IRS Notice 2018-122:  Federal Deduction for State and Local Tax Payments

The new federal tax law limits an individual’s deduction for the amount of state and local taxes paid during the year to $10,000 ($5,000 in the case of married filing a separate return).  This limitation applies to tax years 2018 through 2025.

In response to this new limitation, some state legislatures are considering or have adopted legislative proposals that would allow taxpayers to make transfers to funds controlled by state or local governments, or other transferees specified by the state, in exchange for credits against the state or local taxes that the taxpayer is required to pay.  The aim of these proposal is to allow taxpayers to characterize such transfers as fully deductible charitable contributions for federal income tax purposes, while using the same transfers to satisfy state or local tax liabilities.

IRS stated in the Notice 2018-122 that it intends to issue regulations addressing the federal income tax treatment of transfers to funds controlled by state and local governments that the transfer can treat in whole or in part as satisfying state and local tax obligations.  The regulations will make clear that the substance-over-form would dictate the proper characteristic of such payment for federal income tax purposes, thereby limiting taxpayers’ ability to recharacterize tax payments subject to deduction limitation to fully deductible charitable contributions.

Please refer to the link below for further detail:
https://www.irs.gov/pub/irs-drop/n-18-54.pdf

Withholding on Partnership Interest Sale or Exchange By a Foreign Person

Newly enacted Internal Revenue Code sections 864(c)(8) and 1446(f) impose a 10% withholding tax on amount realized by foreigners from a sale or exchange of interest in a partnership with an effectively connected income of U.S. trade or business effective for a transaction entered into after November 27, 2017.

Section 1446(f) provides that a purchaser of a partnership interest is generally required to withhold 10% of the amount realized on the disposition if any portion of the foreign seller’s gain is effectively connected income of U.S. trade or business, as defined under section 864(c)(8).  Withholding is exempted if:

• The purchaser receives a non-foreign affidavit from the seller;
• The purchaser receives an affidavit that no gain is attributable to a U.S. trade or business;
• The IRS provides for reduced withholding through issuance of a withholding certificate; or
• The partnership is publicly traded.

If the purchaser does not withhold when required, the partnership is required to withhold from distributions to the purchaser an amount equal to the under-withholding plus interest, thereby putting an ultimate responsibility to the partnership.

How the changes to sections 864 and 1446 will affect foreign sellers of residents of countries with income tax treaty with U.S. is unclear.  Generally, U.S. tax treaties exclude gain on sale of partnership interest by a foreign person from U.S. taxation if that person has does not have a permanent establishment in the U.S.  However, in general, newly enacted domestic tax laws override older tax treaty provisions.  Hence, it is unclear whether a non-U.S. person can successfully claim exemption from the new withholding requirement under section 1446(f).

Below is a link to an article covering interplay of newly enacted section 1446(f) with income tax treaties.
- http://www.klgates.com/disposition-of-a-partnership-interest-now-subject-to-tax-withholding-01-18-2018/

Below are the links to the inquiries made by American Bar Association and NY State Bar Association for clarification on interplay between the 1446(f) withholding requirement and existing income tax treaties.
- https://www.americanbar.org/content/dam/aba/administrative/taxation/policy/031918comments.authcheckdam.pdf
- https://www.nysba.org/Sections/Tax/Tax_Section_Reports/Tax_Section_Reports_2018/1387_Letter.html

외국인 투자자의 파트너십 지분 판매 및 교환에 대한 원천징수

2017년 11월 27일 이후부터는, 새로 제정된 864(c)(8) 및 1446(f)에 의거하여 외국인투자자가 미국내 사업과 연관된 소득이 있는 파트너십지분을 판매 또는 교환 할 경우 이에 대해 10 %의 원천징수세를 부과하게된다.

세법 1446(f)에 따라, 일반적인 경우, 지분 구매자는 외국인투자자에게 지분에 대한 대가를 지불할때에 만약 이러한 거래가 미국내 사업과 연관된 소득이 있다면 이에 대해서 10 %를 원천징수하여야 한다. 미국내 사업과 연관된 소득에 대한 정의는 세법 864(c)(8)에서 다루고 있다.

10% 원천징수 규정에 면제되는 경우는:

• 구매자가 판매자로부터 외국인이 아님을 증명하는 진술서(“Non-foreign affidavit”)를 받는경우;
• 파트너십 지분 거래에 대한 이익이 미국내 사업과 연관되지 않음을 증명하는 진술서를 받는경우;
• 국세청 (IRS)이 원천징수 증명서 발급을 통해 원천 징수를 줄이는 경; 또는
• 파트너쉽이 상장회사일 경우이다.

구매자가 원천징수하여야 하지만 원천징수가 이루어지지 않을 경우, 파트너십이 구매자의 분배금에서 원천징수와 이자를 합한 금액을 원천징수해야 한다. 즉, 구매자가 원천징수하지 않을 경우, 파트너십이 이 규정의 책임을 지게 된다.

미국과 조세조약 을 맺은 국가의 거주자에게 새로운 규정이 어떻게 영향을 미치는지에 대해서는 아직 분명하지 않다. 일반적으로, 미국 조세조약은 미국에 고정 사업장을 가지고 있지 않는한 외국인의 파트너십지분 판매의 이익을 세금에서 배제한다. 일반적으로 새로 제정된 세법이 이전의 조세조약 규정보다 우선함으로, 외국인이 새로운 원천징수 조세법에 면제를 받을수 있는지는 불확실하다.

새로 제정 된 1446(f) 항과 조세조약의 관계를 설명해주는 글:
- http://www.klgates.com/disposition-of-a-partnership-interest-now-subject-to-tax-withholding-01-18-2018/

American Bar Association 및 NY State Bar Association에서 1446(f) 요건과 기존 조세조약의 관계에 대해 문의하는 글:
- https://www.americanbar.org/content/dam/aba/administrative/taxation/policy/031918comments.authcheckdam.pdf
- https://www.nysba.org/Sections/Tax/Tax_Section_Reports/Tax_Section_Reports_2018/1387_Letter.html

Tax Rate Reduction Implication to Fiscal Year Companies

IRS Notice 2018-38

Internal Revenue Code (IRC) section 11(b) provides that the rate of corporate income tax is 21% effective for tax years beginning after December 31, 2017.  Additionally, the alternative minimum tax (AMT) tax imposed under IRC section 55 has been repealed effective for tax years beginning after December 31, 2017.  For a fiscal year end corporation’s taxable year beginning before January 1, 2018 and ending after December 31, 2017 (the “transition period”), under IRC section 15, the effective date of these tax law changes is as of January 1, 2018.  In other words, tax liability of a fiscal year end corporation must be computed using both old and new tax law for the transition period.

The IRS issued Notice 2018-38 (the “Notice”) providing guidance how tax liability should be computed during the transition period for a fiscal year end corporation.  Under the guidance, a corporation with a fiscal year that includes January 1, 2018, computes federal income tax using a blended tax rate approach and the following example illustrates how the rule applies.

Example I – IRC sections 11(b) & 15(a)

Corporation X reports $1,000,000 of taxable income for its fiscal year ending June 30, 2018.  Corporation X’s federal tax liability is $275,534, as computed below.

Example II – IRC sections 55 & 15(a)

Corporation X reports $1,000,000 of taxable income and $3,000,000 AMTI for its fiscal year ending June 30, 2018.  Corporation X’s AMT tax liability is $26,932, as computed below.

Please refer to the Notice 2018-38 https://www.irs.gov/pub/irs-drop/n-18-38.pdf for additional detail.

No More Government Subsidy for Conducting Business on the Golf Course!

(Meals and Entertainment Deduction Limitation)

많은 비지니스 거래들이 골프장이나 스포츠 경기의 VIP관람석에서 행해진다. 하지만, 2018년부터 이러한 비지니스 액티비티와 관련하여 발생되는 비용에 대한 세금 공제가 철회된다.

Tax Cuts and Jobs Act (the “Act”)가 발행되기 전까지는, 비지니스와 관련하여 발생되는 Meals and Entertainment비용의 50% 를 공제할 수 있었다. 또한, 고용주의 사업장에서 직원에게 고용주의 편의를 위해 제공되는 식사에는 100% 세금 공제가 적용되었다.  하지만, the “Act”에 의해 2018년 1월 1일 부터는 특정 Meals and Entertainment 비용에 적용 되는 공제액이 상당량 제한된다.  아래의 차트에 새 법안을 정리해 보았다.

