LA PIANIFICAZIONE FISCALE INTERNAZIONALE: U.S. VIRGIN ISLAND

LA PIANIFICAZIONE FISCALE INTERNAZIONALE: U.S. VIRGIN ISLAND

enero/febrero 1996



Corporations

When starting a new business in the United States (“US”) many are the questions that arise as to the choice of entity.

Of course, the final decision depends on the interests being pursued in each particular case; moreover, attention should be paid to the different tax and civil implication of each different entity

In our previous article we talked about Limited Liability Companies (“LLC”). This time we will focus our attention on Corporations, their different types, structure, form of organization and tax features.

In legal terms, a Corporation is defined as an independent entity that is separate from the Shareholders who own and may control and manage it. This means that the Corporation itself is held legally liable for its actions and the debts incurred, while the Shareholders only respond (with their personal assets) in proportion to the amount of capital invested in the corporation. Corporations have perpetual existence, meaning that death or departure of one of the shareholders is not a cause for termination of the Corporation.

There are two different types of Corporations, commonly known as “C” and “S” Corporations, in reference to Subchapters “C” and “S” of Chapter 1 of the Internal Revenue Code of 1986, as amended (the “Code”), which regulates them.

“C” Corporation

is a form of business whose capital is represented by shares (or stocks) and that can have an unlimited number of shareholders and different classes of stocks. As a separate entity, it has full authority to enter into contracts, acquire properties, receive and provide funding and start court proceedings. With regard to the tax treatment, because “C” Corporations are legally considered separate entities from their owners, their profits are taxed separately from the ones of the Shareholders: income is taxed at the corporate level and it is taxed again when it is distributed to owners as dividends, what is known as “double taxation”. Currently the corporate tax for the state of Florida is 5.5%, fixed, while the maximum federal corporate rate is 35%. Considering, however, that state taxes are deductible on federal return, the combined rate of taxes on Corporate income is 38.575%.

“S” Corporation

“S” Corporation is a special type of Corporation. If from a legal point of view it is identical to the “C” type, the difference lies in taxation, since “S” Corporation avoids double taxation: all profits and losses are directly passed through to the Shareholders who report them on their personal tax return. Consequently, corporate income is taxed only once as the business is not taxed itself, only the Shareholders are. Thus, as it can be easily noticed, there is a similarity between the tax treatment of Corporation type “S” and Limited Liability Companies (“LLC”) and Partnerships (which we will discuss in one of our future articles). “S” Corporations are created through an IRS tax election: within 75 days from the formation, the Corporation may elect “S-Corporation Status” by adopting an appropriate resolution and completing and submitting a form to the Internal Revenue Service (Form 2553).

In order to qualify for S-Corporation status, the Corporation must meet the following requirements:

  • – be a domestic corporation (located within any state in the US);
  • – have only US citizen or US resident shareholders;
  • – have no more than 100 shareholders;
  • – have only one class of stocks;
  • – no more than 25% of corporate gross income can be passive income.

Additionally, only certain types of business can choose to select the type “S” Corporation. Among businesses that are excluded are:

  • – financial Institutions;
  • – insurance companies taxed under Subchapter L;
  • – international domestic sales Corporations

In general, the corporate structure consists of Shareholders, Directors and Managers. The Shareholders are the owners of the company and are the ones who elect the Board of Directors, which makes business decisions and oversee policies and appoints the Officers (President, Secretary and Treasurer). In Florida, these three positions, as well as the one of Director, can be exercised by the same person. It is important to underline that Corporations are not required to reveal their Shareholders, being in this way, de facto, an anonymous company. Moreover, in many states, like Florida, the Corporation may consist of a single Shareholder provided that it acts as a separate entity from him/her.

In order to create a Corporation it is necessary to register the Articles of Incorporation (“Articles”) and pay the appropriate official expenses with the Department of State’s Division of Corporation (“Department of State”); bylaws and minutes of meetings of shareholders, must be drafted but need not to be filed with any Governmental agency.

The minimum information required in the Articles of Incorporations varies from State to State: usually it includes the name and the address of the Corporation, the name and the address of the Registered Agent and the name of the members of the Board of Directors, President, Secretary and Treasurer. This information is public and is registered with the Department of State. Note that the Registered Agent may be an individual or a company authorized by the State Department to act as registered agent, located in the state in which the Corporation was created. Additionally, Corporations are required to file, between January 1 and May 31, an Annual Report to the Department of State to avoid an administrative dissolution.

The limited liability of the Shareholders, together with their anonymity, is one of the most important advantage of forming a Corporation; while the double taxation of profits (of the Company level first and the Shareholders level upon distribution of dividends) is definitively a disadvantage.

