Saturday, April 20, 2013

Hitched: Filing Taxes, For Better Or For Worse

Andrea Grimes for The Frisky.com  writes: This Sunday, Patrick and I will celebrate our first anniversary as married people. I would love to tell you the last twelve months have comprised a life-changing, soul-altering period of self-discovery and exploration of what it means to be in love. That this column will be full of witty and insightful paragraphs full of meaningful revelations.
“Would you marry me again?” I asked Patrick over beers at our local dive. Sure, he said, “But I wouldn’t plan another wedding.”
On that point, we’re agreed. And we’re also agreed on this point: the main thing that the last year of nuptial bliss — and it really has been bliss — has taught us is that being married isn’t significantly different than being everything but married.
In fact, the most significant difference between my pre-marriage life with Patrick and my post-marriage life with Patrick? Twenty dollars.
Our April anniversary, barring the possibility of a zombie apocalypse in which citizenship as we know it disappears into a brain-smeared ether, will always coincide with filing our taxes. So that’s a precious joy I can now share with my dear husband. A precious joy that cost me twenty dollars.
What twenty dollars? The twenty dollars more I owed the federal government for filing my taxes as a married person than as a single person. I’m not bothered about the dollar amount — though I could have used that money toward a couple of pitchers of beer — but I am a little bothered about why it happened in the first place.
Married people have two options: file taxes jointly with a spouse or separately with a spouse. Through the wonder of modern technology, specifically the Turbo Tax software on which I rely so heavily, I learned that because Patrick and I earn about the same amount of money, filing jointly will kind of fuck us.
As my parents, both CPA’s, explained to me during a marathon tax-filing phone call on Sunday night, bless every inch of their amazing selves, filing jointly is supposed to be a kind of governmental tip o’ the hat to married folks, but it really only works in your favor if there’s a primary breadwinner in the household. Otherwise — and this is what happened to us — making about the same amount of money can, in combination, knock you both up into a higher tax bracket than if you’d filed on your own as a single person. For a self-employed independent contractor like myself, for whom a tax return is but a beautiful dream, any way I can save on what I pay into my taxes is a boon.
My husband works for a salary, which in theory should mean he’s a tax return kind of guy. But when we file jointly, my taxes owed increase by four unhappy digits. Which means it can cost me thousands just to be married.
My read on this — and I’d be happy for any Frisky tax professionals to steer me wrong from this interpretation, because I really dislike it — is that the federal government presumes one partner is going to be a primary breadwinner. If that’s the case, it may not be a such big deal to file jointly with a significantly lesser-earning spouse.
Which, to me, paints a picture of a kind of marriage I’m unlikely to ever have. As child-free folks, neither Patrick nor I will ever need to take time off work to raise a kid. Barring a financial windfall, I’ll never primarily be a housewife, and he’ll never primarily be a househusband. We’ll both be working, and working hard, for the rest of our lives.
Of course, the idealized, uber-’50s fantasy marriage in which Husband brings home the bacon while Wifey stays dusting armoires and planning elaborate dinner parties, is just that: a fantasy. A largely white, affluent, imagined marriage realized by the Cleavers and the Romneys and few others.
On the other hand, it’s perfectly reasonable for one spouse to simply end up in a significantly higher-paying job than their partner, who could work in any number of industries, or stay home as a househusband or housewife or as a teacher — sadly, given the reluctance in this country to pay educators what they’re worth for the work they do. I get that, so I’m not arguing for an evil, Cleaver-pushing government conspiracy. But I am saying I don’t particularly like the implications as I read them.
I do think what happened to Patrick and me — and to be clear, I am not complaining about being in the exceedingly privileged position of finding gainful employment and paying taxes in the first place — points toward something that, as a culture, Americans have been reluctant to acknowledge: the economic realities of dual-earning households to which the Cleaver/Romney model doesn’t and has never applied. We’re confused on all kinds of levels, confused about whether women need to “lean in” (barf, let’s talk about men leaning out), confused about who “should” stay home with the kids, confused about women who make more than their male partners.
As I stared at my computer screen this week, flipping my Turbo Tax filing status from married to single and watching that twenty dollars fluctuate, I thought about all of those things. And then I wrote a check. And then I ate ice cream with my husband, who made a trip to the store during the whole financial wrangling ordeal just to bring home a sweet reward for my efforts. I didn’t mind the twenty dollars so much.
Because as frustrating as filing taxes is, it’s really nothing compared to planning a wedding.
Posted on 7:48 AM | Categories:

Are you a savvy manager of your IRA?

The Associated Press writes: Are you a savvy manager of your IRA? When it comes to retirement planning, most of the focus is placed on 401(k)s. The reality is that individual retirement accounts represent the largest share of America's savings.   At the end of last year, IRAs had $5.4 trillion in assets compared with $5.1 trillion in 401(k)s and other defined contribution plans. Some 40 percent of U.S. households own at least one type of IRA, which offer tax incentives to save for retirement.

Many of these IRA holders are left to their own devices to manage their accounts.
Of course, some investors are take-charge types with the ability to maximize savings without taking on too much risk. But in many other instances, portfolio management is hit-or-miss, with little attention to selecting an appropriate mix of mutual funds or other investments.
"Many individuals are still missing out on the long-term savings benefits of IRAs, simply because they don't understand what they are and how they work," said Dan Keady, director of financial planning for TIAA-CREF, a financial services company.

In a recent telephone survey of 1,008 adults, his company found that nearly half of the respondents lacked a basic knowledge.  IRAs provide individuals not covered by workplace retirement plans with an opportunity to save on a tax-advantaged basis on their own.
The money put into a traditional IRA can be deducted from the accountholder's taxable income for that year, and the money isn't taxed until it's withdrawn at retirement.
Also, workers who are leaving jobs can use IRAs to preserve the tax benefits that employer-sponsored plans offer.

Haphazard management
With so many IRA holders managing accounts on their own, approaches vary widely, often to the detriment of long-term savings.  For example, surveys by the fund industry's trade organization, the Investment Company Institute, found that low-yielding money-market mutual funds make up a far larger proportion of IRA portfolios than is typically considered appropriate.  For example, the ICI found that IRA holders in their 60s had invested nearly 25 percent of their portfolios in low-yielding money funds.

