Presenting a live 110 ‐ minute webinar with interactive Q&A Foreign Partnerships With U.S. Business Ties: Foreign Partnerships With U.S. Business Ties: Challenges for U.S. Taxpayers Best Practices for Complying With Federal Form 8865 WEDNES DAY, NOVEMBER 3, 2010 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific T d Today’s faculty features: ’ f l f George Kilts, International Tax S enior, Cherry Bekaert & Holland , Vienna, Va. Li Zhang, Manager, Spott, Lucey & Wall Inc. , S an Francisco Ron Cohen, Partner, Greenstein Rogoff Olsen & Co. , Fremont, Calif. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Foreign Partnerships with U.S. Business Ties: Challenges for U.S. Taxpayers Ti Ch ll f U S T Webinar Nov. 3, 2010 Li Zhang, S pott Lucey & Wall Inc. George Kilts, Cherry Bekaert & Holland li.zhang@ spottluceywall-cpas.com gkilts@ cbh.com Ron Cohen, Greenstein Rogoff Olsen & Co. ron@ groco.com
Today’s Program Accurately Completing Form 8865 And Its S chedules S lide 6 – S lide 21 [Li Zhang and George Kilt s] Associated Form 8865 Issues S lide 22 – S lide 27 [Li Zhang] Hypothetical Taxpayer Case S tudy S lide 28 – S lide 29 [George Kilt s] Form 8865 Client Experiences S lide 30 – S lide 31 [Ron Cohen] 5
Li Zhang Spott Lucey & Wall Inc Li Zhang, Spott Lucey & Wall Inc. George Kilts, Cherry Bekaert & Holland ACCURATELY COMPLETING ACCURATELY COMPLETING FORM 8865 AND ITS SCHEDULES 6
Who Must File – Category 1 Filer Controlling 50% partners • Control means more than 50% interest of capital, profits, or p , p , loss in such partnership. • Constructive ownership rules apply when the interest in a partnership is determined. Example : A U.S. person became a controlling 50% partner due to the interest attributed from his Canadian mother. 7
Who Must File – Category 2 Filer Controlling 10% partners • A U S person owns a 10% or greater interest while the • A U.S. person owns a 10% or greater interest, while the partnership is controlled by U.S persons, each owning at least 10% interest. • Attribution rules apply for purposes of determining a 10% interest. 8
Who Must File – Category 3 Filer Reportable transfers • U.S. person owns directly, indirectly or by attribution at least a 10% interest of the foreign partnership immediately after the transfer transfer. • The value of the property transferred (including related person) exceeds $100,000. d $100 000 9
Who Must File – Category 4 Filer Reportable events • Acquisitions (> 10% direct interest or > 10% increase) • Acquisitions (> 10% direct interest or > 10% increase) • Dispositions (< 10% direct interest or > 10% decrease) • Changes in proportional interests (> 10% increase or decrease) 10
Who Must File - Exceptions General exceptions • Multiple Category 1 filers • Constructive owners • Members of an affiliated group corporations filing a consolidated return 11
Who Must File – Exceptions (Cont.) Other general exceptions • Foreign partnership files Form 1065 • Foreign partnership files Form 1065 • Certain Category 2 filers • Certain Category 4 filers • Partners in a domestic partnership that contributed property to a foreign partnership 12
Ownership Disclosure On Form 8865 Schedule A: Disclosure of direct and constructive ownership Schedule A-1: Disclosure of a 10% or more direct interest Schedule A-2: Disclosure of affiliated foreign or domestic partnerships 13
Form 8865 - Schedules • U.S. Treasury Department Circular 230 Disclosure: Any U.S. tax U.S. Treasury Department Circular 230 Disclosure: Any U.S. tax advice contained herein (or in any attachment) was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. EYU 14 Strafford Publications 14 Cherry Bekaert & Holland 2010
8865 Schedule B – Income Statement • Report income statement of foreign partnership in U.S. GAAP • Reported in U.S. dollars – Exchange rate • Inter-company transactions • Same as Form 1065: Use the instructions for Page 1 of Form 1065 Sa e as o 065: Use t e st uct o s o age o o 065 • Note: If the foreign partnership has filed a Form 1065 or 1065-B, you do not need to complete Schedule B for Form 8865. Attach a copy of page 1 p py p g of the Form 1065 to the Form 8865. EYU 15 Strafford Publications 15 Cherry Bekaert & Holland 2010
8865 Schedules D And K • These forms are the same as the domestic partnership Form 1065 schedules. • S h d l D ( Schedule D (capital gains and losses) i l i d l ) – Part 1: Short-term capital gains and losses – Part 2: Long-term capital gains and losses – Same as Form 1065; use the 1065 instructions for Schedule D • Schedule K (partner’s distributive share items) – Line 16: Foreign transactions Line 16: Foreign transactions – Same as Form 1065; use the instructions for Schedule K Form 1065 • Note: If the foreign partnership has filed a Form 1065 or 1065-B, you do not need to complete Schedules D and K for Form 8865 Attach a copy of not need to complete Schedules D and K for Form 8865. Attach a copy of the Form 1065 Schedule D & K to the Form 8865. EYU 16 Strafford Publications 16 Cherry Bekaert & Holland 2010
8865 Schedule L – Balance Sheet • The balance sheet should agree with the partnership’s books and records. Attach a statement explaining any differences p g y • Translated into U.S. dollars in accordance with U.S. GAAP – Exchange rate • • Note: Any inter-company transactions shown on the balance sheet should Note: Any inter-company transactions shown on the balance sheet should also be shown on Schedule N. • Note: If the foreign partnership has filed a Form 1065, you do not need to complete Schedule L for Form 8865 Attach a copy of Schedule L from complete Schedule L for Form 8865. Attach a copy of Schedule L from the Form 1065 to the Form 8865. EYU 17 Strafford Publications 17 Cherry Bekaert & Holland 2010
8865 Schedule M B/S for Interest Allocation B/S for Interest Allocation • Interest expense: Fungible • Interest expense is allocated based on foreign and U.S. assets. • Foreign assets related to passive and general category income • • Should be prepared in U S dollars under temporary Regs §1 861 Should be prepared in U.S. dollars under temporary Regs. §1.861- 9T(g)(2) and 1.861-12T EYU 18 Strafford Publications 18 Cherry Bekaert & Holland 2010
8865 Schedules M-1 And M-2 • Same as Form 1065: Use the 1065 instructions for Schedule M-1 • Note: If the foreign partnership filed Form 1065 or 1065-B, do not g p p , complete Schedules M-1 and M-2 on Form 8865. Instead, attach to Form 8865 a copy of the Schedules M-1 or M-2 from Form 1065 or 1065-B. • Schedule M-1: Include all reconciliation items such as guarantee payments, and travel & entertainment expenses • Schedule M-2 – Show what caused the changes in the direct partners’ capital accounts during the partnership’s tax year, as reflected on the partnership’s books and records books and records – All items should be reported in U.S. dollars. EYU 19 Strafford Publications 19 Cherry Bekaert & Holland 2010
8865 Schedule N – Interco. Transactions • Report inter-company transactions between the foreign partnership, partners and other related persons/entities p p • This is used by the IRS in transfer pricing audits. The IRS requires a minimum amount of transfer pricing documentation for related party minimum amount of transfer pricing documentation for related party transactions. • • Transfer pricing Transfer pricing • HIRE Act EYU 20 Strafford Publications 20 Cherry Bekaert & Holland 2010
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