Breaking News – 3520 and 3520-A not required for foreign retirement and education trusts

The announcement by Internal Revenue Service yesterday via Revenue Procedure 2020-17 offers a big relief to many taxpayers with foreign retirement fund account or education, medical or disability trusts. Following are the salient features of the Rev. Proc.:

  • The Rev Proc provides exemption from filing Forms 3520 and 3520-A for an “eligible individual’s” transactions with, or ownership of, an “applicable tax-favored foreign trust” (ATFFT)
  • An eligible individual generally means an individual who is a U.S. citizen or resident and who is compliant with all requirements for filing U.S. federal income tax returns and has reported as income (to the extent required) any contributions to, earnings of, or distributions from, an ATFFT.
  • ATFFT includes foreign pension or a tax favored foreign retirement trust and foreign medical, disability or educational trust or a tax favored foreign non-retirement savings trust.

Retirement Trusts:

  • Tax favored retirement trust must be created to operate exclusively or almost exclusively to provide, or to earn income for the provision of, pension or retirement benefits.
  • The trust must only permit contributions with respect to income earned from the performance of personal services.
  • Contributions to the trust must: (a) be limited by a percentage of earned income of the participant, (b) be subject to an annual contribution limit of $50,000 or less, or (c) be subject to a lifetime contribution limit of $1,000,000 or less.
  • Withdrawals from the trust must be conditioned upon reaching a specified retirement age, disability, or death, or penalties must apply to withdrawals made before such conditions are met. However, an exception is provided for early withdrawals for hardship or educational purposes, or for the purchase of a primary residence.
  • Employer provided trusts must be non discriminatory

Non-retirement Trusts:

  • Trust must be created to operate exclusively or almost exclusively to provide, or to earn income for the provision of, medical, disability, or educational benefits.
  • Contributions to the trust must be limited to $10,000 or less annually or $200,000 or less on a lifetime basis
  • Withdrawals from the trust must be conditioned upon the provision of medical, disability, or educational benefits, or penalties must apply to withdrawals made before such conditions are met.

Cherry on the top!

  • Penalties are not applicable in case of the above trusts because ATFFT is exempt from reporting on 3520 and 3520-A
  • Rev Proc also includes procedures for the eligible individuals who have been assessed penalty for failing to comply with IRC 6048, to request abatement of the penalty assessed
  • Rev Proc also describes the procedure to claim refund of the previously paid penalty

This is a tremendous news for many taxpayers who have such qualifying accounts/ trusts in foreign countries. For example dual residents of U.S. and Canada who have RESP accounts will now breathe a sigh of relief.

Transition tax and S- Corporations, IRS provides additional details

IRS today provided additional information on how to comply with the transition tax payment when a triggering event occurs with S – Corporations (IR-2019-128). The updated FAQ explains when, how and where to file the Consent Agreements.

As per the provisions, S- Corporations are allowed to defer Section 965 transition tax liability after making the 965(i) election. Generally when the triggering event occurs (when S Corporation ceases to be an S Corporation, when a liquidation or sale of substantially all the assets occurs or when the shareholder of S- Corporation transfers the stock – whichever occurs first), the entire tax liability will be assessed on the shareholder’s tax return for that year. However, shareholder can make election under Section 965(h) and pay the tax liability in eight installments. Section 965(i)(4)(D) provides that the shareholder in such cases, must obtain consent of the Commissioner in order to pay in installments.

IRS explains in the updated FAQs that in such cases,

  • shareholder must file a Consent Agreement within 30 days of the occurrence of the triggering event.
  • IRS further clarifies that it is not possible for S Corporation to obtain the consent on behalf of the shareholders.
  • The Consent Agreement may be filed with IRS Memphis Compliance Service Collection Operations at the following address: Memphis CSCO, 5333 Getwell Road MS 81, Memphis, TN 38118
  • It is still required that the shareholders make Section 965(h) election on the tax return to pay the tax liability in eight installments.
  • Form 965-A and 965-B, whichever is applicable must be updated as well.
  • S-Corporation and the shareholders are jointly an severally liable to pay the triggered tax in installments.

FAQs have also been updated with some examples when there is an excess remittance of the transition tax.

 

 

 

Dreaming of Tesla? Hurry up the tax rebate halves in 2019

IRS Notice 2018-96 provides that qualifying vehicles from Tesla, Inc. purchased for use or lease are eligible for a $7,500 credit if acquired before Jan. 1, 2019. Beginning Jan. 1, 2019, the credit will be $3,750 for Tesla’s eligible vehicles. On July 1, 2019, the credit will be reduced to $1,875 for the remainder of the year. After Dec. 31, 2019, no credit will be available.

Code Sec. 30D(a) provides for a credit for certain new qualified plug-in electric drive motor vehicles. The new qualified plug-in electric drive motor vehicle credit begins to phase out for a manufacturer’s vehicles in the second calendar quarter after the calendar quarter in which at least 200,000 of the manufacturer’s vehicles that qualify for the credit have been sold for use or lease in the U.S.

