The year 2023 has witnessed a remarkable upsurge in bankruptcy filings, indicating a concerning trend. January and February alone recorded substantial increases of 19% and 18%, respectively, compared to the same months in the previous year. This persistent rise in bankruptcy filings reflects the growing economic difficulties faced by households and businesses. Experts attribute this trend to inflation and supply chain disruptions, which are expected to persist and contribute to the continued increase in bankruptcy filings.

During times of economic uncertainty, tax professionals often receive numerous inquiries regarding the consequences of debt workouts and restructurings, particularly with regards to cancellation-of-debt (COD) income. The occurrence of COD income hinges on various circumstances, including debt modification, equity issuance, discounted debt acquisition, satisfaction of debt through contingent value rights, discharge of debt within or outside bankruptcy, and asset foreclosure.

By default, COD income is generally taxable under Section 61 of the Internal Revenue Code (IRC), unless explicitly excluded under tax law. Fortunately, Section 108 of the IRC provides certain cases where COD income may be partially or entirely excluded from taxation. This article will delve into two exclusions available for COD income: the bankruptcy exclusion and the insolvency exclusion.

Under the bankruptcy exclusion, COD income resulting from the discharge of debt in a bankruptcy proceeding can be excluded from taxable income. This exclusion serves as a relief for individuals and businesses that have sought bankruptcy protection to alleviate their financial burdens. However, it is important to note that this exclusion does not apply to COD income arising from debt modifications or other circumstances unrelated to the discharge in bankruptcy.

The insolvency exclusion provides another avenue for excluding COD income from taxation. This exclusion applies to taxpayers who are insolvent immediately before the discharge of debt. Insolvency refers to a situation where an individual or business's total liabilities exceed the fair market value of their assets. In such cases, the amount of COD income that can be excluded is limited to the extent of insolvency. For a partnership, the insolvency is determined at the partner level and the exclusion is made at the partner level rather than the partnership level.

The exclusion of COD income under the bankruptcy or insolvency exclusion is generally a timing item, essentially deferring recognition of the income through a reduction in the taxpayer’s tax attributes (see Secs. 108(b) and 1017), including net operating losses, general business credit, capital loss carryovers, basis in property, foreign tax credit carryovers, etc.

As the surge in bankruptcy filings continues in 2023, individuals and businesses facing financial challenges should be aware of the tax implications of debt workouts and restructurings. While COD income is generally taxable, certain exclusions under Section 108 of the IRC offer relief for those undergoing bankruptcy or insolvency. Understanding these exclusions can help individuals and businesses mitigate their tax burdens during times of economic uncertainty and financial distress.

현재 글로벌 경제 침체와 공급망의 불안정성으로 인해 많은 기업들은 매출과 수익성의 하락을 겪고 있으며 물가 상승의 영향으로 상황이 악화되고 있다. 이러한 불확실한 시기에 사업을 운영하는 것은 틀림없이 어려운 일이며, 경제 전문가들은 상황이 더욱 악화될 가능성이 있다고 말하고 있다. 이러한 어려움을 극복하기 위해서는 기업들은 세무 관리를 최적화하는 것을 비롯한 비용을 최소화하는 전략을 적극적으로 모색해야 한다.

Interest Charge-Domestic International Sales Corporation (IC-DISC) 는 IRC section 992에 따라 제공되는 세제 혜택으로 국제 판매에 관여하는 특정 유형의 기업에 혜택을 제공할 수 있다. IC-DISC의 주요 목적은 미국 기업이 수출 상품을 수출하거나 특정 수출 관련 서비스를 제공하는 경우 세제적 이점을 제공하는 것이다.

IC-DISC 세제 혜택을 받기 위해서는 해당 기업은 미국에서 제조, 생산, 재배, 추출된 상품을 수출해야 한다. 이는 직접 또는 간접적으로 수출하는 기업뿐만 아니라 수출 관련 서비스를 제공하는 기업도 포함된다.

자격을 갖춘 기업은 별도의 IC-DISC 법인을 설립해야 하며, IC-DISC 수수료를 지불하여 수출 관련 수입의 일부를 할당할 수 있다. 이 수수료는 적격 수출 판매액의 4%와 수출 상품 판매에 대한 과세 소득의 50% 중에서 더 높은 금액으로 결정된다. 적절한 절차를 통해 설립된 IC-DISC 법인은 연방 소득세에서 면세 혜택을 받을 수 있다.

