Ohio legislators are considering tax law changes that would relieve headaches for companies that do business across many municipal boundaries.
While Ohio has a uniform law limiting how a municipality may tax, it serves only as a ceiling for what a city may do. Cities can and have imposed their own rules and treatments within those guidelines.
Nonuniform municipal rules and multiple filings have made it difficult for companies to determine what taxes they owe and have deterred others from doing business in the state, says Joseph R. Popp, JD, LLM, tax supervisor at Rea & Associates.
“One of the challenges is the definition of a day. Are you working in a municipality for a day if you’re present at all, or do you have to work half of the day, or the full day? What if your workers pick up a truck at your office and then spend the rest of the day outside that city?” Popp says.
“Cities are taking different approaches, which could result in multiple cities trying to tax you for the same day,” he says. “That’s an example of the complexity that businesses are facing and why they feel that the Ohio municipality taxation structure is burdensome.”
In addition to creating uniform definitions, House Bill 601 would eliminate the need to file tax returns in cities where less than 1 percent of your income is allocated and the tax owed is less than $50. It would also change rules regarding a “free pass” that has been given in cases when workers spend fewer than 12 days in a city. That would be extended to 20 days, and tax would then be collected going forward only.
Smart Business spoke with Popp about the problems posed by current municipal tax laws and what proposed legislation would do to rectify the situation.
What types of businesses does this affect?
Those that are mostly going to be affected will be service-based groups — those that do cable TV installation or something service-based that would take company representatives to many different municipalities while working under the same business umbrella. Temporary agencies that have people going to multiple locations would also be a business group that would have interest in this.
Are there things businesses should do in preparation for the bill’s passage?
Businesses should consider looking at where they might have done things wrong in the past.
A client of ours has a real estate rental company and thought it was in a jurisdiction where tax was not due. However, we found that it was in city limits and tax was due to the city. We’ve prepared returns showing this taxpayer owes $20,000 for a couple of different years. Because of that city’s interest and penalty structures, the client will pay another $20,000 in penalties and interest. Under the new rule, the city would be limited to imposing only $4,000 in penalties and interest, although it’s not clear if the new legislation would be a retroactive change.
So, companies may want to see if there are opportunities to leverage the rule change and end up paying less to the municipality. The municipality may not like the rule change and it wants to get as much tax, interest and penalties as it can now, so that opens up another bargaining chip for businesses to use in their negotiations with a municipality’s tax administrator.
Is the legislation likely to pass?
Yes, and the reason for this confidence stems from how this came about. The major cities are on board with this, the Ohio Society of CPAs is presenting the professional point of view and the members of the legislature are involved in the process. There was a lot of effort put forth to ensure that there was agreement and buy-in by all interested parties.
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Joseph R. Popp, JD, LLM is a tax supervisor at Rea & Associates. Reach him at (614) 923-6577 or email@example.com.
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While the light of economic recovery may be appearing on the horizon, many sectors of the economy continue to suffer slow growth and persistent or periodic struggles with liquidity as a result of low demand for goods and services. Until consumers determinatively shake off the historically low levels of confidence and reverse the current trends of debt reduction and increased savings rates, some businesses will fall on hard times.
A struggling business and its leaders (e.g., directors and officers of corporations, or managers of limited liability companies) seeking to avoid the entity’s failure as it experiences liquidity challenges or insolvency need to heed some legal rules that may not be readily apparent.
Smart Business spoke to Steve Dettmann and Douglas Landrum of Jackson DeMarco Tidus Peckenpaugh about a few common legal matters for those businesses, and their principals (and guarantors), to consider when the business experiences difficult times.
Management may be liable to creditors
Normally, the duties of the directors of a corporation and the managers of a limited liability company are owed to the equity holders of the business. However, if a business has insufficient equity or is insolvent, management personnel may become personally liable for approving distributions to shareholders or other equity owners. For a Delaware business entity, the Delaware Supreme Court has held that when a corporation is actually insolvent, fiduciary duties arise for the benefit of creditors in the place of shareholders — under the theory that the creditors of an insolvent corporation become the beneficiaries of any increase in value and suffer the detriment of further decreases in value of the corporation’s remaining assets. Thus directors and managers should ascertain an accurate financial understanding of proposed actions of struggling businesses.
Not all guaranties are the same
Another area where principals become exposed to personal liability for obligations of the business is by executing guaranties. In many lending circumstances involving small and medium-sized business entities, lenders will require guaranties of varying types from principal equity owners. These guaranties come in many forms — some absolute, some limited and some contingent. Some guaranties are unconditional and others may limit the lender’s recourse to a specific set of assets or circumstances. Most guaranties contain a set of waivers pursuant to which the guarantor waives statutory suretyship defenses — some ironclad and others suffering notable deficiencies. Understanding the difference is key.
In commercial real estate lending, the borrower’s principals are frequently induced to give the lender a “springing” guaranty (sometimes referred to as a “recourse carve-out” guaranty) under which the lender’s right to seek recovery beyond the borrower or the specific secured collateral arises only upon the occurrence of specified events. These events typically include “bad boy” acts of the borrower (notwithstanding that only certain of the acts are inherently “bad”) including, among others, fraud, misrepresentation, commission of waste, prohibited transfers, failure to pay real estate taxes or failure to properly apply security deposits, reserves or insurance proceeds. The spring on some guaranties is sprung (i.e., the recourse obligation arises) when the borrower, during times of financial difficulties, seeks legal protection from its creditors through the filing of a petition in bankruptcy — even though the bankruptcy petition may be later dismissed (i.e., like bells that cannot be unrung, certain springs cannot be unsprung). Therefore, if a commercial real estate enterprise is failing, guarantors having influence over the actions of the borrower should consult with counsel to ascertain the potential consequences of a borrowing entity’s proposed actions before those actions are taken, and to carefully navigate through potential foreclosure of real property security so as to avoid, where possible, the triggering of liability under a guaranty.
Completion guaranties are commonly used as credit enhancements for construction financing, but the remedies available to a lender are uncertain. Generally, recovery under a completion guaranty is limited to the increase in value of the collateral that completion would offer; and where a lender on an underwater project cannot demonstrate that the value upon completion would exceed the as-is value, then the completion guaranty may be worthless.
Knowing which type of guaranty binds the principal, and whether there may exist a partial or complete defense to recovery, is essential to determining what actions should be taken or decisions should be made on behalf of the business.
Filing bankruptcy may not be a good idea
While a debtor-in-possession (DIP) usually acts as the trustee upon the filing of a bankruptcy petition under Chapter 11 of the United States Bankruptcy Code, if the business cannot present or implement a viable plan to reorganize in a Chapter 11 bankruptcy, under certain circumstances, the bankruptcy case can be converted to a Chapter 7 liquidation upon request of the creditors. Independent U.S. Trustees appointed by the court in Chapter 7 bankruptcy liquidations are compensated based upon what they are able to collect on behalf of the estate for payment to the creditors of the bankrupt entity. With this motivation, the trustees frequently look into the pre-petition acts of management and equity holders to determine whether the bankruptcy estate may have causes of action that could bring a recovery. A Trustee may therefore act in a manner opposed to management and equity holders, as they look for evidence of insider transactions, misuse of corporate assets for personal benefit, distributions to equity holders at or near the time of insolvency or breaches of duties that could provide access to policies of directors and officers liability insurance.
Accordingly, if a struggling business is unlikely to be able to reorganize in bankruptcy, then it may be a better course for management to wind-up the business and distribute assets to creditors (similar to a bankruptcy liquidation) without filing a case with the United States Bankruptcy Court. Negotiating with creditors for a liquidation of the company’s assets without a bankruptcy case may avoid the appointment of a trustee who turns out to be the worst enemy of former management or owners.
Remember tax obligations
One of the knee-jerk reactions of management in a difficult business setting is to use funds withheld from employee wages (income tax, social security tax or Medicare withholdings) for liquidity purposes instead of paying over the funds to the IRS and other tax authorities. This is one of the worst methods that management could employ to prop up the business as it begins to fail, as any “responsible person” of the business (meaning the individual or group of individuals within an organization who, individually or collectively, has sufficient authority to pay over withholding taxes) may be held personally liable by the IRS for a Trust Fund Recovery Penalty — a 100 percent tax penalty — for failing to pay over taxes withheld from the employee.
If a business is struggling, management and equity holders must be mindful of the many traps that exist from which could arise personal liability, and a small investment in consultation with legal counsel before actions are taken may be essential to avoiding unnecessary loss.
Steve Dettmann is Senior Counsel, Real Estate Practice Group and Douglas Landrum is a Shareholder and a Member of the Corporate Practice Group at Jackson DeMarco Tidus Peckenpaugh. Reach them at SDettmann@jdtplaw.com and DLandrum@jdtplaw.com, respectively.
As we move into 2012, there are a number of favorable federal tax provisions that are set to expire at the end of the year, absent action by Congress and the President.
Smart Business spoke with Stanley E. Heyman, a shareholder in the Tax and Estate Planning Services Group at Jackson DeMarco Tidus Peckenpaugh, to highlight a few of these favorable provisions that currently offer tax and estate planning opportunities for the rest of the year, and to discuss the new Medicare taxes scheduled for 2013.
What changes to income tax can be expected?
For income tax purposes, the top individual federal income tax rate for 2012 remains at 35 percent. It is scheduled to increase to 39.6 percent for 2013. Qualified capital gains and dividends for 2012 remain taxed at a maximum 15 percent (0 percent for taxpayers in the 10 percent and 15 percent income tax brackets). The qualified capital gains tax rate is scheduled to increase to 20 percent in 2013 and qualified dividends are scheduled to be taxed at ordinary income rates in 2013 (with the top income tax rate scheduled to increase to 39.6 percent, as mentioned above).
To the extent these federal tax rates are to rise next year, acceleration of income into 2012 may offer potential tax savings.
For 2012, high-income individuals will not be subject to any reduction in the total amount of otherwise allowable itemized deductions on their personal federal income tax returns. However, a limitation in the total amount of such itemized deductions for high-income individuals is scheduled for 2013.
For 2012, high-income individuals will also not be subject to the phase-out of the personal exemption deduction on their personal federal income tax returns. The phase-out of such personal exemption deduction for high-income individuals is scheduled for 2013. As a consequence, as we move into 2013, high-income taxpayers’ ability to reduce federal taxes from such items will diminish.
How should estate planning be approached differently?
For estate planning purposes, the top federal estate tax rate in 2012 is 35 percent and the applicable estate tax exclusion amount is $5,120,000 per person. The top federal estate tax rate in 2013 is scheduled to jump to 55 percent and the applicable estate tax exclusion is scheduled to fall significantly to $1 million per person.
The top federal gift tax rate for 2012 is 35 percent and the lifetime gift tax exemption amount is $5,120,000 per person. The top federal gift tax rate in 2013 is scheduled to jump to 55 percent and the lifetime gift tax exemption amount is scheduled to also fall significantly to $1 million per person.
In addition to the foregoing, the first $13,000 of gifts by a donor each year to each recipient is excluded under the annual gift tax exclusion. Furthermore, there remains an unlimited gift tax exclusion for qualifying educational and medical payments. The federal generation-skipping transfer tax rate in 2012 is 35 percent and the generation-skipping transfer tax exemption amount is $5,120,000 per person. The federal generation-skipping transfer tax rate is scheduled to rise to 55 percent in 2013 and the generation-skipping transfer tax exemption amount is scheduled to fall to approximately $1.3 million per person.
Based upon the above described $5,120,000-per-person exemption amounts, there currently exists an unprecedented opportunity for wealthy individuals to gift assets to children and grandchildren without gift tax or generation-skipping transfer tax; however, such gifts must be made before the end of this year.
What potential tax increases should taxpayers be aware of?
Last fall, President Obama proposed for 2013 the following changes, which have not been enacted into law:
- A certain minimum tax rate for “millionaires”
- A further limitation on itemized deductions for high-income individuals
- Raising the top estate, gift and generation-skipping transfer tax rates to 45 percent
- Significantly lowering the estate, gift and generation-skipping transfer tax exclusion/exemption amounts
How can taxpayers prepare for other tax rate changes?
As part of the major health care reform legislation passed in 2010, new Medicare taxes are scheduled for 2013 for high-income individuals. A new 3.8 percent tax will be applied to unearned income. This new tax will apply to capital gains, dividends, interest and rental income for high-income taxpayers. In addition, a new 0.9 percent tax will apply to the earned income (i.e., salaries, wages) of high-income earners. These additional taxes can potentially push the effective federal tax rate for certain high-income taxpayers to more than 44 percent. For appreciated assets that can be sold at capital gains rates, a disposition by certain high-income individuals in 2012 instead of 2013 could potentially save 8.8 percent in federal taxes (due to the 2013 5 percent rise in capital gains rates and new 3.8 percent tax on unearned income).
Because many of the federal tax laws are creatures of politics, this year’s Presidential and Congressional elections should be closely watched as the outcome will determine whether we might expect any modifications to the significant changes in federal tax laws scheduled for next year. Readers should also keep an eye on State of California tax rates, which continue to be the subject of political debate and change due to the ongoing state budget crisis, a further discussion of which is beyond the scope of this article.
Stanley E. Heyman is a shareholder in the Tax and Estate Planning Services Group at Jackson DeMarco Tidus Peckenpaugh. Reach him at SHeyman@jdtplaw.com.
Do you own a vacation home in Mexico? Have a bank account in Hong Kong? Has your spouse retained Canadian citizenship? Are you a long-term U.S. resident who was born in the U.K.? Is your brother-in-law, who is a citizen and resident of Ireland, the successor trustee of your revocable trust?
Each of these scenarios raises complex tax issues that, without proper planning, could easily have disastrous and costly consequences.
Smart Business spoke to Laura A. Zwicker, chair of Greenberg Glusker’s Family/Strategic Wealth Planning Group, about how to stay out of the IRS’s crosshairs by being aware.
Homes in Mexico
Most of us would contact a tax professional before establishing a trust in the Cayman Islands. But, we wouldn’t necessarily see the need when buying a vacation home in, say, Cancun, especially since vacationing in Mexico has become as commonplace as visiting Hawaii or Florida.
Because coastal and border land in Mexico can only be directly owned by Mexican citizens and certain Mexican entities, a condo in Cancun is likely to be acquired through a fideicomiso, similar to a trust. The IRS takes the position that a fideicomiso is a trust subject to all foreign trust reporting requirements.
Thus, a Cancun condo purchaser must file both Form 3520 and 3520-A with the IRS annually or be subject to significant civil penalties. To make matters worse, after March 18, 2010, if our Cancun condo purchaser actually uses the condo, or lets a relative use the condo, the fair rental value for the period of use is subject to U.S. income tax.
The 2011 Offshore Voluntary Disclosure Initiative offers the opportunity to come into compliance, possibly without penalties, if delinquent returns are filed by August 31, 2011.
Overseas bank accounts
Whether hiding hundreds of millions in a Swiss account or simply maintaining a U.K. account to pay bills while in your London office, the Financial Crimes Enforcement Network of the Treasury Department is looking for you.
For almost 40 years, there have been reporting requirements for U.S. citizens and residents holding interests in foreign financial accounts. However, those requirements were largely unenforced until three years ago.
If you have an interest in or signatory power over any financial account in any foreign country, disclosure is required on your personal income tax return. Additionally, if the account had a balance of $10,000 USD or more in any given year, a Report of Foreign Bank and Financial Accounts (FBAR) is required. Failure to file a FBAR can result in significant civil and criminal penalties.
Worse than having failed to file FBARs is having both failed to file FBARs and failed to report the income generated by a foreign account on U.S. income tax returns, which results in additional underpayment, failure to file and fraud penalties.
Again, the 2011 Offshore Voluntary Disclosure Initiative offers the opportunity to come into compliance, possibly without penalties, if delinquent returns are filed by August 31, 2011.
My spouse is not a U.S. citizen
Spouses are generally able to transfer assets to each other, both during lifetime and at death, without tax consequences. If your spouse is not a U.S. citizen, things get a little more complicated without proper planning.
Lifetime gifts to a non-U.S. citizen spouse are limited to $130,00 per year before using your credit against gift tax. Gifts at death to a non-citizen spouse begin using estate tax credit immediately, unless the assets pass to a Qualified Domestic Trust (QDoT). Proper planning with life insurance and QDoTs can prove helpful in lowering your tax bill and preserving your credit against gift and estate tax to pass assets to your children.
Special issues for U.K. persons
You have lived in the U.S. for 15 years and have homes, bank accounts and other ties to the U.S., but are not a U.S. citizen. No complications, right? Maybe!
For individuals born in the U.K. who have retained their U.K. “domicile of origin,” engaging in ordinary estate planning in the U.S. could have unexpected and costly U.K. inheritance tax (IHT) consequences. If a U.S. resident with a U.K. domicile of origin transfers assets to a U.S. revocable trust, which most U.S. lawyers would advise, and the value of the assets exceeds the U.K. nil rate band, an immediate U.K. tax of 20 percent on that excess value is imposed. Additionally, a U.K. tax of 6 percent of the value of the trust assets is charged every 10 years during a lifetime.
Moreover, if the U.S. resident is still deemed to be a U.K. domiciliary at death, the value of the trust would be taxed again by the U.K. at a rate of 40 percent. Thus, without appropriate planning, this taxpayer could pay a cumulative tax approaching 75 percent on assets that should have been taxed once at a rate of 40 percent.
Naming a foreigner as successor trustee
You are a U.S. citizen, your spouse is a U.S. citizen and neither of you owns a vacation home or holds financial accounts outside of the U.S. You have nothing to worry about, right? Perhaps, but if the brother-in-law, best friend, or business manager named as successor trustee of your revocable trust is a citizen and resident of a foreign country, once that successor trustee begins to serve, your trust suddenly transforms itself into a foreign trust for tax purposes.
While it is unlikely that the trust will be subject to an expatriation tax, the trust will be subject to all of the reporting requirements described above with respect to Mexican fideicomisos, as well as additional income tax reporting on any income generated.
In our global society, information and assets move ever more quickly and easily across borders; however, the road to properly complying with reporting requirements and carefully engaging in gift and estate tax planning is becoming more complex. Although the immediate cost of expert legal and accounting advice may be off-putting, the ultimate cost of proceeding without it could be devastating.
Laura A. Zwicker chairs Greenberg Glusker Fields Claman & Machtinger LLP’s Family/Strategic Wealth Planning Group. She regularly counsels high net worth individuals and their families in connection with domestic and international estate and tax planning issues. She can be reached at (310) 785-6819 or LZwicker@greenbergglusker.com.
Most businesses think that real estate laws only affect businesses actively engaged in acquiring, selling or operating real estate. But changes to the real estate tax code will have far-reaching effects on information reporting, depreciation of assets and more for any business that owns or rents property.
Smart Business sat down with tax attorneys Glenn A. Fuller and Stanley E. Heyman of Jackson DeMarco Tidus Peckenpaugh to ask how recent changes to the tax code relating to real estate can affect businesses not in the real estate field.
You indicated that recent changes to the tax laws would likely affect many businesses not traditionally interested in real estate. Can you give an example?
A perfect example is the Small Business Job Act of 2010. A seemingly innocuous provision of this act as of Jan. 1, 2011, requires generally any business that receives rental income from real estate as being considered to be engaged in the trade or business of renting property. What this means as a practical matter is that for these businesses, if they make payments of $600 or more to any service provider while earning rental income, the business owner will be required to file with the Internal Revenue Service and the service provider IRS Form 1099.
As you can imagine, there have been many of us in the tax community who have raised concerns that this new information reporting rule will be extremely onerous for businesses, and there is a strong movement underway in Congress to try to repeal this provision. For now, though, all businesses should be aware of this law even if such rental activity is tangential to their core business.
Have there been any other recent changes to the federal tax laws involving real estate that could affect non-real-estate companies that businesses should know about?
Yes. Just touching upon a couple of items, as part of the recent spate of legislation intended to stimulate economic activity, the Tax Relief, Unemployment Insurance, Pre-Authorization and Job Creation Act of 2010 has a temporary provision that allows businesses to fully depreciate certain assets the year they are placed in service (bonus depreciation). In addition, certain qualified restaurant and retail improvements can now be depreciated over a 15-year period. There are also other recent favorable Federal tax law changes but they are beyond the scope of this discussion.
What does this mean for businesses?
Bonus depreciation is essentially the ability for a business to fully write off the cost of certain assets in the same year that they are placed in service and allows businesses to promptly recover the cost of their investments. In addition, the ability to depreciate qualified restaurant and retail improvements over a 15-year period allows businesses to recapture the cost of their investments more quickly. It is the hope that these depreciation provisions will stimulate investment in qualifying property and help spur the economy.
What types of businesses would benefit?
The rule is generally designed to help all businesses; however, of these provisions there are only some that are available for qualifying restaurant and retail businesses. The tax laws can be very complex and businesses should consult with their tax adviser for more details, as these rules are only available for certain types of what we call ‘personal property.’ Since many of these personal property assets are intertwined with other assets, any business needs to be aware of what can be depreciated on an accelerated basis and what needs to be depreciated over a longer period of time.
Can you give an example of the type of property that you’re referring to?
Consider, for instance, an office building. In general, you see the walls and other structural parts of the office building being depreciated over a 39-year recovery period. Other assets that comprise the office complex can be eligible for depreciation on a quicker scale and may even be available for bonus depreciation. These are items such as wiring, computer systems and even landscaping.
How long will these tax strategies be available to businesses that would like to take advantage of them?
Well, that’s the kicker. The bonus depreciation rules are scheduled to expire at the end of this year, and qualified restaurant and retail improvements must be placed in service before the end of 2011. As such, we are encouraging our business clients who are considering making these types of investments to do so by the end of this year. It is also worth noting that the State of California has not adopted these favorable depreciation provisions for state income tax purposes.
Glenn A. Fuller is a shareholder and member of the Real Estate Practice Group and the Tax and Estate Planning Practice Group at Jackson DeMarco Tidus Peckenpaugh. Reach him at firstname.lastname@example.org. Stanley E. Heyman is a shareholder and member of the Tax and Estate Planning Practice Group at Jackson DeMarco Tidus Peckenpaugh. Reach him at email@example.com.
In the rush of running a business day-to-day, business owners may neglect to make time to develop a tax strategy. But failing to create a tax plan can result in the business paying more taxes than it needs to, says Rod Murray, senior vice president and middle market leader at Associated Bank.
“Tax planning ties in to the day-to-day and year-to-year operations of a company,” says Murray. “But it also figures in to the longer-term planning, such as succession planning in family owned and privately held companies.”
Smart Business spoke with Murray about why it is important to determine the impact of your decisions on your company’s tax liability.
What are the tax implications of capital expenditures?
When a company needs to acquire equipment, tax consequences may factor in to the choice of an operating lease or a capital lease or commercial term loan. With an operating lease, payments will flow through the company’s income statement, so it’s an expense item that doesn’t affect the overall leverage of the balance sheet. Consulting with a business banker and tax adviser can help you determine which is the better option for your business.