In any case, before determining what kind of company to form, it is advisable to always consult an expert in order to better study the factors and requirements of each company and analyze the interests of each specific case.

 

Cav. Piero Salussolia,Esq.;

Dott.ssa Angela Cappuzzello (not admitted in Florida);

This article was written with effort and dedication in order to provide valuable information on diverse topics. Please feel free to share this information with your colleagues and friend so long as you do not modify or alter its contents and our contact information.




Limited Liability Company: a business type with several advantages.

June 2015

While our previous article “Most Common Types of entities in the United States” analyzed the various forms of business entities which can be established in the USA,

this article will specifically focus on the Limited Liability Company.

The Limited Liability Company, also known as LLC, is the most popular way to start a business because of the advantages it offers.

It is a relatively new form of entity originally created in 1977 in the State of Wyoming and now recognized in all 50 States and the District of Columbia; and it can be best described as a hybrid between a corporation and a partnership since the LLC provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.

Owners of an LCC are called members and may include individuals, corporations and other LLCs (whether domestic or not). Each owner is entitled to a Membership Interest, which represents a member’s collective rights in the LLC, including the member’s share of profits and losses of the LLC,  the  right  to  receive  distributions  of  the  company’s assets and any right to vote or participate in management. Members may personally manage the LLC as well as it may be managed by selected managers. Indeed, there are two different management structures of a LCC:

1)        Member management: assume that members participate equally in the management of the company’s business; each member has an equal say in the decision making process of the company which operates much like a partnership. This is more frequent to find in small LCCs.

2)        Manager management: in which one or more owners (or even an outsider) is designated to take responsibility for managing the LCC. Only the named managers are in charge of the affairs of the company, get to vote on management decisions and act as agents of the LLC, while the non- managing owners simply share in LLC profits and losses and have the right to vote.

There is no maximum number of members, so unlimited number of individuals, corporations and partnerships may participate in a LLC.

Most states also permit “single member” LCCs.

In order to create a LCC, it is necessary to file “Articles of Organization” (in some states called “Certificate of Organization” or “Certificate of Formation”) with the LCC Division of the State government. These are considered public documents meaning   that   they   are   generally accessible by the public. The minimum information required for the articles of organization varies from state to state. Generally, it includes the name of the LLC, the name of the person organizing the LLC, the duration of the LLC and the name of the LLC’s registered agent. Some states require additional information, such as the LLC’s business purpose and details about the LLC’s membership and management structure. In all states an LLC’s name must include words or phrases that identify it as a limited liability company. These may be the specific words Limited Liability Company or one of various abbreviations of those words, such as LLC or Ltd. Liability Co.

The LLCs usually come into existence on the same day the Articles of Organization are filed and a filing fee is paid to the Secretary of State. In addition to the Articles of Organization, the LLC must have an Operating Agreement, which governs the LLC’s finances and organization and sets the rules and regulations for operating the company (i.e., the LLC member’s rights and responsibilities, their percentage interests in the business, their share of the profits and other provisions) and lists the members of the company. The Operating Agreement may be easily modified with the required percentage of votes, as the business grows and changes.

As  mentioned  above,  the  LLC  is  a  hybrid  between  the corporation form of organization and the partnership form. Just like shareholders of a corporation, all LCC members are protected from personal liability for business debts and claims: only LCC assets may be used to pay off business debts, while owners stand to lose only the money invested in the company. However, a LCC doesn’t have the corporate formalities (board meetings, shareholders meeting, minutes, etc.)   or   extra   levels   of   management   (Shareholders, Directors,   Officers),   but   the   easy   management   of   a partnership, with just one level of management.

Another difference from corporations (in particular, “C” corporations) is related to the tax treatment of a LLC. Indeed, in the eyes of the federal government LCCs are considered as pass through entities, meaning that business income and expenses are “passed through” the business to the members, who report their share of profit – or losses – on their personal tax returns, just like the owners of a partnership would (so called, “federal pass-through tax advantage”), which is exactly the same tax advantage of partnerships. Thus, the business itself is not taxed, but business’ taxes are paid through the owners’ personal income tax return. However, if the LLC has only one member, it is treated as a disregarded entity for income tax purposes. Both LLC with two or more members and with only one member may elect to be treated as a corporation.

When the LLC has a single member, it may be useful to know about the Foreign Investment in Real Property Tax Act of 1980 income tax withholding, also known as FIRPTA. FIRPTA is a United States tax law that imposes U.S. income tax on foreign people selling U.S. real estate or, more in general, disposing of United States real property interests. People from all over the world invest in United States real estate, so if you are buying property from a foreign owner, FIRPTA may apply to your purchase. Under this law, people purchasing U.S. real property interests (transferee) from foreign persons (transferor) are required to deduct and withhold a tax equal to 10% of the total amount realized by the transferor on the disposition (which is normally the purchase price). It is important to know about FIRPTA because if the transferor is a foreign person and you fail to withhold, you may be held liable for the tax and penalties do apply.