That's four times larger than the average allocation to money funds in 401(k) accounts owned by people in their 60s.  Perhaps even more surprising, IRAs held by people in their 20s had an average 22 percent in money funds.  Among the reasons cited for the unusually high weighting: Money funds are often a default investment for small rollovers into IRAs from other investment accounts, and IRA holders may be more likely than other investors to keep invested savings readily available for conversion to cash.

Most investors use money funds as parking places for cash that's temporarily kept out of higher-yielding investments. But it's no way to build retirement savings because money funds have offered returns barely above zero for the past four years.
David Schehr, who follows investment industry trends for Stamford-based research firm Gartner, said it appears that people "are a little better at investing for the long-term with their 401(k)s than they are with their IRAs."  He believes there's a growing need for products to help IRA owners manage accounts on their own.

Among the startup firms that have launched in recent years to address this need are online-based services such as Wealthfront, ShareBuilder, Betterment and Motif Investing.

New option

The latest entrant into this niche is Rebalance IRA, which launched in January. Its advisory board includes Burton Malkiel, a Princeton University economist and author of the investing classic, "A Random Walk Down Wall Street"; and Charles Ellis, founder of the investment consultancy Greenwich Associates and author of another renowned investing book, "Winning the Loser's Game." Both are advocates of low-cost index mutual funds and exchange-traded funds, which seek to match market performance rather than beat it.

Customers can set up portfolios invested exclusively in ETFs, after a free phone consultation with Rebalance IRA's professional financial advisers to assess their goals and existing investment accounts. Initial calls usually last around an hour.

For a $250 initial fee, a customized account is established and the adviser maintains periodic contact with the customer. A fee of 0.5 percent of the total assets invested is charged annually for portfolio management, with a minimum fee of $500. An accountholder also pays management expenses of the ETFs. Those expense ratios vary depending on which ETFs are selected, and average less than 0.20 percent.  Because Rebalance IRA's $500 minimum annual management charge per account is steep for someone with a small IRA, it's not recommended for an account with less than $75,000.

SYSTEMATIC APPROACH
The service includes automatic portfolio rebalancing to help IRA holders become more disciplined investors.  "People tend to buy when everybody is optimistic and the stock market is up, and sell when everybody is pessimistic and the market is down," Malkiel says. "Rebalancing makes you do the opposite of what your emotions tell you to do." He cited findings that systematic rebalancing over the last 15 years added 1.5 percentage points to an average annual return of a portfolio invested in stocks and bonds, while reducing volatility.
Schehr, the Gartner analyst, sees significant potential for start-ups like Rebalance IRA if they can market themselves effectively. "A lot of boomers really haven't dealt with how they're managing their IRAs," he says. "And with retirement around the corner, they're finding out they're late in the game to start taking charge of their accounts."
Posted on 7:47 AM | Categories:

Accountants without Borders

Daniel Hood for AccountingToday.com writes: Boundaries come naturally to us. From childhood, we eagerly identify ourselves by the street we live on, by town or city, by state, by country. With rare exceptions, we don't play with kids from outside our neighborhood, or root from teams outside our state, or think very highly of those who didn't have the good sense to be born and raised where we were.


In many ways, the structure of the accounting profession reinforces that awareness of boundaries. In the U.S., the profession is licensed state by state to patrol accounting standards that are set at a national level and that change from country to country. It answers to regulators at a number of different levels, and earns a sizable portion of its fees helping businesses comply with rules set by different levels of government and in carefully delineated areas of tax jurisdiction. One of the most important skills that accountants can offer their clients is knowing what rules apply within which boundaries.
This is not a problem; in fact, in most cases it makes perfect sense to focus on the local, however you define it. Being close enough to meet face to face with your clients is a good thing, as is having a deep knowledge of your state's tax incentives, or its business regulations. Being strong within your boundaries is a good thing -- as long as it doesn't limit you to those boundaries.
The reason this matters is that, while your accounting practice is often delineated by jurisdictions, many of your clients' businesses are not. Machine tools and computer parts and software travel a lot better than tax returns and audits of U.S. GAAP, and more and more of your clients are discovering this as part of the sometimes-desperate scramble for profit unleashed by the recent economic unpleasantness. If they can't sell to their usual customers in the U.S., the modern web of air and sea links makes it easy to send goods around the world, while the modern Web makes it easy to find new customers in Germany or China or Africa. All but the most stubbornly local products (think haircuts and hot coffee) can be sent around the world, and all but the smallest of your business clients is now able to take advantage of this new globalization.
So U.S. businesses that previously would have been deemed too small to move abroad are searching out new markets around the world, even as foreign businesses seek out new markets in the U.S., whether in the automotive corridors of the South or among the tech players of Silicon Valley or the investment banks of New York. And as they come and go, crossing boundaries with abandon, they are discovering that they need the kinds of services they expect on a local basis from their accountants:How do we report this? Do we have to pay tax on this, and who to? Do we need a license for this? Can we hire part-time workers there?
Now, no accounting firm can know all the answers for the whole world. But any accounting firm should know how to find them. In some cases, it may be expertise the firm develops in-house or partners for; for instance, if you work with electronics developers, it may make sense to know something about the countries where they source their components. In other cases, your firm may need to join up with an international network or association, in order to be able to comfortably refer globetrotting clients to local expertise wherever they end up.
Just as this globalization is an opportunity for your clients, it's an opportunity for you and your firm -- an opportunity to deepen relationships with precisely the kind of growing clients you want to keep, while developing skills that can attract new ones.
All you need to do is to remember that being strong at home doesn't mean you never leave the house.
Posted on 7:47 AM | Categories:

I Want to Live in America!- Part I Tax Planning Considerations for Foreign Scientists and Engineers

