Common Tax Traps and How to Avoid Them July 12, 2016 The webinar - - PowerPoint PPT Presentation

Common Tax Traps and How to Avoid Them

July 12, 2016

The webinar will begin at 10:30 a.m. CT

Shawn Sullivan Senior Vice President Tax Services Tim Ellis Manager Tax Services

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About the Speaker

Shawn Sullivan

Senior Vice President Tax Services

Extensive public and private accounting experience Experience in M&A, international tax, and business structuring

About the Speaker

Tim Ellis

Manager Tax Services

Works primarily with manufacturers,

• il and gas entities, and auto

dealerships Member of AICPA, KSCPA

Learning Objectives

Learn why organizations cannot treat partners as employees. Understand filing requirements for payments made to foreign individuals and entities. Identify the nuances and growing complexity of state tax nexus. Recognize when individuals and businesses are required to report on foreign financial assets. Explore the scenarios that may lead to exposure of Canadian tax return filings.

5 Tax Traps

#1: Partners as Employees #2: Foreign Financial Assets Reporting #3: Payments to Foreign Entities / Nonresidents #4: State Tax Nexus Risk #5: Treaty Country Return Filing Requirements (Canadian)

TAX TRAP #1: TREATING PARTNERS AS EMPLOYEES

Partners as Employees Risk Exposure

Under-reporting partner income Disqualification of benefit plans Taxation of unvested profits interest Overpayment of employment taxes Penalties Limitation of IRC Sec 199 DPAD benefit Excess IRC Sec 263A cost capitalization

Under-Reporting Partner Income

• Guaranteed payments
• Inclusion of benefits

Disqualification of Benefit Plans

• Cafeteria plans

Taxation of Unvested Profits Interest

Partner upon receipt

• Rev. Proc.

2001-43 IRC Sec 83(b)

Overpayment of Payroll & Withholding Taxes

• FICA, Medicare
• Federal and state unemployment
• Self-employment tax considerations

Penalties and Unexpected Impact to Deductions

Substantial Authority Issue Reasonable position disclosures IRC Sec 199 DPAD IRC Sec 263A – Uniform Capitalization

Partners as Employees: Work-Arounds

• Disregarded Entities
• New IRS temporary regulations
• Tiered Partnerships
• S Corporation
• Reasonable compensation
• Substance over form

Polling Question #1

TAX TRAP #2: NOT REPORTING FOREIGN FINANCIAL ASSETS

Foreign Asset Reporting Risk Exposure

• Penalties
• FinCen 114 - $10,000 per violation
• Form 8938 - $10,000 per violation
• Civil penalties if willful neglect

How to Avoid The Trap: FinCEN Form 114

• Foreign Financial Accounts
• Financial interest
• Greater than 50% S corp & P-ship owners
• Signature authority
• Aggregate value exceeds $10,000 at any

time in calendar year

• Due Dates CHANGE
• 2017 filing season (2016 calendar year)
• April 15, 2017
• Extension to October 15, 2017

How to Avoid The Trap: Form 8938

• Individual requirements
• Specified Financial Asset
• Exceed specified values
• US person living in US
• Single/HOH - $50K/$75K
• MFS - $50K/75K
• MFJ - $100K/$150K

How to Avoid The Trap: Form 8938

• Specified Domestic Entities
• New starting after 12/31/2015
• Applies to entities created to avoid

having to report individually

• At least 50% of the entity’s income is

passive or at least 50% of the assets held are for production of passive income

What if You Fell in the Trap and Haven't Reported? Offshore Voluntary Disclosure Program Streamlined Domestic Offshore Procedures

Polling Question #2

TAX TRAP #3: NOT WITHHOLDING U.S. TAX ON PAYMENTS MADE TO FOREIGN ENTITIES

US Withholding Risk Exposure

• Your company is liable for 30%

withholding.

• Penalties
• Form 1042
• Form 1042-S

What's a Withholdable Payment?

Interest Dividends Services performed in the U.S. ECI FDAP Other passive types

• f income

How Do You Know What Rate to Apply?

• Form W-8 Series
• Form W-8BEN-E
• Form W-8BEN-ECI
• Form W-8BEN
• Form W-8EXP
• Form W-8IMY

US Withholding Reporting Requirements

• Form 1042
• Similar to 1099 Reporting
• Must have W-8 on file to claim a treaty

benefit

• If no W-8, then default 30% withholding

applies

• Required even if 0% withholding

TAX TRAP #4: FAILURE TO IDENTIFY AND MANAGE MULTI- STATE NEXUS EXPOSURE

State Tax Nexus Risk Exposure

Interest and penalties Professional fees Double taxation Lost profits

What is Nexus?

• Nexus = Connection = Level of Activity
• Person
• Property
• Transaction
• Varies by type of tax
• Sales/use
• Income tax
• Non-income-based tax
• Varies by jurisdiction
• State level
• Local

Nexus Considerations

Constitutional underpinnings Public Law 86-272 Economic nexus Factor presence nexus Attributional nexus Click-through nexus

State Nexus Preventive Measures and Remediation

• Nexus study
• Voluntary Disclosure Agreements (“VDA”)
• Tax amnesty programs

State Nexus: When the State Calls Usually the initial contact is in the form

• f a nexus questionnaire.

No longer eligible for VDAs or amnesty programs? Consequences of “losing” or not completing a nexus questionnaire

Nexus Considerations

Sales Tax

• Substantial nexus
• Physical presence
• Attributional nexus
• Click-through nexus
• Quill

Income Tax

• Substantial nexus
• Physical presence
• Attributional nexus
• Economic nexus
• Factor presence nexus
• Quill not applicable
• PL 86-272 protection

(income tax only)

TAX TRAP #5: NOT FULFILLING TREATY COUNTRY RETURN FILING REQUIREMENTS (CANADA)

Polling Question #4

Canadian Reporting Requirements Risk Exposure

Federal Income Tax - 15% Provincial Income Tax - 2.5% to 16% Interest Penalties CRA audits

When are Filings Required?

• US employees performing services in Canada
• Making sales into Canada
• US sales rep visiting customers in Canada

US Employees Performing Services in Canada

Regulation 105

• Services performed in Canada for a fee

paid to a non-resident are subject to 15% withholding.

• No relief just because treaty country
• Waiver possible
• Form R105

US Employees Performing Services in Canada

Regulation 102

• Default - Employees are subject to

Canadian taxes for services performed in Canada even for one day.

• Waiver Relief
• If working less than 45 days
• RC473
• If working less than 183 days
• R102-R

Making Sales into Canada

Level of business conducted with Canada Permanent establishment U.S. sales rep visiting Canadian customers Other considerations

Thank you!

Shawn Sullivan

Senior Vice President Tax Services Shawn.Sullivan@aghlc.com linkedin.com/in/dshawnsullivan 316.291.4110

Tim Ellis

Manager, Tax Services Tim.Ellis@aghlc.com linkedin.com/in/timrellis 316.291.4049