The 2013 Florida Legislature adopted a new limited liability Company act, which is called the Florida Revised Limited Liability Company Act (the “Act”) and created new Chapter 605 of the Florida Statutes.

The new law became effective January 1, 2014, even though LLCs already in existence before that date were given the possibility to continue to operate under the provisions of the existing law (unless they elected to be governed by the new act) until December 31, 2014. This means that actually January 1, 2015 is the date from which all LCCs formed or registered in Florida are subjected to the new law.

Just like the previous law, the new one remained a “default statute”, which means that, except for the “nonwaivable” provisions expressly listed in the new Chapter 605, the members may override the statutory default rules by their operating agreement.

Among some of the more important changes in the new law are the following:

a)        Adds more “nonwaivable” rules pertaining to operating agreements, meaning that certain rules cannot be overridden by the operating agreement, while others can be modified with certain limitations;

b)        Delineates the liability of members and managers with  respect  inaccurate  records  filed  with  the

Department of State;

c)        Clarifies that there are only two management structures  for  LLCs  (“manager-managed”  and

“member-managed”) and defines very precisely the respective duties of members and managers in each case. Moreover, it eliminates the term “managing member”;

d)        Permits LLCs to file Statements of Authority with the Department of State to delineate the authority

of certain persons or groups of persons (as members, managers and/or officers) associated with the LLC;

e)        Permits interest exchanges and explicitly addresses direct actions by members against the LLCs, as well as actions against other members and managers, to enforce member’s rights and protect their interests.

Also,  for  the  first  time,  companies  based  outside  of  the United States that want to domesticate as Florida LLCs will be allowed to do so while keeping their status of foreign entity.

The new law has represented a substantial evolution in Florida law and was intended to modernize Florida’s LLC law, so to make Florida a more attractive place to organize and operate an LLC.

 

Cav. Piero Salussolia , Esq.

Dott.ssa  Angela  Cappuzzello (not admitted in Florida)

This article was written with effort and dedication in order to provide valuable information on diverse topics. Please feel free to share this information with your colleagues and friend so long as you do not modify or alter its contents and our contact information.

IUS GENTIUM By: Piero Salussolia P.A.



MIAMI DJ MAGAZINE

Miami DJ Magazine 2015




BUSINESS PEOPLE

 

BUSINESS PEOPLE 2015




Most common types of entities in the United States

February 2015

When starting a business venture, one of the first decisions to make is to determine what form of business entity to establish. The business structure you choose will have legal and tax implications,

so it is very important to understand at least the basic differences amongst the most common forms of business entities; namely:

  • Sole Proprietorships (or DBA);
  • Partnerships;
  • Corporations;
  • Limited Liability Companies (LLC);
  • Cooperatives;

SOLE PROPRIETORSHIPS (or DBA)

A sole proprietorship (also known as DBA, short for “doing business as”) is the simplest and least expensive structure that may be chosen to start a business.

It is an unincorporated entity owned and run by one individual with no distinction between the company and its owner, who is entitled to all profits and has unlimited personal liability for all the company’s debts, obligations and losses.

Because the sole proprietor and its business are one and the same, there is no legal separation between him/her and the business, with the consequence that the business itself is not taxed separately. The sole proprietorship’s income or loss becomes the individual’s income or loss, which means that it must be included in his/her personal tax return.

PARTNERSHIPS

A partnership is a vehicle where two or more people share ownership. Generally, each partner contributes to all aspects of the business, including money, property, labor and skills and will share in the profits and losses of the business.

There are two main forms of partnerships:

1)      General Partnerships; where liabilities and managerial duties are divided equally among partners. Furthermore, partners are not only liable for their own actions, but also for the decisions made by the other partner(s); and the personal assets of all partners can be used to satisfy the partnership’s debts.

2)      Limited Partnerships; where some partners may have limited liability (to the extent of each partner’s investment percentage in the partnership), but will also have limited input with management decisions (the Limited Partners). However, limited partnership must have at least one general partner, which will have unlimited liability.

Regarding taxes, a partnership must file an “annual information return” to report the income, deductions, gains, losses, etc., from the business’s operations, but the entity itself does not pay income taxes: it “passes through” any profits or losses to its partners, which will include their share of the partnership’s income or loss on their individual tax return.

