Tax Lawyers Minneapolis

2015 Second Quarter IRS Underpayment and Overpayment Interest Rates

On March 13, 2015, the IRS announced that the underpayment and overpayment interest rates for the calendar quarter beginning April 1, 2015, will remain unchanged. The rates will be:

three (3) percent for overpayments [two (2) percent in the case of a corporation];
three (3) percent for underpayments;
five (5) percent for large corporate underpayments; and
one-half (0.5) percent for the portion of a corporate overpayment exceeding $10,000.

How are the IRS Underpayment and Overpayment Rates Determined?

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.

Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

What do the IRS Underpayment and Overpayment Rates Affect?

The most important impact of the IRS underpayment and overpayment rates is felt whenever the tax liability of a US taxpayer changes from the liability indicated on the original tax return. Most often, this happens as a result of an amended tax return filed voluntarily by the taxpayer or as a result of an IRS audit.

If, as a result of an audit or an amended tax return, the taxpayer is assessed with additional tax liability, the underpayment interest rate will be applied from the due date of the original tax return (usually, April 15) through the date of assessment of additional tax liability (or the date the amended tax return is filed). Conversely, if an amended tax return or an IRS audit produces a refund, then, the IRS is obligated to pay the overpayment interest rate on the refund due.

IRS Underpayment Rate and PFIC Calculations

The IRS Underpayment Rate has a surprising additional affect on a taxpayer’s liability. If a taxpayer owns a PFIC that is considered a Section 1291 fund, then, under the default PFIC method, he will need to calculate PFIC interest on the PFIC tax due. This PFIC interest is calculated at the IRS underpayment rates.

Who Must File Form 1120-F

Form 1120-F (“U.S. Income Tax Return of a Foreign Corporation”) is used to report the income, gains, losses, deductions, credits, and to figure the U.S. income tax liability of a foreign corporation. The form is also used to claim any refund due, to transmit Form 8833 (“Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)”), or to calculate and pay a foreign corporation’s branch profits tax liability and tax on excess interest, if any, under Internal Revenue Code Section 884.

In this article, we will explain who is required to file Form 1120-F. This article is not intended to convey tax or legal advice. Please contact Mr. Eugene Sherayzen, an experienced tax attorney at Sherayzen Law Office, PLLC if you have further questions.

Who Must File Form 1120-F?

In general, unless an exception exists or a special return is required, a foreign corporation must file Form 1120-F if any of the following is true:

1. A foreign corporation engaged in a trade or business in the United States, whether or not it had U.S. source income from that trade or business, and whether or not income from such trade or business is exempt from U.S. tax under a tax treaty;

2. A foreign corporation had income, gains, or losses that were treated as if they were effectively connected with the conduct of a U.S. trade or business;

3. A foreign corporation was not engaged in a trade or business in the United States, but it had US-source income and its tax liability has not been fully satisfied by the withholding of tax at source (under chapter 3 of the Internal Revenue Code);

4. Special circumstances require the foreign corporation to file Form 1120-F in certain other instances. For example, if a foreign corporation is claiming the benefit of any deductions or credits, or is making a claim for the refund of an overpayment of tax for the tax year, Form 1120F should be filed (also see below for more detailed description of come of these circumstances when Form 1120-F must be filed); or

5. Certain specific types of entities or individuals may be required to file Form 1120-F. In particular, instructions to Form 5471 state that a Mexican or Canadian branch of a U.S. mutual life insurance company is required to file Form 1120-F if the U.S. company elects to exclude the branch’s income and expenses from its own gross income. Furthermore, a receiver, assignee, or trustee in dissolution or bankruptcy must file Form 1120-F, if that person has or holds title to virtually all of a foreign corporation’s property or business. Note that Form 1120-F is due whether or not the property or business is being operated. Finally, an agent of a foreign corporation in the United States should file Form 1120-F if the foreign corporation has no office or place of business in the United States when the return is due.

Form 1120-F Required for Claiming Treaty or Code Exemption

As mentioned above, even if a foreign corporation does not have any gross income for the tax year because it is claiming a treaty or IRC exemption, it still must demonstrate that the income was properly exempted by filing Form 1120-F to provide the IRS with the identifying information and attaching a statement to Form 1120-F noting the nature and amount of the exclusions claimed. If there was tax withholding at source in such a case, the foreign corporation must complete the Computation of Tax Due or Overpayment section of Form 1120-F in order to claim a refund on the amounts withheld.

Entities that Elect to be Taxed as Foreign Corporations

In general, Form 1120-F must be filed by a foreign eligible entity that elects to be classified as a corporation, and it must attach a copy of Form 8832 (“Entity Classification Election”) with Form 1120-F.

Exceptions to Filing Form 1120-F

Various exceptions may apply for foreign corporations that would otherwise be required to file the form. The most prominent examples of these exceptions to filing Form 1120-F are the following: (i) if the foreign corporation did not engage in a U.S. trade or business during the tax year and its full U.S. tax was withheld at source; (ii) if the foreign corporation’s only U.S. source income is exempt from U.S. taxation under Internal Revenue Code Section 881(c) or (d); or (iii) if the foreign corporation is a beneficiary of an estate or trust engaged in a U.S. trade or business, but it would itself otherwise not be required to file.

