International Tax Advisors, Inc. is proud to announce Manuel Lavin, Esq., LL.M. as a 2020 Summer Intern. Manuel holds a J.D. from St. Thomas University School of Law and a Master of Laws – LL.M. Taxation from Georgetown University Law Center. Very excited to have him on board.
TCJA Limitations Suspended
The Coronavirus Aid, Relief and Economic Security Act (“CARES Act” or the “Act”) is aiming to put cash immediately back in the hands of corporate businesses by amending certain Tax Cuts and Jobs Act of 2017 (“TCJA”) provisions and creating immediate refund opportunities, including:
- Net operating loss (“NOL”) five-year carryback modification;
- Temporary repeal of the taxable income limitation for NOLs;
- Acceleration of alternative minimum tax (“AMT”) refundable credits; and
- Non-calendar year taxpayer NOL carryback clarification.
What is the CARES Act?
The CARES Act was enacted on March 27, 2020 to provide emergency assistance and health care response for individuals, families, and businesses affected by the 2020 coronavirus pandemic. The CARES Act includes many components, tax and non-tax related. See ITA’s Article: Tax Saving Components of the CARES Act
In this particular article, we focus on the immediate benefits for corporations and the ability to unlock cash refunds with simple amendments.
History of TCJA
The TCJA, which applies to tax years beginning after December 31, 2017, repealed NOL carrybacks, limited the offset of taxable income using NOLs to 80% (i.e., essentially creating a 20% minimum tax), and repealed the alternative minimum tax (“AMT”).
NOL Opportunities for Corporations
1. NOL Five-year Carryback Modification
The TCJA amended Section 172(b) to disallow net operating loss carrybacks. Section 2203 of the Act now modifies Section 172(b)(1), creating a special rule allowing for losses arising in 2018, 2019, and 2020 to be carried back five years.
In periods prior to 2018, the corporate rate was 35% as opposed to 21%, and amending returns could provide a significant cash refund opportunity. Consideration should be paid to address tax law in place during certain carryback years. For example, in years prior to 2018, the Section 199 domestic production activities deduction (“DPAD”) was available. Utilizing an NOL carryback could reduce the amount of DPAD available when amending the prior-year return.
2. Temporary Repeal of Taxable Income Limitation
The TCJA limited NOLs to 80% of taxable of income, starting in 2018. Now, under section 2203 of the Act, Section 172(a) is amended to allow a full offset of taxable income for tax years beginning before January 1, 2021. For tax years beginning after December 31, 2020, the 80% limitation goes back into effect.
If NOLs arising between 2018-2020 are not carried back or used to offset income prior to 2021, those NOLs generated between 2018-2020 become re-subject to the 80% limitation when carried forward to tax years beginning after December 31, 2020.
Post 2020 NOL Calculation
= Pre TCJA NOLs (2017 and prior)
+ Lessor of:
- Aggregate NOLs 2018-2020, or
- 80% (Taxable income before NOL, §199A, §250 – Pre TCJA NOLs)
The calculation of taxable income before deductions such as Section 199A (Qualified Business Deduction) and Section 250 (Global Intangible Low-Taxed Income, “GILTI”, and Foreign Derived Intangible Income, “FDII”) can be useful in allowing more NOLs to be utilized as the 80% limitation is not reduced by such deductions.
However, while a GILTI inclusion may increase the amount of NOL allowable post-2020 (i.e., the GILTI inclusion increases taxable income but there is no corresponding reduction for a GILTI deduction under Section 250), an increased NOL may then consequently reduce the GILTI deduction allowable under the taxable income limitation of Section 250(a)(2). Considering GILTI deductions are allowed on a year-by-year basis, and NOLs can be carried forward indefinitely, it may be more advantageous to maximize Section 250 deductions post-2020, as opposed to maximizing the NOL offset.
3. Acceleration of AMT Refundable Credits
Section 2205 of the Act modifies Section 53(e), and removes the application of Section 53(c), to allow the full remaining refundable AMT credit to apply to the first taxable year which begins in 2018. Corporations with unused AMT credits could file an amended 2018 return to claim the additional credits immediately.