Takeaway

The “Act” 은 납세자가 비지니스 Meals and Entertainment와 관련하여 발생하는 경비 및 특정 부가 급여를 공제하는 것을 제한한다.  납세자는 이러한 유형의 활동에 대한 세금 비용을 고려해야 한다. 또한, 세금 공제를 극대화하기 위해 업무용 식사, 오락, 레크리에이션 행사 및 부가 혜택을 기록하는 계정을 따로 생성하고 트랙하는 것을 권한다.

No More Government Subsidy for Conducting Business on the Golf Course!

(Meals and Entertainment Deduction Limitation)

 Many business deals are made on the golf course or in the sky box of sports games.  However, starting in 2018, no tax deduction is allowed for the expenses incurred in connection with these types of activities.

Prior to the Tax Cuts and Jobs Act (the “Act”), taxpayers generally could deduct 50% of meals and entertainment expenses incurred or paid for active conduct of trade or business.  Additionally, meals provided to an employee for the convenience of the employer on the employer’s business premises were 100% deductible. However, the Act has substantially limited the deductibility of certain meals and entertainment expenses effective January 1, 2018, and the following chart summarizes the new rule.

Takeaway

The Act significantly limits taxpayers’ ability to deduct expenses incurred in connection with business meals and entertainment, as well as certain fringe benefit.  Taxpayer should consider tax cost of these types of activities.  Additionally, to maximize tax deductions, set up and track separate general ledger accounts for business meals, entertainment, recreational events, and fringe benefits.

California Report on IRC Conformity

연방소득세법이 변경될경우, 캘리포니아의 Franchise Tax Board (FTB)는 제정된 변경사항에 대한 보고서를 작성해야한다. 2017 년 12 월에 제정된 Tax Cuts and Jobs Act (the "Act")는 연방 소득세 법에 많은 변경을가한다. 이에따라 FTB는 예비 보고서 발급과 함께 2018 년 4 월 20 일까지 최종 보고서를 발급 할 계획을 밝혔다. 예비 보고서는 캘리포니아가 IRC 245A, 951A 및 965 조항에 의거한 특정 외국인 소득의 송환세금과 관련된 연방규정에 준수하지 않음을 밝혔다.

IRC 섹션 245A에 따르면, 외국 법인의 10 % 이상을 소유한 미국법인은 외국법인이 지불한 배당금에 대해 100 % 공제를 받게된다. 그러나 캘리포니아는 Worldwide Unitary Combined Report 및 Water-Edge Tax Regime을 지속적으로 유지하는바 연방 정부의 100 % 배당금 공제조항을 준수하지 않음을 밝혔다.

섹션 951A는 Global Intangible Low Taxed Income ( "GILTI")을 보유한 CFC의 미국 주주를 대상으로한다. 주된 내용은 해외자회사가 벌어들이는 소득중에 일반적인 소득을 초과하는 부분은 미국의 과세소득으로 포함시키라는 조항이다. 캘리포니아주는 이 Subpart F 조항과 관련된 연방규정을 준수하지 않으며 실제 배포에 세금을 부과한다고 밝혔다.

Act는 IRC 조항 965에 의해 2018 년 이전에 축적된 외국기업의 소득에 송환세금을 부과한다. 캘리포니아주는 이 연방규정을 준수하지 않으며 실제 분배가 이루어질 때 세금이 부과된다고 밝혔다.

Federal Tax Cuts and Jobs Act의 특정 조항에 관한 California 예비 보고서를 보려면 아래 링크를 클릭하세요.

https://www.ftb.ca.gov/law/legis/Federal-Tax-Changes/CAPreliminaryReport3Provisions-Revise.pdf

IRS Notice 2018-28: Section 163(j)

IRS는 Notice 2018-28 (이하 “Notice”)를 통하여, 수정된 Section 163(j)에 관한 추가 지침을 담은 규정을 발행 할 계획이라고 밝혔다. 이 규정이 발행되기 전까지 납세자는 Notice에 설명된 조항들을 참고 하도록 한다.

수정된 163(j)는 비지니스의 조정된 과세 소득의 30%가 넘는 부분에 대해 순 사업 이자 비용의  공제를 금한다. 이 조항은 이전 과세 연도를 포함한 과거 3년 간의 연 평균 총 수령 소득이 $25M 을 넘지 않는 납세자들에게는 적용되지 않는다. 이 조항을 적용할 때 추가적으로 설명이 필요한 요소들 중 몇 가지를 아래에 정리해 보았다.

Section 5: Section 163(j)의 제한은 통합 그룹 (consolidated group) 에 적용하기 위함이다. 다시 말해, 통합 그룹의 조정된 과세 소득을 계산 할 때 사용되는 과세 소득이 통합 과세 소득으로 간주되며, 회사간의 의무는 Section 163(j)(1)의 제한을 결정 할 시에는 고려되지 않는다.

Section 6: Section 163(j) 의 제한 금액은 C-corporation의 E&P (배당 가능 이익) 를 산정하는데에 있어 아무런 영향을 주지 않는다.

Section 3: 기존의 Section 163(j) (1) (A) 에 의해 1월1일 2018년 이전 과세 연도에 불허된 실격 이자를 보유한 납세자들의 경우, 이 이자를 사업 이자로 여기어 2017년 12월 31일 이후의 첫 과세 연도로 이월 시킬 수 있다.

아래의 링크를 참조하여 Notice 2018-28를 확인하기 바란다.

https://www.irs.gov/pub/irs-drop/n-18-28.pdf

California Report on IRC Conformity

The Franchise Tax Board (FTB) of California is required by law to produce an annual report on all changes to federal income tax law enacted in the previous year.  The Tax Cuts and Jobs Act (the “Act”) enacted in December 2017 contains many significant changes to federal income tax law and FTB issued preliminary report and plans to issue a final report by April 20, 2018.  The preliminary report issued on March 20, 2018 clarifies, along with other matters, that California does not conform to the federal rules related to the repatriation of certain foreign-earned income under IRC sections 245A, 951A and 965.

Under IRC section 245A, a U.S. corporation that owns 10% or more of a foreign corporation will receive a 100% dividends-received deduction on dividends paid by the foreign corporation out of its foreign-source earnings.  However, California continually maintains its own Worldwide Unitary Combined Report and Water’s-Edge tax regime, and does not conform to the federal 100% dividends-received deduction provision.

Section 951A subjects U.S. shareholders of CFCs with Global Intangible Low-Taxed Income (“GILTI”) to current tax.  The full amount of the U.S. shareholder’s share of the GILTI is treated as an income inclusion with applicable deductions.  California does not conform to the federal rule in connection with the Subpart F provision and it imposes tax on actual distribution.

The Act imposes a one-time deemed repatriation tax on untaxed earnings of foreign corporations accumulated prior to 2018 under IRC section 965. California does not conform to the federal provision and tax will be imposed when the actual distribution is made.

Please click on link below to view the California’s Preliminary Report on Specific Provisions of the Federal Tax Cuts and Jobs Act.

https://www.ftb.ca.gov/law/legis/Federal-Tax-Changes/CAPreliminaryReport3Provisions-Revise.pdf

IRS Notice 2018-28: Section 163(j)

The IRS issued Notice 2018-28 (the “Notice”) stating that the IRS will issue regulations providing additional guidance related to the amended section 163(j).  Before the issuance of the regulations, taxpayer may rely on the rules described in the Notice.

The amended 163(j) disallows a deduction for net business interest expense of any taxpayer in excess of 30% of a business’s adjusted taxable income. There is an exception to this limitation that applies to taxpayers with average annual gross receipts for the three taxable year period ending with the prior tax year that do not exceed $25 million.  In applying the rule in practice, there were many areas requiring additional clarifications and guidance, and the following are some of the issues addressed in the Notice:

Section 5 of the Notice clarifies that the limitation under section 163(j) is intended to be applied at the level of the consolidated group.  In other words, a consolidated group’s taxable income for purposes of calculation adjusted taxable income will be its consolidated taxable income, and intercompany obligations will be disregarded for purposes of determining the limitation in section 163(j)(1).

Section 6 of the Notice clarifies that the limitation under section 163(j) will not affect whether or when such business interest expense reduces earnings and profits of the payor C corporation.

Section 3 of the Notice clarifies that taxpayers with disqualified interest disallowed under prior section 163(j)(1)(A) for the last taxable year beginning before January 1, 2018, may carry such interest forward as business interest to the taxpayer’s first taxable year beginning after December 31, 2017.

Please click on the link below to view the Notice 2018-28.

https://www.irs.gov/pub/irs-drop/n-18-28.pdf