Gerald Nowotny for JDSupra.com writes: Overview/ As discussions regarding immigration reform continue to unfold, one point that is not under discussion or subject to debate is the contribution of foreign scientists and engineers to the New Economy. The statistics are pretty startling.
According to a 2012 report from the Information Technology Industry Council, the Partnership for a New American Economy, and the U.S. Chamber of Commerce, research has found that “every foreign-born student who graduates from a U.S. university with an advanced degree and stays to work in the U.S.  has been shown to create on average 2.62 jobs for American workers—often because they help lead in innovation, research, and development.”
A 2011 report from the Partnership for a New American Economy concluded that immigrants were founders of 18 percent of all Fortune 500 companies, many of which are high-tech giants.
A 2007 study by researchers at Duke University and Harvard University concluded that one-quarter of all engineering and technology-related companies founded in the United States from 1995 to 2005 “had at least one immigrant key founder.”
A 2006 study by the National Venture Capital Association found that, during the previous 15 years, immigrants started one-quarter of the public companies in the United States backed by venture capital. These companies had a market capitalization of more than $500 billion and employed 220,000 workers in the United States in 2006.
One of the aspects that is recently of interest to me is the tax planning of foreign scientists and engineers who emigrate to the U.S. and become part of the New Economy. In many cases, these scientists become naturalized citizens. In other cases, they are green card holders. One thing is for certain though, green card or naught, Uncle Sam taxes these scientists on their worldwide income and assets once they become citizens or obtain a green card.
Questions 67 and 68
The interesting question is the tax treatment of the sale of company shares following the initial public offering (IPO) of the technology companies for these foreign-born scientists and engineers. In many cases, these scientists still have family members living in the scientist's home country. When you consider the impact of an IPO on the personal tax planning of these scientists and engineers, the foreign-based parents become an important planning fact.
Is there an opportunity for the foreign-born scientist or engineer to avoid U.S. capital gains taxation on the sale of the shares following the IPO and restriction period on the sale of shares? Can the proceeds be reinvested without U.S. taxation? Can the foreign-born scientist, a green card holder or naturalized citizen receive tax-free distributions from a foreign trust.
The answer is "Yes" but the path to Shangri La is a minefield.
Foreign Grantor Trusts
While it is true that Congress enacted legislation in 1996 to make it very difficult for American taxpayers to utilize and exploit foreign trusts to avoid U.S. income taxes, it is not impossible. The foreign scientist who owns a million shares of founder's stock in his company that is about to undergo an IPO can minimize the impact of U.S. taxes on the value of those proceeds when the stock is sold following the expiration of a restriction period on the sale of the stock. The planning structure is a foreign trust that is treated as a grantor trust with respect to the non-citizen parents or settlors who establish the trust.
A trust is a foreign trust unless both of the following conditions are satisfied: (i) a court or courts within the U.S. must be able to exercise primary supervision over administration of the trust; and (ii) one or more U.S. persons have the authority to control all substantial decisions of the trust.
Under this test, a trust may be a foreign trust even if it was created by a U.S. person, all of its assets are located in the U.S., and all of its beneficiaries are U.S. persons. All it takes is one foreign person who has control over one “substantial” type of trust decision.
No tax consequences are imposed on a U.S. person on account of the creation of a foreign trust, but, under some circumstances, income tax may be imposed on her transfer of property to a foreign trust, whether that trust was created by her or by another. Code § 684 treats a transfer of an item of property by a U.S. person to a foreign trust as a sale or exchange for an amount equal to the fair market value of the property transferred and requires that the transferor recognize gain (but not loss) on the excess of such fair market value over her basis in the transferred property. This rule does not apply to the extent that any person (including the transferor) is treated as the owner of such trust under the grantor trust rules.
If a foreign trust to which a U.S. person has made any direct or indirect gratuitous transfers has one or more U.S. beneficiaries, Code § 679 treats the trust as a so-called “grantor trust” owned by the U.S. person within the meaning of Code § 671 to the extent of her transfer. A transfer is not a gratuitous transfer if it was made for full fair market value. If the transferor is the grantor or a beneficiary of the trust, any obligation issued by the trust is disregarded, except as provided in the regulations. A Qualified Obligation must not have a term that exceeds five years with an interest equal to the Applicable Federal Rate. This is a key exception to IRC Sec 679 and the application of the grantor trust
Strategy Example
Facts
Bobby Singh, age 35,  is a software engineer from Mumbai that came to the U.S. to attend MIT. After graduation he moved to Silicon Valley to work for a high tech start up. The company is planning an IPO later in 2013 or in early 2014. Bobby has one million of Founder's shares with negligible cost basis. The current IRC Sec 409A valuation of the shares is $10 million per share. Bobby has a sister living in the U.S. but his Mom and Dad still live in India. Bobby is married with two small children. He is an American citizen. Taxation in India for his parents on the investment income is also a planning issue  as Indian tax authorities attempt to capture more tax revenue on worldwide income for Indian domiciled and resident taxpayers. 
In California, the combined federal and state capital gains taxes on the Founder's shares would be 37.1 percent which is almost equal to the top federal marginal tax bracket on ordinary income.
Strategy
IRC Sec 679 and IRC Sec 684 would apply generally upon the transfer of  Bobby's Founder shares treating Bobby as the owner of trust assets for income tax purposes. Absent grantor trust status, the transfer of Founder's Shares would result in an immediate tax on the gain at the time of the transfer at a 35 percent tax rate. Bobby's company allows for the intra-family transfer of shares for tax planning purposes.
Bobby will rely on the exception for the sale on a fair market value basis to a foreign corporation owned and controlled by his parents. The Founder's shares are transferred to a Nevada LLC. Bobby retains a one percent managing member interest and sells the remaining 99 percent of the LLC interests to a Newco. The sales price of the LLC interests are discounted 35 percent reflecting a valuation discount for lack of control (non-voting interests) and lack of marketability (closely held) from the current 409A price of the Founder's shares.
The sales price at $6.50 per share of 750,000 shares is $4.87 million. The down payment is $243,000.  Bobby gifts the down payment to his parents. The installment not provides for interest only payments at one percent per year with a balloon payment in Year 5. Bobby will most likely forgive the balance of the loan to the foreign corporation.
The sale LLC interests should are sold on an installment sale basis to a UK corporation. Newco is incorporated in the UK but has its management and control located in Malta. As a result, under the UK-Malta tax treaty, the company is a considered a Maltese tax resident. Under Maltese tax law, the taxpayer is only taxed on income remitted to Malta. Newco is not subject to taxation in the UK. Additionally, the company is exempted from the Indian Controlled Foreign Corporation rules.
Bobby's parents are the settlors of irrevocable trust in Jersey. They contribute the shares of the company to the trust. Under U.S. tax law, they will be considered the grantors of the trust for U.S. taxpayers. Hence, the trust will not be taxed on the sale of the Founder's shares for U.S tax purposes following the IPO and restriction period.  The trust will not be taxed on U.S. income unless it is effectively connected to a U.S. trade or business or fixed and determinable or periodic income (FADP). Additionally, Bobby's parents will be able to avoid current taxation for Indian tax purposes.
Following the sale of Founder's shares in the foreign trust, the trustee's appoint some of the trust assets to domestic irrevocable trust in a Nevada which has not no income taxation on trust income. Bobby's parents take distributions from the trust and make tax-free gifts to Bobby and his sister each year.
Summary
The foreign trust rules and income taxation of foreign trusts are extremely complex. The rules are designed to prevent the legal avoidance of U.S. income using foreign trusts. While the rules are complex, it is not impossible to achieve the objective. This is the first installment of several installments focusing on the foreign trust planning and taxation. The fact pattern above is not that rare and presents a planning opportunity for foreign-born scientists and engineers that find themselves in the fortuitous position of realizing their American Dream. Unfortunately, many may have missed the planning opportunity but better late than never.
Posted on 7:47 AM | Categories:

401(k) Plans Work in a Balanced Approach to Retirement Security

Mike McNamee for Investment Company Institute writes:   “Prediction is very difficult, especially about the future.”
– Said by either Nobel Prize-winning physicist Niels Bohr or New York Yankee Yogi Berra, depending on which source you consult.
What’s the outlook for American workers looking forward to retirement? Though the future is never entirely predictable, there’s ample data to show how our country’s retirement system is working today, and how it’s building resources for the decades ahead. In particular, researchers are studying how the increasing use of 401(k) and other defined contribution plans has affected Americans’ preparedness for retirement.
The answer, according to a growing body of research: taken as part of a broader retirement system, 401(k)s work for working Americans. Retirees do face legitimate risks—but the decline of private-sector defined benefit (DB) plans and the rise of defined contribution (DC) plans, such as 401(k) plans, isn’t one of them. This shift isn’t unlikely to reduce retirement preparedness.
That may come as a surprise to many readers. In this series, ICI Viewpoints is addressing key features of 401(k) plans and the broader retirement system of which they’re a part. That requires puncturing myths that sometimes dominate discussions of retirement policy—and providing facts that often don’t show up.

Evidence of Success

In ICI’s 2012 paper, “The Success of the U.S. Retirement System,” my Research colleagues Peter Brady, Kimberly Burham, and Sarah Holden lay out results of the latest research on Americans’ retirement prospects.
Among other things, they show that Americans rely on a “pyramid” of resources for their income in retirement. At the base is Social Security, which provides a strong foundation of inflation-protected retirement income for almost all workers. For the majority, Social Security may be the largest single source of income in retirement.
Atop that foundation, retirees can build their retirement by drawing upon the benefits of homeownership; upon employer-sponsored retirement plans, including both DB and DC plans; upon contributory and rollover individual retirement accounts (IRAs); and upon other savings. The composition of the retirement resource pyramid varies across households, and different households depend on each of these components to different degrees, depending on lifetime income, work history, and other factors.
Though Social Security and homeownership are primary sources of retirement resources, employer-sponsored retirement plans remain crucial for most households: data from the Survey of Consumer Finances (SCF), conducted by the Federal Reserve Board, show that about 80 percent of near-retiree households hold retirement resources in DB or DC plans or IRAs.
The retirement resource pyramid is working for most Americans. Research shows that workers have accumulated sufficient resources to maintain their standard of living in retirement, while analysis of the transition into retirement shows that most households maintain both consumption and after-tax income at the same level in the first years after retirement as when they were working. Moreover, studies that examine households later in retirement find that, on average, retirees maintain sufficient wealth to generate as much income as they could early in retirement.
The research also shows that retirement outcomes have been improving over time. For example, academic analysis (examples can be found here and here) has found that successive generations of Americans have reached retirement wealthier than the last. Assets specifically earmarked for retirement are now at record levels: adjusted for inflation and population growth, retirement assets have increased nearly sixfold since 1975, while the poverty rate among individuals aged 65 or older has declined from nearly 30 percent in 1966 to 9 percent in 2011.
And despite concerns about the DB-to-DC shift, the share of retirees receiving income from private-sector retirement plans and the amount of income that those retirees receive has gone up over time, not down.
That’s the picture for current retirees. What’s the outlook for today’s workers?
Although few workers have had access to a 401(k) for a full working career, several studies show that the typical participant can accumulate enough in a 401(k) to provide adequate retirement resources, when combined with Social Security and other resources. In part, this reflects the balanced incentives of 401(k) plans, which encourage participation and savings across the income spectrum.
Research also shows that many workers, particularly workers who change jobs frequently, will be better off with a DC plan than a DB plan, even when taking into account the risks faced by participants in either type of plan (for example, the investment risk faced by workers in DC plans and the job-turnover risk faced by workers in DB plans).
In testimony submitted in January 2013 to the U.S. Senate Committee on Health, Education, Labor and Pensions, ICI reviewed a Dartmouth College study that compared typical DB plans with typical 401(k) plans, using SCF data in a variety of possible labor market and investment return scenarios, concluded that “generally, 401(k) plans ... are as good or better than DB plans in providing for retirement.” Furthermore, in an analysis of data from the University of Michigan’s Health and Retirement Study (HRS) that looked at both detailed descriptions of retirement plans and the actual work histories of individuals, economists from MIT, University of Chicago, Dartmouth, and Harvard projected that retirement resources will be higher on average with private-sector DC plans than they would be with private-sector DB plans.

