TaxConnections Member and Blogger Yvette Kwong posts about China Free Trade ZoneAs part of China’s strategy and long-term goal to further open up China to the world economy and international trade, China has set up a “Free Trade Pilot Area” or FTPA in Shanghai.

The intent is to observe and learn from Shanghai’s experience for nationwide application later on in China.

According to Deloitte the focus will be on policy reforms rather than preferential treatment. This should result in trade, investment and financial liberalization.

Details of the rules are expected to be announced shortly with full implementation of those rules to be accomplished by the end of 2013.

Business Sectors Likely to Benefit from the FTPA

The FTPA will give wholly foreign-owned banks the opportunity to set up shop in China for the first time.

Two foreign banks (Citigroup and Development Bank of Singapore) and eight Chinese banks have received approval to open branches in the zone.

According to the Wall Street Journal banks in the zone are expected to have more freedom to set interest rates and Read More

TaxConnections Picture - SSN and PassportUnited States Social Security and Medicare taxes continue to apply to wages for services performed as an employee working outside of the United States if you are working for an “American employer”. Similarly, if you are abroad and you are a self-employed US citizen or resident you generally are subject to the so-called “self-employment tax”. Self employment tax is a social security and Medicare tax on net earnings from self-employment. You can learn more about Self employment tax when working abroad from my blog post here on TaxConnections.

Many questions arise about US social security when one is working overseas. Some of these questions are: If you are working for an American employer, do you have to pay tax to both the US and the foreign host country’s social security systems? What happens if you are employed overseas but you are neither self-employed nor working for an American employer? If you do not have enough credits under the US social security system to qualify for benefits, does your work overseas “count” for purposes of US eligibility? If you already have enough credits under the US system to qualify for benefits, what happens with your foreign social security benefit credits — does the US count your foreign social security credits toward your US coverage?

Learn the answers in today’s blog posting.

Totalization Agreements

The US has negotiated international Social Security agreements, called “Totalization agreements,” with 24 countries. See the list here. Totalization agreements achieve two main goals: The first goal is to eliminate the possibility of Read More

World Currency blog postGenerally

The normal assumption in domestic business transactions is the expectation that there will not be a movement in terms of a currency’s accelerating or declining value during the interim of a financial transaction. In an international transaction there is an expectation the currency will have volatility. The use of financial instruments has as its purpose, a prudence of assurance that delivery of currency on a contract date certain will enable the sale or purchase of goods to be unaffected by a fluctuation. To accommodate the necessity in the international market place to hedge international transactional risks, a business enterprise often utilizes an offshore corporate conduit to carryout the financial management of this function.

Financial instruments frequently are companion to a business transaction and utilized to manage the market risk inherent in the currency fluctuations of the floating exchange system. A purchase or sale of goods in conjunction with transnational agreements is in many instances a secondary transaction that poses a risk by virtue of a financial instrument being tied to the transaction. Where a purchase of merchandise requires payment in a currency other than the vendee, financial instruments insure against currency fluctuations. The purchase of such financial instruments is incidental to the transaction and can result in gain or loss of the actual financial instrument utilized to manage the risk.

One party to a transaction may anticipate a currency to accelerate in value and purchase a currency contract reflecting that expectation. Contrarily, a counter party may sell a currency contract anticipating a currency will Read More

Reference Cliff Jernigan's eBook Corporate Tax Audit SurvivalThis is Part [6] of a series of a Chapter in the eBook “Corporate Tax Audit Survival – A View of The IRS Through Corporate Insider Eyes” by Cliff Jernigan.

You can download the entire eBook here.

Sample From Chapter 4: “I am From Mars”

Because of my experiences in the private sector, I sometimes had difficulty fitting into the IRS fabric.

One example of this involved the high-profile debate about whether stock options should be expensed for financial statement purposes. This issue was extraordinarily intense during the 2003-2004 time period, with the Financial Accounting Standards Board (FASB) arguing that stock options should be reflected as an expense on the financial statements while industry argued that they should be reflected as an item on the balance sheet. Most employees in the high-technology sector agreed that they should be reflected as an item on the balance sheet, and I strongly supported the high-technology position.

This topic has no bearing on the filing of a corporate tax return. For tax return purposes, stock option exercises usually are treated as an income tax expense.

My colleagues in the IRS often would argue about this issue over lunch or at other meetings. Almost universally they Read More

TaxConnections Blogger Diane Yetter posts about sales tax auditsIt’s a fact of life that no one looks forward to being audited.  Undergoing an audit can be a scary proposition.  But just because your company is being audited, that doesn’t mean that you can’t take control of the situation and play a part in determining how the audit will progress.  One of the first steps in a sales tax audit is the opening conference with the auditor.  This is one of your first and best opportunities to take control of the audit and set the tone for how it will progress.  Here we’ll outline seven ways that you can set the ground rules for a sales tax audit during this opening conference.