예시:

미국에서 위젯을 제조하고 모든 위젯을 캐나다로 수출하는 C-corporation인 Company X를 예로 들어보겠다. 2022년에 Company X는 총 매출 $100M와 과세 소득 $5M를 기록했다. IC-DISC 구조를 도입함으로써 Company X는 IC-DISC 법인에게 $4M의 수수료 (적격 수출 판매액의 4% 또는 적격 과세 소득의 50% 중에서 더 높은 금액) 를 지급할 수 있다. 이 결과, Company X는 $1M의 과세 소득을 신고하게 되며, IC-DISC 법인은 연방 소득세에서 면세 대상 법인이므로 세금이 부과되지 않는다. IC-DISC 구조를 도입함으로써 Company X는 연방 소득세 $840,000를 절약할 수 있다.

IC-DISC의 자격 요건과 혜택은 복잡하며 특정한 상황에 따라 달라질 수 있다. IC-DISC를 활용하기에 적합한 기업인지 판단하기 위해서는 국제 세무 경험을 갖춘 숙련된 세무 컨설턴트와 상의하는 것이 중요하다.

IC-DISC가 제공하는 세제 혜택을 활용함으로써 수출에 종사하는 기업들은 이 어려운 시기에 세무 관리를 최적화하고 재무 성과를 향상시킬 수 있다.

The current global economic downturn and the volatility of supply chains have led many businesses to face declining sales and profitability, exacerbated by the impact of inflation. Running a business during these uncertain times is undoubtedly challenging, and economic experts suggest that the situation may further deteriorate. In order to navigate these difficulties, businesses must actively seek strategies to minimize costs, including optimizing their tax management.

The Interest Charge-Domestic International Sales Corporation (IC-DISC) is a tax incentive provided under IRC section 992 that can benefit certain types of businesses involved in international sales. The primary purpose of an IC-DISC is to provide a tax advantage to U.S. companies that export goods or provide certain export-related services.

To qualify for the IC-DISC tax benefit, the business must be involved in exporting goods that are manufactured, produced, grown, or extracted in the United States.  This includes companies engaged in direct or indirect exporting, as well those offering export-related services.

A qualified business must establish a separate entity, the IC-DISC, to which it can allocate a portion of their export-related income by paying IC-DISC commission.  The commission is determined as the higher of 4% of qualified export gross receipts or 50% on the taxable income from sale of export property.  A properly structured IC-DICS entity is tax-exempt for federal income tax purposes.

Illustration:

Let’s consider the example of Company X, a C-corporation that manufactures widgets in the United States and exports all of its widgets to Canada.  In 2022, Company X records $100M of gross revenue and $5M of taxable income.  By implementing an IC-DISC structure, Company can pay $4M of commission (greater of 4% of qualifying export sale or 50% of qualifying taxable income) to the IC-DISC entity.  As a result, Company X reports $1M of taxable income, while the IC-DISC remains tax-exempt for federal income tax purposes. and the IC-DISC is subject to zero tax, as it is a tax-exempt entity for federal income tax purpose.  By implementing the IC-DISC structure, Company X saves $840,000 in federal taxes.

The eligibility and benefits of an IC-DISC can be complex and highly dependent on specific circumstances.  It is crucial to consult with a qualified tax advisor experienced in international tax matters to determine if your business is an ideal candidate for utilizing an IC-DISC.

By leveraging the potential tax advances offered by an IC-DISC, businesses engaged in exporting can optimize their tax positions and enhance their financial performance during these challenging times.

Under current GAAP, in general, crypto assets are accounted for as indefinite-lived intangibles assets.  These assets are initially recorded at cost and subject to impairment testing, and upward adjustment is prohibited.   In other words, if the price of the cryptocurrency goes up or if a cryptocurrency that was previously written-down subsequently recovers, it cannot be written up.

FASB believes that the current accounting treatment of crypto assets does not provide investors, lenders, creditors and users of financial statements with decision-useful information (the underlying economics of these assets and an entity’s financial position).  In order to address these concerns, the Board has issued the proposed Update to improve the accounting for and disclosure of certain crypto assets.

Under the proposed Update, when adopted, would require that an entity measure certain crypto assets at fair market value in the balance sheet and recognize changes in fair value in net income.  The proposed Update also would require that an entity provide enhanced disclosures for both annual and interim reporting periods.  The proposed Update would require a cumulative-effect adjustment to the opening balance of retained earnings as of the beginning of the annual reporting period in which an entity adopts the proposed Update.  The Board will determine the effective date after it considers stakeholders’ feedback on the proposed Update.

Link to FASB’s Exposure Draft Proposed Accounting Standards Update—Intangibles—Goodwill and Other—Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Asset (fasb.org)

Final regulations under IRC section 6403 require disclosures of the beneficial owners of the entity and individuals who have filed an application with specified governmental authorities to create the entity or register it to do business in the United States to FinCEN.  The final regulations become effective January 1, 2024 requiring many corporations, limited liability companies, and other entities created in or registered to do business in the United States to report beneficial ownership information.

These requirements are intended to help prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity, while minimizing the burden on entities doing business in the United States.

Prior to adopting the final regulations, it was possible for individuals to use entities such as corporations, trusts, or partnership to hide their ownership of foreign bank accounts.  However, under the new beneficial ownership information reporting requirement for FBAR (Foreign Bank Account Report), the FinCEN requires that individuals disclose beneficial ownership information for these entities.  This means that applicable entities must provide information about any person who owns or controls the entity, including their name, address, and identification number, if applicable.  The purpose of this requirement is to increase transparency and prevent individuals from using entities to hide their ownership of foreign bank accounts.

Under the final regulations, a beneficial owner includes any individual who, directly or indirectly, either exercises substantial control over a reporting company, or owns or controls at least 25% of the ownership interests of a reporting company.  The terms substantial control and beneficial owner further defined in the final regulations.

2022-21020.pdf (federalregister.gov)

CARES(Coronavirus Aid, Relief, and Economic Security) 법에 따라 2020년에 설립된 ERC는 2020년 3월 13일부터 2021년 12월 31일 사이의 기간 동안 COVID-19 팬데믹으로 인해 운영을 중단했거나 수입이 크게 감소한 사업체 중 직원에게 급여를 지급한 사업체에 한해 환급이 가능한 세금 크레딧이다.

IRS는 2023년 3월 7일에 발행된 IR-2023-40에서 고용주 및 사업체들에게 세금 공제 자격이 없음에도 불구하고 직원 유지 크레딧(ERC)을 청구하도록 조언하는 제3자(3rd party)를 경계하라는 경고를 다시 발행했다. 일부 제3자는 세액공제에 대한 납세자 자격 및 계산과 관련하여 부적절한 조치 및 입장을 취하고 있다.

이러한 제3자는 환급 금액에 따라 큰 선불 또는 성공보수형 수수료를 부과할 뿐 아니라 사업체의 연방 소득세 신고서(Federal income tax return)에 청구된 임금 공제(Wage deduction)가 세액 공제 금액만큼 감소되어야 한다는 사실을 사업체 및 납세자에게 알리지 않을 수 있다.

따라서, 사업체는 비약적인 절세를 약속하는 허위광고 및 접근을 주의할 것을 권장한다. 납세자(사업체)는 항상 세금 신고서에 보고 및 기록된 정보에 대한 책임이 있다. ERC를 부적절하게 청구하게 될 경우 납세자는 과징금 및 이자와 함께 공제액을 상환해야 한다.

추가적으로 IRS 범죄 수사부와 법무부는 범죄 수사를 시작했으며 과도하거나 부적절한 ERC의 발기인 및 기타 조력자에 대한 기소를 시작하였다.

ERC의 혜택을 받았지만 자격 또는 청구 금액에 대해 확신이 없는 경우 세무 고문이나 변호사와 상의하여 자격 및 크레딧 금액 결정에 사용된 계산에 대한 검토가 필요하다. ERC 크레딧을 청구할 때 오류나 부적절한 조치가 있다고 판단할 경우, 수정 보고서 또는 IRS에 자발적으로 신고하여 리스크를 manage 하는 걸 고려할 필요가 있다.

The Financial Accounting Standards Board (“FASB”) issued an exposure draft of a proposed accounting standards update that would require targeted improvements to income tax disclosures in financial statement report (the “Proposed ASU”).  The Proposed ASU addresses investor requests for more transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation, income taxes paid information and disaggregated disclosure of income and tax expense by jurisdictions.  Here is summary of the changes contained in the Proposed ASU:

Income Taxes Paid

The Proposed ASU would require that all entities disclose the amount of income taxes paid disaggregated by individual jurisdictions in which income taxes paid on both an interim and annual basis.

