Saturday, August 9, 2014

Sage Summit, Day 2

 Simon HollowayPractice Leader - Process Management & RFID, writes: On the second day of the Sage Summit in Los Angeles, the focus was on Sage’s strategy and innovation. This was the theme of the keynote delivered by Pascal Houillon and Himanshu Palsule and the opening of the Sage Innovation Lab.
In the keynote, Pascal reviewed Sage’s progress in North America against their technology strategy and how Sage offers customers choice and flexibility through purposeful innovation. Over the past few years, Sage has focused on strengthening its core accounting and ERP offerings, developing new cloud solutions and introducing strong connected services to extend its desktop offerings in a hybrid cloud model. As part of this, Pascal highlighted how Sage is building on three trends to deliver their next generation of solutions:
  • Extending customers’ presence in the cloud, including building on their existing investment
  • Helping customers to benefit from the convergence of mobility and data
  • Maintaining mission critical considerations as the foundation of all the products they build.
Himanshu picked up on these themes with live demos of some of Sage’s new cloud, mobile and business intelligence solutions. Mobile applications shown included Sage Mobile Sales, Sage Mobile Service and integration with Sage Mobile Payments, all of which are commercially available. Emphasis was also given to Sage Intelligence Go!, which is the cloud version of Sage Business Intelligence and will be commercially available in 2015.
Sage North America announced the general availability of Sage 300 Online. This is a very affordable cloud-based system ($69 per month) and is ideal for those small and midsized businesses that have outgrown their basic accounting software and are seeking an ERP solution to provide them with better integration and collaboration capabilities.
Other highlights from the floor relating to demonstrations of significant product updates included:
  • Start-up and small business segment: previews in the Innovation Lab of a new Sage One mobile app for solopreneurs and of Sage 50 modernisation; and
  • Mid-market segment: the upcoming launch of Sage ERP X3 Online, which takes all of the core functionality of Sage ERP X3 Version 7 to the Cloud for medium-sized businesses.
Posted on 6:45 AM | Categories:

Tax Planning Considerations for the Purchase of a Residence in the U.S. by Foreign Buyers / Overview

Gerald Nowotny for Osborne & Osborne PA write: In spite of its many problems as a nation, the quality of life and level of economic opportunity as well as the overall respect for the rule of law, places the United States in a very unique position when compared to the rest of the World. The proof of my thesis – how many people have come to the U.S. legally and illegally for the last 150 years versus the rest of the world? Central and South Americans and others are moving to the United States and not Beijing, Moscow or Outer Mongolia.

The combination of economic and political stability along with a stable currency and low inflation continue to make the United States a desirable final destination. These considerations – political and economic instability- are frequently short lived and uncertain in many parts of the world. Many non-Americans discovered this truth a long time ago. In many large metropolitan areas of the U.S., wealthy individuals and their families can live without personal scrutiny and threat to their personal freedom and security.

Many foreigners purchase a personal residence as an investment and a safe haven from their own countries in the pursuit of their own version of life, liberty and the pursuit of happiness on American soil. In many cases, foreigners send their children to college in the U.S. with the children frequently remaining in the U.S. after graduation for a number of years. As home financing is less available in many countries when compared to the U.S., many foreigners purchase the residence outright. As a result and by definition, these foreigners have substantial assets in the U.S. for tax purposes.

Traditionally, the tax structuring for wealthy foreigners in regard to the purchase of a U.S. personal residence has focused on federal estate tax planning considerations and not federal income taxation. As a practical matter, why would the homeowner worry about income taxation if there is no rental income associated with principal residence?
The 2012 Tax Court case of G.D. Parker, Inc. v. C.I.R. T.C. Memo 2012-327 (2012) is the proverbial "game changer" for this planning scenario and shifts the focus to income tax considerations. The case is a perfect example of what can go wrong.1

Genaro Delgado Parker is a very wealthy Peruvian who owned a large ocean front home in Key Biscayne. The taxpayer owned a Florida corporation which had a number of subsidiary companies including another Florida corporation which owned the Key Biscayne home. The shares of the holding company were owned by a Panamanian corporation. In this respect, the taxpayer did what a large number of foreign buyers have done when it comes to purchasing a personal residence.

The client and his family lived in the home rent-free for several years (2003-2005). The IRS disallowed deductions under IRC Sec 262 for repairs and maintenance and depreciation on the basis that these deductions were personal and family expenses and not business expenses. These expenses over a three year period averaged $125,000-$150,000 per year approximately. Further, the IRS treated the rent-free use of the house as a constructive dividend paid to the taxpayer through the corporate chain up to the taxpayer personally.