The 401(k) System Has Unique Benefits

Why has the 401(k) developed to be such a successful retirement tool? Three key elements make the 401(k) a success today.
Portability. Americans are a mobile workforce, and it’s not unusual for them to move from job to job—even career to career. 401(k) benefits are portable and can travel with a worker and continue to grow throughout his or her lifetime.
Ownership. 401(k) owners own actual assets—not a promise of future benefits. Participants have full rights to their own contributions and their investment earnings, subject only to the tax rules that encourage workers to preserve their savings for retirement. The design of 401(k) plans also helps limit the impact of investment shocks and mitigate risks. For example, workers invest paycheck-by-paycheck (enabling them to take advantage of the benefits of dollar-cost averaging) in accounts that tend to be diversified.
Innovation. Innovation has created new, convenient services for participants, including daily balances, web-based retirement-planning tools, and call centers. Innovation has also helped boost participation—and retirement security. For example, employers can use automatic enrollment to get more workers into plans—a key social innovation that uses workers’ inertia to boost, rather than depress, saving. Employers also can use auto-escalation of workers’ contribution rates to increase savings rates.
In addition, more than 70 percent of 401(k) plans offer target date funds—innovative funds that allocate savings between stocks and bonds based on workers’ retirement horizon, and rebalance those holdings as markets move and savers age. These funds provide diversification, keep 401(k) participants exposed to growth assets as part of a balanced portfolio, and help them rebalance in a timely and disciplined manner.
When talking about the adequacy of the 401(k) system to meet Americans’ retirement needs, it’s useful to remember that saving is really a lifecycle issue. People’s focus on formal retirement savings typically occurs later in their working career—meaning households are more likely to focus on saving for retirement as they near retirement age and as their income increases. Consequently, distinct “snapshots” of coverage rates in any given year understate the share of the population who will retire with work-related retirement benefits.
Though it’s hard to make predictions, participants are committed to the value and benefits provided by the 401(k) system. What is clear, as the research from ICI and others show, is that 401(k) and other DC plans are key parts of a balanced approach for achieving retirement security for working Americans.
Posted on 7:46 AM | Categories:

Look Before You Leap from an S to a C Corporation

Roger Russel for AccountingToday writes: It might be tempting for small business owners, and their advisors, to contemplate the higher tax rates on individuals spawned by the American Tax Relief Act, and conclude that switching their S corporation to a C corporation makes sense. ATRA, passed to avert the fiscal cliff, raised tax rates for highest income individuals to 39.6 percent, alongside the 3.8 percent Medicare tax for married taxpayers with adjusted gross income over $250,000 ($200,000 for single taxpayers).


Since taxation of a C corporation is based on its earnings, while S corporation shareholders are subject to personal income tax based on the company’s earnings, it might make sense to be taxed as a C corporation subject to the lower corporate tax rate. Not necessarily so, said John Evans, CPA, a partner in the tax group at New York-based Marks Paneth & Shron LLP.
“The smart move will be to avoid that immediate, knee-jerk reaction,” he said. “You may think you’re lowering your tax obligations by being a C corporation and have the company pay the taxes at a lower rate. The reality is you’ll still probably save by remaining or becoming a flow-through entity such as an S corporation.”
There are a number of reasons why the owners of a growing company should retain its S designation, according to Evans.
“Double taxation of corporations is what I see most people miss,” he said.
Evans provided a few examples to illustrate the continued advantage of operating as an S corporation:
“Say an accrual basis company earns $1,000,000 in profit. If it’s a C corporation, it pays $350,000 in income taxes. Its shareholder also pay a 23.8 percent tax on the retained earnings when they are distributed, so there are two levels of tax that reduce the shareholders’ net cash distribution to $495,000. If the company is an S corporation, the income flows through to the owners, who pay as little as $396,000 in income tax. The S corporation owners are left with $604,000, or $109,000 more than the C corporation owners.”
Double taxation surfaces again if and when the business is sold, Evans observed.
“If it’s a regular corporation and it sells its assets, there is gain at the corporate level, and then tax is paid again when the proceeds are distributed to shareholders,” he said.
“Say a company finds a buyer for all its assets and one of the assets to be sold is self-created goodwill with a fair market value of $5 million and no tax basis,” he said. “If it’s a C corporation, it is subject to $1.75 million in corporate taxes. The remainder is distributed to the owners who must then pay $774,000 in capital gains tax on that amount.”
However, the result is more favorable if the company is an S corporation, Evans indicated. “In the case of an S corporation, the $5 million flows through to the shareholders as a capital gain and they pay $1 million in taxes. The S corporation owners are left with $4 million after taxes, while the C corporation owners are left with approximately $2.5 million—a savings of $1.5 million in taxes as a result of operating as an S corporation.”
As with all tax planning, people shouldn’t make quick decisions to change their entity based solely on tax rates, since the result may be different when they run the numbers.

1 Comment

As an attorney that deals with Asset Protection planning for business owners nationwide I'd add that other corporate forms, including LLCs that elect "S" taxation also generally provide a substantially higher degree of creditor protection for the business and its owners. I'm thrilled to see this simple analysis I can share with clients as many times when tell me teh have a C-Corp. and I ask "why?" they have no idea or say, "Because that's the way my old lawyer/cpa etc. sets them up".
Ike Devji, J.D.
Posted on 7:46 AM | Categories:

CAVEAT EMPTOR: TAX PLANNING IN THE NEW NORMAL

Charlie Jordan for Brightworth writes: During the height of the 2008/2009 financial crisis, Rahm Emanuel, then Chief of Staff to President-elect Barack Obama, made the infamous statement “You never want to let a serious crisis go to waste.” In all fairness to now Mayor Emanuel, his point was that crises create the opportunity and the catalyst for action that may or may not have been possible, or even appropriate, beforehand.
One recent “disaster” was averted on January 2nd of this year when President Obama signed The American Taxpayer Relief Act of 2012, avoiding the dreaded “fiscal cliff”. For high-income taxpayers, the bill: increased the top marginal rate to 39.6%, increased long-term capital gain rates to 20%, put a cap on itemized deductions and phasedout personal exemptions. When you combine these increases with the new Medicare surtax provisions coming into effect, high-income individuals now have an income tax problem greater than before. They may feel like it’s their “crisis”.
Well to solve this crisis, here come the bright flyers, magazine ads, promotional seminars, and internet advertising for the tax product dujour. Yet keep in mind the action you should take isn’t to suddenly change your whole financial strategy, or put all of your money into one special product. It’s to do more proactive, holistic tax planning. This is our new normal.
Here are three key considerations when evaluating strategies to address higher taxes.
Focus on your goals first
With any tax planning strategy, first take your financial goals into consideration. For many people, their main goal isn’t to save every penny in tax that they can. Goals tend to be larger and more meaningful; retiring at 55, putting my kids through college and coming out debt-free, etc. Keep in mind there are numerous financial products that shield assets from taxes, such as non-qualified annuities and permanent life insurance. They can serve as suitable and appropriate options for lowering your income tax bill, but may have other potentially negative side effects. Do they fit in with the rest of your coordinated plan? How are they going to help you meet your objectives? Focus on your goals first and then align the strategies and products that will move you closer to accomplishing those goals.
Ask questions and understand the strategy
There are many highly-complex strategies and products sold that are often misunderstood by both the investor and the advisor. Your advisor should be able to clearly explain why a particular strategy is being recommended and how it ties into the rest of your financial plan. Do not be afraid to ask questions and use your intuition. If something makes you uneasy, either seek to better understand or do not move forward. And of course, especially when evaluating a financial product, if it sounds too good to be true, it probably is.
Work with an objective and coordinated team of trusted advisors
Finally, make sure your advisor, CPA, attorney and insurance professional are all on the same page. Having two or more objective sets of eyes on a potential strategy will reduce the likelihood of a financial pitfall. The most effective teams are ones that have earned the trust of their clients.
Innovation is not dead in the financial world and is a good thing for investors. As tax laws continue to change, there will be creative and novel approaches to mitigating the impact. With that being said, there are potholes and traps along the way that need to be avoided. Investors should surround themselves with objective and wise counsel that they trust and seek to understand how any given strategy will help get them from where they are today to where they want to be in the future.
Posted on 7:46 AM | Categories:

Run a business from your mobile phone / Top 10 apps for small business

Xenios Thrasyvoulou for ManagementToday writes:  How many business meetings have you been to lately where someone hasn’t pulled out their smartphone or iPad to take notes or to look up information?


Thanks to the wonders of technology and the ever-developing cloud, small businesses are taking advantage of the power of mobile, and owners are being liberated from their desks. A recent PeoplePerHour poll found that a staggering 73% of business owners use apps to run their businesses on a daily basis.

The most obvious advantage is the freedom; having the ability to keep in touch with staff and clients from anywhere with an internet connection. If you think that your mobile or tablet isn’t meant as a business tool, think again. As they say, there’s an app for everything, including streamlining processes and operations. Business apps include the basics, like email and calendar management, to CRM tools, accounting, HR and even sales, which could mean a real difference to your bottom line.
The top ten apps for small business owners who want to run their firms on the go are:

Document editing

Google Drive: Google Drive is ubiquitous for a reason. You can store all of your business documents in the cloud, track changes and create new documents on the go - a no-brainer for small business owners.

Notes on the move

Evernote: This is a fantastic note-taking and bookmarking application that works with nearly every computer, phone or mobile device out there. You can capture your ‘eureka’ moments when you’re out and about and share between a number of users.

Cheap/free calls

Skype: What business couldn’t make great use of free calls? Especially if you have the need to make international calls on a regular basis. The quality of the call is also pretty good for VoIP.

Video conferencing

Webex: This clever app lets you attend and schedule meetings in HD video around the world saving potentially thousands of pounds on the cost of flights. You can also arrange and host webinars.
Posted on 7:46 AM | Categories:

eBay's Mobile Efforts, Global Push Deliver Solid Growth (mobile payments & international markets)

Trefis @ SeekingAlpha writes: eBay (EBAY) continued its strong performance in the first quarter of 2013 as growth in new users lifted net revenues by 14% y-o-y to $3.7 billion. The trend was helped by the ongoing adoption of m-commerce and the company’s expansion into international markets. It added over 2.8 million new users to eBay and PayPal through mobile devices in Q1. The digitization of local storefronts presents an enormous opportunity for the company, and we expect it to continue its impressive run in the near term. This should help eBay achieve its target of $300 billion in commerce volumes by 2015, up 70% from 2012. It took its first steps in this direction by registering $49 billion in commerce volumes in Q1, up 19% y-o-y.
The company’s recent performance was helped by its continuing push for global expansion. More than half of its users and commerce volumes now comes from outside the U.S. The company plans to continue focusing on emerging growth markets such as Russia, Brazil, India and China. It is working to expand PayPal’s offline presence to drive future growth. PayPal’s tie-up with Discover Financial Services (DFS) will come into effect in Q2 and its collaboration with ATM Company NCR will expand its presence to restaurants and gas stations. [1] We expect PayPal to lead revenue growth for eBay in 2013 and soon overtake Marketplaces to become the largest revenue contributing segment. Here we take a look at how eBay’s primary businesses performed in Q1 and the trends that will affect them in 2013.
eBay competes primarily with Google (GOOG), Square, Intuit GoPayment and few other companies in the payments space, and Amazon (AMZN) in e-commerce.
PayPal Drives eBay’s Growth
PayPal had a strong quarter with revenue up 20% to $1.5 billion driven by PayPal’s adoption as a reliable payment gateway. Expanding merchant coverage through hardware launches to support offline presence and global expansion supported the rapid growth in PayPal’s adoption. It finished the quarter with 128 million active accounts globally, adding 5 million new active accounts during the period. eBay stated that over the past 12 months, one out of every four PayPal account holders made at least one purchase through mobile. We expect PayPal’s adoption growth rate to accelerate as its in-store point of sale solution becomes available in more stores beyond the almost 20,000 retail locations currently and the Discover partnership goes live in Q2. The growth will be helped by global expansion as the chip and pen version PayPal Here becomes available across Europe.
eBay’s other payment service, Bill Me Later, also had a good quarter. Standalone, Bill Me Later enabled Total Payment Volume of $849 million, up 31% y-o-y. The service’s penetration as a funding source in the Paypal Wallet was ~4% share on eBay and ~2% on merchant services. This helped improve PayPal’s funding mix and reduce funding costs. We expect Bill Me Later’s increasing relevance to further help PayPal reduce costs.
Marketplaces Keeps Pace With PayPal’s Growth
In Q1, eBay’s core Gross Merchandise Volume (GMV) grew 13% y-o-y to $18 billion. In the U.S., core GMV was up 16% to $7.4 billion. Global active users increased 13% to 116 million. The company attributed the strong performance to continued site improvements such as streamlined registration and checkout and the full launch of a new look and feel in the U.S. and select international markets.
The quarter further underlined eBay’s growing emergence as a retail destination - pitting it as an alternative to Amazon.com. During the quarter, fixed price listings accounted for 68% of global GMV. eBay also announced a simplified pricing structure for U.S. sellers, including free listings for customers and eBay store sellers in Q1. We expect the benefits of the new pricing structure to become evident in Q2. Besides the effect of a new pricing structure, marketplaces’ performance in Q2 will also be helped by the company’s push in BRIC (Brazil, Russia, India and China) countries. The company officially launched its localized website in Russia in Q1 and a full marketing campaign, which includes TV, is set for launch in Q2. In India, the company recently reduced its fee to attract sellers.
GSI Commerce Matches Steps Towards Growth
GSI’s ability to enable its clients to grow faster than the e-commerce market has led leading retailers and brands like Kate Spade and Dick’s Sporting Goods to sign up for its services. The segment recorded revenues of $236 million in Q1, flat over last year while same-store sales grew 16%. This was due to the combined effect of strong volume growth and a lower take rate. eBay now expects the continued integration of GSI and its ability to deliver innovative omni-channel solutions to support similar growth in the near future. The company expects to add 30 new clients by the year-end.
We believe that GSI’s popularity with retailers will help eBay’s plans for PayPal. PayPal’s coverage is currently more than 90% of GSI’s client volumes and its share of checkout was 14% during the quarter. With GSI leveraging eBay technologies such as Red Laser and Magento to build solutions for clients, we expect GSI’s popularity to increase in the near term.
We currently have a $54 price estimate for eBay which is being revised.
Posted on 7:45 AM | Categories:

Treaties & tax planning – digital economy spurs reboot

KPMG writes: Since the economic crisis began, corporate tax planning that shifts profits among jurisdictions to reduce tax has come under fire. From hearings in the UK’s House of Lords to the G20’s 2013 World Economic Forum, the emphasis on tax morality is gaining steam, prompting more calls for large corporations to pay back their 'fair share' of tax to the communities in which they earn their profits.


Governments globally and across the Asia Pacific are examining treaty-based transactions more closely in audits. They are also looking into ways to update traditional tax treaty principles to address how profits are made in the digital economy.


There are three areas of biggest concern for companies employing tax-effective treaty-based structures for their Asia Pacific investments and operations:


  1. 'permanent establishment' concepts
  2. intellectual property planning
  3. treaty shopping and beneficial ownership issues.


'Permanent establishment' concepts

While it remains well suited to issues involving physical manufacturing and retail operations with tangible inputs and products, policy makers realize that the ‘permanent establishment’ concept is ill-equipped for dealing issues arising from transactions in the digital economy.


With online shopping, both buyer and seller can be located anywhere. Sales can be solicited from outside a jurisdiction, and physical goods can be sold in a country without the seller’s presence, so the business activity required to create a permanent establishment does not exist and no tax obligation is triggered.


Beyond online sales, the internet has fostered revenue streams even more removed from traditional sales of goods and services that occur at specific places. Exactly where these activities are located for tax purposes raises questions that current taxation principles cannot answer.


Australia and France
In the quest to develop answers, the governments of Australia and France are perhaps the most advanced. Australia has struck an advisory committee of policy makers and tax professionals to determine how to collect revenue from non-residents on their profits derived in Australia from digital economy activities. So far, the committee’s thinking appears to be influenced by a report1 on taxation and the digital economy issued by the government of France in February 2013.


The French report (known as the 'Colin & Collin' report, after its co-authors) notes that the activities of digital companies lack 'points of stability' required to create a permanent establishment. The report calls for the concept to be redefined to encompass 'permanent virtual establishments' that earn income from digital economy activities in countries without any fixed base. The report also points out that current tax concepts do not address data created by users. Based on this argument, the report calls for a tax on data collection through regular and systematic monitoring of users’ activity in France. Such a tax could be introduced in France as early as 2014.


The Australian government is similarly committed to collecting a greater share of the tax revenue from e-commerce, and so companies should consider making submissions to the advisory committee.


China
China’s domestic tax regulatory framework lags behind Australia and France in the cross-border taxation of e-commerce. The Chinese tax authorities have referred to the OECD discussion paper titled Attribution of Profit to a Permanent Establishment Involved in Electronic Commerce Transactionson, and they are increasing scrutiny on inbound business-to-business e-commerce and cloud computing transactions. However, the levels of sophistication and experience of the Chinese tax authorities in different locations still vary. Non-resident enterprises conducting e-commerce in China should perform tax risk analyses and prepare detailed supporting documents to support their tax positions, taking technical merits and local administrative practices into account.


India
The e-commerce industry in India is rapidly expanding, with analysts projecting a five-fold increase in revenues by 2016, compared to 2012. To help address taxation issues arising from transactions in this sector, in 2001, the Indian Government constituted a High Powered Committee (HPC). The HPC’s report agreed with the OECD Technical Advisory Group’s thinking at the time that e-commerce and regular commerce transactions should be treated tax-neutrally. The HPC also recommended developing an alternative permanent establishment concept for e-commerce transactions.


Since then, no legal principles for tax e-commerce transactions have been codified, leading to substantial litigation in the area, particularly over the taxation of software. Indian courts and tax tribunals have tended to followed the OECD’s e-commerce principles, ruling that the use of copyrighted articles does not give rise to royalties and so Indian withholding tax applies. The issue is now pending before India’s Supreme Court.