CORPORATIONS

A corporation is an independent legal entity that is separate from the people – so called “shareholders” – who own and may control and manage it. This means that the corporation itself, not the shareholders who own it, is held legally liable for its actions and the debts incurred, while the shareholders have limited legal and financial liability. Generally, shareholders cannot be sued individually for corporate wrongdoings and their personal assets are protected from the creditors of the corporation (they can generally only be held accountable for the amount of capital committed to invest in the company).

Shareholders elect a Board of Directors which make business decisions and oversee policies, and appoint the Officers (President, Treasurer and Secretary), responsible for the day-to-day operations.

There are two different kinds of Corporations:

1)      “C Corporations (in reference to Subchapter “C” of Chapter 1 of the Internal Revenue Code, “IRC”, which governs them) are legally considered separate entities from their owners. Income is taxed at the corporate level and it is taxed again when it is distributed to owners as dividends, what is known as “double taxation”.

2)      “S Corporations (named after subchapter “S” of Chapter 1 of the IRC)

is a special type of corporations created through an Internal Revenue Service (“IRS”) tax election. After a corporation has been formed, it may elect “S” Corporation Status by adopting an appropriate resolution and completing and submitting a form to the IRS. In order to qualify for “S” Corporation Status, the corporation must meet the following requirements: be a domestic corporation (located within any state in the US), have only US citizen or US resident shareholders, have no more than 100 shareholders, have only one class of stocks, not be an ineligible corporation (i.e., certain financial institutions, insurance companies and domestic international sales corporations). What makes the “S” Corporation different from the “C” Corporation is that the corporate income is taxed only once, similar to how sole proprietorships and partnerships are taxed. All profits and losses are passed through directly to the shareholders, who report them on their personal tax return, while the business itself is not taxed.

LIMITED LIABILITY COMPANIES (LLC)

The Limited Liability Company, also known as LLC, is a relatively new form of business created in 1977 in Wyoming and now recognized in all 50 states and the District of Columbia.

It can be best described as a hybrid between a corporation and a partnership because it provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.

Owners of an LCC are called members and may include individuals and entities (whether domestic or not).

There are two different management structures of a LCC:

1)      Member management: assume that members participate equally in the management of their business. This is more frequent to find in small LCCs.

2)      Manager management: in which one or more owners (or even an outsider) is designated to take responsibility for managing the LCC. Only the named managers get to vote on management decisions and act as agents of the LCC.

There is no maximum number of members. Most states also permit “single member” LCCs (i.e., those having only one owner).

The peculiarity of this kind of company is that, just like shareholders of a corporation, all LCC owners are protected from personal liability for business debts and claims: only LCC assets are used to pay off business debts, while owners stand to lose only the money that they have invested in the company. However, a LCC doesn’t have the corporate formalities (Board meetings, Shareholders meeting, minutes, etc.) or extra levels of management (Shareholders, Directors, Officers), but the easy management of a partnership. Moreover, unlike “C” corporations, LCCs are not taxed as a separate business entity. Instead, business income is “passed through” the business to the members, who report their share of profit – or losses – on their personal tax returns, just like the owners of a partnership would.

COOPERATIVES

A cooperative is a business organization owned by and operated for the benefit of a group of users using its services.

Profits and earnings generated by the cooperative are distributed among the members, also known as user-owners, who contribute equity capital.

Regarding the tax treatment, cooperatives operate as “S” Corporations and receive a “pass-through” designation from the IRS.

Cooperatives are common in the healthcare, retail, agriculture, art, restaurant industries and NYC apartment buildings.

Be aware that this is just a general illustration of the various forms of business existing in the United States. Each of them needs an in-depth analysis, which will be done in the forthcoming articles.

Cav. Piero Salussolia , Esq.

Dott.ssa  Angela  Cappuzzello (not admitted in Florida)

This article was written with effort and dedication in order to provide valuable information on diverse topics. Please feel free to share this information with your colleagues and friend so long as you do not modify or alter its contents and our contact information.

IUS GENTIUM By: Piero Salussolia P.A.



OFFSHORE VOLUNTARY DISCLOSURE PROGRAM

January 2015

Offshore structures have become one of the preferred business vehicle for investments in the United States due to its discretion and tax advantages although, if erroneously applied, could subject its owner(s) to heavy sanctions and criminal liabilities.

In order to prevent tax evasion and money laundering, the Internal Revenue Service (“IRS”) introduced the Offshore Voluntary Disclosure Program (“OVDP”), which has been revised over the years.  In June 2014, the IRS announced the latest version of the OVDP. The program was initially created after the U.S. Department of Justice (“DOJ”) discovered international tax evasion by U.S. taxpayers using hidden offshore bank accounts.