When a shareholder or his family is permitted to use corporate property for personal purposes, the fair rental value of the property is includable in his or her income as a constructive dividend to the extent of the corporation's earnings and profits.2 For a corporate benefit to be treated as a constructive dividend, the item must primarily benefit the taxpayer's personal interests as opposed to the business interests of the corporation.3
The IRS hired a local real estate expert to determine the fair market value rent that should be imputed as a constructive dividend and determined that the fair rental was $23,000 per month or $360,000 per year for each year over a three-year period.

IRC Sec 881(a) imposes a tax of 30% dividends received from U.S. sources by a foreign corporation except as provided under IRC Sec 881(c), to the extent the dividend received is not effectively connected with the conduct of a trade or business within the United States. A lower rate may apply where the taxpayer has the benefit of a lower rate under a tax treaty. IRC 1442(a) generally requires the payor of interest subject to the tax imposed by section 881(a) to deduct and withhold that tax at the source. If the payor does not do so, it becomes liable for such taxes under IRC Sec 1461. The IRS assessed substantial accuracy-related penalties and interest in the Parker case.

The amazing aspect of this case is the fact that the original tax audit was primarily focused on the taxpayer's other corporate transactions. Once you let the IRS into the tent, they have the ability to look under every stone! The last thing that the foreign taxpayer wants to do is end up on the flip side of the equation of the cliché – "Su casa es Mi Casa" (Your house is my house) as a result of poor tax planning. 

The planning paradigm has shifted to a balance of planning for unexpected estate taxes and income tax considerations for use of the personal residence. A failure to acknowledge these considerations could result in Uncle Sam ending up with the foreigner's house as a result of tax liens.

Tax Planning Considerations in the Purchase of a U.S. Residence.

A. Federal Estate Taxes

The federal estate tax is imposed on the estate of every non-domiciliary decedent  under IRC Sec 2101 based upon the value of gross estate situated in the United States at the time of death.  The estate tax exemption threshold is very low - $60,000. Property is not ordinarily included in the taxpayer's estate for estate tax purposes unless the decedent owns the property at death. Real property physically located in the U.S. and owned outright has a U.S. situs as does U.S. stock owned by a non-resident at the time of death. Stock in a foreign corporation is defined as foreign situs property

Property that is considered U.S. situs property for estate tax purposes may be purchased directly by a foreign corporation as its parent or ultimate beneficial owner and treated as having a foreign situs for U.S. federal estate tax purposes. The entity must be classified as a corporation and corporate formalities must be observed and the corporation should be the real owner of the property in substance.

The writing was already on the wall for non-resident aliens purchasing a homestead in the U.S prior to the GD Parker case.  Some older case law already existed which examined the business purpose of the corporation owning the U.S. real estate. If the corporation is disregarded, the shareholder can be treated as the direct owner of the property resulting in an unexpected estate tax. Specifically, raw land or a residence used by the shareholder poses some concern.

In Bigio v. C.I.R., a non-resident owned a condominium and other Miami properties on Miami Beach through a Panamanian corporation as a residence. Absent a lease or loan arrangement, the Tax Court determined that the non-resident was the beneficial owner of the condominiums.4

Bigio was principally an income tax case focused on the issue of U.S. residency based upon the taxpayer's substantial presence in Miami during the tax years of question. The Tax Court looked through the ownership by a Panamanian corporation and ruled that Bigio was the beneficial owner, i.e. treated as if he owned the property personally. The structuring in Bigio did not use a separate U.S. entity to own the real estate coupled with the ownership of the U.S. entity by a foreign corporation. The federal estate tax laws for non-residents treat shares in a foreign corporation as non-U.S. situs property.
Many existing transactions for non-resident aliens owning homes have used a LLC treated as a disregarded entity to own the U.S. real estate. This structuring poses a potential estate tax risk with respect to a LLC that is treated as a pass-through entity, i.e. treated as a sole proprietorship or partnership. The IRS will not generally issue an advance ruling on whether or not a partnership (LLC) interest is treated as intangible property when owned by a LLC that is taxed as a partnership or sole proprietorship in the case of a single member LLC.  As a result, a LLC that is treated as a disregarded entity, partnership or sole proprietorship, may be considered a U.S. situs asset for federal estate tax purposes.
In that respect, making an election to be treated as a regular corporation is essential for estate tax planning purposes otherwise a single member LLC will be treated as a disregarded entity potentially subjecting the residence owned by the non-resident alien to federal estate taxes. Under the aggregate theory of partnerships (LLC), the owner of a partnership interest may be treated as owning a proportionate interest of the underlying property of the partnership (LLC).