Rate Reconciliation

The Proposed ASU would require public business entities on an annual basis disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than 5 percent of the statutory tax (that is, pretax income or loss multiplied by the applicable statutory tax rate).  The specific categories include state and local income tax; foreign tax effects; enactment of new tax laws; effect of cross-border tax laws; tax credits; valuation allowance; nontaxable or nondeductible items; and change in unrecognized tax benefits.

For entities other than public business entities, the Proposed ASU would require qualitative disclosure about specific categories of items and individual jurisdictions that result in a significant difference between the statutory tax rate and the effective tax rate.

Disaggregated Disclosure

The Proposed ASU would require all entities to disclose pretax income (or loss) from continuing operations disaggregated between domestic and foreign jurisdictions and disclose income tax expense (or benefit) from continuing operations, disaggregated by federal, state, and foreign taxes.

Transition and Effective Date

The Proposed ASU would be applied on a retrospective basis, that is, as of beginning of the earliest period presented in the financial statements.  The effective date of the Proposed ASU would be determined after the FASB considers stakeholder feedback.

To read the exposure draft of the Proposed ASU, please clink the link below:

Proposed Accounting Standards Update—Income Taxes (Topic 740): Improvements to Income Tax Disclosures (fasb.org)

President Joe Biden released his annual budget Thursday, outlining his policy priorities for the year ahead. Biden's FY 2024 budget proposes to increase taxes for corporations and individuals with incomes above $400,000 as part of a plan intended to reduce federal budget deficits. Specifically, the budget proposes to increase the US corporate income tax rate from 21% to 28%, and to raise the tax rate on the foreign earnings of US multinational corporations from 10.5% to 21% while adopting an undertaxed profits rule.

For individuals, the budget proposes measures including increasing the top individual ordinary income tax rate from 37% to 39.6%, taxing capital gains income for high earners at ordinary rates, and imposing a 25% "minimum income tax on the wealthiest taxpayers." The budget also calls for higher Medicare health insurance taxes for individuals with incomes above $400,000 as part of a plan that seeks to avert the projected insolvency by 2028 of the Medicare hospital insurance trust fund.

President Biden's proposal seeks to increase revenue and reduce spending in order to put the federal government on a more sustainable fiscal path. However, given Republican control of the House of Representatives, it is unlikely that these proposals will be enacted without bipartisan support.

Question:  why not reduce wasteful government spending instead of increasing taxes?

The IRS released IR-2023-33 (the “Notice”) providing a tax relief for taxpayers who live in disaster areas in Alabama, California, and Georgia postponing the due date of 2022 income tax returns for individuals, various businesses and tax-exempt entities until October 16, 2023.  The relief also includes postponing the due of the fourth quart of 2022 estimated tax payment, the first through third quarter of 2023 estimated tax payments, and quarterly payroll and excise tax returns normally due on January 31, April 30, and July 31 until October 16, 2023.

The IRS automatically provides filing and penalty relief to any taxpayer in the disaster area.  If an affected taxpayer receives a late filing or late payment penalty notice from the IRS for the related returns and payments, the taxpayer can call the number on the Notice to have the penalty abated.

Additionally, individuals and businesses in a federally declared area who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year of loss or 2022 tax return.

The official announcement of the IRS tax relief for disaster are taxpayer can be bound in the below link:

IRS: May 15 tax deadline extended to Oct. 16 for disaster area taxpayers in California, Alabama and Georgia | Internal Revenue Service

Taxpayers who live in the affected areas should check the Notice and consult with a tax advisor for more information.

The Superfund excise tax is imposed by section 4661 of the Internal Revenue Code (IRC) on the sale or use of certain chemicals and petroleum products. The tax is designed to fund the cleanup of hazardous waste sites under the Superfund program.

If a US company has a maquiladora subsidiary (a manufacturing operation in Mexico that is owned and operated by a foreign company), it may still be subject to the Superfund excise tax if it produces or uses certain chemicals and petroleum products that are subject to the tax.

Section 4672 of the IRC provides that the Superfund excise tax is imposed on the sale or use of taxable chemicals and petroleum products by the manufacturer, producer, or importer of the products. Therefore, if the US company or its maquiladora subsidiary is the manufacturer, producer, or importer of the taxable chemicals and petroleum products, it may be subject to the Superfund excise tax.

It's important to note that the Superfund excise tax applies to specific chemicals and petroleum products that are listed in the IRC. The list includes a range of chemicals and petroleum products, such as crude oil, gasoline, diesel fuel, and certain chemicals used in manufacturing processes.

If you believe your company may be subject to the Superfund excise tax, it's best to consult with a tax professional who can provide guidance specific to your situation.