EisnerAmper Blog

May, 3, 2013

By Mugdha John, CPA  

Over the past several years, the IRS has mandated different types of information returns be filed to facilitate reporting of investments/financial interests in foreign entities.  Form 5471 is one such information return to be filed by U.S. persons with respect to certain foreign corporations. 

A few exceptions from filing are provided to prevent duplicate filing of the same information by different persons.  Nonetheless, broadly speaking, Form 5471 is required to be filed in the following situations:

• U.S. person becomes a director or officer of a foreign corporation
• U.S. person acquires an ownership interest in a foreign corporation in excess of the prescribed limits
• U.S. person disposes of stock in a foreign corporation that reduces his or her interest in the foreign corporation to less than the prescribed limits
• U.S. person is in control of a foreign corporation for an uninterrupted period of at least 30 days in a year
• U.S. person is a 10% or more shareholder in a foreign corporation that is a ‘controlled foreign corporation’ for an uninterrupted period of at least 30 days in a year and that person owns that stock on the last day of the year.

In determining the ownership interest, the complex rules of direct, indirect, and constructive ownership come in to play.  One must not be under the impression that the filing is required only when a U.S. person directly buys or sells an interest in a foreign corporation. 

A $10,000 penalty is imposed for each form per year for failure to furnish the form in a timely manner.  Additional penalties of up to $50,000 are charged for instances of continued failure.  A defaulting person is also subject to a reduction of 10% of the foreign taxes available for credit.  Continued cases of failure are also subject to additional reductions.  Failure to file or report certain specific transactions attracts a penalty of $10,000 per reportable transaction.  Last but not least, criminal penalties may also apply for failure to file the requisite information. 

If you are directly or indirectly involved in a foreign corporation in any of the ways discussed above, we advise you to check with your tax advisor to determine if you have any filing obligations.

To learn  more about this topic checkout EisnerAmper LLP’s May 15 webinar, Tax Compliance for Closely-Held Businesses with International Activities.
 

March 26, 2013

By Jordan Amin, CPA 

The IRS has been cracking down on the misclassification of employees as independent contractors.  Especially during tough economic times, employers looking to reduce expenses use contractors instead of full-time employees to save costs on payroll taxes, benefits and offsetting salary costs if there is not enough work at a given time.  Some employers are using independent contractors as a way to stay beneath the 50-employee threshold for providing health insurance under the new health care laws.
 
Although these savings can be significant, the potential costs of the IRS reclassifying an independent contractor as an employee during an audit can also be substantial. Additionally, the cost of an IRS examination itself, including the disruption to your business, can also be quite expensive. 

While the rules are far from clear cut, here are some questions to answer regarding independent contractor status:

• Behavioral Control: Does the company control what the worker does and how and where the worker does it?  What level of instruction is provided to the worker?
• Financial Control: Does the worker have unreimbursed expenses incurred in performing their job?  Are their services available to the general marketplace and are they free to seek other opportunities?
• Type of Relationship: Does the worker receive any benefits from the employer (i.e., insurance, vacation pay, etc.)?  What is the duration of the relationship?  Is there a written agreement?

While the answers to some of these factors may contradict each other, the relationship as a whole must be examined to determine the true nature of the relationship and whether the worker is properly classified as an independent contractor or should be an employee.

Employers should contact their tax advisor for assistance in making this determination or for representation during an IRS examination.  

January 24, 2013

By: Feng Zhang  

Recently, one of our clients asked our advice relating to loan vs. lease equipment.   It was a good time to have the discussion since this decision can affect their restricted debt covenants (i.e., current ratio, funds flow coverage ratio, etc.).   Immediately, we analyzed the loan vs. lease decision for equipment based on the respective terms offered by the lender and determined that the lease option is better due to the following advantages:

1. The lease offers a lower monthly payment as compared with the loan, which improves the client’s cash flow.

2. The lease offers an option to purchase the equipment at the end of the lease term at fair value.  Thus, technically, it is like the client has already owned the equipment and just delays the financing of the remaining value till the end of the lease term.   With the loan option, the client would have to finance the full amount up front. 

3. The lease will not affect the restricted debt covenants that are already in placed due to the client’s current financing with the lender.   The loan will increase the client’s current and long-term liabilities and its long-term assets, thus it can result in unfavorable debt covenants.  In addition, the loan itself usually will contain its own restricted debt covenants and require all of the client’s assets be pledged as collateral; whereas the lease does not contain debt covenants and only the leased equipment is served as collateral.

Because of the above considerations, we concluded that the lease option was better for the client.    It is important to consult with your trusted business advisor before making similar decision in that vein.   You don’t want a surprise at year-end that you have violated the restricted debt covenants, as that can be  very costly and difficult to fix in a timely fashion. Also, in certain situations, a loan option may be more beneficial due to other factors including accelerated first-year depreciation options. 
 

