Tax Lawyer Blog

A Blog written by the Tax Attorneys for Individuals and Businesses

Filing Requirements for Overseas Business Investments

Failing to take IRS reporting requirements into consideration is among the biggest mistakes made by U.S. citizens when investing abroad. In addition to FinCEN 114 (the FBAR), U.S. Citizens with a certain percentage ownership in foreign corporations have several filing obligations with steep fines for noncompliance. These filing obligations include Form 8938 and Form 5471.

Form 8938 regarding certain foreign financial assets

Form 8938 must be filed by U.S. citizens, resident aliens and certain nonresident aliens who have “specified foreign assets” with an aggregate value that exceeds a specific threshold. These include:

  • Financial accounts that are maintained by a foreign financial institution, and
  • Foreign assets that are held for investment and not in an account maintained by a financial institution (e.g., stock or securities issued by a non-U.S. person, any interest in a foreign entity, and any financial instrument issued by a U.S. person or with a non-U.S. citizen counterparty).

The threshold for taxpayers living in the U.S. is $50,000 per person ($100,000 for a married couple) on the last day of the tax year, or more than $75,000 ($150,000 for a married couple) on any day of the year. The threshold for taxpayers living outside the U.S. is $200,000 per person ($400,000 for a married couple) on the last day of the tax year, or more than $300,000 ($600,000 for a married couple) on any day of the year.

Form 5471 information return: foreign corporation ownership

A U.S. citizen who owns 10% or more in a foreign corporation, partnership or trust, is obligated to file a Form 5471 (Information Return of U.S. Persons With Respect To Certain Foreign Corporations) every year with their Form 1040 personal tax return (or if owned by a business, LLC, or nonprofit organization, with the entity’s Form 1120, Form 1065 or Form 990 annual return). Form 5471 includes:

  • Information on ownership of the corporation
  • Corporation balance sheet
  • An income and expense sheet for the current year
  • Certain corporate transactions

Note that where U.S. taxpayers comprise over 50% of the ownership interest in a foreign corporation, the corporation is considered a Controlled Foreign Corporation (CFC). Complex rules govern what amount of CFC income is subpart F income which flows through to the taxpayer’s personal or business tax returns and payment obligations – taxpayers are therefore advised to obtain expert tax advice with all such filings.

Under IRC § 6038, penalties apply for late filing, incomplete filing, or failure to file Form 5471. Congress imposed harsh penalties due to the IRS’s past difficulties in obtaining information regarding U.S. taxpayers’ interest in foreign corporations. The penalty for failure to file Form 5471 is hefty, beginning at $10,000 per form per year for every 30-day period (or fraction thereof), commencing 90 days following notification of the failure to file – up to a maximum $50,000 penalty per year. In addition, failure to file leaves the taxpayer’s entire return open for audit for three years after the IRS receives the information.

Experienced international tax attorneys

In addition to hefty penalties, the U.S. government may criminally prosecute anyone who does not comply with tax filing requirements. The international and criminal tax attorneys at Moskowitz, LLP have extensive experience in this area of tax law and are here to help. Contact our office today for a consultation.

Year-End Tax Planning: Businesses and Business Owners

Dear Subscriber:

This Practice Alert highlights the opportunities and challenges that affect year-end planning for 2016 and includes a checklist of actions that can cut taxes in this year and the years to come.

Take a look and give us a call. We look forward to lowering your tax burden and helping you financially succeed.

Happy Tax Planning,

Steve Moskowitz, Esq.
Founding Partner
Moskowitz LLP, A Tax Law Firm

Strategies for Businesses and Business Owners

Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2016, the expensing limit is $500,000 and the investment ceiling limit is $2,010,000. Expensing is generally available for most depreciable property (other than buildings), off-the-shelf computer software, qualified real property, qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. The generous dollar ceilings that apply this year mean that many small and medium sized businesses that make purchases before the end of 2016 will be able to currently deduct all of their outlays for machinery and equipment. What's more, the expensing deduction is not prorated for the time that the asset is in service during the year. This opens up significant year-end planning opportunities.

Businesses also should consider making expenditures that qualify for 50% bonus first year depreciation, if bought and placed in service this year. The bonus depreciation deduction is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the full 50% first-year bonus write-off is available even if qualifying assets are in service for only a few days in 2016.

  • Businesses may be able to take advantage of the "de minimis safe harbor election" (also known as the book-tax conformity election) to expense the costs of lower-cost assets and materials and supplies, assuming the costs don't have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit of property can't exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA's report). If there's no AFS, the cost of a unit of property can't exceed $2,500. Where the UNICAP rules aren't an issue, purchase such qualifying items before the end of 2016.
  • A corporation should consider accelerating income from 2017 to 2016, if it will be in a higher bracket next year. Conversely, it should consider deferring income until 2017, if it will be in a higher bracket this year.
  • A corporation should consider deferring income until next year, if doing so will preserve the corporation's qualification for the small corporation AMT exemption for 2016. (Note that there is never a reason to accelerate income for purposes of the small corporation AMT exemption because if a corporation doesn't qualify for the exemption for a given tax year, it will not qualify for the exemption for any later tax year.)
  • A corporation (other than a "large" corporation) that anticipates a small net operating loss (NOL) for 2016 (and substantial net income in 2017) may find it worthwhile to accelerate just enough of its 2017 income (or to defer just enough of its 2016 deductions) to create a small amount of net income for 2016. This will permit the corporation to base its 2017 estimated tax installments on the relatively small amount of income shown on its 2016 return, rather than having to pay estimated taxes based on 100% of its much larger 2017 taxable income.
  • If your business qualifies for the domestic production activities deduction (DPAD) for its 2016 tax year, consider whether the 50%-of-W-2 wages limitation on that deduction applies. If it does, consider ways to increase 2016 W-2 income, e.g., by bonuses to owner-shareholders whose compensation is allocable to domestic production gross receipts. Note that the limitation applies to amounts paid with respect to employment in calendar year 2016, even if the business has a fiscal year.
  • To reduce 2016 taxable income, consider deferring a debt-cancellation event until 2017.
  • To reduce 2016 taxable income, consider disposing of a passive activity in 2016, if doing so will allow you to deduct suspended passive activity losses.
  • If you own an interest in a partnership or S corporation, consider whether you need to increase your basis in the entity so you can deduct a loss from it for this year.

These are just some of the very many year-end steps that can be taken to save taxes. By contacting Moskowitz LLP, we can tailor an individualized plan that will work best for you.