On July 7, 2011, Eugene Sherayzen, Esq., was re-appointed for the third time to the Minnesota State Bar Association Publications Committee. The Committee is responsible for overseeing the budget and publication of the most important Minnesota legal journal, “Bench & Bar”.
The IRS generally taxes U.S. taxpayers on all income, from any source derived. Foreign taxpayers, on the other hand, will usually only pay U.S. taxes on income sourced in the U.S. However, under The Foreign Investment in Real Property Tax Act (“FIRPTA”), the IRS treats gain on the disposition of certain U.S. property and interests as if it were “effectively connected” with the conduct of a U.S. trade or business, and thus subject to U.S. tax, even if foreign individuals or businesses are not actually engaged in a U.S. trade or business. (In general, effectively connected income consists of both U.S.-source income and certain types of foreign source income earned by non-resident aliens and foreign corporations engaged in the conduct of a trade or business within the U.S).
Penalties for failure to comply with the IRS provisions can be substantial, so taxpayers and purchasing agents should be aware of these rules if they are involved in such transactions.
The FIRPTA Withholding Tax
The FIRPTA income tax withholding provisions (IRC Section 1445 and related sections) require purchasers or agents acquiring U.S. real property interests (“USRPI)” from foreign persons to withhold 10 percent of the amount realized on the disposition, subject to certain exemptions. In general, a USRPI is any direct interest in parcels of real property located in the U.S., and any interests in a U.S. corporation (such as shares, but not including solely a creditor interest).
The IRS defines “disposition” for this provision to include disposition for any purpose of the Internal Revenue Code, including but not limited to: sales or exchanges, liquidations, redemptions, gifts, transfers, and similar transactions. “Foreign” persons are broadly defined by the IRS, and include nonresident alien individuals, foreign corporations, partnerships, trusts, estates, and foreign branches of U.S. financial institutions if the foreign branch is a qualified intermediary. The “amount realized” generally means the sales or contract price of the property (see IRS rules for more detail).
Upon advance request, the IRS has the authority reduce the 10 percent withholding tax to an amount that will cover the estimated tax liability due, if it is determined that the collection of the amount due under applicable IRS provisions will not be jeopardized by the reduction.
Note that special rules apply for distributions of USPRIs by foreign corporations, partnerships, trusts, or estates, and by certain domestic corporations to foreign shareholders.
Penalties
In general, various penalties may be imposed under the applicable FIRPTA provisions. Penalties apply for failure to file the required Form 8288 when due and for failure to pay the withholding when due. Additionally, any tax required to be withheld under Section 1445 may be collected, plus interest on the unpaid amount, if the taxpayer fails to do so. Further, a criminal penalty of $10,000 or five years in prison may be imposed under Section 7202 for willful failure to collect and pay over the required tax. Corporate officers or other responsible persons may face separate penalties under Section 6672.
Contact Sherayzen Law Office
This article is intended to give a brief summary of some of the issues concerning, and should not be construed as legal or tax advice. If you have further questions regarding these matters as it pertains to your own tax circumstances, Sherayzen Law Office offers professional advice in all of your tax and international tax needs. Call (952) 500-8159 to discuss your tax situation with an experienced business tax lawyer.
Due to the enactment of the Small Business Jobs Act of 2010, self-employed taxpayers who pay their own health insurance costs can now reduce their net earnings from self-employment by these costs. Previously, the self-employed health insurance deduction was allowed only for income tax purposes. For tax year 2010, however, self-employed taxpayers can also reduce their net earnings from self employment subject to self-employment taxes on Schedule SE by the amount of self-employed health insurance deduction claimed on line 29 on Form 1040.
Taxpayers can claim the self-employed health insurance deduction if the insurance plan is established under their business and if any of the following are true:
a) They were self-employed and had a net profit for the year,
b) They used one of the optional methods to figure net earnings from self-employment on Schedule SE, or
c) They received wages from an S corporation in which the taxpayer was a more-than-2-percent shareholder.
Contact Mr. Sherayzen at Sherayzen Law Office Minneapolis tax lawyer who can help you properly plan your tax strategy to take advantage of the Internal Revenue Code.
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The following are some upcoming tax deadlines and reminders for the December of 2010. (This list may not include all applicable tax deadlines for your situation, and does not constitute tax advice; please, consult Sherayzen Law Office for more information and assistance with your tax planning needs.)
Selected General Deadline Reminders for Individuals: December 31, 2010
Traditional IRA to Roth IRA Conversion. Last date for taxpayers to convert a traditional IRA to a Roth IRA for the tax year 2010 (provided a taxpayer meets the other applicable criteria).
Keogh plan deadline. Keogh plans must be established by the last date of the year (December 31, for calendar year basis taxpayers) in order for contributions to be deductible for the tax year 2010.
Capital Gains and Losses. Capital gains and losses for individual taxpayers are determined by the last trading date of the tax year. This is the case even though the settlement date (the date the shares-sold are actually exchanged and cash is received by the broker) may be several days later. Thus, even though the settlement date may occur in early 2011 for shares sold on the last trading date of 2010, the capital gains and/or losses will be established in 2010.
Short Sale Gains (But not Losses). Gains on shares sold short are also determined by trading date because of an IRS ruling treating the transaction as a constructive sale. Thus, shares sold short for gain on the last trading date of 2010 will be treated as capital gains for the tax year 2010, even though actual delivery of the shares may occur in 2011. Note, however, that for losses on shares sold short, the losses are not deductible until the shares are actually delivered to a broker. Taxpayers should plan accordingly if a loss is anticipated.
Marital Status. Taxpayers should note in general that marital status as of the last date of the year will determine the status for the entire tax year 2010.
General Tax Calendar Deadlines and Information (From IRS Publication 509)
December 10: Employees who work for tips. If you received $20 or more in tips during November, report them to your employer. You can use Form 4070.
December 15: Corporations. Deposit the fourth installment of estimated income tax for 2010. A worksheet, Form 1120-W, is available to help you estimate your tax for the year.
Selected Tax Deadlines for Employers Based on Monthly Deposit Rule
Social security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in November by December 15, 2010.
Non-payroll withholding. If the monthly deposit rule applies, deposit the tax for payments in November by December 15, 2010.
Employer’s Tax Deadlines: Payroll Due Dates for Deposit of Taxes for 2010 Under the Semiweekly Rule
| Nov 24-26: | Dec 1 |
| Nov 27-30: | Dec 3 |
| Dec 1-3: | Dec 8 |
| Dec 4-7: | Dec 10 |
| Dec 8-10: | Dec 15 |
| Dec 11-14: | Dec 17 |
| Dec 15-17: | Dec 22 |
| Dec 18-21: | Dec 27 |
| Dec 22-24: | Dec 29 |
| Dec 25-28: | Jan 3 |
| Dec 29-31: | Jan 5 |
Excise Tax Deadlines
December 10: Communications and air transportation taxes under the alternative method. Deposit the tax included in amounts billed or tickets sold during the first 15 days of November.
December 14: Regular method taxes. Deposit the tax for the last 15 days of November.
December 28: Communications and air transportation taxes under the alternative method. Deposit the tax included in amounts billed or tickets sold during the last 15 days of November.
December 29: Regular method taxes. Deposit the tax for the first 15 days of December.
Have more questions about tax deadlines, or need help in planning for your year-end tax decisions? Call Sherayzen Law Office to discuss your tax situation with an experienced tax lawyer!
While the exact schedule of your business tax planning reviews may often depend on the exact nature of your business, I want to point out in this article certain events which should trigger a review of your tax strategies by a Minnesota business tax lawyer.
A. Business Formation
A review of your business tax strategies should be scheduled during business formation or at least within several months of your company’s existence. Unfortunately, a lot of business owners neglect obtaining the advice of a business tax attorney during the first year of the existence of their businesses. The anxiety over what the future might bring and the desire to cut costs are usually proffered as the explanation of this tendency.
Yet, this is a mistaken view. In reality, it often leads to a completely opposite result: more money is being spent inefficiently, higher tax costs are incurred, and there is a higher likelihood of creating huge legal and tax liabilities down the road. A company may even go out of business due to its neglect of legal and tax planning.
One of the main functions of a business tax lawyer is to structure business transactions in such a way as to fully comply with U.S. tax laws (and the laws of other relevant tax jurisdictions where appropriate) while making sure that full advantage is taken of these laws to reduce and even eliminate business tax waste. For example, where appropriate, a business tax attorney may advise to hasten a purchase order in order to reduce tax liability in this tax year. If the purchase is being made in a foreign country, this business tax lawyer may advise that the contract is signed in that foreign country in order to offset foreign income that the company received from the sales of its product in that country. This may further favorably impact the situation with respect to the foreign tax credit.
B. One Month Prior to the End of a Fiscal Year
The next tax planning session should be scheduled about a month prior to the end of each fiscal year. By this time, sufficient economic data about the performance of the business should be collected by the company’s accountant. This will allow your business tax lawyer to review the assumptions about income and expenses that were made at the beginning of the fiscal year. Based on this review, the business tax attorney may revise the tax planning strategies and give advice on what to do during this last month of the fiscal year to make sure that full advantage is taken of the Internal Revenue Code provisions.
C. Business Tax Filing
In order to maximize its benefits, business tax filing should consist of three steps. First, the accountant prepares a tax return for the business. If you use your tax attorney to prepare the tax return, then you can skip this step. Second, prior to filing the tax return, submit it for a review to your business tax lawyer. Following this step may bring two important benefits: a.) you get a “second opinion” on the tax return, and b.) the tax lawyer may modify the tax return in order to harmonize it with the rest of the business and tax planning strategies (which may sacrifice short-term benefits in order to achieve your company’s long-term business goals or reduce overall long-term tax liability). Finally, the third step is to use the already filed tax return in conjunction with the economic analysis and projections for the next fiscal year in order to formulate a new business tax plan. This new tax plan will later be reviewed at the end of the year as indicated in Section “B” above.
Thus, in reality, your business tax planning strategies should be reviewed at least twice a year by your tax attorney: while filing the tax return and at the end of the year. This holds true unless there is a material change of your company’s circumstances.
D. Material Change of Circumstances
Every time an event occurs that may materially modify the tax situation of your business, it is necessary to immediately contact your business tax lawyer to review the tax situation and tax strategies of the business. Moreover, it is important to remember that such situations are likely to give rise to additional tax compliance and legal liability issues which may be identified only by a tax professional.
E. Conclusion
Business tax planning should become a natural and routine practice of your overall business planning. In the long run, the benefits of tax planning are likely to far outweigh whatever immediate legal expenses your business may incur, not to mention the protection it offers against future legal liability. At the very least, two reviews of your business tax strategies should be scheduled during a fiscal year: when you file your business taxes and about a month before the end of the year. If an event occurs that may materially change the tax situation of your company, then an emergency tax and legal liability session with your business tax lawyer should be scheduled.
Sherayzen Law Office can help you throughout this process. We can help you properly analyze your business tax situation, identify the problems and opportunities, and adopt the right business and tax strategies to take full advantage of the U.S. tax laws while reducing potential future liabilities.
Call to discuss your tax situation with Mr. Sherayzen an experienced business tax lawyer!
