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New International Tax Laws Now in Effect Under TCJA

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Under the new tax changes for The Tax Cuts and Job Act (TJCA) there were several new provisions that impact US companies performing business internationally.  Below are few selected key provisions.

Under the Foreign Derived Intangible Income, or FDII, a deduction is created for certain foreign income earned by U.S. companies. This only applies to U.S. C-corporations with either a U.S. or foreign parent with an incentive to use U.S. workers.  In result, this creates a preferential rate of 13.125% on qualifying foreign income, or QFI.  QFI includes income derived from sale of property to foreign sources and, also, includes income from services performed for foreign sources by a U.S. company, not through a foreign branch. For example, if the FDII is $1,000, the tax on the FDII is $131.25 rather than $210.

Global intangible low-taxed income, or GILTI, creates a minimum annual tax on controlled foreign corporations operating in low taxing countries. This applies to all U.S. owners of foreign GILTI companies including C-corporations, S-corporation, LLC, and even individuals. If a foreign country’s tax is above 13.125% then in general there’s no GILTI.  However, if a foreign country’s tax rate is below 13.125% then this tax will apply.  Assume a country with 0% tax rate then the U.S. parent will pay 10.5% GILTI tax which will be reported and paid with the US tax return. This discourages U.S. companies from operating in low or no tax countries.

Finally under the new territorial tax system a US C-corporation only can exclude income earned by its foreign subsidiaries which is not subject to Subpart F income or GILTI tax.  For example, assume a U.S. C-Corporation has 100% ownership in a foreign entity and generates $1,000 profit with taxes of $150. The net cash of $850 can be repatriated back to the U.S. tax free as 100% dividend exclusion.  The U.S. C-corporation then distributes the $850 to its individual shareholders who only pay dividend rate tax of 23.8% federal plus state taxes.    This 100% foreign owned company dividend exclusion does not apply to U.S. parent companies who are S-corporation or LLC’s as well as individuals.

To discuss more about your international tax situation, please contact Hani Sharestan at (949) 910-2727.

 

Making Large Gifts Now Won’t Harm Estates After 2025

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On November 20th, the IRS announced individuals taking advantage of the increased gift and estate tax exclusion amounts in effect from 2018 to 2025 will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to levels before 2018.

The Treasury Department and the IRS issued proposed regulations which implement changes made by the 2017 Tax Cuts and Jobs Act (TCJA).  As a result, individuals planning to make large gifts between 2018 and 2025 can do so without concern that they will lose the tax benefit of the higher exclusion level once it decreases after 2025.

In general, gift and estate taxes are calculated, using a unified rate schedule, on taxable transfers of money, property and other assets. Any tax due is determined after applying a credit – formerly known as the unified credit – based on an applicable exclusion amount.

The applicable exclusion amount is the sum of the basic exclusion amount (BEA) established in the statute, and other elements (if applicable) described in the proposed regulations. The credit is first used during life to offset gift tax and any remaining credit is available to reduce or eliminate estate tax.

The TCJA temporarily increased the BEA from $5 million to $10 million for tax years 2018 through 2025, with both dollar amounts adjusted for inflation. For 2018, the inflation-adjusted BEA is $11.18 million. In 2026, the BEA will revert to the 2017 level of $5 million as adjusted for inflation.

To address concerns that an estate tax could apply to gifts exempt from gift tax by the increased BEA, the proposed regulations provide a special rule that allows the estate to compute its estate tax credit using the higher of the BEA applicable to gifts made during life or the BEA applicable on the date of death.

To discuss more about your gift and estate tax situation, contact WFY’s Estates and Trusts Partners, Marisa Alvarado and Kevin Wiest, at info@cpa-wfy.com or (949) 910-2727.

© Copyright 2018. All rights reserved.

Earn Money from California’s Training Subsidy Program

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It’s Free Money, and We Can Help You Get Your Share

Do you provide formal training for your employees? Exciting news: The government wants to chip in. Yes, really. In fact, for the past 35 years the State of California has provided over $1.5 billion in training subsidies to California businesses. Smaller companies can receive up to $50,000 per year and larger companies can receive up to $375,000 per year. Never heard of this program? You’re not alone.

The funding comes from a tax that every for-profit company in the state pays, the Employment Training Tax. This tax generates over $100 million a year that is then given back to companies that successfully apply for the funds.

This is not a tax credit. It’s “free money,” given in the form of a check. The money goes to help companies cover the cost of providing training for their employees so they can more efficiently and profitably do their jobs. Almost any type of training is covered, and there are very few restrictions on who can do the training. Typically most recipient companies simply have their own in-house personnel lead the training sessions.

Examples of eligible training include:

  • Business Skills, such as Leadership, Team Building, Communication, Sales, Marketing or Customer Relations
  • Computer Skills, such as Accounting Software, ERP, MRP, CRM, Scheduling, MS Office and other software needed to run a business
  • Manufacturing Skills, which includes almost anything necessary to produce the product or service

Virtually any for-profit company with a physical location in California can take advantage of this program. And once the state cuts the check they have no hold on how the money is used.