In previous years, companies were able to write off up to $250,000 of qualifying expenses through Section 179 of the Internal Revenue Code, subject to a phase-out if the business had capital expenditures exceeding $800,000. That expensing limit was scheduled to drop to $25,000 for 2011, but the Small Business Jobs Act of 2010 allows eligible companies to expense up to $500,000 of qualifying Section 179 property in both 2010 and 2011. In addition, the act raises the capital expenditures limit to $2 million and expands the definition of Section 179 property.
How can bad debt and operating losses impact a company’s tax situation?
The silver lining to bad debt is that companies can deduct it from their gross income when figuring taxable income. If the business extends money to a client, supplier, employee, or distributor for a business reason and, after attempts to collect, the receivable becomes worthless, that bad debt may be deducted in part or in full. In addition, if a company’s deductions for the year are more than its income, it may have a net operating loss, which can be deducted from income in a year other than that in which it occurs.
What other tax deductions and credits should businesses be aware of?
If a company has hired one or more unemployed workers between Feb. 3, 2010, and Dec. 31, 2010, it is eligible for the new hire retention credit. Businesses may be able to claim a general business tax credit of up to $1,000 per worker when they file their 2011 tax returns.
Businesses can also shelter some of their income with contributions to a qualified retirement plan. If a company has 100 or fewer employees, it may be able to claim a tax credit for a portion of the costs of starting a SEP, SIMPLE or qualified plan. The credit equals 50 percent of the cost to set up and administer the plan and educate employees about it, up to a maximum of $500 per year for each of the first three years of the plan.
The small business health care tax credit can also benefit businesses with 25 or fewer employees. The credit is worth up to 35 percent of a small business’s premium costs. It phases out gradually for companies with average annual wages of $25,000 to $50,000 and for those with between 10 and 25 full-time-equivalent workers.
Finally, the Work Opportunity Tax Credit has been extended through Aug. 31, 2011. This credit provides eligible employers with a credit of up to 40 percent of the first $6,000 of first-year wages of a new employee if the employee falls into one of 12 targeted groups that have consistently faced significant barriers to employment, such as felons and Supplemental Security Income recipients.
How can foreign tax credits impact a business?
Legislation enacted in August 2010 incorporates international reform measures, many of them focused on foreign tax credits. In a move to limit the use of foreign tax credits by U.S. corporations with foreign operations, corporations will no longer be able to split creditable foreign taxes from the foreign income they are associated with. This provision applies to foreign income taxes paid or accrued in tax years beginning after Dec. 31, 2010.
The legislation also ended the foreign tax credit for covered asset acquisitions. Beginning after Dec. 31, 2010, corporations are prevented from claiming foreign tax credits when they engage in covered asset acquisitions such as qualified stock purchases or acquisition of an entity that is treated as a corporation for foreign tax purposes but as a noncorporate entity for U.S. purposes.
In addition, foreign tax credits claimed on a deemed dividend are limited to the amount that would have been allowed on an actual dividend, applicable to U.S. property acquired by a controlled foreign corporation after Dec. 31, 2010.
Finally, the 80/20 rules, applicable to U.S. corporations for which at least 80 percent of gross income is from a foreign source and is attributable to the active conduct of foreign trade, have been terminated. However, dividends and interest paid by existing 80/20 corporations are grandfathered in under the act.
How can an employer sort through all of these credits?
An experienced financial professional can assist in getting you the tax planning help you need through an experienced and knowledgeable CPA. Now is the time to talk with a financial professional to develop a comprehensive plan that maintains the flexibility to adapt to your company’s changing circumstances.
Deposit and loan products are offered by Associated Bank, N.A., Member FDIC and AB-C. Equal Opportunity Lender. Neither Associated Banc-Corp nor any of its affiliates give tax or legal advice. Please consult a financial, tax or legal professional for information specific to your situation.
Rod Murray is senior vice president and middle market leader at Associated Bank. Reach him at (312) 565-5271 or Rodney.Murray@associatedbank.com.