B. How Ugly Can it Get?

The revelation that the ownership of the U.S. homestead is improperly structured is likely to result during an audit and will be a big surprise to the taxpayer. The initial estate tax bracket under the progressive rate structure is 26 percent. The threshold for the non-resident alien is $60,000 of assets in the U.S. estate. Absent an arms-length lease between the corporation and the non-resident alien, a deemed dividend will be assessed based upon a fair market rental of the property to the taxpayer. Corporate level deductions for repairs and maintenance along with depreciation will be disallowed. The U.S. corporation is the withholding agent and is personally liable for the withholding on the dividend deemed payable to the foreign corporation that owns the shares of the U.S. corporation. Based upon the personal use of the residence, the withholding tax rate on the deemed dividend is 30 percent absent a lower rate under a tax, treaty.

Example

Frukko, a resident and citizen of Colombia, purchased a three bedroom condo on Brickell Key in Miami for $750,000 in January 2010.  Based on rentals within the same condominium, a fair market rental is $4,500 per month or $54,000 per year. The condo is owned within a Florida corporation. The Florida LLC is treated as a corporation for federal tax purposes.  The LLC is wholly owned by a Cayman corporation which is owned by Frukko.

Frukko's children have lived in the property on a full time basis since the purchase while they attend the University of Miami. Frukko and his wife have lived in the property when they are in the U.S. which is approximately half of the year.

The IRS audits Frukko's returns for the following tax years – 2010-2013. They determine that he should have declared income based upon the value of the deemed dividend of $54,000 each year. The withholding liability amount is $16,200 per year in 2010-2013, four years. An estimate of the taxes, interest and penalties for the four years is $60,080.

C. Federal Tax and Compliance Requirements of Electing to be Taxed as a Corporation

LLCs are entities created by state statute. A single member LLC is treated as a disregarded entity for tax purposes absent an election to be treated as a corporation through the filing of Form 8832. A domestic LLC with two members is treated as a partnership for tax purposes unless it files Form 8832 and elects to be treated as a corporation. A single member LLC is treated as a sole proprietorship absent an election to be treated as a corporation.

An election must be filed within 75 days of the formation of the company. Alternatively, the IRS allows Form 8832 to be filed within the first 75 days of the fiscal year which is the calendar tax year for our foreign buyer. Rev. Proc. 2009-41 permits business entities to file a classification election with an effective date retroactive up to 3 years and 75 days prior to the date that the request is filed.

Normally an entity may not change its corporate status within a 60-month period unless there is a change of ownership of more than fifty percent. The 60-month rule does not apply to a LLC that was a newly formed entity that made its initial election upon formation. Most entities formed by non-resident aliens should be able to fall under this rule in regard to making an election for the LLC to be treated as a corporation for federal tax purposes.
As previously stated in the discussion of federal estate taxes, the corporate election is critical to avoid U.S. federal estate taxation. The LLC will require a tax identification number and file a Form 1120 each year.

D. LLC Taxed as a Partnership

Historically, foreign buyers have structured their real purchases using LLCs taxed as a partnership for federal tax purposes. As previously discussed, this structure has some estate tax uncertainties due the Internal Revenue Service's lack of clarity on whether it subscribes to the entity theory or the aggregate theory of partnerships.

In the entity theory, the LLC is treated as a distinct entity separate from its owners. In the aggregate theory, the LLC is treated as a collection of assets owned by the members on a pro rata basis. If the aggregate theory applies, the member under the U.S-situs rules would be subject to transfer taxes on his pro rata ownership. Under the entity theory, the LLC interest would be treated as intangible property.

E. Where Do We Go From Here?

The scale of the potential tax adversity as demonstrated in GD Parker for foreigners purchasing a personal residence is significant. It is always alarming when you find out that you may be sleeping in a minefield.
Moving forward, taxpayers and their advisors would be well advised to revisit their existing structures and make revisions. The decision in GD Parker suggests that corporate ownership of personal real estate with the shares being owned by a foreign corporation in order to eliminate U.S. transfer taxes is still a functional solution. However, taxpayers would be well advised to structure an arms-length lease based upon a fair market rent based on comparable rentals in the jurisdiction where the property is located. Oddly enough, in many instances, the tax rate at the corporate level may end up being lower than the marginal tax rate of the individual if the LLC were taxed as a partnership.

