Foreign Asset Reporting For Entities: New for 2016!

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There is a lot of attention these days on big companies (Apple, Google, General Electric, Facebook and others) stashing their earnings overseas in what are considered tax havens to avoid paying US taxes on their corporate income. Some international tax reform proposals have been suggested as to how to get the corporation to either bring this stash back into the US by way of a "repatriation holiday" or "deemed repatriation" or ending the system of tax deferrals. 

These rules and proposed tax reforms are for the big players, in the mean time, what is happening with the little guys?

For those of us tax professionals who specialize in international tax and compliance with FATCA, Form 8938 has played a big role since 2011. I wrote in detail about this Form and its filing requirements in my widely read blog post here. The Form 8938 had applied to individuals alone and entities had not been considered as falling under the law to report their Specified Foreign Financial Assets {SFFA}. 

What changed in 2016? 

The Treasury Department and the Internal Revenue Service {IRS} adopted § 1.6038D-6 (REG-144339-14) early this year as final. As per the new regs, for tax years beginning after December 31, 2015, certain domestic corporations,partnerships, and trusts that are

considered formed or availed of for the purpose of holding, directly or indirectly, specified foreign financial assets must file Form 8938 if the total value of those assets exceeds $50,000 on the last day of the tax year or $75,000 at any time during the tax year. 

What is a Specified Domestic Entity {SDE}?

§ 6038D(f) defines an SDE as "any domestic entity which is formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets, in the same manner as if such entity were an individual". 

An entity can be a corporation, partnership or a disregarded entity. 

In order to be classified as an SDE, the entity has to make a determination every year 

under Treasury Regulation § 1.6038D-6(b)(2) if: 

• At least 50% of the corporation or partnership’s gross income or assets is passive; 

                                                                   OR

• At least 80% of the corporation or partnership’s gross income or assets is closely held directly, indirectly or constructively by a specified individual on the last day of the corporation's or partnership's tax year. 

Is A Trust a Specified Domestic Entity?:

A trust could be broadly considered an SDE under the new rules if it has one or more specified individuals as current beneficiaries. A "current beneficiary" is generally any person who at any time during the tax year is entitled to, or at the discretion of any person may receive, a distribution from the principal or income of the trust (determined without regard to any power of appointment to the extent that such power remains un-exercised at the end of the tax year).

There are many exceptions to a trust being considered an SDE. One can determine this only after careful reading of the regulations. Some of the excepted trusts include REITs, IRA accounts, § 403(b) or § 457(g) plans. A Grantor Trust is also exempt from reporting SFFAs under the new regs.

The above rules are in effect for Tax Year 2016 that is the coming 2017 tax season. If the above rules effect you and you do not take any action, the penalty for non-disclosure is $10,000 for failure to file the Form 8938 up to a maximum of $50,000. 

The tricky and complicated part of tax compliance here is determining if the SDE passes the passive income test; the 80% closely held test; and the total income from all sources. 

Please contact your Enrolled Agent or other tax professional if you think you may be impacted by the above changes. 

Bibliography: Treas. Reg § 1.6038D-6; Final Regs on § 6308D; Form 8938 Instructions; Article on Citizens For Tax Justice website; IRB 2016-10. 

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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxbiz.com. 

2016 Year End And Tax Planning: What To Expect?

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When that first leaf changes color, there's a nip in the air, and the sunshine starts to fall into corners it did not before, you know the year is coming to an end. Typically that is when I start getting phone calls for year end tax planning. 

This year has been tumultuous, to say the least, as we recover from all the pre and post election trauma or elation depending on which candidate you favored, we need to put our tax plans in place based on what we know about likely tax changes for 2017 and 2018.

Most tax planning usually starts with identifying the need to either postpone income & accelerate deductions if you think you are going to be in a lower tax bracket in the coming years OR to accelerate income & postpone deductions if your income is going to increase. And then we look into your withholding and taxes, your employer retirement contributions etc. 

Filers who claim itemized deductions on their taxes are the ones who have the flexibility in shifting deductions. For example, one can send in the last estimated tax check before December 31st to claim the deduction in the current year. A mortgage payment for January can be made in December and your charitable contributions for 2017 can be moved back as well. 

If your total medical expense for any reason is over 10% of your AGI, you can have any elective procedures before December 31st so you will be eligible for the tax write-off as well. This is especially very important if you are 65 years of age or older since the special 7.5% medical cost threshold is gone for the Tax Year 2017 and you get the same 10% medical cost threshold as the rest.

If you are going to have a spike in income and that is going to put you into the Alternative Minimum Tax category, the planning of deductions will change. 

Now would also be a good idea to visit Capital Loss Harvesting or Tax Loss Harvesting and see if that will be a right strategy for you. The basic premise of this fancy term is that you sell off your low-yield investments or those that have lost value to off-set the gain(s) from the sale of those that increased in value. There are downside risks to this strategy that you should have your tax professional or financial advisor weigh in for you. 

Speaking of tax planning for the coming years, we must take into reckoning some important points from President-Elect Trump's proposed tax plan. These proposals stand a very high chance of passing since both the House and the Senate are in Republican hands & they have been itching for tax reform. From many accounts and experts weighing in, these plans if implemented will reduce revenue by an estimated $7.2 trillion in the first decade and as a result deficit is expected to increase as well. 

Proposed Tax Plan from President-Elect Trump:

• Tax brackets reduced to three: 12%, 25% and 33%.
• Elimination of:

         a. Alternative Minimum Tax.
         b. Head of Household filing status.
         c. Net Investment Income Tax.
         d. Personal Exemptions.
         e. Estate Tax

• Business tax rate lowered to 15%.
• Cap on itemized deductions at $100,000 for single filers and $200,000 for married filing joint. 
• Standard deduction $15,000 for single filers and $30,000 for married filing joint. 
• Low-income families get a credit up to $1200 a year for child-care costs. 
• Carried interest is taxed at ordinary tax rates instead of capital gains rates. 

Based on the above, 2016 would probably be a good year to accelerate your charitable contributions. This is especially true if you are in a higher income tax bracket, the percentage of savings is higher as well. Donating appreciated stock to a tax-exempt charity is also a good way to increase your itemized deductions. 

We do not know yet how the GOP will go with the proposals, please check with your Enrolled Agents and make sure advice is tailored to your unique situation. 

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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxbiz.com.