So what are you waiting for? Hurry up if you are intending to buy or lease Tesla. Only few weeks are left to claim the credit and bring down the cost of the vehicle. Merry Christmas!

Post-Wayfair Sales Tax Issues for foreign companies selling in U.S.

You may have seen a headline or heard a discussion about “Wayfair”. What is this? “Wayfair” refers to the most significant state tax case to come before the U.S. Supreme Court in decades.
For more than 50 years, state sales and use tax laws have held that a seller’s requirements are based on a “physical presence” test. In other words, a company generally must collect sales tax in a given state only if that company had a physical presence (branch office, warehouse, etc.) in that state.
In 2016, South Dakota contested this law, pointing out that the physical presence test was obsolete in the Internet era. The physical presence test gave remote sellers an unfair advantage, as they could sell into the state without collecting sales tax, while in-state competitors were forced to collect sales tax.
On June 21, 2018, the U.S. Supreme Court issued a decision, stating that the physical presence test was invalid. The Court explained that a company has nexus (or connection) with a jurisdiction when that company “avails itself of the substantial privilege of carrying on business” in a jurisdiction.
In practical terms, this is means that when a company makes sales into a state over a certain threshold of sales or transactions, that company is required to collect sales tax in that state. For example, South Dakota law states that any company that has at least $100,000 in sales or 200 transactions in the state must begin to collect and remit South Dakota sales tax.
Since this decision in June, more than 30 states have (or will soon have) sales and transaction thresholds. Retailers of all types should examine their obligations and be prepared to collect sales tax in additional jurisdictions.
Each state can create its own standards and guidelines for nexus standards. Twenty-four states have adopted the same $100,000 annual sales or 200 transactions test as South Dakota. Eight other states have differing thresholds. Also, some of the states have required marketplaces (such as Amazon) to collect sales tax on behalf of vendors.
Another important issue to remember that the states are not party to the income tax treaty signed by the Federal government and they may or may not conform the treaty articles. This creates an added burden for the foreign sellers.
Retailers/ Amazon sellers should review the requirements state by state. Although the thresholds may be the same, the measuring periods and basis for measuring sales may vary. The beginning date of enforcement also varies. Penalties for non-compliance can be quite severe.
Tax Planning & Compliance
– Do not simply register in states once you determine you have nexus without considering several additional steps.

  • Determine nexus
  • Review the wording of your contracts and invoices. A change in wording could reduce the risk of sales tax requirements.
  • Decide whether the risk is material. It may be that the cost of registration and compliance is greater than your risk of exposure.
  • Implement a sales tax compliance software. Several commercial systems are available.
  • Consider a system to store and track certificates.

CPA Global tax can help you with all questions you may have in complying with the state tax issues.

Owe tax to IRS? Your passport may have been revoked!

Joe just received a shocking notice from IRS (CP508C) informing him that his passport is being revoked when he was about to embark on a business meeting overseas.
Joe reaches out to his CPA for help. Can he do anything to avoid the revocation of passport?

CPA explained that IRS notified the U.S. State Department about his seriously delinquent federal tax debt (SDTD) and as a result, is revoking his current passport. Joe has limited options. He needs to request an installment agreement or pay off the tax debt. Both solutions seemed overwhelming to Joe.

Joe enters in to installment program with IRS based on the CPA’s advice. CPA with the help of Taxpayer Advocate Service, was able to resolve the issue. Joe received CP508R notice from IRS notifying him that the certification of tax debt was reversed. Fortunately in this case, Joe was able to get his passport reinstated only with the timely help of his CPA – just in time for his travel plans.

If you owe greater than $50,000 to IRS, be careful! IRS may have revoked your passport and you may not be able to travel. There are different options available for different situations based on facts and circumstances. We at CPA Global Tax are happy to assist.

GILTI? IRS issues proposed regulations

Section 951A, which was added by the Tax Cuts and Jobs Act (TCJA) enacted in December, 2017, subjects a current US tax on a U.S. shareholder’s pro rata share of its global intangible low tax income (GILTI).

Under the TCJA, a U.S. person that owns at least 10 percent of the value or voting rights in one or more CFCs will be required to include its global intangible low-taxed income as currently taxable income, regardless of whether any amount is distributed to the shareholder. A U.S. person includes U.S. individuals, domestic corporations, partnerships, trusts and estates.

Per IRS news release 2018-186, the new reporting rules requires the filing of Form 8992. The Form would be helpful for U.S. Shareholder Calculation of Global Intangible Low-Taxed Income.

The new law applies to the first tax year of a CFC beginning after Dec. 31, 2017, and the U.S. shareholder’s year with or within which that year ends, and all subsequent tax years.

These proposed regulations do not include foreign tax credit computational rules relating to global intangible low-taxed income, which will be addressed separately in the future as the release further states.

CPA Global Tax team can help you navigate through to the maze of these complicated rules. Please email us for any assistance.