Tax Lawyers Minneapolis

Alternative Minimum Tax Foreign Tax Credit

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US persons are taxed on their worldwide income, but are allowed a foreign tax credit (FTC) for foreign taxes paid. In most cases, the FTC gives taxpayers a dollar-for-dollar credit against their US tax liability.

However, the FTC may be limited for Alternative Minimum Tax (AMT) purposes in order to ensure that a taxpayer’s US liability is only reduced on foreign-source income. This article will briefly examine some of the basic elements of the Alternative Minimum Tax Foreign Tax Credit (AMTFTC).

Alternative Minimum Tax Foreign Tax Credit Calculation

The AMT for individuals in calculated on Form 6251. Taxpayers who need to determine whether they will have an AMTFTC, will first need to calculate their foreign tax credit for their regular tax. Once this is done, line 34 of the form should be filled in, and if the amount on this line is greater than or equal to the amount on line 31 (see IRS instructions for specifics), then a zero would be entered on line 35 (the AMT line), and the instructions should be reviewed to determine whether the form will need to be attached to the tax return. If the AMT is not owed, line 32 of the form will still need to be filled in, in order to determine whether a taxpayer has an AMTFTC carryback or carryforward.

If the AMT is owed, the FTC may be limited by IRS rules. In general, for purposes of calculating the AMTFTC limitation, foreign-source AMT income (AMTI) is divided by total AMTI. This amount is then multiplied by the tentative minimum tax (and not the regular tax). This calculation must be determined for each separate basket type of income (i.e. general and passive income). FTCs that are not used because of the AMTFTC may be carried forward.

Taxpayers may elect to use regular foreign-source income in the numerator of this equation, provided that it does not exceed total AMTI.

Contact Sherayzen Law Office For Tax Help With Determining AMT, FTC and AMTFTC

Determing your Foreign Tax Credit and Alternative Minumum Tax can involve complex issues and this article only attempts to provide a very general background information that should not be relied upon in making the determination of your specific situation. Rather, you should contact Sherayzen Law Office for legal help with this issue. Our tax firm will help you determine your AMT, FTC and AMTFTC for the relevant tax years as well as provide sound tax planning for the future.

Foreign Rental Property Tax Depreciation

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Do you own, or are you thinking of owning, foreign rental property?  While investing in foreign rental property may have many advantages and can be a potentially lucrative enterprise, you should be aware that, among other aspects, the IRS treats rental properties located outside of the United States differently than rental properties in the United States with respect to the depreciation deduction.  This article explains some of the basic differences in the depreciation treatment of such properties.

Depreciating US Residential Rental Property

The IRS defines “residential rental property” to include rental buildings or structures for which 80% or more of the gross rental income for the tax year is from dwelling units.

In general, for residential rental property located within the United States, taxpayers must depreciate the property using the straight-line method over 27.5 years.   Furthermore, the mid-month convention for residential rental property should be used.  In the first year that depreciation is claimed for residential rental property, it can be claimed only for the number of months the property is in use as a rental.

Depreciating Foreign Residential Rental Property

The IRS rules for depreciating residential rental property located outside the United States, however, are different.  Under IRC section 168(g)(1)(A), “any tangible property which during the taxable year is used predominantly outside the United States” must use the alternative depreciation system.  When using the alternative depreciation method specified in the Internal Revenue Code, foreign rental properties must be depreciated over a much longer 40 year period.  This means that the depreciation that may be deducted for a foreign rental property will smaller than if the same property (at the same purchase price, disregarding currency fluctuations) were located within the United States.

Contact Sherayzen Law Office For Legal Help With Rental Properties

There are other potentially complex issues relating to foreign and US residential rental properties that are beyond the scope of this general explanation, as this article only attempts to provide background information that should not be relied upon in making the determination of your specific situation. Rather, you should contact Sherayzen Law Office for legal help with this issue. Our experienced international tax firm will guide you through the complex web of rules concerning your U.S. and international tax needs.

Cash and Property Contributions to Partnerships and Their Affect on a Partnership Interest

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A partnership is defined to mean the relationship between two or more persons to carry on a trade or business, with each person contributing money, property, labor, or skill, and each expecting to share in profits and losses.  This article will provide a broad overview of some of the tax consequences of cash and property contributions to a partnership (whether upon formation or additional contributions later), the basis of partnership interests received by partners, the basis of contributed property to the partnership, and some other helpful information.

Basis of a Partner’s Interest

The basis of a partnership interest is the cash contributed by a partner, increased by the adjusted basis of any property contributed by a partner. In general, no gain or loss will be recognized when property is contributed by a partner in exchange for an interest in a partnership; however, in certain circumstances (explained further in this article), a partner must recognize gain, and if so, this gain is included in the basis of his or her partnership interest.

Special rules apply to a partner’s contribution to the partnership in the form of assumption of a partnership’s liabilities.

Basis of Contributed Property to the Partnership (Transferred Basis)

For the partnership, the basis of contributed property (for the purpose of determining depreciation, depletion, gain, or loss for the property) will be the same as the partner’s adjusted basis for the property as of the date it was contributed, increased by any gain that must be recognized by the partner.

Contribution of Property- Top Three Exceptions to General Recognition Rules

As mentioned above, usually no gain or loss will be recognized by either a partner or partnership when property is contributed to a partnership in exchange for an interest in the partnership. This general rule applies to both situations where a partnership is being formed and already existing partnerships.

However, there are some exceptions to this rule, three of which are explained below.

1) Property Subject to a Liability

If a partner contributes property that is subject to a liability, or if a partner’s liabilities are assumed by the partnership, that partner’s basis interest will usually be reduced (but never below zero) by the amount of the liability assumed by the other partners. The partner’s basis should be reduced because the assumption of the liability is treated as a distribution of cash to that partner; the other partners’ assumption of the liability is likely to be treated as a cash contribution by them to the partnership.

In most circumstances, a partner must recognize gain when property is contributed which is subject to a liability, and the resulting decrease in the partner’s individual liability exceeds the partner’s partnership basis.

2) Partnership Would be an Investment Company if Incorporated

Gain will be recognized when property is contributed in exchange for a partnership interest if the partnership would be treated as an investment company, if it were incorporated .

A partnership will usually be treated as an investment company if over 80% of the value of its assets is held for investment, and it consists of certain readily marketable items, such as money, stocks and other equity interests, real estate investment trusts, and interests in regulated investment companies. Whether a partnership will be treated as an investment company or not, is typically determined immediately after the contribution of property.

3) Partnership Capital in Exchange for Services Rendered

In most circumstances, if a partner receives a partnership interest in exchange for services rendered, that partner must recognize compensation income.

Partnership’s Holding Period for Contributed Property

Usually, the partnership’s holding period for contributed property includes the partner’s holding period.

Partner’s Holding Period for Partnership Interest

A partner’s holding period for a partnership interest usually includes the holding period of the property contributed (if the property was a capital asset or Section 1231 asset to the contributing partner).

Treatment of Built-In Gain/Loss to the Partnership

In general, if a partner contributes (non-depreciable) property, and the partnership eventually sells or exchanges the property and recognizes gain or loss, the built-in gain or loss must be allocated to the contributing partner. (If the property is depreciable, detailed rules apply to allocation procedures).

Partner’s Basis Increases/Decreases

A partner’s basis will usually increase by any additional contributions by a partner to a partnership (including an increased share of, or assumption of, a partnership’s liabilities), a partner’s distributive share of taxable and nontaxable partnership income, and in general, a partner’s distributive share of the excess of the deductions for depletion over the basis of depletable property.

In general, a partner’s basis will decrease (but not below zero) by any money (including a decreased share of partnership liabilities, or an assumption of the partner’s individual liabilities by the partnership) and adjusted basis of property distributed by a partnership to a partner, a partner’s distributive share of partnership losses, and a partner’s distributive share of nondeductible partnership expenses that are not capital expenditures (including a partner’s share of any section 179 expenses).

Contact Sherayzen Law Office For Legal and Tax Help Regarding Partnerships

The contribution of property to partnerships and various partnership-partner taxation matters can involve complex issues, and this article only attempts to provide a very general background information that should not be relied upon in forming a partnership, contributing property to the partnership or any other specific taxation aspects. Rather, you should contact Sherayzen Law Office for legal help with this issue. Our experienced business tax firm will guide you through the complex web of rules concerning U.S. partnership formation and taxation matters and help you with your specific needs.

U.S. Taxation of Foreign Persons: General Overview

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Unlike U.S. citizens, U.S. resident aliens and domestic corporation which are taxed under the Internal Revenue Code on their worldwide income, the IRS applies a special tax regime to foreign persons. The general rule (subject to numerous exceptions) is that foreign persons are only taxed on their U.S.-source income of specified types and income effectively connected (or treated as “effectively connected”) with a trade or business conducted by such foreign persons within the United States.

For example, generally, capital gains which are not effectively connected with a U.S. trade or business are not subject to U.S. income tax. Be careful, though, because even this seemingly simple rule contains conceptions. The most common exception can be found in IRC Section 871(a)(2). Pursuant to this provision, net capital gains from U.S. sources are taxable to nonresident alien individuals who are present in the United States for 183 days or more during a taxable year even if the gains are not effectively connected with the conduct of a U.S. trade or business.

One can distinguish three main categories of income which is relevant to determining the taxation of foreign persons – effectively connected income, fixed and determinable annual or periodical income, and U.S. source capital gains. Each of these three categories follows specified rules and contains numerous exceptions. Moreover, often, these provisions have to be coordinated with the other provisions in the IRC.

Contact Sherayzen Law Office to Understand Your U.S. Tax Liability

The taxation of foreign persons is a very complex tax question, and this article only attempts to provide a very general background information that should not be relied upon in making the determination of your U.S. tax liability. Rather, you should contact Sherayzen Law Office for legal help with this issue. Our experienced tax firm will guide you through the complex web of rules concerning U.S. taxation of foreign persons, and help you determine your U.S. tax liability.

What is SEP IRA?

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A Simplified Employee Pension (“SEP”) is a written plan that allows you to make contributions toward your own retirement as well as your employees’ retirement while avoiding the complexity of various qualified plans. Under a SEP, you make contributions to a traditional IRA set up by or for each eligible employee.

It is important to note that SEP-IRA is owned and controlled by the employee, and you make contributions to the financial instituation where the SEP-IRA is maintained.

At a minimum, SEP-IRAs are set up for each employee that is considered to be eligible under the IRS regulations. “Excludable” employees can be excluded from coverage under a SEP.

There are three basic steps in setting up a SEP. First, you must execute a formal written agreement to provide benefits to all eligible employees. Second, you must give each eligible employee certain information about the SEP. Finally, a SEP-IRA must be set up by or for each eligible employee.

While there are special rules determining the contribution limit for self-employed individuals, generally, a contribution to a common-law employee’s SEP-IRA cannot exceed the lesser of 25% of the employee’s compensation or $49,000 (for the tax year 2011).

Contact Sherayzen Law Office to Understand SEP-IRA Option

If you have any questions with respect to SEP-IRA and how it functions, contact Sherayzen Law Office for additional legal help.