Contact Sherayzen Law Office for Help With U.S. Compliance For Foreign Corporations

U.S. tax compliance for foreign corporations can involve many complexities and it is easy to ran afoul of the numerous U.S. tax requirements. This is why, if you have a foreign corporation, you are well-advised to seek help from the experienced international tax professionals of Sherayzen Law Office. Contact Us to Schedule Your Confidential Consultation Now!

2015 Inflation Adjustments to Tax Benefits

The IRS recently announced annual inflation adjustments for more than 40 tax provisions, including the tax rate schedules, and other tax changes. Revenue Procedure 2014-61 provides details about these 2015 inflation adjustments. In this writing, I would like to highlight main 2015 inflation adjustments.

1. 2015 inflation adjustments for income tax brackets. The tax rate of 39.6 percent affects singles whose income exceeds $413,200 ($464,850 for married taxpayers filing a joint return), up from $406,750 and $457,600, respectively. The other marginal rates – 10, 15, 25, 28, 33 and 35 percent – and the related income tax thresholds are described in the revenue procedure.

2. 2015 inflation adjustments for Standard Deduction. The standard deduction rises to $6,300 for singles and married persons filing separate returns and $12,600 for married couples filing jointly, up from $6,200 and $12,400, respectively, for tax year 2014. The standard deduction for heads of household rises to $9,250, up from $9,100.

3. 2015 inflation adjustments for Itemized Deduction Limitation. The limitation for itemized deductions to be claimed on tax year 2015 returns of individuals begins with incomes of $258,250 or more ($309,900 for married couples filing jointly).

4. 2015 inflation adjustments for Personal Exemption Amounts. The personal exemption for tax year 2015 rises to $4,000, up from the 2014 exemption of $3,950. However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $258,250 ($309,900 for married couples filing jointly). It phases out completely at $380,750 ($432,400 for married couples filing jointly.)

5. 2015 inflation adjustments for Alternative Minimum Tax (AMT): AMT exemption amount for tax year 2015 is $53,600 ($83,400, for married couples filing jointly). The 2014 exemption amount was $52,800 ($82,100 for married couples filing jointly).

6. 2015 inflation adjustments for Earned Income Credit (EIC) amount. The maximum EIC amount is $6,242 for taxpayers filing jointly who have 3 or more qualifying children, up from a total of $6,143 for tax year 2014. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phaseouts.

7. 2015 inflation adjustments for Estate Basic Exclusion Amounts. Estates of decedents who die during 2015 have a basic exclusion amount of $5,430,000, up from a total of $5,340,000 for estates of decedents who died in 2014.

8. 2015 inflation adjustments for Foreign Spouse Gifts. The exclusion from tax on a gift to a spouse who is not a U.S. citizen is $147,000, up from $145,000 for 2014.

9. 2015 inflation adjustments for Foreign Earned Income Exclusion (FEIE). The 2015 FEIE breaks the six-figure mark, rising to $100,800, up from $99,200 for 2014.

10. 2015 inflation adjustments for Annual Gift Exclusion Amount. The annual exclusion for gifts remains at $14,000 for 2015.

Same Interest Rates for the Fourth Quarter of 2014

On September 3, 2014, the IRS announced that the underpayment and overpayment interest rates for the fourth quarter of 2014 will remain the same The rates will be:

three (3) percent for overpayments (two (2) percent in the case of a corporation);
three (3) percent for underpayments;
five (5) percent for large corporate underpayments; and
one-half (0.5) percent for the portion of a corporate overpayment exceeding $10,000.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis.  For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.  You can trace the interest rates for the fourth quarter of 2014 directly to this calculation.

Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points.  The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points.  The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

It is important to note that the underpayment interest rates for the fourth quarter of 2014 will be used to determine the PFIC interest rate on the excess distribution for the fourth quarter of 2014.

Underpayment and Overpayment Interest Rates for the Third Quarter of 2014

Underpayment and Overpayment Interest Rates are important to all taxpayers who are either due a refund or owe taxes to the IRS, because the interest on the refund or the amount due will be calculated based on these Interest Rates. This essay reminds U.S. taxpayers that the IRS announced that the interest rates will remain the same for the calendar quarter beginning July 1, 2014. The rates will be:

three (3) percent for overpayments [two (2) percent in the case of a corporation];
three (3) percent for underpayments;
five (5) percent for large corporate underpayments; and
one-half (0.5) percent for the portion of a corporate overpayment exceeding $10,000.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.

Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

Interest factors for daily compound interest for annual rates of 0.5 percent are published in Appendix A of Revenue Ruling 2011-32. Interest factors for daily compound interest for annual rates of 2 percent, 3 percent and 5 percent are published in Tables 7, 9, 11, and 15 of Rev. Proc. 95-17, 1995-1 C.B. 561, 563, 565, and 569.