What is GILTI?

U.S. shareholders of Controlled Foreign Corporations (CFC’s) are required to include in income their Global Intangible Low-Taxed Income (GILTI), as a result of the addition of IRC §951A by the Tax Cuts and Jobs Act. The rules apply to tax years of foreign corporations beginning after December 31, 2017, and to tax years of the U.S. shareholders in which or with which such tax years of foreign corporations end.

How is it calculated?:

Intangible income is determined according to a formulaic approach that assigns a 10-percent return to tangible assets (Qualified Business Asset Investment (QBAI)) and each dollar above the return is treated as an intangible asset.

What are the Proposed GILTI Regulations?:

Proposed regulations have been issued that provide the best guidance on the computation of the GILTI inclusion. The proposed regulations provide some new rules, including rules for consolidated groups, domestic partnerships, and partners, and required basis adjustments. The proposed regulations also contain a number of anti-abuse rules to be aware of and impose new reporting requirements.

How do I handle GILTI compliance?:

The rules for GILTI are complex and the guidance issued to provide additional rules for computing the correct GILTI inclusion. To ensure that the inclusion is correctly computed, it is recommended to work with international tax experts like the team at Azran Financial. Contact us to find out more information and if GILTI or FDII implications affect you and your business.

After weeks, indeed months of proposals and counter-proposals, seemingly endless negotiations and down-to-the-wire drama, Congress has passed legislation to avert the tax side of the so-called “fiscal cliff.” The American Taxpayer Relief Act permanently extends the Bush-era tax cuts for lower and moderate income taxpayers, permanently “patches” the alternative minimum tax (AMT), provides for a permanent 40 percent federal estate tax rate, renews many individual, business and energy tax extenders, and more. In one immediately noticeable effect, the American Taxpayer Relief Act does not extend the 2012 employee-side payroll tax holiday.

The American Taxpayer Relief Act is intended to bring some certainty to the Tax Code. At the same time, it sets stage for comprehensive tax reform, possibly in 2013. Moreover, it creates important planning opportunities for taxpayers, which we can discuss in detail.

Individuals:

Unlike the two-year extension of the Bush-era tax cuts enacted in 2010, the debate in 2012 took place in a very different political and economic climate. If Congress did nothing, tax rates were scheduled to increase for all taxpayers at all income levels after 2012.  President Obama made it clear that he would veto any bill that extended the Bush-era tax cuts for higher income individuals. The President’s veto threat gained weight after his re-election.  Both the White House and the GOP realized that going over the fiscal cliff would jeopardize the economic recovery, and the American Taxpayer Relief Act is, for the moment, their best compromise.

Tax rates.  The American Taxpayer Relief Act extends permanently the Bush-era income tax rates for all taxpayers except for taxpayers with taxable income above certain thresholds:

$400,000 for single individuals, $450,000 for married couples filing joint returns, and $425,000 for heads of households.  For 2013 and beyond, the federal income tax rates are 10, 15, 25, 28, 33, 35, and 39.6 percent.  In comparison, the top rate before 2013 was 35 percent.  The IRS is expected to issue revised income tax withholding tables to reflect the 2013 rates as quickly as possible and provide guidance to employers and self-employed individuals.

Additionally, the new law revives the Pease limitation on itemized deductions and personal exemption phaseout (PEP) after 2012 for higher income individuals but at revised thresholds. The new thresholds for being subject to both the Pease limitation and PEP after 2012 are $300,000 for married couples and surviving spouses, $275,000 for heads of households, $250,000 for unmarried taxpayers; and $150,000 for married couples filing separate returns.

Capital gains.  The taxpayer-friendly Bush-era capital gains and dividend tax rates are modified by the American Taxpayer Relief Act. Generally, the new law increases the top rate for qualified capital gains and dividends to 20 percent (the Bush-era top rate was 15 percent). The 20 percent rate will apply to the extent that a taxpayer’s income exceeds the $400,000/$425,000/$450,000 thresholds discussed above. The 15 percent Bush-era tax rate will continue to apply to all other taxpayers (in some cases zero percent for qualified taxpayers within the 15-percent-or-lower income tax bracket).

Payroll tax cut.  The employee-side payroll tax holiday is not extended. Before 2013, the employee-share of OASDI taxes was reduced by two percentage points from 6.2 percent to 4.2 percent up the Social Security wage base (with a similar tax break for self-employed individuals).  For 2013, two percent reduction is no longer available and the employee-share of OASDI taxes reverts to 6.2 percent. The employer-share of OASDI taxes remains at 6.2 percent. In 2012, the payroll tax holiday could save a taxpayer up to $2,202 (taxpayers earning at or above the Social Security wage base for 2012).  As a result of the expiration of the payroll tax holiday, everyone who receives a paycheck or self-employment income will see an increase in taxes in 2013.