 A renowned case of tax fraud in the U.S. is the Birkenfeld case, in which the DOJ investigated Swiss bank UBS after Bradley Birkenfeld, a former employee, had divulged details of how the bank facilitated U.S. taxpayers to conceal income and assets not reporting them to U.S. authorities.  The DOJ entered into a deferred prosecution agreement with UBS imposing a $780 million fine to be paid by the bank, which also agreed to disclose account information for more than 4,500 clients. 

Similarly, Credit Suisse had to pay $2.6 billion dollar fine for conspiring to aid tax evasion.  To date, there are about 100 Swiss banks negotiating their cases with the DOJ to prevent facing felony tax charges.  Equally, Deutsche Bank AG was accused of aiding tax evasion and agreed to pay $554 million to avoid prosecution.

Presently, U.S. taxpayers holding foreign financial accounts must report their interest when the aggregate value of those accountsexceeds $10,000 U.S. dollars at any time during the calendar year, by filing a Report of Foreign Bank and Financial Accounts (“FBAR”); otherwise, they may be subject to civil and/or criminal sanctions.

The OVDP was introduced in 2009 for taxpayers who intentionally failed to report offshore income and failed to file the FBAR. Accordingly, taxpayers who amended their tax returns and filed FBARs for the years 2003 to 2008, had an opportunity to avoid criminal prosecution and were to pay the equivalent of 20% of the highest aggregate value of the unreported offshore accounts during the six-year period as penalty. Later in 2011, the offshore penalty increased from 20% to 25% and the disclosure period was extended from six to eight years (2003 to 2010).  In 2012, the penalty increased to 27.5%.

The 2011 reform also included the opt-out procedure where taxpayers could avoid criminal prosecution although remaining subject to all penalties as mitigated by the program; so the taxpayer would opt out the ODVP, so long as the IRS proved the voluntary non-compliance.

The latest changes to the OVDP were announced in June 18, 2014. The new rules are stricter due to the awareness and efforts in preventing tax evasion. Many offshore financial institutions have been requiring U.S. taxpayers to assure they are reporting the offshore income to U.S. authorities.

Due to the publicity surrounding the voluntary disclosure initiatives, U.S. taxpayers with offshore financial accounts should know of their duty to report the income; accordingly, undeclared offshore income would be treated as a willful non-compliance with U.S. tax law. For delinquent FBARs, a 50% penalty will be applied when a financial institution (where the taxpayer has or had an account) has been publicly identified as being under investigation or as cooperating with an investigation.

In 2012, the IRS also created streamlined offshore procedures for U.S. taxpayers living abroad or dual citizens with delinquent tax returns. They were required to file the returns for the previous three years and to file FBARs for a six year-period, along with the penalty fee. Low compliance risk taxpayers (i.e., less that $1,500 in tax due each year) were not subject to penalties or follow-up actions.  Nonetheless, the risk level could increased based on the following factors:

  1. There were indications of tax planning or avoidance;
  2. There was material economic activity in the U.S.;
  3. Any of the tax returns claimed a refund;
  4. The taxpayer did not report the income in the country of residence;
  5. The taxpayer was under investigation by the IRS;
  6. FBAR penalties had been previously imposed;
  7. The taxpayer had a financial interest over any financial account located outside his or her country of residence;
  8. There was U.S. source income.

In the 2014 reform, this procedure was maintained and modified. Now procedures are available to both U.S. individual taxpayers residing in and outside the U.S. who certify that the failure resulted from non-willful conduct.  Accordingly, taxpayers may follow Streamlined Foreign Offshore Procedures (“SFOP”), or Streamlined Domestic Offshore Procedures (“SDOP”).  Eligibility for one or other procedure depends on whether the taxpayer, for the three most recent years for which the tax return is due, did not have a U.S. abode and was physically abroad for at least 330 full days, or is not a U.S. citizen or legal permanent resident. In such case, the SFOP apply.

To comply with the SFOP, the taxpayer must submit a delinquent tax return or amend the one previously filed, for each of the most recent 3 years for which the U.S. tax return is due.  Additionally, the taxpayer must submit delinquent FBARs for each of the most recent 6 years for which the FBAR due date has passed, along with payment of all tax due and all applicable statutory interest with respect to each of the late payment amounts.  Taxpayer will be exempt from late fees.

Additionally, the taxpayer will have to certify the submission of all the FBARs and that failure to file tax returns, report income, pay tax, and file information returns, resulted from non-willful conduct.

To comply with the SDOP the requirements are similar but the offshore penalty is equal to 5% of the highest aggregate balance of the foreign financial assets for each of the years in the covered tax return period.

As explained, it is mandatory to know and understand the foregoing rules since the authorities are putting a big effort to collect from delinquent taxpayers and the ignorance of the law is no longer an excuse.

