Dealing With Uncertainty
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By Yunna Barats |
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By Janice Angell Director Tax Services jangell@rbz.com |
| Publication Date: Tax Planning 2010 | |
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In our current economic environment, uncertainty about government spending and taxes is very high. The effects of the current economic downturn are not only a concern within our U.S. borders, but internationally as well. In an effort to address some of these issues, this article has been divided into two parts. Both parts will discuss some tax planning scenarios for you to consider from a domestic and then international perspective.
On the Domestic Front
Yunna Barats
The most critical time to engage in tax planning is at the end of the year. This is when a CPA would evaluate a client’s tax situation and prepare projections based on the client’s expected earnings and pending changes in the tax law. In 2010 we would also need a crystal ball, to prepare an accurate projection. If you have one, we will be happy to arrange a short-term lease.
The so-called “Bush tax cuts” are set to expire in 2010, and come January 1, 2011, tax rates will revert to the 2001 levels. This applies to income tax rates, dividends, capital gains and gift and estate taxes (surprisingly, this year gift tax rates will also play into year-end tax planning).
There is a lot of talk in Washington to extend the Bush era tax cuts. Of course, there is a lot of talk in Washington in general, and that is not something we can rely upon for year-end tax planning. Hopefully, in the weeks following the election the lame-duck session will produce some clarity, which will allow us to plan with greater certainty.
So here are the possible scenarios: (i) Congress takes no action, and tax rates revert to their much higher 2001 levels; (ii) tax cuts are extended for some taxpayers (meaning, not you); or (iii) tax cuts are extended.
Our philosophy is to hope for the best but plan for the worst. That means we are planning for much higher tax rates next year. Here are our proposed action items that most clients need to consider.
Accelerate income into 2010. This is entirely contrary to business as usual in the tax profession, but these are exceptional times. Income is usually deferred if possible, to garner the benefit of the time value of money. This time the disadvantage of the much higher tax rates will greatly outweigh all other considerations.
For example, selling a capital asset today, at the 15% federal income tax rate on long-term capital gains will be much more advantageous (to you, not the government), than selling an asset in January at the 20% capital gains rate.
A trick of the trade–if a transaction is unwound prior to year-end, there is substantial tax authority that it can be ignored as if it did not take place. This allows us to reverse undesirable sales if Congress does act at the last minute.
Other obvious actions to consider would include pre-billing customers, declaring and paying dividends earlier than usual and deferring deductions and loss carryovers. Basically, do the opposite of what you would ordinarily do at year-end.
More advanced planning options may include accelerating installment sales (these are usually not taxable until a payment is made, but can be made entirely taxable at once) or making taxable gifts. Highest gift tax rates are set to increase dramatically from this year (35%) to next year (55%). If you were considering making lifetime gifts to children, this may be the time to do it. Also, there is still time to take advantage of the absence of Generation Skipping Tax. This benefit is also set to expire at the end of this year.
When planning for the worst, we need to incorporate the latest tax law changes in our year end planning. September and October of 2010 brought us some significant tax legislation. To create more excitement in everyone’s lives, the lawmakers decided to make them retroactive to the beginning of the year.
We have given more detailed descriptions of these changes in our eNews Tax blasts, an archive of which can be found on our firm website at www.rbz.com/news/tax.asp.
I would like to remind readers of three additional and significant provisions: federal extension of 50% bonus depreciation, federal expansion of Sec. 179 write-off and California suspension of net operating losses. As I noted above, all these changes are retroactive to the beginning of the year.
As always, there is no cookie-cutter solution for everyone. Each taxpayer has his or her unique set of circumstances that warrant a custom tailored solution. However, one thing is true for everyone: tax planning circa 2010 will require more time and more analysis than usual and may also mean that you will need to take some action before you open that Champagne bottle on December 31.
On the International Front
Janice Angell
As the IRS restructures its practice to address international tax issues, the rules continually change and we are left with a myriad of international tax proposals, some of which are addressed below, providing us with an uncertain landscape with which to structure and plan international business transactions. Some of the issues on the table include:
LMSB Restructuring
The Internal Revenue Service announced this past summer that it is restructuring its Large and Midsize Business division to strengthen international tax compliance, including an enhanced focus on transfer pricing issues and an increase in staff to nearly 1,500 employees. The new division will continue to serve the same population of taxpayers (corporations, Subchapter S-corporations, and partnerships with assets greater than $10 million, as well as certain high-wealth individuals).
Foreign Corporations Regarded as Domestic Corporations
Notwithstanding the usual definition of a domestic corporation, a corporation that would otherwise be regarded as foreign would be treated as domestic if its management and control occurred, directly or indirectly, primarily within the United States. This provision would apply to any qualifying foreign corporation if its stock is regularly traded on an established securities market or if the aggregate gross assets of the corporation (including assets under management for investors), whether held directly or indirectly, at any time during the tax year (or preceding year) are $50 million or more.
Repeal of the 80/20 Rule
Current law provides that dividends and interest paid by a domestic corporation are free of U.S. withholding tax if at least 80% of the domestic corporation’s gross income during the preceding three-year period is foreign-source income attributable to the active conduct of a foreign trade or business.
Transfer Pricing
Transfer pricing addresses the issue of whether related party transactions between controlled taxpayers in different tax jurisdictions are conducted at arm’s-length. The IRS is auditing more mid-sized companies for transfer pricing issues, both inbound and outbound, and have increased their staff. The IRS is focusing on the following issues: transfer of intangible property, intercompany services, buy-in calculations under cost sharing arrangements, and limited risk structures.
Obama’s Proposals
Some additional ideas raised by the Obama administration include: ending the Section 199 manufacturing deduction for major oil and gas companies, determining foreign tax credits on a pooling basis, modifying rules for dual-capacity taxpayers, and the tax treatment for transfers of intangible property to offshore entities. These are proposed offsets to raise revenue if, for instance, the R&D credit is made permanent. House Democratic leaders publicly embraced Obama’s ideas but aides acknowledged that they will be difficult to pass in a closely divided Senate.
And, in President Obama’s fiscal year 2011 budget, the White House proposed eliminating taxpayers’ ability to deduct interest expense related to foreign-source income on which tax is deferred. The proposal seeks to match the timing of interest expense deductions with income inclusion on corporate tax returns. The Republicans reject the proposal to eliminate deferral of income because the payment of U.S. taxes will be accelerated and detrimental to U.S. companies operating in the global marketplace.
These are just a few of the issues that are creating so much uncertainty in our current economic environment. It has become increasingly important that individuals and companies conducting business across international borders seek the advice of their RBZ advisor so that they can help you navigate through the complicated and often confusing issues that you may currently be dealing with.