AMT. In recent years, Congress routinely “patched” the AMT to prevent its encroachment on middle income taxpayers. The American Taxpayer Relief Act patches permanently the AMT by giving taxpayers higher exemption amounts and other targeted relief. This relief is available beginning in 2012 and going forward. The permanent patch is expected to provide some certainty to planning for the AMT. No single factor automatically triggers AMT liability but some common factors are itemized deductions for state and local income taxes; itemized deductions for miscellaneous expenditures, itemized deductions on home equity loan interest (not including interest on a loan to build, buy or improve a residence); and changes in income from installment sales. Our office can help you gauge if you may be liable for the AMT in 2013 or future years.

Child tax credit and related incentives.  The popular $1,000 child tax credit was scheduled to revert to $500 per qualifying child after 2012.  Additional enhancements to the child tax credit also were scheduled to expire after 2012.  The American Taxpayer Relief Act makes permanent the $1,000 child tax credit. Most of the Bush-era enhancements are also made permanent or extended. Along with the child tax credit, the new law makes permanent the enhanced adoption credit/and income exclusion; the enhanced child and dependent care credit and the Bush-era credit for employer-provided child care facilities and services.

Education incentives.  A number of popular education tax incentives are extended or made permanent by the American Taxpayer Relief Act.  The American Opportunity Tax Credit (an enhanced version of the Hope education credit) is extended through 2017.  Enhancements to Coverdell education savings accounts, such as the $2,000 maximum contribution, are made permanent.  The student loan interest deduction is made more attractive by the permanent suspension of its 60-month rules (which had been scheduled to return after 2012). The new law also extends permanently the exclusion from income and employment taxes of employer-provided education assistance up to $5,250 and the exclusion from income for certain military scholarship programs.  Additionally, the above-the-line higher education tuition deduction is extended through 2013 as is the teachers’ classroom expense deduction.

Charitable giving.  Congress has long used the tax laws to encourage charitable giving.  The American Taxpayer Relief Act extends a popular charitable giving incentive through 2013:  tax-free IRA distributions to charity by individuals age 70 ½ and older up to maximum of $100,000 for qualified taxpayer per year.  A special transition rule allows individuals to recharacterize distributions made in January 2013 as made on December 31, 2012.  The new law also extends for businesses the enhanced deduction for charitable contributions of food inventory.

Federal estate tax.  Few issues have complicated family wealth planning in recent years as has the federal estate tax.  Recent laws have changed the maximum estate tax rate multiple times. Most recently, the 2010 Taxpayer Relief Act set the maximum estate tax rate at 35 percent with an inflation-adjusted exclusion of $5 million for estates of decedents dying before 2013. Effective January 1, 2013, the maximum federal estate tax will rise to 40 percent, but will continue to apply an inflation-adjusted exclusion of $5 million. The new law also makes permanent portability between spouses and some Bush-era technical enhancements to the estate tax.

Businesses:

The business tax incentives in the new law, while not receiving as much press as the individual tax provisions, are valuable. Two very popular incentives, bonus depreciation and small business expensing, are extended as are many business tax “extenders.”

Bonus depreciation/small business expensing.  The new law renews 50 percent bonus depreciation through 2013 (2014 in the case of certain longer period production property and transportation property). Code Sec. 179 small business expensing is also extended through 2013 with a generous $500,000 expensing allowance and a $2 million investment limit.  Without the new law, the expensing allowance was scheduled to plummet to $25,000 with a $200,000 investment limit.

Small business stock.  To encourage investment in small businesses, the tax laws in recent years have allowed noncorporate taxpayers to exclude a percentage of the gain realized from the sale or exchange of small business stock held for more than five years.  The American Taxpayer Relief Act extends the 100 percent exclusion from the sale or exchange of small business stock through 2013.

Tax extenders.  A host of business tax incentives are extended through 2013.  These include:

  • Research tax credit or R&D credit
  • Work Opportunity Tax Credit (WOTC)
  • New Markets Tax Credit
  • Employer wage credit for military reservists
  • Tax incentives for empowerment zones
  • Indian employment credit
  • Railroad track maintenance credit
  • Subpart F exceptions for active financing income
  • Look through rules for related controlled foreign corporation payments

Energy:

For individuals and businesses, the new law extends some energy tax incentives.  The Code Sec. 25C, which rewards homeowners who make energy efficient improvements, with a tax credit is extended through 2013.  Businesses benefit from the extension of the Code Sec. 45 production tax credit for wind energy, credits for biofuels, credits for energy-efficient appliances, and many more.

Looking ahead

The negotiations and passage of the new law are likely a dress rehearsal for comprehensive tax reform during President Obama’s second term.  Both the President and the GOP have called for making the Tax Code more simple and fair for individuals and businesses.  The many proposals for tax reform include consolidation of the current individual income tax brackets, repeal of the AMT, moving the U.S. from a worldwide to territorial system of taxation, and a reduction in the corporate tax rate. Congress and the Obama administration also must tackle sequestration, which the American Taxpayer Relief Act delayed for two months. All this and more is expected to keep federal tax policy in the news in 2013. Our office will keep you posted of developments.