 

Cav. Piero Salussolia,Esq.;

Lizet Cardozo, Abg. (admitted in Colombia only);

Monica Tirado, Abg. (admitted in Colombia only).

This article was written with effort and dedication in order to provide valuable information on diverse topics. Please feel free to share this information with your colleagues and friend so long as you do not modify or alter its contents and our contact information.

 




DEFERRED EXCHANGE REGULATIONS UNDER SECTION 1031 OF THE INTERNAL REVENUE CODE

With the purpose of stimulating the economy, the Internal Revenue Service (“IRS”) aimed to encourage the commerce of Real Estate (“R.E.”) through Section 1031 of the Internal Revenue Code (“IRC”). This Section allows R.E. investors to defer the capital gain tax when selling a property and reinvesting the proceeds in like-kind property held for productive use in a trade or business, or held for investment. Capital gain is generally calculated on the difference between the purchase price of the R.E. plus purchase expenses improvement and remodeling costs minus amortizations and net selling proceeds.

Advantages of Section 1031 are, amongst others, that the seller can dispose of the property deferring income tax liability, allowing the investor to increase the purchasing power of money and to maximize the return on the investment. 

Please note that Section 1031 does not apply to exchange of stocks, bonds, notes, securities, or interests in the assets of a partnership or LLC.

According to Section 1031, an investor will have to comply with the following requirements:

  1.  The relinquished property (i.e., property the investor is selling) and the replacement property must be located in the U.S.;
  2.  Within 45 days of closing, the investor must provide a qualified intermediary (or exchange facilitator) with a list, identifying potential replacement properties;
  3.  Within 180 days of the sale of the exchanged property, the investor must complete the exchange with at least one of the listed properties;
  4.  The investor must take title to the replacement property in the same legal name of the relinquished property;
  5.  The value of the replacement property must be similar or higher to the value of the relinquished property;
  6.  The investor must reinvest all the cash proceeds from the sale in the replacement property, any cash received is subject to taxation.  As a very simplified example, if the investor purchased a property for $2,000,000.00 and later reinvests in a $1,500,000.00 property, the $500,000.00 balance would be subject to federal capital gain tax at a maximum rate of 20%. The chart below shows the applicable rates depending on the amount of gain

TAXABLE INCOME

TAX RATE
 $72,500 or less

0%

 $72,501 – $450,000

 15%

 $450,001 and over

 20%

It is worth noting that some states impose state capital gain tax, which would add to the maximum federal rate of 20%.

Furthermore, the identified replacement property must follow one of three rules:

  1.  The Three-Property Rule: The investor may identify up to three different properties as possible replacements, without consideration of the market value.  This rule applies to 95% of the transactions;
  2.  200% Rule: The investor may identify different replacement properties, so long as the total value of all the potential replacement properties does not exceed 200% of the market value of the relinquished property;
  3.  95% Exemption: The investor may identify any number of replacement properties, so long as the replacement property’s value represents at least 95% of the aggregate value of all the identified properties.    

Through the exchange process, the investor will always carry over the relinquished property’s basis to the replacement property (i.e., the value of the relinquished property, plus improvements, minus amortization).   However, heirs of the taxpayer will receive the property at its market value as long as all applicable estate taxes have been paid.  Later, when the property is sold, only the amount resulting from the difference between the new purchase price and the fair market value at the time of the taxpayer’s death will be subject to taxation.

In sum, R.E. in the U.S. has different tax benefits that not only stimulate the economy, but also allow investors to maintain stability in the purchasing power of money.  

 

Cav. Piero Salussolia,Esq.;
Lizet Cardozo, Abg. (admitted in Colombia only);
Monica Tirado, Abg. (admitted in Colombia only). 

This article was written with effort and dedication in order to provide valuable information on diverse topics. Please feel free to share this information with your colleagues and friend so long as you do not modify or alter its contents and our contact information.

IUS GENTIUM By: Piero Salussolia P.A.




Investments in the United States – Part II

December 2014 

Real Estate (“R.E.”) investments in the United States (“U.S.”) and their tax implications are subject to various factors that determine the investment’s viability and efficiency according to the investor’s necessity.   

This article will focus on Personal Investment in relation to state and local capital gain tax, ordinary income tax, and federal estate tax.

As it was explained in Investments in the United States, Part I, all ordinary income and capital gain may be subject to state and local tax, which rate varies from state to state.  There are some states that do not asses a tax on personal income, such as Florida. Nonetheless, Florida has a 5.5% corporate income tax (as will be discussed in the forthcoming articles).

