Tax Services for Startups & Individuals

In today’s dynamic business environment it is becoming increasingly common for U.S companies to have operations overseas in pursuit of talent, business strategy, and/or tax savings purposes. However, it is a common misconception that many U.S taxpayers (individuals and corporations) have that the U.S tax law is limited to imposing taxes and reporting obligations on revenue streams within its shores. One of the least commonly known nuances about foreign operations reporting is the concept of controlled foreign corporations (CFC) regulations that mandate detailed reporting of any foreign entity that is 50% or more owned by the U.S taxpayer. In this context, the taxpayer refers to any individual, corporation, partnership, trust, or any entity that is a U.S tax resident. These reporting regulations dictate that the offshore corporation may be taxed under certain situations –  Subpart F income for example. To the company, the IRS mandates the U.S taxpayer to file form 5471 to report the activities of the foreign corporation.

IRC Section 6038(a) requires information reporting with respect to certain foreign corporations (Form 5471) and describes the information required to be reported on this form. IRC Section 6038(b)(1) provides for a monetary penalty of $10,000 for each Form 5471 that is filed after the due date of the income tax return (including extensions) or does not include the complete and accurate information described in Section 6038(a).

On the other hand, if there are foreign shareholders of a U.S entity then the U.S entity is mandated to file form 5472 if there are any (related party) reportable transactions. The penalty for non-filing or late filing form 5472 is $25,000.

Nevertheless, besides form 5471 and 5472 there are other numerous information returns related to foreign holdings and activities that carry hefty penalties, even owning disregarded entities offshore is cumbersome as it comes with form 8858 filing obligation. Please schedule a consultation with us if you have any questions.

After the U.S Supreme Court released a decision in Wayfair vs. South Dakota case clearing the way for states to impose sales and use tax based on economic presence standard therefore it has become vital for businesses to identify their sales and use tax exposure.

Now that states may impose nexus on out-of-state retailers without physical presence as a result of the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc. (U.S. Supreme Court, Dkt. No. 17-494, June 21, 2018), states may continue to use notice and reporting laws to ensure the payment of sales and use taxes or these types of laws may become obsolete. Taxpayers must carefully evaluate whether specific activities or contacts create nexus in each state in which they do business. A nexus review helps businesses understand their exposure and avoid audit situations.

The majority of states assess sales and use tax based on the location of the product being utilized. Therefore, making location as one of the most important factors in calculating a sales tax rate is the location of a sale. For sales that take place over the counter, the address of the business is used to determine the rate. If a business is shipping or sending a product to a location other than their place of business, however, the tax can be based either on the ship from address or the ship-to address depending on the sourcing rules of the state(s) involved in the sale.

Business-related expenses for travel may be deductible if they are ordinary and necessary business-related expenses. An ordinary expense is one that is common and accepted in the trade or business. A necessary expense is one that is helpful and appropriate for the business. Assuming an expense is correctly characterized as a business travel expense, the taxpayer must substantiate the expense by adequate records, or evidence corroborating his own testimony, of the amount of the expense, the time and place incurred, its business purpose and, if expenses of others are to be deducted, the business relationship of such persons to the taxpayer. IRC 274(d). The IRS often has the edge in these disputes because the tax law spells out detailed rules about how these expenses must be verified and documented. Most companies sincerely attempt to comply but often fall short anyway.

Best Practices:

Per IRC 1.274-5 the reimbursement and allowance arrangements are accepted as equivalent to the substantiation of the amount of the expense by adequate records and documentary evidence and satisfy the requirements of adequate accounting to the employer. It is a preferred approach for an employer to adopt an accountable plan (reimbursement arrangement) and utilize expense management applications such as Expensify or Zoho Expense for adequate substantiation of travel expenses in case of an audit. Per IRC 62(a)(2) an “accountable plan” is a reimbursement arrangement between an employer and employee that satisfies the business connection, substantiation, and return of excess amounts requirements.

Business expense reimbursements paid through a system that does not meet the specific requirements for accountable plans are considered paid under a nonaccountable plan and are treated as taxable compensation. Because of the difference in the tax treatment of reimbursements under an accountable plan versus a nonaccountable plan, it is important to review your reimbursement policies. Please schedule an appointment to discuss your options under this IRS guidance or if you would like us to review and update your travel recordkeeping procedures.

Post-TCJA taxpayers generally may continue to deduct 50% of the food and beverage expenses associated with operating their trade or business (e.g., meals consumed by employees on work travel), but no deduction for entertainment expenses are permitted.

As long as the food or beverage expense satisfies the following criteria, 50 percent of the expenses continue to be deductible:

• the expense is ordinary and necessary and paid in carrying on a trade or business;
• the expense is not lavish or extravagant;
• the taxpayer or employee is present when the food or beverages are furnished;
• the food and beverages are provided to a current or potential business customer, client, consultant, or a similar business contact; and
• food and beverages provided at an entertainment activity are deductible if they are purchased separately.

Some examples of deductible meals include:

The following entertainment-related expenses are fully deductible:

• expenses for goods, services, and facilities that are treated as compensation;
  certain reimbursed expenses;
• expenses for recreation and social activities for the benefit of employees who are not highly compensated;
• expenses for goods, services, and facilities that the taxpayer makes available to the general public;
• expenses for goods and services that the taxpayer sells in a bona fide business transaction in full consideration for money or money’s worth;
• expenses paid or incurred for goods or services that are includable in the income of a non-employee who receives the entertainment or prize as taxable income;
• expenses for food and beverages provided to crew members of certain commercial vessels or drilling rigs.

References:  IRC §162(a)(2), IRC §212, IRC §274(a)(1)(A), IRC §274(d), IRC §274(n)

Here are research activities that are specifically excluded from qualified research under I.R.C. § 41(d)(4):

I. Research after Commercial Production

Qualified research does not include any research performed after the beginning of commercial

Production, such as following activities:

• Preproduction planning for a finished business component;
• Tooling up for production;
• Trial production runs;
• Trouble shooting involving detecting faults in production equipment or processes;
• Accumulating data relating to production processes
• Debugging flaws in a business component

II. Adaptation

Any activity that relates to adapting an existing business component per customer’s requirement is also excluded.

For example, if a taxpayer owns rights to a software and grants licenses to customers, in this case, any expenditure incurred by the taxpayer in adapting the core software program to requirements of the customer represent activities excluded from definition of qualified research under 41(d)(4)(b).

III. Duplication

This exclusion applies in instances where a taxpayer spends time  analyzing the existing elements of their business components to develop potential alternative elements. For example, plans, blueprints, detailed specifications, and publicly accessible information of the business element.

However, Qualified Research Expenditures spent on researching solely an alternative product is not excluded

IV. Surveys, Studies, Research Relating to Management Functions

Qualified research does not include any management functions or techniques, including preparation of financial data and analysis. Also includes such items of the following activities:

• Efficiency surveys
• Development of employee training programs;
• Management organization plans;
• Management based changes and accumulating data in production processes;
• Market research, testing or development;
• Routine data collections or ordinary testing

V. Research in the Social Sciences, etc.

Qualified research does not include research in the social sciences such as economics, humanities, arts, behavioral science, or business management.