Making a Section 444 Election

/in , /by

The IRS has established various rules regarding required tax years in order to prevent excess deferral of taxes by partnerships, S corporations, and personal service corporations. In certain circumstances, however, under Internal Revenue Code Section 444, partnerships, S corporations, and personal service corporations may elect to use a tax year other than their required tax year, subject to certain limitations. This article will explain the basics of Section 444 elections. It is not intended to constitute tax or legal advice.

Partnership, S Corporation and personal service corporation taxation can involve many complex tax and legal issues, so it may be advisable to seek an experienced attorney in these matters. Sherayzen Law Office, PLLC can assist you in all of your tax and legal needs.

Requirements

In general, a partnership, S corporation, or personal service corporation can make a section 444 election provided that it meets the following requirements: (1) it is not a member of a “tiered structure” (defined below), (2) it has not previously made a section 444 election, and (3) it elects a tax year that meets IRS deferral period requirements.

A tiered structure is defined in 26 C.F.R. § 1.444-2T: “—(1) In general. A partnership, S corporation, or personal service corporation is considered a member of a tiered structure if— (i) The partnership, S corporation, or personal service corporation directly owns any portion of a deferral entity, or (ii) A deferral entity directly owns any portion of the partnership, S corporation, or personal service corporation.”

Determination of the Deferral Period

The deferral period is determined by whether a partnership, S corporation, or personal service corporation is adopting or changing its tax year by making a section 444 election, or whether it is retaining its tax year.

For partnerships, S corporations, or personal service corporations adopting or changing to a tax year other than its required year, the deferral period is the number of months after the end of the new elected tax year to the end of the required tax year.

If a partnership, S corporation, or personal service corporation makes a Section 444 election to retain its tax year, the deferral period must be three months or less, determined by the number of months from the start of the tax year to be retained and the end of the first required tax year.

Making a Section 444 Election

Form 8716 must be filed in order to make a Section 444 election. In general, the form must be filed by the earlier of the due date (not including extensions) of the elected tax year or the 15th day of the 6th month of the tax year for which the Section 444 election will go into effect. Form 8716 should be attached to Form 1065, Form 1120S, or Form 1120 for the first elected tax year. A Section 444 election will remain in effect until terminated.Required Payments

A partnership or an S corporation making a Section 444 election must also file Form 8752, “Required Payment or Refund Under Section 7519” for every year that the election is in effect. If the required payment is greater than $500, the payment must be made when the form is filed. A personal service corporation must distribute required amounts to its employee-owners by December 31st of each elected Section 444 tax year.

Contact Sherayzen Law Office for Help with Section 444 election.

 

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

Do I need an Accountant or Attorney for Form 8938 Offshore Assets Disclosure?

/in , , /by

A lot of taxpayers are still confused about whether they need an attorney or an accountant to file delinquent Forms 8938. As I explain below, Form 8938 is an essentially legal disclosure form and its voluntary disclosure should be handled by an experienced international tax attorney.

Form 8938 Requires Legal Disclosure

It is important to understand that Form 8938, more than any other form except the FBAR now Form 114 (formerly TD F 90-22.1), requires a legal disclosure of specified foreign assets. The form does not involve any accounting calculations of tax liability or even knowledge of US GAAP (something that other information tax returns, like Forms 5471 or 8865, may require). The taxpayer simply needs to disclose his ownership of specified offshore assets according to the instructions of Form 8938.

Failure to File Form 8938 Is a Legal Issue

Since Form 8938 is a legal disclosure form, the failure to file the form and the penalties associated with the form constitute a legal problem that should be handled by an international tax attorney, not an accountant.

This is even more the case because the strategy with respect to handling Form 8938 and the explanation of the reasonable cause require advocacy – a critical skill which is a part of an attorney’s basic training, which accountants are not trained in.

Clients need an advocate to deliver their position to the IRS in a clear manner. Clients need an advocate to be able to interpret the law, not simply assume that what the IRS agent is saying is the only true version of the law. Finally, clients need an advocate to defend their interests with skill and persuasion.

Tax attorneys are advocates, in addition to performing calculations. Despite the seeming confusion over the role of the two professions, an attorney’s entire approach is likely to be radically different from that of an accountant simply because attorneys are trained to think and act in a completely different manner.

Contact Sherayzen Law Office for Legal Help with Your Voluntary Disclosure of Specified Foreign Assets

If you have undisclosed offshore assets that should have been disclosed on Form 8938, contact Sherayzen Law Office. Our experienced international tax firm will thoroughly analyze your case, estimate your potential Form 8938 penalties, identify all non-compliance issues, and develop a comprehensive approach to your offshore voluntary disclosure.

IRS Auto Depreciation Limits Released for 2013

/in , /by

The IRS recently released Rev. Proc. 2013-21 detailing the updated price inflation adjustment limitations on depreciation deductions and lease inclusion amounts for passenger automobiles first placed in service during calendar year 2013. These adjustments are required under Internal Revenue Code Section 280F. If you need advice relating to these matters, or any other tax or legal issues, please contact Sherayzen Law Office, PLLC.

Relevant Definitions

According to the IRS, “Passenger automobiles are defined in section 280F(d)(5)(A) as any 4-wheeled vehicle which is manufactured primarily for use on public streets, roads, and highways, and which is rated at 6,000 pounds unloaded gross vehicle weight (or, in the case of a truck or van, 6,000 pounds gross vehicle weight) or less. Section 280F(d)(5)(B) provides exceptions from this definition, and allows the Secretary to promulgate regulations to exclude trucks and vans from the definition of passenger automobiles” (Internal Revenue Bulletin: 2003-37).