1. Use a sign-in and sign-out sheet.  You’ll want to monitor the activities of the auditor.  Using a sign-in and sign-out sheet helps you to track the comings and goings of the auditor and ensure that they have left the premises.  And it is likely your company wants to know who is on the premises so use this as the explanation why it is required.

2. Only have one contact person.  Pick one person in your company through which all communications will take place with the auditor.  This ensures that potentially sensitive information won’t be leaked accidentally to the auditor by other employees.

3. Request the specific information needed to track a transaction. If the auditor is examining a transaction, ask the auditor for what specific records are needed for the questionable transaction.  This way you are providing the Read More

TaxConnections Blog Post - Harold Goedde about Tangible Property RegulationsWhile many of us were working long hours in mid-September to wrap up the 2012 tax filings for our clients, the IRS was busy as well. On September 13, 2013, the IRS issued the final, revised tangible property regulations TD 9636. In doing so, the taxing authorities have provided clarity for taxpayers in many areas surrounding the treatment of capital expenditures.

These regulations govern the treatment of expenditures incurred in acquiring, producing, or improving tangible assets, including rules on determining whether costs related to tangible property are deductible repairs or capital improvements. The regulations have broad application – they affect all taxpayers that acquire, produce, or improve tangible property.

History

By issuing these regulations, the IRS has sought to resolve the capitalization vs. expense conundrum that has befuddled taxpayers for years. These regulations have followed a tortuous path—the original proposed regulations from 2006 were withdrawn in 2008 after receiving a negative reception, and new proposed regulations were issued. Then in 2011 the 2008 proposed regulations were withdrawn and new regulations were issued in temporary and proposed forms. Those regulations were originally intended to be effective in 2012, but the difficulty of adopting the Read More

TaxConnections Blogger Chris Wittich posts about Water and Taxes“W” is for water.  Water, water everywhere… including in the world of tax.  Sometimes water is deductible sometimes it is not.  If you have a rental property, feel free to deduct the water bill as part of your utilities expense for the rental property.  That means if you own it and rent it out to someone else and you are paying the water bill, its deductible.  That doesn’t mean if you are renting it there is any way to deduct the utilities.  If you own a house that is just used as your principal residence your water bill won’t be deductible since it is just a personal expense.

Sometimes water can cause damage to your property.  Casualty losses fall in the nebulous sometimes deductible category.  Are the costs to repair a casualty to your property a deductible expense?  Yes.  Is that tax deduction going to save you any taxes?  Maybe.  A casualty first needs to be a single identifiable event. The gradual erosion of the property over time due to weather is not a casualty.  A single storm that damages your property is a casualty.

A casualty is deductible to the extent that the costs exceed $100 and 10% of your AGI for the year.  So if your costs to repair are $85 that’s not going to work.  If your income for the year was $350,000 and the costs to repair are less than $35,000 you are out of luck.  As you can see a 10% threshold knocks out many of the casualties from having a tax benefit.  One other important thing to note on the casualties is that a net operating loss generated from a Read More

IRSAs an Enrolled Agent myself, I must respond to John Dundon’s recent Blog entry.  The dwindling of resources of only 2.7% over a 2 year period is hardly a catastrophe for any governmental entity. I worked in local government for almost 15 years and KNOW without a doubt that such a minor loss of resources could be managed with little or no difficulty.  However, government bureaucrats are like little children who always want MORE, MORE, MORE!

No doubt there are issues especially with a workforce that has a large number of employees nearing retirement.  One thing I have noticed over the years when attending the IRS Tax Forums, is the younger employees are far more efficient than the Senior Managers and non-executives just building up their retirement accounts.

The fact that the e-Service program has been seriously curtailed, supposedly because of lack of use, is demonstrative of the agency’s management making a bone-headed decision. One must suspect that the real reason the service has been curtailed is because the Treasury Employees Union was strongly opposed to a renewal of the private contract.  Regardless of the usage level, there is no way the manual processing of POA’s and Account Resolution are even close to being as productive as the electronic method.

One of the biggest problems for all of government is the political argument made that you cannot focus on incidental expenses but rather you should look at the whole picture.  This is just bureaucratic double-talk.  I call this the “paper clip, rubber band and pen argument.”  No doubt that IRS employees, as do employees in every unit of government and yes, even business, take home their share of these items.  On its surface, no one is going to question the cost of these lost resources.  However, the aggregate total is no doubt a substantial cost.  Now just find every instance of something in the agency that might fit this scenario.  [i.e. why do they need to mail 2 copies of every notice?] Read More

Gavel[1]I started listening to the arguments presented by the DoJ in the Loving case. See the link below.