Further, India recently amended its domestic tax law retroactively to provide that payments for use of computer software would give rise to royalties. Under India’s domestic law, royalties are defined broadly and they are taxable as passive income. But despite their domestic tax impact, these amendments cannot be read into a tax treaty, as affirmed by the Indian courts in WNS North America Inc.


India’s government has formed an expert committee to examine tax issues related to the information technology and information technology enabled services sector. Its report is due for release in April 2013. To help reduce litigation, the government also formed an advisory panel to examine international tax and transfer pricing issues. As the committees attempt to develop solutions, many companies in India are invoking mutual agreement procedures under tax treaties to help resolve issues regarding permanent establishment attribution in the digital economy.



Intellectual property planning – high value and mobility

Intellectual property plays a central role in driving value for many global businesses in the digital economy, especially marketing related assets (such as trademarks, designs and logos) and technology-related assets (such as patents).


The intangible nature of these assets makes it easy to move their ownership to new locations. These assets can generate both costs and income depending on whether they are being developed or exploited. In development, grants and tax relief may be available. During exploitation, the rate at which profits are taxed becomes more important. Intellectual property planning involves holding mature assets in lower-tax jurisdictions, relying on transfer pricing and treaty-based withholding tax reductions on royalties to reduce the global company’s overall tax bill.


China
Some governments, such as China, have put in place measures to encourage foreign enterprises to move and hold valuable intellectual properties in their countries. For example, under China’s 'high-and-new technology enterprise' program, qualified companies pay corporate income tax at 15 percent, rather the usual 25 percent rate. A key condition to qualify for this treatment is that the Chinese enterprise has core intellectual property situated in China. Further, Chinese companies that conduct R&D activities to develop their own intangible properties can claim a 150 percent bonus deduction.

IndiaIn India income from intellectual property is governed by current domestic tax laws. Indian tax authorities are looking into issues regarding:


  • situs of incorporeal assets on inter-group transfers of intellectual property
  • apportionment of income attributable to Indian operations
  • transfer pricing and indirect taxes.


The Authority for Advance Rulings recently held that the transfer of intellectual property and related rights owned by a foreign company to another foreign company was taxable in India in view of nexus of the intellectual property with an Indian subsidiary of the transferor. The definition of capital asset in the domestic tax laws has also been amended to include any rights that could be interpreted to include intellectual property rights.


With India gearing up to enforce its general anti-avoidance rules (GAAR) from 1 April 2016, any tax planning measures undertaken purely with a tax motive could be characterized as tax avoidance transactions and disregarded. Thus intellectual property migration should be backed by sound commercial rationale. As Indian transfer pricing authorities are closely scrutinizing valuations done on transfer, companies should ensure intellectual property valuations have the strength to withstand the test of transfer pricing audits.


Australia
Australia is taking action on several fronts to defend its tax base against inappropriate profit shifting involving intellectual property:


  • New rules introduced in February 2013 go beyond the traditional arm’s length principle for determining transfer prices, requiring them to be set with an eye to the broader economic and business context in the allocation of expected profits among international groups.
  • Australia is reviewing the permanent establishment terms of its tax treaties to address intellectual property concerns.
  • Australia’s domestic GAAR can override the terms of tax treaties, giving it more power to tackle treaty-based intellectual property planning structures. Intellectual property planning structures are also being challenged on the basis that the entity that owns the property lacks sufficient business substance in the treaty country, under the beneficial ownership rules.



Treaty shopping and beneficial ownership issues

A third issue of top priority for many Asia Pacific tax authorities is treaty shopping, by which residents of third countries gain inappropriate access to tax treaty benefits. This access is often achieved through the use of shell corporations set up in treaty countries. While traditional companies have engaged in such planning for some time, the high mobility and lack of physical location of activities in the digital economy facilitates its use by companies in the sector.


China 
Many countries, including India and China, employ so-called “beneficial ownership” rules to look through companies without business substance to deny treaty benefits.


In 2009, the government of China issued Circular 601, which sets out rules requiring that, before claiming treaty benefits, non-residents extracting certain passive income from China must prove they are the beneficial owner of income by showing that the business has sufficient substance in the treaty country based on factors such as staff, premises and business operations.


But Circular 601 did not set specific thresholds or other criteria for assessing these factors. Uncertainties arose over how the rules apply to determine beneficial ownership in practice, especially for group companies and for agents, such as private equity funds, that are the registered owners of equity interests but are acting on the true beneficial owner’s behalf.

In Announcement 30, released in July 2012, the State Administration of Taxation (SAT) introduced several welcome clarifications and safe harbors to help ease beneficial ownership determinations in some cases. Announcement 30 emphasizes that no single factor can determine beneficial ownership. The assessment should be made based on a totality of factors.

Briefly, two of the most important clarifications in Announcement 30 are as follows:


  • Companies that are publicly listed in the treaty country are automatically considered to have sufficient business substance in that country, as are certain direct and indirect subsidiaries of such companies (regardless of whether the subsidiary is a listed company).
  • Where an agent, such as a private equity fund, receives China-sourced income on behalf of another party (the principal), the Chinese tax authorities should look at the principal to determine the income’s beneficial ownership, regardless of whether the agent itself is a tax resident of the treaty country.


While Announcement 30 does not resolve all of the uncertainties arising from China’s beneficial ownership rules, it offers much-needed guidance for the situations it addresses. It also signals the SAT’s willingness to provide detailed interpretational guidance, and we expect this is just the first of a series of announcements that may be forthcoming.


India
The Indian judiciary has often traversed the thin line between tax planning and tax avoidance arising out of treaty shopping. Usually, the Indian courts have followed the Westminster principleand recognized that developing countries often set favorable treaty terms to attract investment.


India is seeking to tighten its tax policies without raising the ire of global investors by bringing about clarity in anti-abuse laws. To this end, it has deferred introduction of GAAR to April 2016. On the sidelines, it has started treaty talks with various countries, including Mauritius, and now requires non-residents to produce a tax residency certificate to access treaty benefits. While India’s government has assured investors that it would accept these certificates as proof of residence, it has not committed to what characteristics the certificate should have to stand the test of beneficial ownership.
Posted on 7:45 AM | Categories: