Certified Public Accounting Firm

Articles On This Page

Self-Charged Interest through Passthrough Entities NEW!

New Regulations for Determining Economic Nexus in Texas 

Final Regulations Eliminate the Potential Harms to Post-2025 Estates

IRS Published Tax Inflation Adjustment for Tax Year 2020

Treasury Guidance and Proposed Regulations on the Repeal of Section 958(B)(4) 

Section 267A Deduction Disallowance 

2019 Post-Season Filing Update 

The Tax Cuts & Jobs Act: An Increase in Federal Payments for R&D Activity 

2018 Tax Law Change on Meals & Entertainment Deductions 

Check Your FBAR Reporting Obligation to Avoid Significant Penalty 

2018 Reminder for Individual Taxpayers: Time to Check Your Withholding Amount 

2018 Post-Season Filing Update 

2017 Tax Reform Series: Transition for U.S. Shareholders of Foreign Corporations 

IRS Issues New Tax Withholding Tables 

FASB Issues Four Staff Q&A Documents on Implementation Issues Related to the Tax Cuts and Jobs Act 

President Signs Sweeping Tax Overhaul Into Law 

Tax Code Overhaul, Regs and Court Decisions Make 2017 Stand-Out Year 

House Passes Tax Bill; Senate GOP Unveils Plan 

2017 Year-End Tax Planning: Tax Reform, IRS, Court Decisions and More Add to Uncertainties at Year-End

Articles

Self-Charged Interest through Passthrough Entities

Summary – Generally, portfolio income such as interest, dividends, annuities, and royalties are required to be taxed as ordinary income and cannot be used to offset passive losses, even if the income was derived from passthrough entities. Under sec. 469, passive losses can only be used to reduce passive income and not income from other sources such as portfolio interest; however, Sec. 1.469-7 provides an exception for this treatment of interest income if the lending activity is between a taxpayer and a passthrough entity in which the taxpayer owns a direct or indirect interest.

This regulation applies to interest income and expense that are recognized in the same tax year under one of three situations:

  • The taxpayer lends money to a passthrough entity (Partnership or S-Corp) in which it owns directly or indirectly a percentage of ownership
  • The passthrough entity makes a loan to a person that owns directly or indirectly an interest in the passthrough entity.
  • A loan is made between two passthrough entities where each of the entities’ owners have the same proportionate ownership interest in each entity.

Interest income sourced from any of the 3 situations listed above, as well as the associated interest expense, is known as self-charged interest income and expense. The exception allows the self-charged interest and expense to be recharacterized as passive activity income and deductions items. This treatment is generally favorable to the taxpayer; however, the passthrough entity has the ability to elect out of the recharacterization. For more information, click here.

Written by Tabitha Ford.

New Regulations for Determining Economic Nexus in Texas

Summary – Historically, states have used physical presence standards to determine state franchise and sales tax nexus. Significant growth in interstate e-commerce over the years led to the Supreme court case South Dakota v. Wayfair, Inc., which established other determining factors such as gross sales revenue and transaction volume to be more appropriate factors for use in determining state nexus for remote sellers.

Most states have amended their laws to establish economic nexus based on the Wayfair decision changes in state tax codes and regulations should be carefully reviewed when planning for your upcoming tax returns. The Texas Comptroller of Public Accounts recently amended the Texas Administrative Code rule §3.286 on January 1, 2019 for sales and use tax, which is enforced after October 1, 2019. A separate amendment was finalized on December 20,2019 for franchise tax nexus to the Texas Amin. Code § 3.586, which will begins with the federal income tax year of 2019 or later.

