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 Tim Ellis Senior Vice President Manager Tax Services 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, oil 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: #2: #3: Partners as Foreign Financial Payments to Foreign Employees Assets Reporting Entities / Nonresidents #5: #4: Treaty Country Return State Tax Nexus Risk 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 Rev. Proc. receipt 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? Services Interest Dividends performed in the U.S. Other ECI FDAP passive types of 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 Public Law Constitutional Economic underpinnings nexus 86-272 Factor Attributional Click-through presence nexus nexus 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 of a nexus questionnaire. No longer eligible for VDAs or amnesty programs? Consequences of “losing” or not completing a nexus questionnaire

Nexus Considerations Sales Tax Income Tax • Substantial nexus • Substantial nexus • Physical presence • Physical presence • Attributional nexus • Attributional nexus • Click-through nexus • Economic nexus • Quill • 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 Permanent conducted with establishment Canada U.S. sales rep visiting Other Canadian considerations customers

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