If you have any questions about the American Taxpayer Relief Act, please contact Azran Financial at (310) 691-5040 or (818) 691-1234 or via e-mail at [email protected]  We can schedule an appointment to discuss how the changes in the new law may be able to maximize your tax savings.

An S-corporation, such as yours, is a pass-through entity that is treated very much like a partnership for federal income tax purposes. As a result, all income is passed through to your shareholders and taxed at their individual tax rates. However, unlike a C corporation, an S corporation’s income is taxable to the shareholders when it is earned whether or not the corporation distributes the income. Because an S corporation has a unique tax structure that directly impacts shareholders, it is important for you to understand the S corporation distribution and loss limitations, as well as how and when items of income and expense are taxed, before developing your overall tax plan.

In addition, some S corporation income and expense items are subject to special rules and separate identification for tax purposes. Examples of separately stated items that could affect a shareholder’s tax liability include charitable contributions, capital gains, Sec. 179 expense deductions, foreign taxes, and net income or loss related to rental real estate activities.

These items, as well as income and losses, are passed through to the shareholder on a pro rata basis, which means that the amount passed through to each shareholder is dependent upon that shareholder’s stock ownership percentage. However, a shareholder’s portion of the losses and deductions may only be used to offset income from other sources to the extent that the total does not exceed the basis of the shareholder’s stock and the basis of any debt owed to the shareholder by the corporation. The S corporation losses and deductions are also subject to the passive-activity rules.

Other key points to consider when developing your comprehensive tax strategy include:

the availability of the Code Sec. 179 deduction at the corporate and shareholder level;

  1. reporting requirements for the domestic production activities deduction;
  2. the tax treatment of fringe benefits;
  3. below-market loans between shareholders and S corporations; and
  4. IRS scrutiny of distributions to shareholders who have not received compensation.

We can assist you in identifying and maximizing the potential tax savings. Please call our office at (310) 691-5040 or (818) 691-1234 or e-mail us at [email protected] to arrange an appointment.

The distinction between resident aliens and nonresident aliens is crucial because resident aliens, like U.S. citizens, are taxed on worldwide income, whereas nonresident aliens are taxed only on U.S. source income. Your status as a nonresident alien individual affords you many opportunities to take advantage of the U.S. tax laws.

We must verify your status as a nonresident alien as the first step in the tax planning process. This procedure is complicated due to the many compliance issues associated with residency. Sometimes residency is determined under an applicable tax treaty; however, if no treaty exists, you are treated as a resident only if one of the following three conditions is met:

  1. You are a “lawful permanent resident” of the U.S. at any time during the calendar year (i.e., you have been issued a “green card”).
  1. You meet the “substantial presence test” (i.e., you have been present in the U.S. on at least 183 days during a three year period that includes the current year), or
  1. You elect to be treated as a resident alien.

The absence of all of the preceding conditions generally indicates that you are a nonresident alien. Of course, there are exceptions to the general rules. For example, an alien individual who meets the “substantial presence test” may still be considered a nonresident alien if a “closer connection” is established with a tax home outside the United States. You may also qualify for dual status residency; if so, your tax year is divided into two separate tax periods. You are then taxed as a resident during one period and as a nonresident during the other.

There are specific rules for establishing and terminating residency, abandoning residency, and expatriating. In addition, all departing aliens (resident or nonresident) must obtain a certificate from the IRS, known as a sailing or departure permit, stating that they have complied with the U.S. income tax laws.

Once your nonresident alien status has been established, the sourcing rules are used to determine whether your income is from U.S. sources or from foreign sources. This is important because U.S. source income that is “effectively connected” with a trade or business in the United States is taxed at regular U.S. rates, and the usual deductions are allowed. Income that is “not effectively connected” and not covered by a treaty is taxed at a flat 30 percent rate. However, income that is covered by a treaty is taxed at the treaty rate, which can be less, but not more than the 30 percent rate.

You must be engaged in a trade or business in the United States to have effectively connected income (ECI). Items of income that are fixed or determinable, annual or periodical (FDAP), as well as capital gain income, are ECI if they meet the “business-activities test” or “asset-use test.” Examples of FDAP income are interest, dividends, rents, royalties and compensation. In addition, for payments made on or after September 14, 2010, “dividend equivalent payments” received by foreign persons are treated as U.S. source dividends subject to U.S. taxation.

As a nonresident alien, you are allowed only one personal exemption, unless you are a resident of Mexico or Canada. However, your country may have an income tax treaty with the United States that allows for more than one personal exemption. Generally, a nonresident alien cannot claim the standard deduction, but there is an exception for certain students from India. A nonresident is also allowed to take deductions for expenses related to ECI, and may claim certain itemized deductions and credits. If these benefits are available to you, they would reduce your U.S. tax burden. Besides income tax, you may be affected by alternative minimum tax, withholding tax, and estate tax issues.

Because your situation is unique, an analysis of your residency status, your income types and sources, as well as any treaty benefits you are eligible to claim, is an important part of your tax planning process. If you would like to discuss the potential benefits associated with your tax status, please contact our office.