October 10, 2012

 By Kriste Naples, Manager  Litigation Services

Are you an owner of an operating or holding company and interested in minimizing taxes?  Of course you are! Who wouldn’t be looking to minimize taxes?  An increased gift tax exemption of up to $5,120,000 is currently in effect but is expected to expire on December 31, 2012.  If you have considered gifting shares or ownership interests to children or other family members, now is the time to do it.  Before the increased exemption expires you can make a large gift in 2012 without owing any gift tax, while this same gift made in 2013 may result in significant taxes.
 
Before a transferor can take advantage of this exemption, a valuation of the company is required in order to determine the fair market value of the entity and therefore the value of the gift.  A few simple steps such as providing the necessary financial information and legal documents could result in significant tax savings.

The exemption also applies to estate tax and is also scheduled to expire on December 31, 2012.  An estate of a decedent, who has died in 2012, may be completely exempt from the estate tax imposed on that estate.

The gift and estate tax exemptions are expected to fall to $1,000,000 as of January 1, 2013.  Anyone that is considering transferring wealth to children or other beneficiaries or has experienced the loss of a loved one in 2012 should consult with their tax advisor on the tax savings they may be entitled to.
 

August 22, 2012

  By:  Milton Kahn, Partner, Private Business Services 

If you are a partner in a partnership or a member of an LLC that is treated as a partnership, and there is a change of fifty percent (50%) or more of the capital and profits in a twelve month period, the Internal Revenue Service requires that entity to “technically terminate” as of the occurrence date and reform a new partnership.  If properly handled using the provisions of IRS code section 721, there is generally no tax consequence to this “technical termination.”  However, income (losses) may not always be allocated based on the previous profit/loss sharing or ownership percent.

When a new partner contributes assets other than cash, such as appreciated property, the tax basis within the partnership will continue to be the same as the amount as if it were still in the hands of the contributing partner.  This will occur even though the amount being credited to the partner’s capital account may be the fair market value of the property on the date of contribution.

In order to prevent possible abuses and inequities in the allocations of certain gains or losses caused by those differences, the cost basis and fair market value will be specifically allocated to the contributing partner via IRS code section 704(c).

It is extremely important to consult with your tax advisor if you are contemplating a change of 50% or more of a partnership interest.

July 13, 2012

 By: Milton Kahn 

The current $5,000,000 lifetime gift tax exemption is scheduled to expire on December 31, 2012.  As of this writing, it is uncertain as to whether this exemption amount will continue, be increased (not likely) or be decreased.  Barring any Congressional action, this provision will sunset and the exemption will revert back to $1,000,000 on January 1, 2013.

For married couples who have unused exemption amounts, serious consideration should be given to using the technique commonly referred to as a Spousal Lifetime Access Trust (“SLAT”).  If properly designed, both the desire or need for current income and the removal of the assets from your estate can be accomplished. 

Here is a very simple example of how it can work: Husband can establish an irrevocable trust for the benefit of his wife.  Income from the trust can be regularly distributed to the wife during her lifetime.  Thus, the husband has indirect access to the income.  Upon the death of the wife, the remaining principal can be passed estate tax free to the children.  These SLATs can be set up by both the husband and wife as long as the trusts are not identical under the IRS Reciprocal Trust Doctrine.

Therefore, if properly constructed, a married couple can shelter up to $10,000,000 from estate tax.  If the exemption reverts back to $1,000,000 ($2,000,000 for a married couple) the potential estate tax savings could be as much as $8 million multiplied by whatever the post-2012 estate tax rate might be. 

The above is a simple explanation and example.  Anyone considering the use of a SLAT is certainly advised to consult with their own tax advisor.
 

July 2, 2012

 Dan Gibson, Partner, Tax Services 

Looking to make the most out of your Social Security retirement benefits? Consider the “file and suspend” strategy. A worker who wishes to wait until age 70 to maximize his/her benefits, would have, in the past, disqualified his/her spouse from collecting spousal benefits until that time. Recognizing this, Congress and the Social Security Administration developed a method that would allow a non-working or low-earning spouse to collect spousal benefits before his or her higher-earner spouse reached age 70. File and suspend allows the higher-earner spouse to file for benefits at full-retirement age (depending on when the individual was born, age 66 or 67); and then immediately suspend receiving benefits; and then wait to receive their own benefits at age 70. Since they have “filed,” the non-working or low-earning spouse can begin collecting spousal benefits at age 62 (reduced spousal benefits) or full-retirement age (full spousal benefits).

These moves are permanent, so make sure you touch base with your tax and/or financial planning advisor before making any decisions.