Summary

The amount of real estate purchased within the U.S. either for personal or rental purposes is very significant and shows no signs of slowing down. The amount of home purchases in the Border States – Florida, California, Texas and Arizona – by foreign buyers is significant. First, foreign buyers like hard assets. The recession in home prices in general presents a buying opportunity. Second, the absence of political and economic uncertainty still presents the U.S. as the favorite safe haven. Many foreigners have purchased a residence in addition to commercial real estate.

The common thinking about how to restructure the purchase of a home in the U.S. needs to be reviewed and reconsidered. The tax minefield has new land mines based upon the result in GD Parker. My legal instinct suggests that a large majority of foreign owners are not properly structured based upon the result in GD Parker. As a result, the tax structuring of each and every foreign buyer should be reviewed to avoid any unpleasant surprises.  
Posted on 6:42 AM | Categories:

Does Your Wealth Manager Optimize For Taxes?

Jim Cahn for NASDAQ writes: It's one thing to invest well and another thing to keep your profits, or at least as much as you legally can. One regularly scheduled event which can have a diminishing effect on returns is tax time. Whether or not you’ve made it through this year’s tax crucible unscathed, you need to be thinking now about how your investments will be taxed next year.
I’ve said this before, but many wealth managers are not investment experts. To this I’d like to add, even if they are financial experts, they are not likely to also be tax code experts.
Is your advisor grasping every opportunity to not only make you money, but help you keep what you have? I certainly hope so.
One of the things you should expect from your advisor is guidance on effective tax management of your investment accounts.
In general this means your advisor should understand your comprehensive situation and when additional taxes may be applicable so that your portfolios are constructed on a tax efficient basis to avoid (if possible) paying out more than you need to via the Alternative Minimum Tax, 3.8% Net Investment Income Tax, and/or higher taxes (20% versus 15%) on qualified dividends and long-term capital gains.
Specifically, it also means that your advisor should be continually monitoring your unique situation vis a vis tax implications. These might include, for instance, the tax implications of being self-employed, the impact of any privately owned businesses/investments that flow through taxation and the impact of various stock options including non-qualified stock options, incentive stock options and the sale of employee stock purchase plan shares.
Now a quick caveat — tax management does not necessarily mean not paying taxes.
Ironically, many investors, left to their own devices, try to save on taxes by moving large amounts into tax efficient investments which can lead to dangerously concentrated positions rather than diversifying and paying taxes.
You should expect your advisor to keep you from making bad tax-driven decisions but also pro-actively structure your account with your tax situation in mind.
One of the most common ways to mitigate taxes is tax loss harvesting, a method of limiting the recognition of short-term capital gains (which are typically taxed at a higher federal income tax rate). To capture the benefit, you sell a security that has lost value since you purchased it. Then, because of the wash-sale rule, you can immediately invest in a second security that is in the same sector as the first, or wait approximately a month before you repurchase the original stock.
Does your advisor have a good sense of you tax liability? If you’ve had significant gains, you may want to see if there are any loss positions that can be realized to mitigate the gain.
Any such moves have to be done well before the end of the tax year. If you have capital losses in excess of capital gains, the IRS allows you to use up to $3,000 of those excess losses per year to offset other income (wages, investment income, etc.) with the balance carried forward to offset gains in futures years.
Truly effective tax loss harvesting is harder than it looks. If your tax return filing covers more than one taxable account, for instance, all of those must be considered together, not separately, to comply with certain IRS rules.
How are dividends being handled? If you are not fully exiting the investment, any dividends that are reinvested, in the original investment would violate the wash sale rule.
Furthermore, any tax loss harvested has to be balanced against the transaction costs of buying and selling the securities in question.
And there are other ways to minimize taxes, all depending on your unique situation. If you’ve had a low-income year, you may want to take the opportunity to do Roth IRA conversions and convert income that would have been taxed at 25% or higher to 15% or lower. Keep in mind that the converted amount is generally subject to income taxation.
Similarly, your advisor should be looking ahead with you on optimizing your social security timing. Delaying taking benefits can have significant tax advantages since 85% of Social Security is taxable when there is significant other income.
Finally, the tax laws change all the time. It is not unreasonable to expect your advisor to have, or have access to, deep knowledge of tax code quirks and obscure provisions.
Jim Cahn is Chief Investment Officer of Wealth Enhancement Advisory Services.
Posted on 6:42 AM | Categories:

There is NO Advantage to Tax Deferral

Jay Beattey for No More Wall Street writes: I’m struck by how many people are sucked into believing that tax-deferred accounts (401ks and the like) are better than after-tax accounts. News Flash:“there is no advantage to tax deferral.”
Given a choice of investing $100 pre-tax, or its $70 after- tax equivalent (assuming a tax rate of 30% here); most people will choose the pretax option assuming they’ll be far ahead in the long run.
But the truth is – there is no different – at least not in an environment of constant tax rates.
In this chart, $259.37 is clearly more than $181.56. But the $259.37 is taxable at 30% (remember – tax-deferred means you will pay it someday), meaning it’s after tax equivalent is precisely $181.56 – there is no difference.
deferral
There are three exceptions to this rule:
1. If future tax rates are lower, then tax-deferral has an advantage (who thinks that will happen?)
2. If future tax rates are higher (very likely), then paying them now is a clear advantage
3. If “earnings” are taxed, then again – the tax-deferred option wins
It is this last exception that persuades people to elect the tax-deferred option when given a choice.
But earnings don’t have to be taxed at all. A Roth IRA for example exempts earnings from future taxes. But the Roth is plagued by three problems – strict contribution limits; most people don’t qualify for a Roth; and Roth funds are largely inaccessible without a penalty until after age 59-1/2.
An alternative is a properly structured cash-value life insurance policy. It too is exempt from all future taxation – making it a kind of “Super-Roth” – without the qualification limitations, contribution limitations, or liquidity limitations.
The cost of these policies is usually much less than the cost of fees and commissions in a typical Wall Street account; they’ll produce more income; and often include long-term-care type benefits.
Don’t fall for the mirage of tax-deferral – it isn’t all it’s cracked up to be – and there are better options out there.
Posted on 6:41 AM | Categories:

5 Tax Strategies to Pay for College Without Going Broke / One wealth advisor shows how small-business owners can use IRS rules to defray tuition expenses

Think Advisor writes: Saving for college is not for the faint of heart. The cost of an education has been spiraling upward and although there are some fine 529 plans to help, the numbers can be mind-boggling.

For men and women who own their own businesses, there are a few tips that can help them create a “tax scholarship” for their children, according to William Cummings, president and owner of Cummings Financial Organization, a money management firm based in Tampa, Fla.
“Hopefully people start planning early,” said Cummings, who used his ideas to help put his three children through college. Owning his own business gave him the chance, he said, to take advantage of IRS rules to help pay the tuition bills.
Cummings, who calculates that the cost of a year of public school tuition could rise past $33,000 by the 2020 academic year, offers tips that anyone can use to reduce the cost of college. They include living at home, establishing in-state residency and placing 529 plan savings in the name of a grandparent, thereby increasing the chances a student will be eligible for student aid programs.
(It's worth noting that while 529 plans held by grandparents are not reportable on the federal student aid application, using the account to pay for college will affect the student's aid eligibility the following year.)
There are also various tax credits, including the Lifetime Learning Credit, which allows parents to deduct $2,000 of educational expenses per year for dependent children.
Any strategy to help ease the tuition burden must be weighed against the tax consequences to the prospective student and the parents, Cummings says.
Parents, Cummings said, shouldn’t be too quick to borrow against or slow their retirement plan contributions. It might be better, he said, to use student loans or aid, “because you can’t get a scholarship for retirement.”
For small-business owners, here are Cummings’ 5 Tax Tips to Pay for College Without Going Broke:
1. Hire Your Children
Giving the kids the chance to work is a good way to shift income. This helps because they probably won’t earn enough to owe taxes. The money can be set aside in an IRA or other investment vehicle. For example, if a child does office work or painting or lawn mowing on rental properties for, say $2,500 per year, the savings can build up over several years before high school graduation. Cummings says it’s important to document the job and ensure that the work is legitimate.
2. Stock Transfer
Putting stock owned by parents in the name of a child can save tax payments. Beware, Cummings says, of the so-called kiddie tax, though, that mandates children can make at most $2,000 per year in unearned income using this strategy. Anything above that is subject to the tax rate of the parents.
3. Tuition Reimbursement
Offering employees tuition reimbursement for taking college courses can lower costs because of the tax benefits associated with such programs. The IRS puts a cap of $5,250 on such a program. It’s important that all employees receive the same benefits. In other words, the children of the business owner can’t receive a benefit not available to other employees.
4. Gift or Leaseback
By making a gift of a piece of property to a child and then leasing it back, the money saved in lower tax payments can be put toward paying for college, as can any lease payments. Beware of the kiddie tax mentioned in No. 2, which applies up to age 24 unless the child is no longer a dependent of the parents.
5. Divorce Planning
For couples no longer married, but able to work on college strategies together, there are ways to maximize tax benefits. Generally, such planning involves deciding which parent claims a deduction for the child as a dependent, leaving the other free to take advantage of tax saving rules while avoiding the kiddie tax.
Posted on 6:41 AM | Categories: