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Our Perspectives

Decrypting Cryptocurrency Income Reporting

3/5/2020

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Whether or not you use fancy terms like currency, fiat money, or legal tender, we intuitively know what money is.  Typically, the average person places little care in how renowned economists define money; rather, they focus on the everyday impact of money, including making more money and/or spending less of it.  And when talking about money, in reality we are typically talking about the United States Dollar (“USD”), which has effectively enjoyed eminent global currency status over the past several decades.  USD comprises approximately fifty-seven percent (57%) of all Foreign Exchange Reserves as of Q3 of 2019. (See http://data.imf.org/?sk=E6A5F467-C14B-4AA8-9F6D-5A09EC4E62A4).  Not surprisingly, § 985 of the Internal Revenue Code (the “Code”) defines USD as the default functional currency in all respects for reporting tax.  The Code, in certain sections, does allow the use of other functional currencies to report tax, for example in Code § 988; however, in order to use a currency that is not the USD, a long list of strenuous requirements must be met under Treas. Reg. §§ 1.985.1 through 8.  

Since 2009, when Bitcoin began attracting followers in earnest, numerous cryptocurrencies (“crypto”) have emerged; these various cryptos eventually turned into their own industry.  The speculative nature of crypto, as well as the somewhat frenzied public attention focused on them, attracted incredibly large amounts of traders to the industry.  Consequently, the IRS began paying attention and eventually provided some initial guidance on how to report income and expenses derived from trading crypto.  Unfortunately, the guidance was somewhat sparse; the guidance did, however, clearly define crypto for federal tax purposes.  Pursuant to such guidance, crypto was not an eligible currency, able to be used for reporting tax under Code § 985. (See Internal Revenue Service Notice 2014-21). 
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Crypto traders varied with respect to whether, and how well, they could embrace this guidance.  Some traders were puzzled and daunted by the requirement to track the basis or fair market value of their crypto, and to provide both basis and fair market value in USD regardless of whether or not they actually received real USD from the crypto transaction.  Every single disposition of crypto, according to the guidance, regardless of whether a trader realized USD gain or loss from the transaction, must be reported on the traders’ tax returns.  Furthermore, pursuant to the guidance, Schedule D and Form 8949 were to be used to list every single crypto trade; as traders and their tax preparers soon realized, without special software or extreme, painstaking care, it is almost impossible to gather up and record accurately all of this required information, particularly when a trade was made with an exchange that did not provide all the requisite information.  In many cases, the traders did not have proper support from the exchanges and/or were discouraged with the volume of work that was necessary to achieve compliance as required under the guidance. 

Nevertheless, the IRS “reminded” approximately 10,000+ taxpayers of their crypto reporting requirements in July, 2019. (See IR-2019-32).  The IRS undertook its so called “Virtual Currency Campaign,” which is officially now one of the IRS’s five large business and international compliance campaigns, and in light of the campaign the IRS revised its Schedule 1, beginning in tax year 2019, and now requests all taxpayers to attest to the following question:

“At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”

Accordingly, tax preparers, tax attorneys, and interested parties have spent countless man hours reviewing the IRS’s guidance and “Virtual Currency Campaign” messaging.  This focus by non-IRS personnel has revealed what may be very small wiggle room for taxpayers to insist that their cryptocurrency token(s) are not actually Virtual Currency.  The IRS defined Virtual Currency as a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.  After all, each token is so different in its utility, or with respect to its purpose and end goal, that one may be able to avoid categorizing any and all crypto tokens into the category of this Virtual Currency.  

Nevertheless, it is to be seen if there are taxpayers gutsy enough to say “no” to the question above when they have undoubtedly traded cryptocurrency during the tax year.  Are any taxpayers willing to take a risk to make their reporting position from murky and confused status to willful failure by supplying the information under Section 7203? We don’t believe so. That’s why we strongly recommend that anyone who received, sold, sent, or exchanged cryptocurrency during the tax year discuss their situation with qualified tax attorneys to find options to address their situation, whether or not there was any unreported gain or loss.
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20% Deduction for Pass-Through Entities

4/4/2019

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What is the QBI Deduction?

In January of 2019, the IRS released the final regulations (RIN 1545-BO71) implementing the 20% deduction on “qualified business income” (the “QBI”) earned by a pass-through entity (the “QBI Deduction”), as enacted by Section 199A of the Tax Cuts and Jobs Act of 2017 (the “TCJA”).  The QBI Deduction was included in the TCJA in order to provide parity by mirroring the reduction in the corporate tax rate, which was reduced from 35% to 21%.
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Pass-through entities are far more likely to be used by small business; pass-through entities, notably, provide greater flexibility in terms of how an entity can be structured and operated.  Pass-through entities, unlike corporations, are not distinct separate taxpayers from their owners and, as such, any income, gain, loss, or tax liability “passes through” the entity to its owners.  This is distinguished from the corporate form of taxation, whereby a corporation will pay 21% on any income earned and, additionally, the corporation’s executives, employees, and shareholders will also pay personal taxes on their income or capital gains that are derived from the corporation itself.

Does the QBI Deduction apply to my business?

There are certain limitations on the types of businesses the QBI Deduction applies to.  Most importantly, a business must be a pass-through entity, as mentioned above, in order to be preliminarily eligible for the deduction.  A pass-through entity includes sole proprietorships, partnerships, LLCs, and S-Corporations. Certain Trusts and Estates may also qualify for the QBI Deduction as well.  

Further, the definition of QBI specifically excludes income from a “Specified Service Trade or Business” (an “SSTB”) if a taxpayer earns more than, if filing as single, $157,500, or, if filing as married filing jointly, $315,000.  According to the IRS, professions that are considered to be a SSTB are professions that are “providing services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets, or any trade or business where the principal asset is the reputation or skill of one or more of its employees.”

How can I take advantage?  

In order to take advantage of the QBI Deduction, a taxpayer must initially make two calculations to determine the amount of the deduction actually available.  The first calculation is the sum of: 20% of QBI, plus 20% of any income from a qualified publicly traded partnership, plus 20% of dividends from a qualified real estate investment trust.  The second calculation is the sum of: 20% of taxpayer’s taxable income (which is different from QBI in the first calculation), minus net capital gains. The lesser of these two calculations, accordingly, will be the amount that a taxpayer is eligible to deduct from its taxable income under Section 199A (thus, the amount of a taxpayer’s QBI Deduction).

To take advantage of the QBI Deduction after having made the calculations in the preceding paragraph, and any other applicable and necessary determination(s), a taxpayer should simply enter the value from the appropriate calculation (above) into Line 9 on Page 2 of taxpayer’s Form 1040 and, accordingly, proceed to calculate the taxpayer’s taxable income.
You can read the IRS Final Regulations for Section 199A at the following link:
https://www.irs.gov/pub/irs-drop/td-reg-107892-18.pdf.
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Tax planning for traveling athletes, artists, and entertainerS

4/20/2018

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Whenever a well-known KBO League star is signed to a deal with an MLB team, or a K-pop group announces a new tour in the States, most Korean Americans are either simply happy to hear the news or, at most, they begin researching how to get a ticket for an upcoming game or concert.  As a tax attorney, however, these announcements generally result in me mechanically checking on rarely advertised, and infrequently considered, facts and circumstances associated with such news, including the Korean-born athlete or singer’s nationality, tax residence, number of days and/or stays in the U.S. for the game or tour, relationship with an agent, and the agent’s presence in the U.S.  All of these various facts and circumstances, as well as some additional select details, will indicate and dictate how an athlete and performer will be taxed while working and performing in the States.

As of today, the United States has entered into tax treaties (“Tax Treaties”) with 68 different countries around the world.  In certain instances, these Tax Treaties provide international entertainers, artists, and athletes with special exemptions from the imposition of U.S. income tax earned while in the States.  Artists and entertainers from most Eastern European countries, for example, are wholly exempt from U.S. federal income tax earned in the States so long as the artist or entertainer satisfies certain requirements set out in a Tax Treaty with the artist’s or entertainer’s country of residence.  

Entertainers, artists, and athletes from most other countries, however, are not as fortunate as their Eastern European counterparts.  In the majority of Tax Treaties, the United States actually caps the amount of income able to be exempted from U.S. federal income tax by providing a limited exemption from federal income tax generally in the range of $3,000 to $20,000.  If earned income from a foreign entertainer, artist, or athlete exceeds the $3,000 to $20,000 threshold prescribed in the Tax Treaty, even by a single dollar, then the entire amount of U.S. source income, generally, will be subject to U.S. federal income tax and, in most cases, state level income tax as well.  

Unfortunately, the U.S. - Republic of Korea Income Tax Treaty happens to be one of least advantageous Tax Treaties, from the viewpoint of the U.S. counterpart and specifically with regards to income earned by entertainers, artists, or athletes, among all 68 Tax Treaties.  (See U.S. - Republic of Korea Income Tax Convention, Article 18).  In order to avoid becoming subject to maximum U.S. withholding and income tax requirements, however, Korean-resident entertainers, artists, and athletes can proactively plan by: (i) reviewing, and revising when necessary, their relationships with their agents; (ii) taking active steps to establish proper expense and reimbursement plans in accordance with U.S. tax rules; and (iii) only choosing, and applying for, optimal and beneficial Visa programs.  In order to address these concerns in the most advantageous way possible, foreign celebrities, athletes, artists, and entertainers should, preferably, begin planning with U.S. and foreign counsel well-before signing a final tour, concert, or big league contract or agreement.

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The State and Local Tax Deduction Under the Tax Cuts and Jobs Act

2/6/2018

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In anticipation of the recently passed Tax Cuts and Jobs Act (“Act”)#1, some Republicans and a lot of Democrats were concerned and vocal over the proposed, and now enacted, modification to the long-standing deduction for state and local taxes unrelated to a business (“SALT Deduction”).  For decades and decades, a taxpayer who itemized deductions was allowed to deduct certain taxes paid to state and local governments from the taxpayer’s federal gross income.   

Prior to the Act, a taxpayer was allowed to (i) deduct state and local property taxes, and (ii) state and local income or sales taxes (whichever was greater).  Additionally, a taxpayer was allowed to take the SALT Deduction without regard to any limitations (e.g., a cap on the amount paid that was deductible).  If a taxpayer paid local real property tax of $7,000 (in connection with a personal residence), state income tax of $13,000, and state sales tax of $8,000 (related to personal costs), the taxpayer could deduct $20,000 ($7,000 in real property tax and $13,000 in state income tax (since the amount of state income tax paid was greater than the state sales tax paid)).  

In terms of SALT Deduction utilization, taxpayers in all states take advantage of the SALT Deduction, albeit more so in traditionally Blue states and less frequently in Red states.  In Maryland, Connecticut, New Jersey, the District of Columbia, and Virginia, for example, 41% of taxpayers utilized the SALT Deduction on their Federal income tax return.  The taxpayers in these states took a SALT Deduction, on average, of $6,095.#2  On the other hand, in West Virginia, South Dakota, North Dakota, Tennessee, and Alaska, only 19% of taxpayers utilized the SALT Deduction; in these states the SALT Deduction, on average, amounted to $1,159 per taxpayer who was able to utilize it.#3

Pursuant to the new Act, currently effective for tax years 2018-2025, Congress has modified the SALT Deduction by limiting the amount of a taxpayer’s total deduction for state and local taxes to $10,000 if the taxes are unrelated to a taxpayer’s trade or business or other profit-seeking activity.#4  Under the Act, and still assuming none of the state and local taxes in our previous example were paid in connection with a profit-seeking activity (e.g., an investment property), the taxpayer would be limited to taking a SALT tax deduction of $10,000, which is $10,000 less than the taxpayer’s SALT Deduction prior to Congress enacting the Act.

Across the country, state legislators and governors appear receptive to finding solutions or workarounds to the new $10,000 cap on the modified SALT Deduction.  One solution gaining steam involves the reclassification or elimination of state and local property taxes as, or in favor of, employment or payroll taxes.  Another popular workaround involves allowing a taxpayer to voluntarily pay state and local income tax: thereby allowing the taxpayer to classify the payment of state and local taxes as a charitable contribution (under the Act there is still no limit to a taxpayer’s amount of deductions for charitable contributions).  

Given the high state and local tax burdens in a number of states, it seems likely that states will adopt legislation in favor of one or more of the above two approaches.  Whether Congress attempts to find a bipartisan solution to states’ solutions to the much maligned $10,000 limitation on a taxpayer’s SALT Deduction, however, is another story altogether.

#1 Public Law 115-97, “An Act to provide for reconciliation pursuant to Titles II and V of the concurrent resolution on the budget for fiscal year 2018”.
#2 Top five (5) states, by percentage, with taxpayers utilizing the SALT Deduction.
#3 Bottom five (5) states, by percentage, with taxpayers utilizing the SALT Deduction.
#4 Internal Revenue Code §§ 164(a) and (b)(6).



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Succinct Guide to Certain 2018 (and Beyond) Changes Under the Tax Cuts and Jobs Act

1/24/2018

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​On December 22nd, 2017, Public Law 115-97, formally titled “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” but more commonly known as the “Tax Cuts and Jobs Act,” was signed.  With the signing of the Tax Cuts and Jobs Act, the United States saw the most significant, and certainly dramatic, change to the Internal Revenue Code since the Tax Reform Act of 1986. Below we highlight certain broad changes to the Internal Revenue Code, specifically tax rates or exclusion amounts, that are of particular importance and applicable to many taxpayers.

​I.     Individual Ordinary Income Tax Rates

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* Revenue Procedure 2017-58 (Oct. 19, 2017)
** All changes in individual rates are set to expire at the end of 2025

II.     Pass-through Entities Tax Rate

Under the Tax Cuts and Jobs Act, there are no special tax rates or caps for taxes flowing to individuals through pass-through entities.  Individual owners of pass-through entities are merely subject to the new individual ordinary income tax rates under the Act.  Congress, however, did include a new 20% deduction for certain types of qualified business income (“QBI”) that is received through a pass-through entity.  The Act defines QBI as the net amount of domestic qualified items of income, gain, deduction, and loss with respect to the taxpayer’s qualified trades and businesses (“QTB”).  A QTB is, generally, any trade or business other than specified service businesses (e.g., professions in the fields of health, law, consulting, athletics, financial services, brokerage services, etc.).  

Accordingly, an important restriction on the 20% deduction comes in the form of a cap on the amount of income eligible for the 20% deduction when an individual derives such income from their specified service businesses.  This cap only allows individuals with specified service businesses to treat their income as QBI, and receive the 20% deduction, if their taxable income is less than $157,500 for single filers and $315,000 for married, joint filers.  If an individual’s QBI derived from a specified service business is beyond the threshold, then the benefit of the 20% deduction for income from such specified service businesses is simply phased out over a $100,000 range, for married individuals filing jointly, and a $50,000 range for all other individuals.

III.     C Corporation Tax Rates
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IV.     Trusts and Estates Tax Rates
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* Basic exclusion amount for 2018, pursuant to Revenue Procedure 2017-58, was set to be $5,600,000
** The Tax Cuts and Jobs Act doubles the basic exclusion amount under § 2010(c)(3), which will be adjusted for inflation, annually.

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Commonwealth of Virginia’s Tax Amnesty 2017

10/13/2017

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Do you owe the Commonwealth of Virginia for past-due taxes? Are you one of the hundreds of thousands of residents, employers, or employees that has failed to file a Virginia tax return? If you can answer yes to any of the above questions, you’re in luck.

Virginia’s 2017 Tax Amnesty program (Program or Amnesty Program) is currently underway and scheduled to last until November 14th, 2017. Pursuant to the Program, qualified individuals and businesses are able to satisfy their delinquent tax obligations by paying their past-due tax bill(s), plus one-half of the interest owed, in exchange for the Commonwealth waiving all remaining interest and penalties. Taxpayers that have multiple outstanding tax bills or unfiled returns are also permitted to participate in the Program on a bill-to-bill basis. Such taxpayers may satisfy one or more outstanding tax obligations even if they’re unable to satisfy all outstanding tax obligations to the Commonwealth.

In terms of Program participation eligibility, almost all individuals and business entities are permitted to participate so long as the individual or entity has a specific type of past-due tax bill or a specific type of unfiled, delinquent return. Accordingly, Commonwealth taxpayers that find themselves or their company in the following situation may be eligible for the Amnesty Program:

  1. Individuals or entities that have a tax bill for an “Eligible Period” (see below) and have an assessment date at least ninety (90) days prior to first day of the Amnesty Program (the Program began on September 13th, 2017), or
  2. Individuals or entities that have a delinquent return for an amnesty-eligible tax type and tax period.

Each specific type of Commonwealth tax, and there are over thirty (30) different taxes levied by Virginia that are eligible for the Program, has a different “Eligibility Period” that must be met in order to qualify for the Amnesty Program. Some of the more common past-due tax type Eligibility Periods are as follows: (i) the Eligibility Period for individual income taxes is taxable year 2015 and prior; (ii) the Eligibility Period for corporate income taxes is taxable year 2015 and prior; (iii) the Eligibility Period for retail sales and use taxes is the month of April 2017 and prior; and (iv) the Eligibility Period for employer income tax withholding is the month of April 2017 and prior.

The current collection status of a specific tax liability may also affect whether a Virginia taxpayer qualifies for Amnesty Program participation (e.g., Program eligibility rules differ depending on if the past-due taxes or delinquent tax return has morphed into a Converted Assessment, Lien, Jeopardy and Fraud Assessment, and so on).

As the Amnesty Program almost halfway complete, now is the time to contact a member of our firm (info@bjkanglaw.com) or your local tax professional for more information. ​
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Delaware’s Blockchain Amendment

7/24/2017

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There is a lot of buzz around Delaware’s “Blockchain Amendment.” The Delaware Blockchain Initiative worked closely with stakeholders on the proposed amendment, which is expected to be signed into law by the end of July. The amendment is generally being hailed as a landmark development, some have even gone so far as to declare it revolutionary.

At its core, the amendment gives Delaware corporations statutory authority to use blockchain or distributed ledger technology to fulfill certain requirements of Delaware General Corporate Law for creating and maintaining corporate records. This sounds a lot less impressive than it is, but having uncertificated blockchain securities will, in the short term, create more efficient processes for companies with larger volumes of shareholders and trading activity. Companies have been issuing blockchain securities (see Overstock’s recent offering on t0), however the amendment provides regulatory certainty and clear minimum requirements.

In the long term, the amendment paves the way for cutting out middlemen in securities transactions, such as transfer agents and clearing houses. This means lower transaction costs and possibly instantaneous clearing and settlement. Hopefully, this initiates similar innovation on the part of the SEC and other government agencies. BUT, Delaware’s amendments are only the first step in recognizing these long term benefits. 

Specifically, the amendment allows:

1. §219(a) requirements for maintenance and preparation of stockholder lists in connection with shareholder meeting to be fulfilled using distributed ledgers and blockchain, shares provided that the names of all of the corporation’s stockholders of record, the address and number of shares registered in the name of each such stockholder, and all issuances and transfers of stock of the corporation are recorded in accordance with § 224.

2. § 224 requirements regarding any books, records, or stock ledgers to be kept by the corporation to be fulfilled by keeping these on a distributed ledger, as long as they: a. can be converted into paper form within a reasonable time, b. can be used to prepare the list of stockholders as required by §§219 and 220, c. record information as required in  § 156 (info on class, series, rights, restrictions, restrictive legends), § 159 (transfers for collateral security), § 217(a) (fiduciaries' voting rights) and § 218 (voting trusts/agreements).

3. Electronic transmission (§232) by means of distributed ledgers.
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Delaware’s blockchain amendment is a step in the right direction as we implement blockchain and start making changes to our financial infrastructure. However, much of the perceived benefits here will come in the long term as federal agencies hopefully follow suit.

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2017 Individual Tax Update

1/31/2017

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​With the new year in full swing and plenty of changes coming with it, few things are certain, aside from updates and annual adjustments to the Internal Revenue Code. For your convenience, we have laid out some of the more important updates below:

1. Tax Brackets Adjusted for Inflation

Below you will find the tax brackets for 2017.  But with Trump’s election and a Republican controlled House and Senate, we could be seeing drastic reductions in tax rates very soon.

2017 Brackets

Tax Rate            Single            Married, Filing Jointly
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10%                    $0                  $0

15%                    $9,326           $18,651

25%                    $37,951         $75,901

28%                    $91,901         $153,101

33%                    $190,651       $233,351

35%                    $416,701       $416,701

39.6%                 $418,401+     $470,701+

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2. Standard Deduction Increase

Individuals will be receiving a small gift in the form of an increase to the standard deduction amount for taxable-year 2017. Accordingly, married couples filing jointly will be entitled to a $12,700 deduction; head of household and individual filers will receive standard deduction increases to $9,350 and $6,350, respectively.

3. Traditional and Roth IRA Phaseout Increase

Traditional IRAs provide you the opportunity to defer taxes while contributing toward your retirement. You can deduct amounts contributed toward your IRA from your current year’s taxable income. However, this benefit phases out at certain income levels. The phase-out lower and upper limits for this deduction, respectively, will increase in 2017 by $1,000 to: $62,000 and $72,000 for single taxpayers, and $99,000 and $119,000 for married couples filing jointly.

Roth IRAs, on the other hand, provide no up-front tax savings but do in fact grow tax-free and provide tax-free income in over the course of your retirement. If you were not eligible for Roth IRA contributions in 2016, it is possible that you may be eligible to contribute in 2017. Same as with the Traditional IRA, Roth IRA phase-outs increased by $1,000 for single filers to a range of $118,000 to $133,000, and $2,000 for married couples filing jointly to a range of $186,000 to $196,000.

4. Estate Tax Exemption Increase

Those of you who will be inheriting more than $5.45 million are in for a small windfall. On January 1, 2017, the estate tax exemption increased $40,000 to $5.49 million. This means that the estates of individuals who pass away will not be subject to any estate tax on up to $5.49 million of the estate. There may be even better news on the horizon, as well, as Donald Trump has indicated he would like to abolish the estate tax entirely. This would mean that wealth, even in excess of $5.49 million, would pass from a decedent to a beneficiary tax free.

5. Medical Expense Deduction Decrease for Seniors

Amid all these increases, seniors will be seeing a decrease to their allowable medical expense deduction. Pre-January 1, 2017, taxpayers 65 and older were able to deduct medical expenses from their taxable income if such expenses surpassed 7.5% of the taxpayer’s adjusted gross income, while the threshold for taxpayers under 65 years of age was, and still is, 10%.  However, beginning this year all individuals will be subject to this 10% threshold.

6. Alternative Minimum Tax Exemption Increase

The Alternative Minimum Tax (the “AMT”) is a nasty trap that only pops up for some taxpayers but still finds a way to complicate the lives of many more. Thankfully, however, the IRS provides an exemption so that if your AMT liability is not over a certain amount you are not subject to the AMT. The exemption amount for tax year 2017 is $54,300 for individuals and $84,500 for married couples filing jointly, which amounts to an increase of $400 and $700, respectively, from the 2016 exemption amounts.

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IRS Releases Temporary Regs in Order to Override Nonrecognition Rules Related to Contributions of §721(c) Property to Partnerships with Foreign Partners

1/23/2017

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On January 19, 2017, the IRS finally released temporary regulations (“TD 9814 Regs”), first brought to the public’s attention in Notice 2015-54 (Aug. 6, 2015), which override the §721(a) nonrecognition of gain rules for contributions of §721(c) appreciated property to a partnership, in exchange for an interest in such partnership, if the partnership has certain “related” foreign partners (partnerships may have cause to breathe easy, however, as the TD 9814 Regs define "related" as the U.S. transferor and foreign partner(s), together, having an 80% or more interest in the partnership's capital, profits, deductions, or losses, as opposed to the 50% threshold originally proposed in Notice 2015-54).

Taxpayers have frequently sought to contribute §721(c) appreciated property to partnerships with foreign partners in order to effectively allocate the built-up gain from, or income stemming from, such appreciated property to the foreign partners who are not subject to U.S. income tax.  The Service, arguably, does in fact already have tools to combat such practices: (i) §704(c) of the Code is used to prevent the shifting of “tax items” among partners; and (ii) §482 of the Code gives the Service broad authority to make allocations that properly reflect the economics of a controlled transaction.  Taxpayers, however, by utilizing a §704(c) method other than the remedial method and/or valuation techniques that are likely inconsistent with the arm's-length standard, have purported to shift appreciated gain and income from appreciated property in a manner that is in fact consistent with Code §§ 704(b), 704(c), and 482.

The TD 9814 Regs, consequently, propose to override nonrecognition treatment on contributions of appreciated property to partnerships (i) with related foreign partners; and (ii) with substantial related-party ownership, unless, however, “certain requirements are satisfied” (e.g., the Gain Deferral Method is used, the de minimis $1mm exception, as it relates to the sum of all property with built-in gain that is contributed to the partnership during the year, applies, or another proposed exception is met).  With the announcement of these rules, the IRS clearly intends for the Code to treat contributions of appreciated property to a partnership in a manner similar to how the Code treats contributions of appreciated property to a foreign corporation (e.g., Code §367).  

​And, as always, before the adoption of these temporary regulations the IRS will accept and consider timely submissions of comments and concerns that are related to the TD 9814 Regs.
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INCREASING EXECUTIVE FOCUS ON TAX COMPLIANCE AS GOVERNMENTS TAKE AIM AT PERCEIVED ABUSE

1/17/2017

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Over the past few years we have witnessed increased scrutiny by worldwide tax authorities of corporate tax planning, corporate tax structures, and tax practices that arguably amount to tax evasion  (e.g., Apple in Ireland; Amazon in Luxembourg; Starbucks in the Netherlands; and so on ). Countries are beginning to enact new and uncompromising legislation in order to combat what they perceive to be corporate tax abuse and corporate planning strategies that have a singular tax-related goal.

The United Kingdom, for example, has legislation (taking effect in 2018) that will make it a criminal offense for a company to fail to prevent the facilitation of tax evasion by its staff, regardless if such evasion relates to domestic or foreign taxes. Such legislation will make it a strict liability criminal offense (e.g., there will be no “intent” requirement needed for a conviction) for a company to fail to prevent the facilitation of tax evasion by a company’s employee(s) or a person associated with the company. Such increased scrutiny, and increasingly tangible steps to deter aggressive tax planning by businesses, coupled with shifting political landscapes and politicians’ increasingly publicized concerns about base erosion and profit shifting, are causing corporate executives and board of directors (“Senior Executives”) to spend more time focusing on tax compliance, according to a new report by Allen & Overy LLP (the “Report”).

This Report, released in January of 2017, surveyed 396 senior-level executives from a variety of companies located across Western Europe, the United States, and Australia. Senior-level executives and board members have traditionally limited the vast majority of their tax-related focus and discussions, if discussed at all and not left to others, to the minimization of the company’s effective tax rates. According to the Report, however, Senior Executives are now increasingly discussing, and spending more time on, effective ways to ensure that their companies are both complying with domestic and international tax reporting requirements and preemptively bringing potential tax issues to the attention of applicable authorities.

While it undoubtedly makes fiscal sense for a company to comply with tax laws and avoid even the potential of a major dispute with a country’s tax laws and tax authority, it can also be highly advantageous and profitable for a company to engage in novel or tried-and-true tax planning strategies in order to dramatically lower their effective rate. With increasingly complex, and ever-changing, tax codes and regulations enacted throughout the world, governments and tax authorities would be wise to provide taxpayers and their advisers with comprehensible and dependable guidance in order to increase the likelihood of transparency and not deter companies from expanding operations across the globe.
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2016 Tax Law Changes

1/12/2016

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With each new year comes changes to the tax code. For the majority of individuals across the U.S., these changes come and go without a thought in the world. For tax attorneys, CPAs, and a small minority of other people who feel inclined to stay up to date on changes to the Internal Revenue Code, these changes represent an opportunity to plan for the not-so-distant future through increased savings or the avoidance of costly mistakes that lead to unnecessary penalties and interest.


The following list represents some important changes to the Code for 2016 - changes that can be helpful to individuals and corporations. As Yoda always says, “Wise to be in sync with the Code, it is.”

New Tax Return Due Dates
C Corporations
  • Calendar year C corporations: returns are now due on April 15th, not March 15th
  • Non-calendar year C corporations: returns are now due on the 15th day of the fourth month following the close of the C corporation's taxable year, not the third month (exceptions apply for C corporations with tax years ending on June 30th)

Partnerships
  • Calendar year partnerships: returns are now due on March 15th, not April 15th
  • Non-calendar year partnerships: returns are now due on the 15th day of the third month following the close of the partnership’s taxable year, not the fourth month

New Information Return Due Date
Taxpayers with certain foreign bank accounts and foreign financial accounts, those individuals required to file FBAR (Foreign Bank and Financial Accounts) returns (FinCEN Form 114), must now file such returns by April 15th - not the previously used FBAR return date of June 30th.

Also enacted in 2016, however, is a first time ever FBAR extension. Individuals who are subject to FBAR may now make use of a newly enacted 6-month extension that allows such individuals to file their FBAR returns up and until October 15, 2016.

Basis Reporting of Inherited Property
Tucked into the mid-July Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 is Code §1014(f), which requires the basis of property received from a decedent to not exceed the basis reported, by the estate, to the Internal Revenue Service for estate tax purposes. Newly enacted §6035 further requires certain executors of estates to report, to both the Service and beneficiaries of an estate, the basis of inherited property received by a beneficiary. Congress, through the adoption of such Code sections, hopes to quash any differences in the eventual basis that is used by a beneficiary for inherited property and the basis that is reported by the estate for estate tax purposes.

We at B.J. Kang Law, P.C. hope that you have a happy, healthy, and successful New Year. Please feel free to contact a member of our firm if you have any questions: admin@bjkanglaw.com.

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Maryland Tax Amnesty Program Slowly Winding Down...

10/7/2015

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​Earlier this year the Maryland General Assembly passed House Bill 1233, appropriately titled the Tax Amnesty Program (the “Amnesty Program”), which provides certain delinquent Maryland taxpayers with generous tax amnesty. Maryland’s Amnesty Program began on September 1, 2015 and runs until October 30, 2015. Under the Amnesty Program, the Maryland Comptroller will (1) waive all civil tax penalties and (2) waive one-half of the interest that will have accrued against a taxpayer who failed to report taxes, failed to pay taxes, or simply underreported a tax liability.

While the window provided to taxpayers who want to take advantage of the program is relatively short, the type of taxpayers that the program is offered to is quite broad. The Amnesty Program is applicable to taxpayers who have nonpayment, nonreporting, or underreporting issues that stem from individual income tax, corporate income tax, withholding tax, sales & use tax, and admissions & amusement tax. Additionally, a unique aspect of Maryland’s Amnesty Program is that, unlike most other states’ tax amnesty programs, there is no language contained within the text of the Amnesty Program that limits or excludes taxpayers who are already under audit, have assessment appeals pending before the state taxing authority, or who have already been identified by Maryland’s taxing authority as potentially delinquent taxpayers.

The Amnesty Program generally requires a delinquent taxpayer to pay the tax owed during the amnesty period (by October 30, 2015). Maryland’s Amnesty Program, however, explicitly provides the Comptroller with the ability to allow such a taxpayer to enter into an agreement to pay such delinquent taxes over an extended period of time. Accordingly, Maryland taxpayers who are potentially or definitely delinquent with regards to their Maryland tax liability – regardless if such liability stems from individual, corporate, withholding, sales & use, or admissions & amusement tax – would be well-advised to take advantage of the Amnesty Program before it expires at the end of the month on October 30, 2015.
For questions or assistance in applying for the Maryland Tax Amnesty Program, please contact us at (703)-595-2836 or admin@bjkanglaw.com
1.Tax Amnesty Program, MD Gen. Assembly, HB 1233 / SB 763 (2015).
2.MD Gen. Assembly, HB 1233 § 2(a)(1)(i) and (ii) (2015).
3.See MD Gen. Assembly, HB 1233 (2015).
4.MD Gen. Assembly, HB 1233 § 2(a)(2)(i) (2015).

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WHAT’S NEW IN 2015: CORPORATE TAX CHANGES AFFECTING SMALL AND MEDIUM- SIZED BUSINESSES

3/30/2015

 
The year 2015 also brings with it some change to sections of the Code that will affect, in particular, small and medium-sized businesses. While none of these changes may seem major, it is important to stay informed of such updates in order to avoid (or to take advantage of) any potential pitfalls (or opportunities).

First, the IRS has announced a change in the Business Standard Mileage Reimbursement Rate (the “BSMRR”) for 2015. This change comes in the form of a per mile increase to 57.5 cents, in contrast to last year’s reimbursement rate of 56 cents per mile.1 Fortunately, this change comes at a time when gas prices have plummeted across the US, which turns the BSMRR increase into a small windfall for some taxpayers.

Second, the IRS has expanded the coverage of the Small Employer Health Insurance Credit. Although the bulk of the credit remains the same, the dollar amount used to determine whether an employer’s average employee salary qualifies it as an “eligible small employer” (one of several criteria that must be met in order to qualify for the credit) has been increased from $25,000 to $25,800.2 This increase means that certain employers who may not have previously been eligible for this credit may now be able to take advantage of it.

Third, the IRS has increased the allowed Exclusion from Wages of Transportation Benefits, which are provided by employers, to: $130 monthly for transportation in a commuter vehicle or for any transit pass, and $250 monthly for qualified parking. These figures are up from $100 and $175, respectively, in 2014.3

Fourth, there have been changes to the Code that will affect how employers compute payroll taxes. The Social Security Administration has increased the amount of earnings subject to social security tax to $118,500, from $117,000 in 2014.4 Employers should take this change into account immediately and adjust their payroll/withholding systems.

Lastly, there is the annual expiration of certain benefits, which are usually extended before the end of the year. One major change is the decrease, from $500,000 to $25,000, of the allowable deduction for purchases of certain qualifying property under Code §179, as well as the elimination of bonus depreciation that was also offered under this Code section.5 These changes could cause a substantial increase in a business’s tax liability if the $25,000 figure is not increased and the bonus depreciation allowance is not reinstated.

While these changes may seem insignificant, you should consult a lawyer or qualified tax professional to determine how they may affect you, or how you may be able to take advantage of them.

For questions or assistance regarding the 2015 Corporate Tax Changes, please contact us at (571)-595-2836 or admin@bjkanglaw.com

1 Notice 2014-79.
2 26 U.S.C. §45R; IRS Pub. 15-B (2015).
3 Id.
4 2015 Social Security Changes, http://www.ssa.gov/news/press/factsheets/colafacts2015.html.
5 H.R. 5771-8.

What's new in 2015: individual tax 

1/9/2015

 
Since 2015 is upon us, our firm feels that now is a good  time  to begin looking at some of the most significant new tax breaks, penalties, and restrictions that will affect taxpayers this year. This week we will mention some of the biggest changes that individual taxpayers will face in the upcoming year. 

The good news is that any changes individuals will face coming year come in the form of minimal increases to tax rates, and related tax thresholds, which have changed slightly due to 2015 inflation adjustments. There are, however, two significant tax changes, a restriction and a penalty, that individuals must be aware of in 2015.

The first major change is a new restriction imposed on individual taxpayers regarding the amount of times that they can make a tax free rollover of one IRA into another IRA in any 12-month period.1 Previously, taxpayers were able to make as many tax free withdrawals of money from their IRA as long as they: (i) replaced the amount that was withdrawn into another eligible retirement plan within 60 days of the initial withdrawal, and (ii) had not made a previous rollover, with regards to the same IRA, within the previous 12 months.

Since the tax free rollover rule was allowed on an account-by-account basis, individuals, effectively, could make unlimited interest-free loans to themselves as long as they were rolled over different IRA accounts and repaying the money within 60 days. Beginning in 2015, however, the “one rollover per 12-month rule” now applies to all IRAs owned by a taxpayer.2

The second major change that individuals taxpayers now face is the penalty for not having health insurance as mandated in the Affordable Care Act (the “ACA”). Prior to this New Year, individuals who did not have health insurance were subject to the following penalty: (i) 1% of the head of household’s annual income; or (ii) $95 per person, whichever amount was greater. Now, however, the penalty for a lack of health care coverage has increased to the greater of: (i) 2% of the head of household’s annual income; or (ii) $325 per person.3 These changes represent a significant increase in the applicable penalty that an individual will face for not being insured -- especially when compared with the generally nominal inflation-adjusted increase of most US tax breaks.

1Internal Revenue Service Announcements 2014-15 and 2014-32.
2Bobrow v. Commissioner, T.C. Memo. 2014-21.
3Congressional Research Service, Individual Mandate Under ACA, p.3.

Are you expanding in the United States? Tax Credit & Incentive Opportunities in Massachusetts

11/21/2014

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Thus far, we have discussed various tax credit and/or tax incentive programs in Virginia and Maryland. However, let's venture a bit north and take a look at Massachusetts.

The following are tax credit or tax incentive programs that could be applicable to your expanding business:

Local Real Estate Tax Exemption: A local real estate tax exemption that is provided by local Massachusetts’ municipalities, the amount of which is negotiated with the municipality; the exemption applies to any increase in property tax that is based on the increase value of the applicant’s property due to new construction or significant improvements.
Informational Link: http://www.mass.gov/hed/business/incentives/tax-increment-financing-tif.html

Research and Development (R & D) Tax Credit: A permanent income tax credit available to either foreign (out-of-state) or domestic (in-state) companies, if subject to the Massachusetts corporate excise tax, on research and development expenditures.
Informational Link: http://www.mass.gov/hed/business/incentives/r-and-d-tax-credit.html

Investment Tax Credit: A corporate income (excise) tax credit for certain companies in Massachusetts that is based on investment (either by purchase or lease) in certain tangible personal property used in business.
Informational Link: http://www.mass.gov/hed/business/incentives/investment-tax-credit.html

Life Science Tax Incentive Program: A tax incentive program for Massachusetts companies engaged in life science research and development, commercialization, and manufacturing - the size of the tax incentive is wholly dependent the ability to create and retain jobs in Massachusetts.
Informational Link: http://www.masslifesciences.com/programs/tax/

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Are you expanding in the united states?                       tax credit & incentive OPPORTUNITIES in maryland 

11/6/2014

 
Last week, we introduced various tax credit and/or tax incentive programs in the Commonwealth of Virginia. Now let us take a look at one of our neighboring states: Maryland.

The following are tax credit or tax incentive programs that could be applicable to your business:

Job Creation Tax Credit: Companies are provided with a credit against either corporate or individual income tax, insurance premium tax, or public service company franchise tax based on the newly created qualifying jobs created by qualifying businesses.
Informational Link: http://www.taxes.marylandtaxes.com/Resource_Library/Tax_Publications/Business_Tax_Credits
/Job_Creation_Tax_Credit.shtml

Enterprise Zone Tax Credit: Real property and state income tax credits for newly created jobs and investments in pre-designated “Maryland enterprise zones.
Informational Link: http://www.business.maryland.gov/fund/programs-for-businesses/enterprise-zone-tax-credit

One Maryland Tax Credit: This tax credit program delves into one of the following categories.
  • Project Tax Credit: generous Maryland income tax credit for capital expenditures made to land acquisition, building construction, rehabilitation, installation and purchasing of equipment in certain Maryland counties if the company making the capital expenditures meets certain job creation requirements.
  • Start-Up Tax Credit: Maryland income tax credit for costs of moving a start-up company to Maryland if certain job creation requirements are met.
Informational Link: http://www.business.maryland.gov/fund/programs-for-businesses/one-maryland-tax-credit

Research and Development (R & D) Tax Credit: An income tax credit for qualified research and development expenses, incurred in Maryland, as defined in the Internal Revenue Code § 41 (b).
Informational Link: http://www.business.maryland.gov/fund/programs-for-businesses/research-and-development-tax-credit

Biotechnology Investment Tax Credit: A refundable income tax credit for early investments in Maryland biotechnology company; investors are able to receive credits worth $250,000 per year for each qualified biotechnology company they invest in.
Informational Link: http://www.business.maryland.gov/fund/programs-for-businesses/bio-tax-credit

Cyber Security Investment Incentive Tax Credit: A unique income tax credit as the credit is provided to qualifying cyber security companies that secure investments from investors; furthermore, the credit is refundable—if a qualifying firm has no Maryland income tax liability in the year the credit is secured, a refund will be generated.
Informational Link: http://www.business.maryland.gov/fund/programs-for-businesses/cyber-tax-credit


are you expanding into the united states?               TAX CREDIT & INCENTIVE OPPORTUNITIES IN Virginia 

10/31/2014

 
So, you are now done with your country to country analysis and decided to expanded into the United States. If you already know where your new company will be in the United States, it is a fairly simple process. You would set up a company in the state of your choice and deal with the requirements.  However, what if you don't have the location in mind and are open to any suggestions on which state or locality is better for your business?

Most businessmen will follow the traditional path to check the state tax rate, which is easily available.1) However,  a creative businessman will be more interested in  state tax credits or state benefit programs that may help their business in a more direct way. If you are one of those creative businessmen, here it comes. We will introduce to you some of the most helpful state tax incentives for a new business or expanding business. Let's start with our home state, the Commonwealth of Virginia. 

Virginia

Capital Gains Tax Exemption
State income tax exemption for long term capital gains incurred in connection with investments in technology, biotechnology, and energy-related companies/start-ups
Informational Link: http://www.nvtc.org/advocacy/virginia_initiatives.php

 
Angel Investor Tax Credit
A credit of 50% per qualified investment made each year, Virginia’s highly competitive Angel Investor Tax Credit encourages early investment in biotechnology, energy, and technology start-ups that are located in the Commonwealth
Informational Link: http://www.tax.virginia.gov/site.cfm?alias=taxcredit#Qualified_Equity_And_Subordinated_Debt_Investments_Credit

Major Business Facility Job Credit
An income tax credit of $1,000 per full-time job created over a threshold number of jobs (the threshold is 50 for some companies, and 25 for others)
Informational Link: http://www.tax.virginia.gov/site.cfm?alias=TaxCredit

Research and Development Tax Credit
An income tax credit for qualifying research and development expenses incurred by companies and individuals located in Virginia; tax credit amounts per company or individual can be as high as $25,050 or $30,000, depending on if the R & D was conducted in conjunction with a college or university located in Virginia

Informational Link: http://www.tax.virginia.gov/site.cfm?alias=TaxCredit#Research_and_Development_Tax_Credit

1) If you are interested in the tax rates by State, the Tax Foundation has excellent web-site showing all sorts of tax rate applicable to your business.

Year-End Tax Credit for Investments in Technology-Related Fields

9/19/2014

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As many taxpayers are about to enter into the 4th quarter of their 2014 fiscal year, now is a good time to find productive ways to reduce taxable income. One such way is to take advantage of Virginia's Qualified Equity and Subordinated Debt Investments Tax Credit (“Investment Credit”). This provides taxpayers with an Investment Credit for a “Qualified Investment” that is made to a “Qualified Business”.1

A Qualified Investment is made when a taxpayer infuses new capital, in the form of cash, into a qualifying business in exchange for either equity or subordinated debt. 2 Generally, the equity received by a taxpayer in connection with a qualified business investment must be held by the taxpayer for at least 3 full calendar years following the year in which the taxpayer is allocated the Investment Credit.3 Likewise, a taxpayer who receives subordinated debt in connection with such an investment must hold the debt for at least three years after it is issued.4 The subordinated debt must not require repayment of principal for the first three years after issuance of such debt. If the debt requires repayment within three years, the subordinated debt will not be considered a Qualified Investment.

A Qualified Business, for Investment Credit purposes, is a business meeting the following five criteria:
  1. Gross revenues of no more than $3 million dollars in most recent fiscal year;

  2. Principal office or facility located in Virginia;

  3. Business primarily performed in, or production substantially performed in, Virginia;

  4. Less than $3 million received in aggregate gross cash proceeds from issuance of equity or debt investments; and

  5. A business primarily engaged in, or organized to engage in, one of the fields specified in Va. Code § 58.1-339.4(A) (i.e. advanced computing, advanced manufacturing, biotechnology, energy, information technology, medical device technology, etc.).5
However, a taxpayer applying for the Investment Credit cannot simply state on their application that the business it made a Qualified Investment to meets the Qualified Business criteria. The taxpayer must make sure that the business has filed Form QBA: an “Application for Designation as a Qualified Business for the Qualified Equity and Subordinated Debt Investments Tax Credit”.

If all of the above criteria are met, then the amount of the Investment Credit the taxpayer may receive is equal to 50% of qualifying investments made during the taxable year.6 Virginia has set a $5 million cap on the total amount of the credit available to all taxpayers in 2014. However, it has provided that if such amount of total qualifying requests for the credit exceeds the $5 million cap, then the credit is to be prorated among taxpayers.7 Thus, it is not too late to apply for the credit; the Investment Credit is not doled out on a first-come, first-serve basis and, most importantly, provides a great last-minute opportunity for taxpayers to reduce their taxable income and for certain businesses to attract investments.

1See Va. Code § 58.1-399.4.
2Va. Code § 58.1-399.4(A).
3Va. Dept. of Taxation, Form QBA, Application for Designation as a Qualified Business for the Qualified Equity and Subordinated Debt Investments Tax Credit, P. 3.
4Id.
5See VA Code § 58.1-399.4; supra FN 3.
6Va. Code § 58.1-399.4(B).
7Supra FN 3.
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Maryland's Biotechnology investment incentive tax credit ("BIITC") 

9/8/2014

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Newsflash: today, in a surprise move that has shocked the country, Wesley Mouch, Top Coordinator of the Bureau of Economic Planning and National Resources, announced that:

"All the manufacturing establishments of the country, of any size and nature, [are] forbidden to move from their present locations, except [if] granted a special permission to do so by the Bureau of Economic Planning and National Resources."

Thankfully, this headline is a work of fiction directly out of Ayn Rand's novel Atlas Shrugged.

As businesses in the U.S. are free to move and relocate to any state of their choosing, States have long undertaken the task of enacting various pieces of legislation aimed at attracting business development within their state borders. One such piece of legislation comes in the form of an attractive tax credit for investors in biotechnology companies that are located in Maryland: the Biotechnology Investment Incentive Tax Credit (“BIITC”). Maryland's BIITC provides “qualified investors” with income tax credits amounting to 50% of an “eligible investment” in a Qualified Maryland Biotechnology Company (“QMBC”). Such credits, however, may not exceed $250,000 for each QMBC per fiscal year.

First, in order to meet the BIITC “qualified investor” requirement, an individual or entity must (1) invest, at a minimum, $25,000, (2) into a QMBC, and (3) be required to file an income tax return in any non-tax haven jurisdiction. Such investor, however, is limited to a Maryland tax credit of $250,000 per fiscal year per each QMBC it invests in. Furthermore, no qualified investor is eligible for more than 15% of the annual budgeted credit amount. For fiscal year 2015, this amounts to a maximum BIITC of $1,800,000 per qualified investor.

Secondly, an individual or entity must meet the BIITC's “qualified investment” requirement. A qualified investment is a contribution of money in cash (or a cash equivalent such as a bank certificate of deposit, a piece of corporate commercial paper, or a U.S. government Treasury bill) to a QMBC in exchange for either stock, a partnership or membership interest, or some other interest in the QMBC that vests in the contributor (investor). Such a qualified investment does not include any form of debt and must be subject to a risk of loss.

Lastly, the BIITC requires the biotechnology company to be a QMBC, which is met if the company has: (1) headquarters and a base of operations in Maryland; (2) fewer than 50 employees; (3) an active business that has been active for no more than 10 years; (4) no securities that are publicly traded on any exchange; and (5) QMBC certification from Maryland's Department of Business & Economic Development.

If the requirements mentioned above are met, investors in Maryland biotechnology companies will be entitled to this state sponsored tax credit. When compared to other state credits for biotechnology company investments (i.e. programs Arizona and Virginia), Maryland's BIITC offers an unparalleled opportunity for investors. This opportunity, however, must be seized as quickly as possible as each application for the credit is approved on a first-come, first-served basis. Furthermore, many recent data-driven studies suggest that the benefit of state and municipality funded tax credits is largely in favor of the taxpayer. The continued funding of tax credits such as BIITC, consequently, may be in jeopardy and must be taken advantage of sooner rather than later.  

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West Isn't Always Best: California's Attempt to Lure and Secure Companies

9/2/2014

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The State of California is highly regarded for it's atmosphere, geographic beauty, outdoor activities, world-renowned food, diversity and people. Another much-talked about characteristic of California, however, is the perceived unfairness of its laws, regulations, and policies towards Californian taxpayers. For many years companies located in California, or doing business there, have criticized California's legislature and state taxing authorities 1 for what they perceive to be anti-business elements.2 In 2014 California, in an attempt to halt such criticism and become more attractive to both out-of-state and in-state businesses, enacted an attractive business credit, the Manufacturing Equipment and Sales & Use Tax Exemption (“Sales Tax Exemption”), under the Governor's Economic Development Initiative.

The Sales Tax Exemption provides a partial exemption3 from sales and use tax for manufacturers, and certain research and developers that purchase or lease tangible personal property for use in their business. In order to qualify for such an exemption, three conditions must be met: (1) the taxpayer must be a “qualified person”; (2) the taxpayer must purchase “qualified property”; and (3) the taxpayer must use the qualified property in a way allowed by this law.

First, in order to be considered a “qualified person” who is eligible for the Sales Tax Exemption, the entity applying for the exemption must be primarily engaged (50% or more of the time) in one of the activities enumerated in codes 3111-3399, 541711, or 541712 of the North American Industry Classification System. These code sections include a large portion of the manufacturing sector, such as manufacturers of: food, clothing, general supplies, biotechnology, pharmaceuticals, wood, chemicals, and machinery.

Secondly, the entity must be purchasing “qualified tangible personal property.” Generally, such qualified tangible personal property purchases must be for either: (1) machinery and equipment; or (2) special purpose buildings or foundations that are integral to the entities' activities (manufacturing or research and development). A taxpayer does not necessarily, however, have to purchase this qualified property. In many instances, qualified person will be entitled to the Sales Tax Exemption with a leased qualified property.

Lastly, the Sales Tax Exemption requires that the tangible personal property purchased or leased by the qualified person be used in a qualified way. In order to meet this “qualified use” requirement, the tangible personal property must be used primarily (more than 50% of the time): in any stage of manufacturing; in research of development; to maintain, repair, measure, or test any other qualified personal property; or by a contractor who is purchasing the property to perform a construction contract for a qualified person.

The tax-saving benefits of meeting the Sales Tax Exemption can be quite significant. The Sales Tax Exemption is applicable to the first $200 million in qualified purchases for each taxpayer annually. A qualifying taxpayer, consequently, who purchases $200 million in qualified property will realize more than $8,000,000 in annual savings. Will this Sales Tax Exemption be enough to actually lure out-of-state entities to California? Only time, quantitative data, and feedback from companies utilizing the exemption will tell. But when used in conjunction with other exemptions and credits recently enacted in California, the anti-business atmosphere that California has been long-criticized for appears to be slowly dissipating.

1 California, unlike any other state in the U.S., has three separate departments in charge of imposing tax on individuals and corporations: California Board of Equalization, California Employment Development Department, and California Franchise Tax Board.

2 Such anti-business elements include, among other things, outdated regulatory provisions and budget processes, stiff regulations and overly aggressive enforcement of such regulations, and high tax rates.

3Companies are exempted from the State of California's sales tax (4.19%) but not additional county tax.

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A State Informational Returns Puzzle

7/19/2013

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It’s that time of the year again. If you are an individual or business who made reportable transactions during the calendar year, you must file Informational Returns to the Internal Revenue Service (“IRS”) and issue a copy of the return to recipients. The recipients use the Informational Return to prepare their tax returns, and the IRS uses it to match the information from the specified transaction to the tax payer’s return. The deadlines are varied by the type of Informational Returns, but the earliest one falls on January 31st.

If you think the Informational Return has nothing do with you, you are wrong! You probably issued or received at least one or two Informational Returns last year, and you will likely get one this year too. Still don’t think so? How about individual forms like 1042-S, W-2, 1098-T, 1099- INT, 1099-DIV, 1099-MISC, or 5498?

If you are recipient of these forms, the instructions are pretty simple. However, this is not necessarily the case if you are the issuer of these forms. Let’s review the requirements using an example.

Say Peter is opening a new retail business in Washington, DC. He hired his old friend in Michigan to do the interior designing, and paid $3,000 for her creative design service; this friend did her design work from Michigan, for the most part. For the entity set-up procedure, Peter hired an attorney in Virginia, and paid $1,200 for his legal service. Peter also contracted services for his new shop location, like pest control, cleaning, and security. All of these services were rendered by small, individual businesses in Maryland. Lastly, Peter hired a retired marketing expert in Connecticut to run a marketing campaign for his business. This campaign was run over the internet, and Peter never met his consultant face-to-face, but nevertheless paid him $1,000.

Peter’s new business may not be up and running yet, but he still has to issue a 1099-Misc form for the payments made to these independent contractors. So, he diligently followed the IRS' instruction in regards to the payee status, amount threshold, service type, etc. He even called a couple of times to verify their tax ID and address. Peter sent out all the relevant copies to these payees in a timely manner, and finally e-filed the forms with the Internal Revenue Service.

At this point, Peter is quite tired of the whole process, and believes that he’s fulfilled all of his requirements. However, this is not the case. Next week, read what other steps Peter must take to ensure that his Informational Returns are squared away.

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A State Informational Returns Puzzle: Navigating the 1099-Misc

7/19/2013

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Last week, we used an example of Peter, a new business owner, who contracted people to work for him from a number of different locations and his efforts to complete his Informational Returns.

Because his contractors were based in different states, Peter would be required to send a copy of their Informational Returns to the payee’s state or city.  For example, he paid a designer in Michigan who performed her service remotely from her office there. Therefore, Peter is required to file the 1099-Misc with Michigan and the relevant local governments, even when there is no MI tax withholding.[1]

When Peter paid a lawyer in Virginia, he should note that the Commonwealth of Virginia does not require the 1099 payer to file the form unless there is a Virginia income tax withheld. Since there was no VA tax withheld, he could skip the 1099-Misc filing.

For the small businesses that Peter contracted in Maryland, he should note that The Comptroller of Maryland is a participant in the IRS combined Federal/State filing program.[2] Since the Internal Revenue Service will forward the electronically filed returns to the State of Maryland, he doesn’t have to file a separate copy of the 1099-Misc.

In the case of his marketing contractor in the State of Connecticut, 1099 payers are required to provide copies of 1099-Misc to Connecticut, regardless of the withholding of CT tax. However, the State of Connecticut is also a participant of the IRS combined Federal/State filing program. So, he can skip sending an extra copy to the state, because his federal 1099-Misc will be forwarded to the state automatically.

This example shows how daunting Informational Returns can be, especially when all fifty states have different Informational Return filing requirements. However, the IRS’s combined Federal/State filing program has made great strides in simplifying this process, and currently 32 states are participating in this program. Until this program covers all fifty states, though, it is always a good idea to go the extra mile to check with State or municipal filing requirements of the Informational Returns.

[1] Public Act 211 of 2003. In fact, this requirement was repealed three weeks ago. Nevertheless, there is no detailed instruction about this change in the MI State or its municipal governments’ web-sites.

[2] You can find more about the program at the IRS Pub. 1220

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Tricks and Traps in Multi-State Taxes

7/19/2013

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In many countries, local taxes are assessed separately on regional, municipal, and prefectural levels. The United States is no exception. In the United States, taxpayers must file an annual federal tax return and file a separate state tax return.  In many cases, state tax laws are similar to federal tax laws. Nevertheless, as state income taxes are based on autonomous state law and administration, you will find that concepts in federal taxation are often not applicable to state tax reporting.

State tax rates vary by state. For example, the state of New York has the highest marginal income tax rate (8.97%) for individuals. On the contrary, states like Florida, Nevada, Alaska, Texas, Washington, Wyoming, or South Dakota do not tax individuals on their income at all.[1]

People often find it specifically challenging when they have to apply for two different sets of state rules for their tax reporting. In fact, it is not uncommon for a U.S. taxpayer to reside in one state and work in another.  To illustrate this tricky “multi-state tax reporting situation,” take a look at a few hypothetical cases below. These cases illustrate the complications that can occur when two separate sets of state taxes overlap.

Case 1:

Q: I am a resident of New Hampshire, but work in Massachusetts. New Hampshire does not tax individuals for their earned income, but Massachusetts assess 5.3% tax on an earned income. As a NH resident, am I still subject to MA income tax reporting requirements?

A: Yes, you are. Since the source of your income is from Massachusetts, you have to file a MA tax return as a non-resident of Massachusetts and pay applicable taxes. As for New Hampshire, you are not subject to file or pay tax on your Massachusetts earned income in the state of New Hampshire, since your home state does not assess income tax on an earned income.

Case 2:

Q: My spouse is living in Virginia and works in the District of Columbia. Does she have a different case from mine?

A:Virginia and District of Columbia are adjacent localities, and they have established a State Reciprocal Income Tax Agreement (“reciprocity”). As long as your spouse properly filed her exemption form with her employer and certified that she was not a resident of DC, she will not be subject to filing or paying tax requirements on her DC earned income to the DC government.  Instead, she will have to include all of her DC earned income into her VA tax return and pay taxes in Virginia.

Case 3:

Q: Next year, I am planning to live in New Jersey and work in New York. I understand that both states have individual income taxes. Do I need to pay taxes in both states?

A: Yes. There is no reciprocity between the two states. You will have to file a tax return in NY as a non-resident and pay applicable taxes. As a resident of NJ, you will also have to file and pay taxes in NJ. However, New Jersey will allow tax credits to offset your tax burden in New Jersey in order to minimize the effect of double taxation.

[1] Individual Income Tax Rate at the state level is available at http://www.taxadmin.org/fta/rate/ind_inc.pdf.
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Unrelated Business Tax & Form 990-T

7/19/2013

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Last week, I gave a theoretical account of a small business owner that was run out of business by a local non-profit.

Fortunately, this is not a real story. To alleviate this potentially unfair competition issue, the Internal Revenue Code makes an exempt organization like the EDL, subject to federal tax at a corporate level to the extent that their income is generated from a business unrelated to their mission. This is commonly called, “Unrelated Business Income.” The Unrelated Business Income has to be reported separately in the Form 990-T.

Unrelated business income is usually found when there is a trade or business activity that is carried on regularly, but is not substantially related to the exempt purpose of the organization.[1] In our theoretical EDL case, the sandwich sale was clearly a business activity, as it involves a sale of product. Furthermore, these sales were made every day. Since the mission of the EDL was to feed people in need, these sales cannot be substantially related to the EDL’s exempt purpose. Therefore, EDL will have to report their sandwich sales separately in 990-T and pay taxes on that income.

In a previous article, I briefly introduced a specific rule about how a membership organization has to calculate their income from journal sales when there are two different price tags for member sales and non-member sales. In fact, this rule was just the tip of the iceberg of a  very complicated calculation process of UBIT income and expenses for a membership organization. We will go over more specific rules for the UBIT calculation later by type of organization. However, let me now put in a very broad context, the UBIT in Form 990-T . Generally, Unrelated Business Income is taxable after deducting directly connected expenses, and the tax is called UBIT (“Unrelated Business Income Tax”).[2]

[1] See Internal Revenue Code Section 513(a) for definition of UBIT.

[2] See Treas. Reg. 1.512(a)–1(a) to find the meaning of “directly connected.”

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Unrelated Business Income Tax (UBIT)

7/19/2013

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We are living in a society that encourages free, open, and fair competition. If you find your competitor with some type of privilege, you will likely be discouraged or at least disappointed.

Let’s say, you own a sandwich shop at a busy downtown strip mall near a tourist attraction. The shop next door is owned and operated by a nonprofit entity called as EDL which stands for “Everyone Deserves Lunch.’ The shop's mission is to give out free sandwiches to low income household children and homeless people. After 2 p.m. every day, they sell their left-over sandwiches to office workers, shoppers, or tourists at a small margin, since they see it as their service to the community. Their unusually cheap price was possible  as  the EDL doesn’t pay property tax, franchise tax or income tax. They also don’t pay any salary to their workers, as they are all volunteers. People like the idea of helping out a nonprofit entity in good will. Furthermore, they like their cheap lunch.

It sounds like a great thing going on for everyone else in this town except for you, the sandwich shop owner. Since you are faithfully paying property tax, income tax, sales tax, and salary to your staff, your sandwich is about 40% more expensive than the one sold by your local nonprofit competitor. It’s just matter of time. You will lose all your business, and may have to wait in line yourself for a free sandwich at the EDL.

Is the EDL really doing a good job nurturing the community or is the EDL driving the small business out of business?

Fortunately, this is not a real story. My next article will address the ways in which the Internal Revenue Service alleviates this potentially unfair competition issue.

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    ​B.J. Kang JD, CPA
    Josh Portman JD, LL.M
    Habeeb Syed JD
    Nora Ji Li LL.M
    Nathaniel S. Johnson

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