a plan by participating employers. These plans need to establish and implement collection procedures which are reasonable, diligent and systematic or they may be found to be engaging in a prohibited transaction for failing to collect delinquent contributions. In order to comply with the law, a plan must have a written delinquency collection policy which addresses the timing of contributions and the steps to be taken when the contributions are not received by the plan.

              A second form of prohibited transaction involves 12b-1 fees. There’s a reason why self-dealing transactions have been verboten in all forms of trust. It’s because the action is too often misaligned with the best interests of the beneficiary. In the case of 401(k) plans that use 12b-1 fees and revenue sharing (the primary source of legal 401(k) self-dealing) underperform by 3.6 percent versus funds that don’t involve self-dealing. 12b-1 fees are ongoing fees paid out of fund assets.

              When may 12b-1 fees be used? Often times they are used to pay commissions to brokers and other salespersons, to pay for advertising and costs of promoting the fund to investors, and to pay various service providers of a 401(k) plan pursuant to a bundled services arrangement. That this is not currently defined by the DOL as a breach of one’s fiduciary duty does not mean the liability has been removed from the plan sponsor. A great example is International Paper (who settled for $30 million) and Cigna (who settled for $35 million). Both were accused of paying “excessive fees” for investing in funds that offer 12b-1 fees and revenue sharing. 

              The third most common prohibited transaction involves entering into a lease with a related party or party-in-interest. It is common in the Multi-employer plan arena to share space with the union, another plan, or an employer. As there are union members and employers representatives that make up the board of trustees, this transaction is considered “self-dealing”. However, there are certain exemptions and steps that can be taken to ensure this transaction is not considered a prohibited transaction.

              There should be a formal written lease agreement and the parties involved need to ensure that the compensation for the lease is reasonable. Lastly, any trustee with possible conflicts should recues themselves during the decision to enter into the lease agreement.

              Fall Out from Prohibited Transactions in both the Civil and Tax Arenas

              Prohibited transactions may also trigger monetary penalties. Qualified pension plans engaged in prohibited transactions with a disqualified person are subject to the IRC section 4975 excise tax. A disqualified person who is in violation of IRS section 4975 must correct the transaction and pay the excise tax based on the amount involved in the transaction. The initial tax on a prohibited transaction is 15% of the amount involved for each year, in the taxable period.

              If the transaction is not corrected within the taxable period, an additional tax of 100% of the amount involved is imposed. Both taxes are payable by any disqualified person who participated in the transaction (other than a fiduciary acting only as such). If more than one person takes part in the transaction, each person can be jointly and severally liable for the entire tax.

              Prohibited transactions will require the inclusion of certain ERISA supplemental schedules in a plan’s financial statements, but are correctible through the DOL’s Voluntary Fiduciary Correction Program (VFCP). There are various forms that will need to be filed with the DOL, which include Part III of Schedule G, Form 5500, Schedule H line 4a-Delinquent participant contributions, Form 5500 and Form 5330. 

              What You Can do to Correct or Avoid Future Prohibited Transactions

              Freed Maxick wants to make sure you fully understand the importance of avoiding prohibited transactions. As part of future audits or engagements, it might be wise to have your service provider(s) review your plans to ensure a prohibited transaction hasn’t taken place.

              Carefully look at prohibited transactions that cause implications related to management integrity, cause and effect of a breach of fiduciary duties, and inclusion of ERISA supplemental schedules in financial statements.

              Be diligent before entering into a transaction and be consistent when you file. Educate yourself ahead of time on what the fiduciary responsibilities are; this will help you avoid prohibited transactions in the future.

              Freed Maxick CPAs can help you identify possible prohibited transactions, aid in the preparation of additional schedules and governmental reporting forms that may be required, and help implement controls and policies to avoid future incident. If you have any questions or concerns about a prohibited transaction or would like to know more information about our audit and tax services for employee benefit plans, call us at 716.847.2651

              Topics: Employee benefit plans, Employee benefit plan fiduciairy responsibilities

              Heads Up for Foreign Companies: Good and Bad News About U.S., State & Local Taxes

              Posted by William Iannarelli on Mon, Jan 05, 2015 @ 09:19 AM

              State Revenue Needs Create Opportunities and Pitfalls for Foreign Companies Doing Business in the United States

              State tax issues for foreign companyStates need money. If you remember nothing else about state and local taxes in the United States, remember that. Each state has some type of obligation or demand that requires revenue and the elected officials in that state know that their jobs are at risk if they propose a tax rate increase. Once you take tax increases off the table, there are only a few options available to increase state revenue.

              Two of those options should be of particular interest to foreign companies that do business in the U.S. The first is to create incentives designed to draw new business into the state. The second is to interpret existing tax rules more broadly and enforce them more stringently.

              The Carrot—State Incentives

              States want your business. Almost every state offers some type of program that provides incentives for companies to begin or augment operations there. Incentive programs include items like credits for hiring and property tax credits on real estate purchased.

              To participate in these programs, you must plan ahead. Many incentives are available only before you start doing business in a state or before your activity in the state crosses certain thresholds. Unfortunately, there is no uniform system of state taxation or state incentives. As a result, most businesses looking to build operations in the U.S. should work closely with a U.S.-based accountant who is experienced in state and local tax incentives.

              The Stick—State Enforcement

              The driving force behind state taxation is the concept of “nexus,” or the extent of a business’ connection to a state. Until recently, states focused on an analysis of 3 criteria to measure the presence of a business within their borders: sales, property, and payroll. Today, states focus much more on the gross receipts a business generates within the state. This shift has left many companies surprised by a tax liability that they never knew existed until they were notified by the state. Many multi-national businesses that start operations in the U.S. will conduct activities that trigger filing and tax obligations in individual states before they reach any threshold that requires a federal filing.

              For foreign companies with existing U.S. operations, a nexus study can provide some comfort that current activities have not triggered state or local obligations, or it can provide a valuable heads-up that a filing or tax obligation has been missed. States have shown a willingness to work with businesses that voluntarily disclose that they have failed to meet a requirement. As long as there’s no reason to suspect a willful failure to comply, a state may reduce the number of back years a company is required to file and waive some or all of the penalties that have accrued.

              FBAR compliance and penalty mitigationThe complex requirements of each state’s system demand meticulous attention to detail from the businesses that would operate within its borders. Advance planning can help your business qualify for significant incentives that could reduce the cost of operating in a state and reduce the costs of getting your business compliant. Whether your business is planning new operations within a state or trying to bring existing operations into compliance with state laws, it’s important to work with an advisor who understands the unique rules of each state. 

              Top 100 CPA firm Freed Maxick supports international business’ expansion into the U.S. Contact us to learn about how we can help you avoid the pitfalls while realizing the benefits of doing business in New York or another U.S. state.

              Topics: US tax issues for foreign companies, Foreign company doing business in the US, State tax issues for foreign company

              Growing Into the U.S.? Consider These Tips on Choice of Entity

              Posted by William Iannarelli on Tue, Dec 30, 2014 @ 09:29 AM

              4 Reasons Why You Should Consider a “C” Corporation

              C Corporations for doing business in the USThe United States economy represents the pot of gold at the end of the rainbow for many businesses around the world. Its citizens and businesses consume trillions of dollars in products and services.

              If you’re planning for growth into the U.S. or you’re already operating there, you should consider whether an American subsidiary makes sense for your business. When U.S. operations have grown to a point that justifies creating a subsidiary in-country, there are four good reasons why most businesses choose to form a type of entity known as the Subchapter “C” corporation.  

              • Protection from liability. One downside of operating in the U.S. is the litigious nature of its residents. The creation of a corporate entity in the States helps to protect the foreign parent from many of the “slings and arrows” directed at commercial enterprises in the country.
              • Financing. If your plans include getting loans from a U.S. bank, you will almost certainly need a U.S. subsidiary. Financial institutions in the states rarely lend to foreign businesses. Formalizing your presence in the country opens doors to financing options not available to businesses based outside its borders. As noted above, forming your U.S. business as a corporation also provides protection for your non-U.S. interests if the business has difficulty repaying the loans.
              • Returning capital to the foreign parent. Some argue that forming a pass-through entity in the U.S. avoids the double taxation that occurs when corporations are taxed once on earnings and shareholders are taxed again on distributed earnings. A corporation can manage this obligation through careful planning. The parent can provide loans to the subsidiary or perform back office support and other business functions. Payments made for such things serve the dual purpose of returning money to the parent and reducing the subsidiary’s taxable income.
              • Tax impact to the parent. Multinational businesses are required to create transfer-pricing plans that set prices for inter-company transactions. Those transactions must be made “at arm’s length” to comply with the various countries’ transfer-pricing laws, and the more formal structure of a corporate subsidiary makes that standard easier to achieve.

              While planning to create a U.S. subsidiary, seek out business advisors in your home country and in the states who are familiar with creating multi-national parent/subsidiary relationships.

              Review of US and state tax structuringThey need to coordinate on the project to make sure that the new organization is structured in a way that maximizes efficiency, observes the rules of both countries, and makes every legal effort to minimize taxes and fees.  