4. Non-calendar Year Taxpayer NOL Carryback
Prior to the CARES Act, the TCJA stated that taxpayers with a year-end after December 31, 2017 would be disallowed NOL carrybacks (i.e., for calendar-year taxpayers, 2017 losses could be carried back). Based on the explicit language, taxpayers with a fiscal year-end of March 31, 2018, for example, would not be permitted to carryback any amount of the loss generated in such fiscal year.
Section 2203 of the Act creates a special rule to clarify that taxpayers with NOLs arising in a taxable year beginning before January 1, 2018, and ending after December 31, 2017 may apply for a carryback under Section 6411(a). Considering the tardiness of the clarification, the Internal Revenue Service will consider the application for carryback timely filed if made before July 27, 2020 (120 days after enactment of this new rule; July 25th, is a Saturday – the following Monday is July 27, 2020).
CARES Act: Full Version
Read the law first hand, below is a copy of the statutory language from Congress’ website.
International Tax Advisors, Inc. can help you understand how to react to this new legislation and maintain effective strategies to avoid overpaying tax. Contact us, 305-423-0221.
Largest Stimulus Package Ever
What is the CARES Act?
The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was enacted to provide emergency assistance and health care response for individuals, families, and businesses affected by the 2020 coronavirus pandemic. The bill was introduced to the Senate on March 19, 2020, passed by the Senate on March 25, and utilizing a “voice vote” rather than a “recorded vote”, was passed by the House on March 27, 2020 and signed by President Trump the same day.
The Act impacts many areas including public health and education. In this article we will only discuss components related to changes in the Internal Revenue Code (“IRC”) and the small business emergency loan program.
Components of the CARES Act:
- Paycheck Protection Program;
- Delay of 2019 Filing Deadlines and Payments;
- Specific Business Payroll Provisions;
- Temporary Repeal of Certain Tax Cuts and Jobs Act of 2017 (“TCJA”) Provisions; and
- Individual Credits and Incentives
1. Paycheck Protection Program
The Paycheck Protection Program (“PPP”) is designed to provide a direct incentive for small businesses to keep their workers on payroll by providing each small business a loan up to $10 million for payroll and certain other expenses. If all employees are kept on payroll for eight weeks, the Small Business Administration (“SBA”) will forgive the portion of the loans used for payroll, rent, mortgage interest, or utilities, up to 100 percent forgiveness. Available for businesses (including self-employed) with 500 or fewer employees.
2. Delay of 2019 Filing Deadlines and Payments
The deadline for income tax returns due April 15 has been extended to July 15, 2020. Both filing and payments are automatically extended with no requirement to file an extension request using Form 7004. However, if an extension is still required beyond July 15, 2020 (extending to September or October), the proper extension form must be filed and taxes paid by July 15, 2020.
The Act also delays estimated tax payments for both individuals and corporations until October 15, 2020, treating all installments as one installment due on such date.
Notice 2020-18, which supersedes Notice 2020-17, clarified that certain informational, non-income tax, filings are still due April 15th.
Individuals who file Foreign Bank and Financial Account Reports (“FBAR”, Financial Crimes Enforcement Network “FinCEN” Form 114) should be aware that FBAR is not part of the income tax return. However, the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 grants FBAR filers an automatic six-month extension (until October 15th), so it is unlikely a separate extension would be provided under the CARES Act. As of the date of this article, the FinCEN website (https://www.fincen.gov/report-foreign-bank-and-financial-accounts) did not list any change in due date for COVID-19.
Notice 2020-20 does specifically extend the deadline for Estate and Gift Tax returns through July 15th, as estate and gift taxes are not part of the income tax return.
3. Specific Business Payroll Provisions
The CARES Act provides for both:
- Employee Retention Credits – a refundable payroll tax credit equal to 50% of wages paid by an employer whose operations were fully or partially suspended or had a gross receipts decline of more than 50% when compared to the same quarter in a prior year.
- Deferral of Employer Payroll Taxes – the employer portion of Social Security taxes (6.2%) can be deferred two years, with half due at year-end 2021 and then remaining due year-end 2022.