Limits for Passenger Automobiles (Excluding Trucks and Vans)

The depreciation limitations for passenger automobiles (not including trucks or vans) first placed in service during calendar year 2013, and for which the additional bonus depreciation applies (allowing for 50% “expensing” of the cost of the automobile in the year of purchase), is $11,160 for the first tax year. The amounts for following years are: $5,100 the second tax year, $3,050 for the third year, and $1,875 for each succeeding year. Note that, for this category and for each category that follows below, any personal use of a passenger automobile, truck or van will reduce the maximum depreciation deduction that may be taken by a business.

As will be seen from the deduction amounts listed below, only the first year of depreciation is affected by the adjustments.

For passenger automobiles (excluding trucks and vans) placed in service during calendar year 2013 to which 50% bonus depreciation does not apply, the depreciation is $3,160 for the first tax year. For the following years, the amounts are: $5,100 the second tax year, $3,050 for the third year, and $1,875 for each succeeding year.

Limits for Trucks and Vans

The depreciation limitations for trucks and vans first placed in service during calendar year 2013, and to which the additional 50% bonus depreciation applies, is slightly higher than passenger automobiles, at $11,360 for the first tax year. For later years, the amounts are: $5,400 the second tax year, $3,250 for the third year, and $1,975 for each succeeding year.

The depreciation limitations for trucks and vans first placed in service during calendar year 2013, and to which the additional 50% bonus depreciation does not apply, is $3,360 for the first tax year. For later years, the amounts are: $5,400 the second tax year, $3,250 for the third year, and $1,975 for each succeeding year.

Bonus Depreciation

Rev. Proc. 2013-21 includes various factors as to why bonus depreciation may not apply, including the fact that a taxpayer, “(1) purchased the passenger automobile used; (2) did not use the passenger automobile during 2013 more than 50 percent for business purposes; (3) elected out of the § 168(k) additional first year depreciation deduction pursuant to § 168(k)(2)(D)(iii); or (4) elected to increase the § 53 AMT credit limitation in lieu of claiming § 168(k) additional first year depreciation.” If a passenger automobile, truck or van is not used at least 50% of the time for business purposes, the vehicle must be depreciated under standard straight-line ADS rules.
The Rev. Proc. also includes updated tables for the dollar amount of income inclusion for passenger automobiles (excluding trucks and vans), and separate tables for trucks and vans with a lease terms beginning calendar year 2013.

IRS Issue Statistics for CFC Holdings; Importance of Form 5471 Grows

/in , /by

On March 6, 2013, the IRS issued statistics for the tax year 2008 with respect to foreign corporations controlled by U.S. corporations. These statistics emphasize the important growth in controlled foreign corporations (“CFCs”) and Form 5471.

IRS Statistics Published in Statics of Income Bulletin (Winter 2013)

In the tax year 2008, some 83,642 foreign corporations controlled by U.S. multinational corporations held $14.5 trillion in assets and reported receipts of $6.0 trillion. These controlled foreign corporations (CFCs) paid $125.2 billion in income taxes on $662.0 billion of earnings and profits (less deficit) before income taxes (“E&P”). Both CFC assets and receipts increased slightly more than 24 percent from tax year 2006, while “E&P” and foreign taxes income taxes paid increased by nearly 30 percent.

For the tax year 2008, these same CFCs were incorporated in 188 different countries (based on unpublished data). More than 42 percent, or 35,856, of these CFCs were incorporated in Europe. Nearly 91 percent of the European CFCs were located in European Union countries.

Almost 79 percent, or 65,740, of CFCs for Tax Year 2008 were concentrated in three major industrial sectors: (1) services; (2) goods production; and (3) distribution and transportation of goods. These three industrial sectors accounted for 81.2 percent of total receipts ($4.9 trillion), 74.9 percent of E&P (less deficit) before income taxes ($496.0 billion), and 57.5 percent of income taxes ($72.0 billion).

Furthermore, for the tax year 2008, controlled foreign corporations were tax owners of 17,548 foreign disregarded entities (FDEs). These foreign disregarded entities reported $4.9 trillion in assets and $230.1 billion in E&P (less deficit) after taxes.

Statistics Demonstrate the Continuous Growth of CFCs and Importance of Form 5471

The IRS statistics confirmed what is already well-known – with growing globalization, the importance of CFCs is increasing with each year. This further means that Form 5471 is also increasing in its importance for the IRS, which is already stepping up the enforcement of compliance with Form 5471 requirements.

Form 5471 is used by the IRS to satisfy the informational reporting requirements of 26 U.S.C. § 6038 (“Information reporting with respect to certain foreign corporations and partnerships”) and 26 U.S.C. § 6046 (“Returns as to organization or reorganization of foreign corporations and as to acquisitions of their stock”). It must be filed by certain U.S. citizens and residents who are officers, directors, or shareholders in specified foreign corporations, if various requirements are met. The penalties can be steep, so compliance with the reporting rules is crucial.

Contact Sherayzen Law Office for Help With Form 5471

If you own foreign corporations, you may need to comply with Form 5471 requirements. This is why you need to contact Sherayzen Law Office to schedule a consultation. Our international tax firm is highly experienced in dealing with Forms 5471 and we can help you comply with its requirements. If you are delinquent in your 5471 compliance, we can also advise you with respect to your voluntary disclosure options.