              Once you’ve determined what type of subsidiary to form, the next question to answer is, “Where in the U.S. should you form it?” We’ll look at some of the considerations at the U.S. state and local level in a future post.  

              Top 100 CPA firm Freed Maxick can help you navigate the complexity of doing business in the U.S. Learn more here.

              Topics: Doing business in the US, Choice of Entity

              Good News from the IRS for S-Corp Shareholders!

              Posted by Mark Shoemaker on Tue, Sep 23, 2014 @ 09:11 AM

              Bona fide indebtedness determination lowers hurdle to obtain debt basis.

              S Corp ShareholdersFor S corporation shareholders, borrowing from one company they own to fund another is a common way to inject some cash into a growing business—especially in these days of conservative lending. But previously, if the funded company experienced losses and you wanted to take deductions for those losses on your personal tax returns, you had to meet a high bar to prove that loan increased your debt basis in the company.

              As a result of the previous position of the IRS and tax courts, shareholders who borrowed from one related entity in order to loan to another had a particularly hard time defending their debt basis. But thanks to final rules from the IRS, that bar has been lowered and S corporation shareholders are now more likely to qualify for tax deductions for entity losses that have been passed through to them.

              Bona Fide Indebtedness Determination

              On July 23, the IRS issued final regulations on debt basis determinations for S corporation shareholders (T.D. 9682). These final rules implement a “bona fide” debt basis determination as opposed to the controversial “economic outlay” doctrine that has been developed by the courts over the last several years. 

              Under the economic outlay doctrine, in order to obtain debt basis an S corporation shareholder must incur a true economic outlay through a transaction, which when fully consummated, left the taxpayer poorer in a material sense.

              On the other hand, bona fide indebtedness is determined under general Federal tax principles and depends on all the facts and circumstances. Basically, a bona fide debt is one that creates a true debtor-creditor relationship that is based on a valid and enforceable obligation to pay a fixed or determinable amount of money. This means that shareholders who structure and document their loans to an S Corporation in the correct way can now qualify for debt basis in that S corporation, and as a result, can claim current tax deductions for their share of any losses that S corporation experiences.

              This is a win for both the shareholder and the company.  The shareholder has potential for additional deductions and the company gets a cash infusion that has potential tax minimizing opportunities for the shareholder.

              Back-to-Back Opportunity

              Previously, the IRS and tax court often used the economic outlay doctrine to deny debt basis to shareholders for funds borrowed from a related entity and then loaned to the S corporation by the shareholder. These transactions are often referred to as back-to-back loans. The reasoning was that, by borrowing from Peter to pay Paul, the shareholder was not considered to be making a true economic outlay.

              But with the new debt basis rules, shareholders who structure and document their back-to-back loans to qualify as bona fide indebtedness (see below) are more likely to obtain debt basis—and claim tax deductions—as result of those loans.

              The Look-Back Opportunity

              While the final debt basis rules were issued with minimal changes to the proposed regulations, one significant highlight is that the final rules did expand their application to open tax years.

              What does this mean for you? In addition to the potential tax benefits of restructuring related entity loans going forward, shareholders who have made back-to-back loans in any open tax year and didn’t increase their debt basis now have the opportunity to go back and claim deductions for any previously disallowed losses—if they can demonstrate there was bona fide indebtedness.

              Determining Bona Fide Indebtedness

              While there is no bright-line test to prove that a debt is bona fide, the key is to demonstrate that there is a true debtor-creditor relationship. Based on federal tax principles, the following steps can help support the determination of bona fide indebtedness:

              1. Make sure there is documentary evidence of the transaction (i.e. a written loan agreement).
              2. Both parties should reflect the transaction as a loan in their records.
              3. Setup a fixed repayment schedule and make efforts to follow the schedule in order to create a history of regular repayments.
              4. The loan should require interest and the rate should be at least as much as the Applicable Federal Rate (AFR).
              5. Consider collateral to secure the debt.
              6. A demand for repayment should be issued if necessary.
              7. There needs to be intent to create a valid debtor-creditor relationship and the lender must have an expectation of receiving repayment at the time of the loan.

              Review S Corporation Financing Strategy

              If you are a shareholder in one or more S corporations, work with your tax advisor to review any existing or prospective loans for the opportunity to demonstrate bona fide indebtedness—and therefore obtain debt basis to claim current tax deductions for any entity losses in the future and/or any suspended losses in open tax years.

              Going forward, you and your CPA might find that funding S corporations with properly structured back-to-back loans provides a tax-advantaged way to finance a new venture with funds from a more established company.

              Topics: S corporation shareholders, Tax, tax deductions

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