Of course, being that this is a government program there is a lot of paperwork involved, and the learning curve for getting this paperwork figured out is fairly steep. Luckily, we’ve already cracked the code. Because of our experience we can handle over 90% of the work required to receive the funds, thus freeing you to do what you do best—run your company.

To see how this program can benefit your company please contact Jeff Myers at JMYERS@CPA-WFY.com or call 949-910-0122

© Copyright 2018. All rights reserved.

Pass-Through Entities and the 20 Percent Tax Break

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Small-business owners and partners are scratching their heads over the Tax Cuts and Jobs Act and how the new 20 percent tax deduction for pass-through entities will work.

Here’s a little background

A pass-through entity can be a partnership, S corporation, limited liability company or partnership, or sole proprietorship — basically, most of the country’s small businesses. Owners and shareholders of these entities are taxed on earnings based on individual, not corporate, tax rates. Effectively, company earnings, losses and deductions pass through to the individual’s personal tax rates, which, in the past, were typically lower than corporate rates. The pass-through deduction was a nice tax break.

But things have changed.

In 2017, the U.S. corporate tax rate was 35 percent, one of the highest in the industrialized world. The new bill slices that rate to a flat 21 percent, which is lower than the top individual tax rate of 37 percent. Earners who fall into that top tax tier would be silly to claim a pass-through deduction, because their individual rate is now higher than the corporate rate. Say bye-bye to that tax break.

Not so fast. To even things out, lawmakers have allowed pass-through owners to deduct 20 percent of their qualified business income, or QBI, from their personal income taxes, whether or not they itemize. Unlike the corporate tax cut, which is permanent, this pass-through deduction lasts only through 2025, unless Congress extends it.

A 20 percent pass-through deduction is nothing to sneeze at. If you have, say, $100,000 in pass-through income, you can reduce your income taxes by $4,800 if you’re in the 24 percent income tax bracket.

What is QBI?

QBI is, essentially, the profit a pass-through business makes during a year.

QBI includes:

  • Rental income from a rental business.
  • Income from publicly traded partnerships.
  • Real estate investments trusts.
  • Qualified cooperatives.

QBI does not include:

  • Dividend income.
  • Interest income.
  • S corporation shareholder wages.
  • Business income earned outside the United States.
  • Guaranteed payments to LLC members or partnership partners.
  • Capital gain or loss.

Here’s the hitch

In order to take advantage of the pass-through deduction, you must have net taxable income from your businesses. If you don’t make any profit, you can’t deduct 20 percent from nothing.

The QBI from each business is calculated separately. If you have several businesses, and one or more loses money in a given year, you will deduct that loss from the QBI from the profitable businesses.

More considerations

Hey, if there weren’t always more considerations, you wouldn’t need us. Whether you can take advantage of all, some or none of the pass-through tax deduction depends on how much money you earn and how you earn it.

For instance, if your taxable income falls below $315,000 if married filing jointly or $157,500 if single, you can take full advantage of the pass-through deduction. But if your taxable income is more than $315,000/$157,500, taking the deduction will depend on your total income and the kind of work you do. If you perform a personal service, such as doctor or consultant, you’ll lose the deduction at certain income levels. The details are still unclear, and we’re looking forward to reviewing future guidance.

The new pass-through deduction can be a nice tax break for folks who qualify. Not sure if you do? Contact us at info@cpa-wfy.com, and we’ll help you navigate the murky waters surrounding the new tax law and pass-through deduction. We’ll see if you’re entitled to anything and, if so, how much.

© Copyright 2018. All rights reserved.

Is This Your Situation: Wondering If An Audit Can Benefit You

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Your privately owned business may not need a financial statement audit according to law, but that doesn’t mean you should skip it. Read through to learn why an audit can be a smart move.

With the vicissitudes of change combined with technological advances, we’re living in an age of transparency where businesses are required to disclose more information about their taxes, financial records, operations and executive salaries.  While private companies are spared the intense scrutiny of professional auditors and not required to provide an external review of their financial statements, there are advantages to having an external audit many business heads rarely consider.