4. Amendment to Certain TCJA Provisions
The TCJA implemented several measures designed to limit reductions against taxable income. Certain of those limiting provisions are now suspended until 2021.
- Net Operating Losses – while the TCJA repealed the ability to carryback NOLs and imposed an 80% limitation on the use of NOLs (i.e., effectively creating a 20% minimum tax), the CARES Act now allows for losses incurred 2018-2020 to be carried back five years and NOLs incurred before 2021 can offset 100% of current taxable income.
- Limitation on Business Interest – while the TCJA updated Section 163(j) to limit business interest deductions further by only allowing an interest deduction equal to 30% of the business’ adjusted gross income (down from 50%), the CARES Act now temporarily increases the interest deduction threshold back up to 50% of the adjusted taxable income for 2019 and 2020. Further, a taxpayer can elect to use 2019 income for 2020 tax year; potentially allowing for a larger interest deduction.
- Qualified Improvement Property – the definition of 15-year property under Section 168 was amended to include qualified improvement property, allowing the property to be eligible for bonus depreciation. The amendment is effective as if included in the TCJA; therefore, taxpayers have an ability to claim refunds in regards to accelerating past depreciation for tax years beginning after December 31, 2017.
5. Individual Credits and Incentives
- Recovery Rebates – For the 2020 tax year, individuals with adjusted gross income (“AGI”) less than $99,000 ($198,000 joint return) are eligible for a tax credit up to $1,200 ($2,400 joint return). There is a 5% phase-out starting at $75,000 ($150,000 joint return). For Individuals with AGI below the $75,000 ($150,000 joint return) threshold, the rebate is limited to the lesser of net income tax liability or $1,200, but not below $600. Further, to be eligible an individual must have either (1) qualifying income of at least $2,500, or (2) a net income tax liability which is greater than zero, and gross income which is greater than the standard deduction. While the recovery rebate is based on the 2020 tax year, the IRS will issue checks in the next 3 weeks until December 31, 2020 based on the 2019 tax return (or 2018 tax return if 2019 has not yet been filed). The check is considered an advance against any 2020 tax year refund due after taking the recovery rebate credit into account.
- Withdrawals from Retirement Plans – Section 72(t) does not apply to coronavirus-related distributions, specifically allowing early distribution penalties to be waived on distributions of up to $100,000 made on or after March 27, 2020 and before December 31, 2020. The income tax due on retirement distributions is spread ratably over a 3-year-period including the year of distribution. Further, the limit on loans made from a solo 401(k) were increased from $50,000 to $100,000.
- Charitable Contributions – For tax years beginning in 2020, up to $300 of charitable contributions are available as a deduction “above the line” (i.e., a deduction which reduces AGI, a limiting factor for many tax incentives).
- Employer Education Payments – For employer paid student loan repayments made prior to January 1, 2021, the amount of repayment is not included in the employee’s taxable compensation.
CARES Act: Full Version
Read the law first hand, below is a copy of the statutory language from Congress’ website.
International Tax Advisors, Inc. can help you understand how to react to this new legislation and maintain effective strategies to avoid overpaying tax. Contact us now, 305-423-0221.
Author: Drew R. Edwards, CPA - Managing Owner, International Tax Advisors, Inc.
Attention Florida Bar, Tax Section members – Free CLE on FIRPTA: Impacts of Entity Choice and Structuring. Non-tax-section members $75.
Clip of section 280A explanation regarding the deduction limitations related to rental real estate used for personal purposes. Consideration should be given to not renting, and the potential for business deductions.
Real Estate Tax Tips
Seminar will cover both domestic tax techniques and foreign investment in U.S. real estate (e.g., Foreign Investment in Real Property Tax Act, “FIRPTA”).
Real estate brokers, investors (both foreign and domestic), and people who hold rental, vacation, or time share properties can all benefit from simple tax techniques.
Address how to hold real estate (e.g., what entity type, LLC vs Corp. vs Partnership), how to mitigate FIRPTA, and how to maximize deductions related to rental and business use, among other topics.
Expanding Business Abroad, Investing in U.S. Real Estate?
Join International Tax Advisors and an all-star team of professionals dedicated to assisting foreign investors in the United States. This event provides a one-stop shop to understand all of the legal, commercial, financial, accounting and tax concerns of making an investment abroad.
The summer is bright with intern energy
International Tax Advisors, Inc. is pleased to introduce our 2019 interns: William Pereira and Gretter Codina Miranda.
Ms. Codina Miranda is a third-year law student at St. Thomas University. She is considering pursuing her LLM in taxation, and has already taken federal taxation.
Mr. William Pereira is in his fourth year of a Joint JD/Taxation LLM at the University of Miami School of Law. Mr. Pereira has taken several international tax courses, covering both inbound and outbound international tax concepts.
We are proud to have Ms. Codina Miranda and Mr. Pereira on the ITA team, and excited to share career opportunities in tax structuring and international tax services.
Tax Havens Enact “Economic Substance” Legislation Post EU Sanctions
Reacting to threatened sanctions from the European Union (EU) (see March 12th report), tax havens have already enacted “economic substance” legislation locally. This will have a direct impact on how foreign individuals should structure their investment in the U.S.
Zero or low-tax jurisdictions, such as the British Virgin Islands (BVI), have long served as locations for offshore holding companies. In regard to U.S. real estate, a foreign individual could use a holding company in a jurisdiction such as the BVI to help “block” U.S. estate tax which only applies to individuals, not corporations. This “BVI Blocker” is a powerful tool considering nonresident alien individuals holding U.S. situs assets (e.g., U.S. real estate, U.S. stock) can be subject to a 40% U.S. estate tax with only a $60,000 exemption (as opposed to the $11.4M exemption in 2019 for U.S. tax residents).
The annual operating cost to achieve “economic substance” may not outweigh avoiding U.S. estate tax.
Under the British Virgin Islands Economic Substance Act of 2018, economic substance is met when:
(a) the relevant activity is directed and managed in the Virgin Islands;
(b) having regard to the nature and scale of the relevant activity;
(i) there are an adequate number of suitably qualified employees in relation to that activity who are physically present in the Virgin Islands;
(ii) there is adequate expenditure incurred in the Virgin Islands;
(iii) there are physical offices or premises as may be appropriate for the core income-generating activities; and
(iv) where the relevant activity is intellectual property business and requires the use of specific equipment, that equipment is located in the Virgin Islands.
A pure equity holding entity, which carries on no relevant activity other than holding equity participations in other entities and earning dividends and capital gains, has adequate substance if it:
(a) complies with its statutory obligations under the BVI Business Companies Act, 2004 or the Limited Partnership Act, 2017 (whichever is relevant);
(b) has adequate employees and premises for holding equitable interests or shares and, where it manages those equitable interests or shares, has adequate employees and premises for carrying out that management.
Non-Cooperative Tax Jurisdictions
Following up on efforts originally outlined in 2016 to address tax abuse and unfair tax competition, the EU, liaising closely with the Organization for Economic Cooperation and Development (“OECD”), created a list of non-cooperative tax jurisdictions. The listing criteria includes: transparency, fair tax competition, and Base Erosion and Profit Shifting (“BEPS”) implementation.
During December 2017, the EU Member States agreed on the first EU list of non-cooperative tax jurisdictions. These jurisdictions were generally given until December 2018 to comply or face sanctions.
Possible EU Sanctions
- Deny funding from many EU programs (European Fund for Sustainable Development (EFSD), the European Fund for Strategic Investment (EFSI) and the External Lending Mandate (ELM))
- Sanctions to apply at a national level against the listed jurisdictions. These include measures such as increased monitoring and audits, withholding taxes, special documentation requirements and anti-abuse provisions
Reality of Economic Substance
Are small island nations able to immediately react with housing and infrastructure for what could be millions of people who may now be required to be physically present in such jurisdictions to fulfill the new “economic substance” requirements? Beyond infrastructure concerns, where will these millions of required qualified employees come from?
International Tax Advisors, Inc. can help you understand how to react to this new legislation and maintain effective strategies to avoid overpaying tax. Call us today 786-762-4266