Besides Florida, Alaska, Nevada, South Dakota, Texas, Washington and Wyoming do not have a personal income tax.  While New Hampshire and Tennessee impose a tax only on interest and dividend  income, all other states have some sort of personal income tax.  The state with the highest tax rate is California at 13.3%, and one with the lowest rate is North Dakota at 3.22%.  In addition, some states, like New York, allow cities and/or counties to impose taxes.  Accordingly, New York City levies a local income tax of 3.88%, which combined with New York State tax of 8.82%, reaches a total of 12.7%.

 (See below a list of some cities that levy a separate individual income tax).

Chart 1 

CITY

LOCAL TAX

STATE TAX

STATE AND LOCAL TAX  

Indianapolis, IN

1,62% 3.4% 5.02%
Baltimore, MD 3.2% 5.5% 8.7%
Montgomery, MO 3.2% 5.5% 8.7%

Detroit, MI

2.5% 4.35% 6.85%

New York City, NY

3.88% 8.82% 12.7% 

It is worth noting that gifts of intangible personal property, e.g., U.S. stocks and bonds, are exempt from U.S. gift tax for NRAs, as opposed to estate taxation –as previously described.Foreign nationals not U.S. residents or Non-Resident Aliens (“NRAs”) not domiciled in the U.S. are also subject to federal estate taxation with respect to certain U.S.-situated assets. These assets include: (1) R.E. in the U.S. at the date of death; (2) tangible personal property (e.g., motor vehicles, artwork, watercrafts, animals, precious gems and metals) physically located in the U.S. at the date of death; and (3) intangible personal property such as securities of U.S. companies, personal and U.S. corporate debt securities (except for securities that generate portfolio interest which is an interest on an obligation issued by a U.S. person where the beneficial is a foreign person who is not a 10% shareholder in the issuer at the time the interest is received), patents, trademarks, and copyrights.  

As of 2014, the highest tax rate on Estate Tax is 40% (see the chart below with the applicable rates). 

Chart 2 

TAXABLE ESTATE

TENTATIVE TAX EQUALS

PLUS                         OF AMOUNT OVER
0 – $10,000 $0  18% $0 
$10,000 – $20,000  $1,800  20% $10,000 
$20,000 – $40,000  3,800  22% $20,000 
$40,000 – $60,000 $8,200 24% $40,000 
$60,000 – $80,000  $13,000  26% $60,000 
$80,000 – 100.000  $18,200  28% 

$80,000 

$100,00 – $150,000 $23,800 30%

$100,000

$150,000 – $250,000 $38,800 32% $150,000
$250,000 – $500,000 $70,800 34% $250,000
$500,000 – $750,000 $155,800 37% $500,000
$750,000 – $1,000,000 $248,300 39% $750,000
$1,000,000 $345,800 40% $1,000,000

A NRA estate is allowed to claim a credit of $13,000, which excludes the first $60,000 of property from U.S. taxation, as opposed to the estate tax exemption of $5,340,000 (in 2014) available for U.S. citizens and resident aliens. 

The U.S. has entered into several estate tax treaties which allows NRAs to avoid double taxation. In the event that a NRA (being a citizen of, or domiciled in, the treaty country) dies owning taxable U.S. situated assets, the NRA estate may claim available credits and deductions.   

As described, personal investments in the U.S. are subject to different tax rules.  Accordingly, it is mandatory to examine the investor’s goals and objectives because there are scenarios where a personal investment can result more advantageous than an investment through a company.  As an illustration, the maximum capital gain tax rate for individuals is 20% as opposed to an almost 40% federal and state combined rate for Florida corporations, as it will be discussed in the forthcoming articles.

Cav. Piero Salussolia,Esq.;

Lizet Cardozo, Abg. (admitted in Colombia only);

Monica Tirado, Abg. (admitted in Colombia only). 

This article was written with effort and dedication in order to provide valuable information on diverse topics. Please feel free to share this information with your colleagues and friend so long as you do not modify or alter its contents and our contact information.




Investments in the United States – Part I

November 2014 

Foreign investment in the United States (“U.S.”) is generally considered advantageous due to the stability of its economic system and a tax structure that, although complex, facilitates foreign investment.  The U.S. has a legal system where every state within its territory coexists with the federal system of government. Accordingly, when investing in the U.S., there are key factors (e.g., geographic location; type of investment; local, state, and federal tax issues; corporate and estate taxes) that must be taken into consideration, which will be discussed in this and forthcoming articles.

 This is the first of four articles that will provide a general overview of different investment structures, specifically on real estate (“R.E.”) investments in the U.S. and their tax implications.  It will analyze such investment structures in the following four scenarios:

1. Personal Investment (Federal taxation);

2. Personal Investment (State and Estate taxation);

3. Investment through a domestic company;

4. Investment through a foreign entity and “Tandem Structures.”            

Generally, and not considering R.E. Property Taxes and local taxation where applicable, there are four basic types of taxes imposed on the holding and disposition of a R.E. investment in the U.S.:

  1. Income Tax;
  2. Withholding T ax on Fixed, Determinable, Annual, or Periodic income;
  3. Capital Gain Tax;
  4. Estate Tax.

Application of Income Tax depends on whether a non-U.S. citizen will be considered a tax resident alien or non-resident alien. A non-citizen is considered a U.S. resident alien, for tax purposes, if lawfully admitted as a legal permanent resident (green card holder), or if the non-citizen meets the substantial presence test as required by the Internal Revenue Code of 1986 (“I.R.C.”), and its amendments.

The substantial presence test requires an individual to be present in the U.S. for at least 31 days during a calendar year, and 183  cumulative days during a 3-year period (including the current year and the two preceding years). The 183-day requirement is determined according to the following formula: an individual is treated as present in the U.S. if physically present in the country all days in the current year; 1/3 of the days present in the preceding year; and 1/6 of the days present in the second preceding year.  The following example illustrates the application of the Substantial Presence Test:

Chart 1

 

PRESENCE

DAYS

FORMULA

RESIDENCY

DAYS

Current year

120

100%

120

1st

Prev. year

150

33.33%

50

2nd

Prev. year

120

16.66%

20

Total

 

 

190

In the example described in Chart 1, the non-U.S. citizen will be considered a tax resident alien because the individual cumulated more than 183 days all together in the 3-year period. 

Resident aliens are generally subject to income taxation on their worldwide income in the same way as U.S. citizens.  Nonetheless, resident aliens may claim a foreign tax credit in order to avoid double taxation.  

In turn, non-resident aliens’ income, subject to U.S. income tax, is divided into two categories depending on whether or not the income is effectively connected with a trade or business in the U.S.  In the first category, if engaged or considered to be engaged in a trade or business in the U.S. during a fiscal year, the non-resident alien (“NRA”) will be treated as a taxpayer subject to the same rates that apply to U.S. citizens and residents.

The chart below illustrates the tax rates applicable to joint tax returns for married couples. 

       Chart 2

NET INCOME

RATE

$17,850 or less

10%

$17,851 – $72,500

15%

$72,501 – $146,400

25%

$146,401 – $223,050

28%

$223,051 – $398,350

33%

$398,351 – $450,000

35%

$450,001 and above

39.6%

In this case, the net income (gross income minus allowable deductions) is determined and a Form 1040NR, U.S. Nonresident Alien Income Tax Return, is required to be filed.  NRAs must apply and obtain an Individual Taxpayer Identification Number (“ITIN”) with the Internal Revenue Service (“IRS”).  The application must include a copy of the NRA’s passport certified by the issuing agency.

In the second category, NRAs’ income that is not effectively connected with a trade or business in the U.S., will be subject to a flat tax of 30%  or a lower treaty rate (if applicable) of the gross amount of U.S. source fixed or determinable, annual or periodical income (“FDAPI”).  Deductions are not allowed and the NRA does not have to file a tax return.

It may be worth nothing that this 30% tax rule may apply to real property rental income when a NRA taxpayer chooses not to treat that income as effectively connected with a trade or business.  In such case, the tenant is responsible to withhold the tax from the rental income and remit it to the IRS.  If the NRA chooses to treat the real property rental income as effectively connected to a trade or business in the U.S. during the fiscal year then, the IRC allows deductions to be claimed against the gross income (e.g., condominium expenses, property tax, utilities, repair costs, furniture depreciation, amortization of property) and the NRA would be  taxed at the graduated rates that apply to U.S. citizens and resident aliens. 

A NRA is subject to long-term capital gains tax rates in the same way as a U.S. citizen, as the chart below illustrates (this rate is lower than that of Chart 2).

Chart 3

CAPITAL GAIN INCOME

RATE

$72,500 or less

0%

$72,501 – $450,000

15%

$450,001 and above

20% 

Capital gain profit generated from the sale of real estate (or any other assets held for investment purposes) is calculated on the difference between the purchase price, purchase expenses, selling price, selling expenses, and improvement and remodeling costs.  

Be aware that any capital gain or rent may also be subject to state tax. This issue will be discussed in Part II of these series of articles.

 

Cav. Piero Salussolia,Esq.;

Lizet Cardozo, Abg. (admitted in Colombia only);

Monica Tirado, Abg. (admitted in Colombia only). 

This article was written with effort and dedication in order to provide valuable information on diverse topics. Please feel free to share this information with your colleagues and friend so long as you do not modify or alter its contents and our contact information.