My take is that the Appeal judges were really questioning the DoJ/IRS and gave their Counsel a ‘grilling’. Why has it taken a 100 years for the IRS to decide that representatives should include tax return preparers.

They then ‘grill’ Counsel on the qualities/characteristics of tax representers set out in a,b,c and d where DoJ/IRS argues ‘and’ actually means ‘or’.

Take a listen – if you have the time – it’s interesting, and see what you think.

The NATP made the following announcement today:

On Tuesday, September 24, oral arguments were heard in the Loving v. IRS case. The IRS was first to present their arguments, followed by representatives of Loving et al. The IRS finished with a rebuttal. Both sides were questioned by the judges on a variety of topics, including: Read More

TaxConnections CEO and Blogger Kat Jennings posts high traffic with Obama Care PostsTraffic on blogs related to Obama Care have recently soared due to consumers interest in tax increases associated with the new healthcare plan. With more than one billion consumers going online for tax advice each year, TaxConnections Worldwide Tax Blog has grown into a valuable resource for tax information.

“Our site traffic increased 20X over the last six months, we are paying close attention to what is trending. Obama Care posts send our traffic soaring through the roof. People want to be informed about the tax increases associated with Obama Care, in a language they can understand, and that is what we give them at TaxConnections”, states Kat Jennings, Founder and CEO of TaxConnections, a niche authority site of tax experts. There are numerous tax hikes that accompany Obama Care that largely affect families and small businesses that include:

1) Investment Income 3.8 Surtax on income earned over $200,000 for single head of households, and $250,00 for income earned on combined households over $250,000. The 3.8% Surtax does not apply to Non-Resident Aliens.

2) Individual Mandate Excise Tax and Employer Mandate Tax, states that anyone not buying “Qualifying Health Insurance” must pay an income surtax of 1%-2.5%. If an Employer does not offer health care coverage, and at least one employee qualifies for a health tax credit, the employer must pay an additional non-deductible tax of $2000 for all full-time employees. This applies to all employers with fifty or more employees. If any employee Read More

TaxConnections Blogger John Dundon posts about the IRS and Compliance ActivitiesThe Treasury Inspector General for Tax Administration produce a report on trends in compliance activities through 2012. The report states:

“During Fiscal Years 2011 and 2012, the Internal Revenue Service encountered challenges that included administering recent legislative changes within an environment of decreasing resources. For example, approximately 50 of the 500 Affordable Care Act provisions add to or amend the Internal Revenue Code. At the same time, the IRS operated under a continuing resolution for Fiscal Year 2012 that funded it at a little more than $11.8 billion, which is a 2.7 percent reduction since Fiscal Year 2010.”

We all know that many Revenue or Collections Agents and Officers can appear over zealous but there are good and bad people in all walks of life. My heart really goes out to some of these people working at the IRS as the report goes on to state, “Since Fiscal Year 2010, approximately 8,000 full-time IRS positions have been lost—about 5,000 from front‑line enforcement personnel. In addition to offering early retirements and buyouts, IRS records indicate that more than one-third of executives and nearly 20 percent of non-executive managers are currently eligible for retirement.”

As a result the report concludes that, “Enforcement revenue collected declined by 9 percent in Fiscal Year 2012, from $55.2 billion to $50.2 billion. This has decreased in two straight years and is 13 percent less than the $57.6 billion collected in Fiscal Year 2010. The 13 percent reduction in enforcement revenue correlates to the 14 percent reduction in the number of enforcement personnel.” Read More

TaxConnections Blogger Annette Nellen Posts about revenue generationIn the past few months, I have been interviewed or heard stories about state and local government practices to generate revenue in new and unusual ways. For example, some California cities are willing to enter agreements with vendors to locate a sales office in their borders and receive a return of some of the sales tax generated. I think the opportunities for doing this will increase when/if the Marketplace Fairness Act passes. With the MFA, more vendors will be required to collect California sales tax despite the lack of a physical presence in the state. So, why not locate some small office in a city that is willing to rebate some of the tax collected for the city to the vendor?

Another instance is a government hiring a third party to help it collect taxes owed. While that might seem innocent enough – outsourcing, it raises a variety of issues. There is a nice write-up of many of these issues in a Action News Alameda article I was interviewed for a few weeks ago – “City of Alameda Moves Forward With Contingency Fee Business Tax Audit Effort,” David Howard, 7/30/13.

The tax sharing is problematic as this is not what we pay taxes for. Taxes are to help fund government operations. When people learn that part of their taxes go into the coffers of a vendor, they will think that the government doesn’t really need the revenue so why not lower rates and will be puzzled about what the purpose of tax is. This is also a race to the bottom as local governments reduce their hard to generate tax revenues and compete against each other for tax dollars. Read More