Texas established a safe harbor with a threshold of $500,000 of Texas gross revenue as the economic nexus standard for both sales and franchise tax. If Texas gross revenue for remote sellers of tangible personal property exceeds this threshold, a permit must be obtained and sales tax should be collected. Similarly, a taxable entity doing business in the state with Texas gross receipts exceeding the threshold is subject to Texas franchise tax, even if the entity has no physical presence in the state. A taxable entity is considered to be “doing business” in Texas the earliest of the following (1) the date the entity establishes physical presence in Texas; (2) the date a use tax permit has been obtained; or (3) the first day the entity’s Texas Gross receipts exceed $500,000 for the federal income tax accounting period.

Should you have any questions regarding your entity filing requirements, please contact our Senior Tax Manager, Nicole Zhao at nzhao@malonebailey.com.

Final Regulations Eliminate the Potential Harms to Post-2025 Estates

Summary - The Tax Cuts and Jobs Act (TCJA, or “2017 Tax Reform”) increased the tax-free threshold to $11.4 million for gifts made or decedents dying between January 1, 2018 and December 31, 2025. However, the mechanism on the estate and gifts tax return is not as straight forward as stated above.

When taxpayers file estate and gift tax returns, they are required to first calculate the estate and gift tax on all taxable transfers of money, property and other assets. Then, a nonrefundable credit (shared between gifts and estates) will be applied to reduce the net tax. This credit is calculated based on an applicable exclusion amount, which is $11.4 million for 2019. In 2026, this exclusion amount will revert to $5 million level.

The statutory sunset of higher exclusion creates a concern: For example, a taxpayer makes a gift of $11.4 million in 2019, and uses up all of his credits of $4,505,800. If he passes away in 2027, at which time the maximum exclusion amount is $5,490,000 and the credit is $2,141, 800, does he need to pay 40% marginal estate tax on the $5,910,000 taxable estates (life-time total gifts minus allowable exclusion at the time of death)? Based on the language of the code section, it seems that this taxpayer will retroactively lose his full benefits of making large gifts by 2026.

The good news is that the final regulation provides a special rule which allows the estate to compute its tax credit using the higher of the exclusion amount applicable to gifts made during life or the exclusion amount applicable on the date of death. Accordingly, in the above example, the exclusion remains $11.4 million on the taxpayer’s 2027 estate tax return.

Click here for more information.

Should you have any questions on the R&D tax credit, please contact Nicole Zhao  at nzhao@malonebailey.com.

IRS Published Tax Inflation Adjustment for Tax Year 2020

Summary - The IRS has announced the tax year 2020 annual inflation adjustments. Key changes include:

  • The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is increased from $19,000 to $19,500.
  • The catch-up contribution limit for employees aged 50 and over who participate in these plans is increased from $6,000 to $6,500.
  • The limitation regarding SIMPLE retirement accounts for 2020 is increased to $13,500, up from $13,000 for 2019.
  • The standard deduction for married filing jointly rises to $24,800 for tax year 2020, up $400 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,400 in for 2020, up $200, and for heads of households, the standard deduction will be $18,650 for tax year 2020, up $300.
  • For tax year 2020, participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,350, the same as for tax year 2019; but not more than $3,550, an increase of $50 from tax year 2019. For self-only coverage, the maximum out-of-pocket expense amount is $4,750, up $100 from 2019. For tax year 2020, participants with family coverage, the floor for the annual deductible is $4,750, up from $4,650 in 2019; however, the deductible cannot be more than $7,100, up $100 from the limit for tax year 2019. For family coverage, the out-of-pocket expense limit is $8,650 for tax year 2020, an increase of $100 from tax year 2019.
  • For tax year 2020, the foreign earned income exclusion is $107,600 up from $105,900 for tax year 2019.
  • Estates of decedents who die during 2020 have a basic exclusion amount of $11,580,000, up from a total of $11,400,000 for estates of decedents who died in 2019.
  • The annual exclusion for gifts is $15,000 for calendar year 2020, as it was for calendar year 2019.

For a complete list of adjustments, please click here and here.

If you have any questions, please don’t hesitate to contact Nicole Zhao at nzhao@malonebailey.com.

Treasury Guidance and Proposed Regulations on the Repeal of Section 958(B)(4)

Summary - Rev. Proc. 2019-40 was issued on October 1, 2019 by the Department of the Treasury and the Internal Revenue Service and it provides guidance related to the repeal of Section 958(b)(4) to certain U.S. persons that own stock in certain foreign corporations.

On October 2, 2019, the Department of the Treasury and the Internal Revenue Service proposed regulations pertaining to the repeal of Section 958(b)(4), which affect U.S. persons that have ownership interests in or that make or receive payments to or from certain foreign corporations.

For more information, please click here.

Section 267A Deduction Disallowance

If you have reviewed your 2018 corporation or partnership tax return, you should have seen the following question:

During the tax year, did the corporation (or partnership) pay or accrue any interest or royalty for which the deduction is not allowed under section 267A?

Upon reviewing this question, it's likely that the first thing that comes to mind is: what is Section 267A?

Section 267A is a new code section that was introduced as law as part of the 2017 Tax Reform. It disallows the deduction for any disqualified related party amount paid or accrued under certain circumstances. When a U.S. taxpayer pays or accrues any interest or royalty to a foreign related party, if, under the law of that foreign country, such amount is not considered as an income of the related party, or if such related party is allowed a deduction with respect to such amount, then such interest or royalty is a disqualified related party amount and cannot be deducted on the U.S. taxpayer’s tax return. The reason for this disallowance of deduction is the tax mismatching in a group’s worldwide structure.

For example, A is a U.S. corporation and a wholly owned subsidiary of B, a corporation incorporated in foreign country X. Under the law of country X, A is a disregarded entity of B. A borrows money from B and pays an interest payment of $50,000 in 2018. Under the law of country X, the intercompany loan and interest are disregarded; the above $50,000 interest paid to B is not treated as an income of B. According to Section 267A, A is not allowed to deduct such payment on its U.S. income tax return.

There are other code sections, such as Section 267, which might limit the deduction of expenses incurred in intercompany transactions.

If you have any questions, please don’t hesitate to contact Nicole Zhao at nzhao@malonebailey.com.

Back to Top

2019 Post-Season Filing Update

Summary - Wolters Kluwer Tax & Accounting has published its post-season tax briefing which highlights major tax law developments, including the introduction of Safe Harbor on the 100% bonus depreciation caps on luxury cars, and proposed regulations for deduction on FDII and GILTI. 
To view the complete tax briefing, please click here.

Back to Top

The Tax Cuts & Jobs Act: An Increase in Federal Payments for R&D Activity NEW!

Summary - Tax reform not only introduced the reduced 21% flat tax rate for C corporation, but also increased the Research Tax Credit by 14%. DST Advisory Group has shared with us an article with us on the changes. To learn more, please click here.
 
To be eligible for the R&D tax credit, you do not have to be in a “high tech” business; instead, conducting activities such as designing, developing or improving a “business component” allows you to utilize this tax incentive.
 
Should you have any questions on the R&D tax credit, please contact Nicole Zhao.

Back to Top

2018 Tax Law Change on Meals & Entertainment Deductions

The 2017 Tax Cuts and Jobs Acts (TCJA) have changed the business expense deductions for meals and entertainment. Recently, the IRS issued guidance on this matter.

Generally speaking, entertainment, amusement and recreation expenses are not deductible. For business meal expenses, taxpayer may take 50% deduction if:

  1. The expense is an ordinary and necessary expense under § 162(a) paid or incurred during the taxable year in carrying on any trade or business;
  2. The expense is not lavish or extravagant under the circumstances;
  3. The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages;
  4. The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
  5. In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts. The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.

What Do You Need to Do?

To maximize your tax deductions on business meal expenses, and to sustain your tax position during a potential IRS audit, we suggest accommodating the tax law changes by modifying your chart of accounts. You may set up the following accounts:

  • Meals – 50% deductible
  • Meals for convenience of employer – 50% nondeductible
  • Meals & Entertainment – 100% deductible
  • Meals & Entertainment – 100% nondeductible

For your convenience, we have created a chart to help you navigate some of the changes:

Expenses

Old Law

New Law

Meals with business clients

50% deductible

50% deductible

Travel meals

50% deductible

50% deductible

Meals provided for the convenience of employer

100% deductible

50% deductible (sunset in 2025)

Office coffee and snacks

100% deductible

Pending for further clarification

Business meeting meals

50% deductible

50% deductible

Expenses for attendance at a business meeting or convention of a section 501(c)(6) business league, chamber of commerce, real estate boards, and boards of trade

50% deductible

50% deductible

Meals & Entertainment that is reported on W-2 or Form 1099

100% deductible

100% deductible

Meals & Entertainment reimbursed by client

100% deductible if taxpayer provides details

100% deductible if taxpayer provides details

Office parties and outings

100% deductible

100% deductible

Entertaining a client

50% deductible

100% nondeductible

Food and beverage are 50% deductible if separately stated from the cost of the entertainment on one or more bills, invoices or receipts

Please also click here for the IRS Notice 2018-76. This serves as current guidance until the proposed regulations are issued.

Should you have any questions, please contact Nicole Zhao for more information. 

Back to Top

Check Your FBAR Reporting Obligation to Avoid Significant Penalty

Recently, the Supreme Court refused to review a Ninth Circuit's decision on an FBAR violation from 2006, which resulted in a $1.2 million penalty on the taxpayer. U.S. v. Bussell, 120 AFTR 2d 2017-6379
 
Law:
 
Each U.S. person (business or individual) who has a financial interest in or signature authority over any foreign financial accounts with aggregate value over $10,000 at any time during the calendar year must file FBAR.
 
A non-willful violation penalty is $10,000, while a willful violation penalty can be up to the greater of $100,000 or 50% of the balance in the foreign bank account at the time of the violation. In addition, a willful criminal FBAR violation can lead to the maximum penalty of 5 year sentence and a $250,000 fine. Each unreported bank account is counted as one violation and thus the total penalty can be times of the above amounts.
 
While the taxpayer in the above case admitted that she willfully failed to disclose her foreign bank accounts, she argued that the $1,221,806 penalty imposed by the IRS violates the Excessive Fines Clause of the Constitution. She also asserted that the IRS illegitimately obtained her Swiss account information from the Swiss government, as the U.S. and Switzerland Treaty only allows receipt of information from the Swiss government pertaining to tax violations. The district court reduced the penalty to $1,120,513, which represented the maximum amount  permitted under the applicable civil laws. But the district court concluded that this case was clearly a tax collection case. The Ninth Circuit affirmed the district court's decision. And on April 30, 2018, the Supreme Court refused to review the Ninth Circuit's decision.
 
Recent FBAR Development:
 
Since 2012, in order to encourage compliance, the IRS has introduced some programs and procedures to reduce the heavy penalty from FBAR violations. These include the Offshore Voluntary Disclosure Program, Streamlined Filing Compliance Procedures and Delinquent International Information Return Submission Procedures. Specifically, the Delinquent FBAR Submission Procedures may help taxpayers avoid the FBAR penalties under certain circumstances.
 
Take Away: Taxpayers (individual and business) should evaluate their FBAR filing obligation and take actions while the IRS compliance incentives are still available.
 
For answers to your FBAR disclosure questions, please contact Nicole Zhao.

Back to Top

2018 Reminder for Individual Taxpayers: Time to Check Your Withholding Amount

On the day you started a new job, you filled out a Form W-4, and HR took care of the payroll withholding for you. When you filed your individual income tax return, you had a couple hundred dollars of refund, year after year. Sweet! You had your 10-year anniversary with this company, and you had never thought about changing the withholding.
 
Then, beginning in mid-December 2017, the words "Tax Reform" overwhelmingly show up on various social medias. You heard discussions about winners and losers from these tax law changes, and you started to wonder whether you are a winner, a loser or both.
 
Now, you can use the Withholding Calculator (created by the IRS) to evaluate your need to update your paycheck withholding. Submit a new Form W-4 to your HR and they will take care of it.
 
Below is a list of changes that may have significant impact on your income tax. If you had any of these in your 2017 tax return, we recommend that you use the Withholding Calculator to get an estimate of your 2018 tax position.
  • Limited itemized deduction of state and local taxes
  • Limited itemized deduction of home mortgage interest
  • Disallowed alimony deduction
  • Increase standard deduction
  • Eliminated personal exemptions
  • Changed tax rates and brackets
  • Increase Child Tax Credit
In addition to the above law changes, life changes and some types of incomes always require a taxpayer to change the paycheck withhold and/or make quarterly estimated tax payments:
  • Change of filing status
  • Change from being employed to self-employed, or vice versa
  • Receipts of dividend, interest or capital gain
  • Owning a partnership interest or being an S Corp shareholder, even no partnership distribution or S Corp dividend is received
  • Receipts of other income that withholding is not done by the payer
If you ever have questions on your 2018 income tax, please don't hesitate to give us a call.
Back to Top

2018 Post-Season Filing Update

Summary - Wolters Kluwer Tax & Accounting has published its tax briefing which highlights key developments during the filing season that will impact taxpayers of all types for the rest of 2018. The IRS will now focus on guidance for implementing the Tax Cuts and Jobs Act while Congress will shift its focus to technical corrections of the first phase of tax reform and a second phase of tax reform.

To view the complete tax briefing, click here.
 
© 2018 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

Back to Top

2017 Tax Reform Series: Transition for U.S. Shareholders of Foreign Corporations

Summary - A U.S. shareholder in a foreign corporation is potentially liable for the Transition Tax, added by the 2017 Tax Cuts and Jobs Act under Code Sec. 965.
 
Mandatory One-Time Tax on Accumulated Offshore Earnings
The transition tax is a mandatory one-time tax on the untaxed post-1986 foreign earnings of certain foreign corporations of U.S. shareholders. The tax is determined by reference to the foreign corporation’s post-1986 foreign earnings for its last tax year, beginning before January 1, 2018. Accordingly, for calendar year foreign corporations with tax years ending on December 31, 2017, the tax could be due and payable with the taxpayer’s 2017 return. This is because the foreign corporation’s tax year ends during a fiscal taxpayer’s 2017 tax year or with a calendar year taxpayer’s 2017 tax year. For fiscal year foreign corporations, the last tax year beginning before January 1, 2018 (e.g., December 1, 2017) will end during or with a taxpayer’s 2018 tax year and the return is due with the 2018 return.
 
We can examine your foreign stockholdings to determine if the tax applies to you. The rules for computing the transition tax are complex and guidance issued by the Treasury and IRS provide additional rules for computing the correct transition tax. To ensure that the tax is correctly computed, we will need to gather additional information based on this guidance. We can also discuss various elections that may be made to pay the tax in installments or defer the tax.

For more information, click here.
 
© 2018 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

Back to Top

IRS Issues New Tax Withholding Tables

Summary On January 11, 2018, the IRS issued new income tax withholding tables. These tables show new tax rates as well as other changes for individuals implemented by the Tax Cuts and Jobs Act (P.L. 115-97), which was enacted December 22, 2017. Employers must implement the updated withholding rules  by February 15, 2018.
 
The new tables reflect the increase in the standard deduction, the repeals of personal exemptions and new tax rates and brackets. They are designed to produce the correct amount of tax withholding and are also intended to avoid over- and under- withholding of tax.
 
To explain these new tables to taxpayers, the IRS posted a Frequently Asked Questions page to its website. 

For more information, click here.

FASB Issues Four Staff Q&A Documents on Implementation Issues Related to the Tax Cuts and Jobs Act

Summary The FASB staff issued four Staff Q&A documents that address issues related to the Tax Cuts and Jobs Act on January 22, 2018. The Q&As address the following topics:

  • Whether to discount the tax liability on the deemed repatriation
  • Whether to discount alternative minimum tax credits that become refundable
  • Accounting for the base erosion anti-abuse tax
  • Accounting for global intangible low-taxed income

For full explanations of the above Q&As, please visit the FASB website here.

Back to Top

President Signs Sweeping Tax Overhaul Into Law

Summary - President Trump signed the Tax Cuts and Jobs Act (P.L. 115-97) on December 22. The Tax Cuts and Jobs Act provides the most sweeping change to the U.S. tax code in decades. This historic bill calls for lowering the individual and corporate tax rates, repealing countless tax credits and deductions, enhancing the child tax credit, boosting business expensing and more. For highlights of the tax bill, see Wolters Kluwer's latest Tax Briefing, President Signs Sweeping Tax Overhaul Into Law.
 
© 2018 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

Tax Code Overhaul, Regs and Court Decisions Make 2017 Stand-Out Year

Summary 2017 was an eventful year in federal tax. Throughout the year, the Trump administration began to make good on campaign promises to reduce the reach and breadth of government regulations. It also saw some significant developments from the IRS relating to the gig economy and virtual currency. 2017 was also notable for developments that didn't happen, most significantly was the failure to repeal and replace the Affordable Care Act. The year was capped with the passage of the Tax Cuts and Jobs Act, the most significant overhaul of the Internal Revenue Code in more than 30 years.

For highlights of these 2017 tax developments, with special emphasis on those that impact 2018 planning and compliance, see Wolters Kluwer's latest Tax Briefing, 2017 Tax Year-In-Review.
© 2018 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

House Passes Tax Bill; Senate GOP Unveils Plan

Summary The House, on November 16, 2017, approved its sweeping tax reform package - the Tax Cuts and Jobs Act (HR 1) - by a vote of 227-205, moving the GOP one-step closer to achieving a signature legislative victory. The Senate is now in the process of preparing its own tax reform package which, if passed, would then need to be reconciled with the House bill before a final bill can be sent to the White House. 

Both the House GOP bill and Senate GOP plan would impact virtually every individual and business on a level not seen in over 30 years. As with any tax bill, however, there would be "winners" and 'losers " Both versions call for lowering the individual and corporate tax rates, repealing countless tax credits and deductions, eliminating the alternative minimum tax (AMT), enhancing the child tax credit, boosting business expensing, and more. 
The White House has signaled its support for the House GOP bill. Possible roadblocks to ultimately getting a bill to the President's desk before year end are unified opposition from Democrats, intense lobbying efforts to preserve tax breaks slated for elimination, and the significant differences in the House and Senate proposals. 

For a comparison of the House and Senate bills, see Wolters Kluwer's latest Tax Briefing, House Passes Tax Bill; Senate GOP Unveils Plan.
 
© 2017 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

2017 Year-End Tax Planning: Tax Reform, IRS, Court Decisions and More Add to Uncertainties at Year-End

Summary Year-end 2017 presents a unique set of challenges for taxpayers. At the top of the list are the uncertainties created by the possibilities within proposed tax reform legislation - what changes might be made, and whether those changes would be retroactive for 2017. Also presenting a unique challenge before year-end is the Trump administration’s initiative to "streamline" rules and regulations. Meanwhile, the usual flood of court decisions and IRS guidance has continued, also presenting new opportunities-and pitfalls-that require year-end action. Equally important to 2017 year-end tax planning, as for any year, is a look at each particular taxpayer’s circumstances, past, present and future, to capitalize on targeted tax rules or mitigate against their application.

For highlights of various considerations especially particular to tax planning at year-end 2017, see Wolters Kluwer’s latest Tax Briefing, 2017 Year-End Tax Planning.

© 2017 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.