Seven reasons why an external audit is smart business

  1. Audits improve functioning of the business. Objective scrutiny of a business’s operations leads to creative improvements and controls, which result in better products and services and a fatter bottom line.Just as regular tuneups improve an automobile engine’s functioning, the external audit achieves similar results by improving a company’s performance by  reinforcing and strengthening what works and eliminating what’s slowing a business down.  Internal controls are scrutinized to make sure they’re achieving their goals and whether timetables and stakeholders’ interests and goals are being achieved.
  2. All companies, regardless of size and industry, can benefit from an external audit.A common misconception is small companies don’t need to be audited. Auditors can identify and address potential problems that may be holding you back.
  3. Audited financial statements are considered more reliable. Investing in an external audit is considered a proactive strategy that improves and enhances the image of the business in the public eye.  It circumvents potential mistrust that comes when information is revealed after the fact.  It also gives customers or clients (existing and potential) and investors a sense of security, knowing that your company’s financial statements have gone through the audit process.
  4. The audit process encourages transparency.  Financial statements that have been verified by an external auditor are considered more reliable in the business marketplace.  External auditors are trained specifically to focus on tightening and improving business processes to reduce the amount of risk of misreporting financial data.
  5. External auditors have no agenda other than the truth.
  6. Audits help foster a culture that encourages change and growth. Rather than view an external audit as a bureaucratic annoyance, managers ought to embrace the audit concept as a conduit to a stronger business, new systems and processes, all of which open the door to innovation.
  7. Audits lead to better hiring decisions.A company’s employees (human capital) are as valuable as its products or services and business operations.After all, their expertise, motivation and attitude affect and define the company’s culture.A careful external audit evaluates every variable in a company’s machinery.

Do you want to know about the advantages of an audit for your business, and what it would involve? Give us a call today.

Unified Framework for Tax Reform

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Republican lawmakers released on Wednesday a “unified framework” for tax reform designed to cut tax rates, simplify the Internal Revenue Code, and provide a more competitive environment for business. The key changes are as follows:

Individuals:

  • Current tax rates: Seven brackets from 10% to 39.6%.
  • Proposed tax rates: Three brackets at 12%, 25% and 35%.
  • Current standard deduction: $6,350 individuals and $12,700 married filing joint.
  • Proposed standard deduction: $12,000 individuals and $24,000 married filing joint.
  • Elimination of personal exemptions, worth $4,050 per person.
  • Repeal of the alternative minimum tax.
  • Repeal of the estate and generation-skipping transfer tax.
  • Eliminate most itemized deductions, including state and local tax deductions (will keep mortgage interest and charitable contributions deduction).

Businesses:

  • Small and family-owned business and flow through entity tax rate reduction (Sole Proprietorships, Partnerships and S Corporations).
    • Current maximum tax rate 39.6%.
    • Proposed maximum tax rate 25%.
  • Current C Corporation tax rate 35%
  • Proposed C Corporation tax rate 20%.
  • Tax U.S. companies only on U.S. income instead of worldwide income.

There is tremendous opportunity this year to plan ahead and create permanent tax saving benefits by structuring a year-end tax plan that fits your situation.

Contact us at info@cpa-wfy.com to discuss how to maximize your 2017 tax benefits from the proposed upcoming changes to the tax law.

What to Know About ‘Power of Attorney’

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A general power of attorney gives broad powers to a person or organization, known as an agent or attorney in fact, to act on your behalf. What powers?

  • Handling financial and business transactions.
  • Buying life insurance.
  • Settling claims.
  • Operating business interests.
  • Making gifts.
  • Employing professional help.

These things make a general power of attorney an effective tool, especially if you’ll be out of the country and need someone to handle certain matters, and obviously if you’re physically or mentally incapable of managing your affairs. Powers of attorney are generally included in estate plans to make sure someone is handling financial matters.

But wait — there are special powers of attorney:

  • Health care power of attorney — This grants your agent authority to make medical decisions for you if you are unconscious, mentally incompetent or in some way unable to make decisions on your own. Although it’s not the same thing as a living will, many states allow you to include your preference about being kept on life support. Several states may let you combine parts of the health care power of attorney and living will into an advanced health care directive.
  • Durable power of attorney — Suppose you become mentally incompetent due to illness or accident while your power of attorney is in effect. Will the power of attorney remain valid? To safeguard against such problems, you can sign a durable power of attorney, which is a general, special or health care power of attorney with a durability provision to keep the current power of attorney in effect.

And what of the agent you choose to have your best interests in mind? Your agent should:

  • Keep accurate records of all transactions done on your behalf.
  • Provide you with periodic updates to keep you or a third party of your choosing informed.
  • Be held responsible only for intentional misconduct, not for unknowingly doing something wrong.
  • Be aware that agents are not customarily compensated.
  • Know that you may decide to appoint multiple agents to act either jointly or separately in making decisions. This ensures more sound decisions, as they act as checks and balances of one another. But the downside? Multiple agents can disagree, and one person’s schedule can potentially delay important transactions or signings of legal documents.
  • Know that you’ve appointed a backup because he or she may become ill, be injured or in some way be unable to serve when the time comes. A successor agent takes over the power of attorney duties from the original agent if needed.

You must sign and notarize your original power of attorney document and certify several copies. Banks and other businesses will not allow your agent to act on your behalf unless they receive a certified copy of the power of attorney. You may revoke a power of attorney at any time — notify your agent in writing and retrieve all copies, letting everyone know that your agent’s power of attorney has been revoked.

It may be wise to consult a professional for advice about the powers being granted, to provide counsel on your candidate agent and to make sure your document meets all legal requirements.

© Copyright 2017. All rights reserved.