Category Archives: IRS.Gov

How to Prepare Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests

Form 8288, form 8288-b

Preparing Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests

The non-resident alien, foriegn LLC and foreign corporations all have one common international tax problem- the U.S. 15% real estate sale price withholding tax.  But there are often another tax which is the state withholding tax.

For example, Hawaii is a five percent withholding tax of the sales price.  As a result, a whooping 20% of the sales price is withheld.

The seller is personally responsible for this tax and so is the escrow company or law firm handling the sale.   It is what we call, in America, as a “hot potato”.   Every person connected with the sale proceeds is personally responsible.

I am sorry.  I have more bad news about Form 8288-B FIRPTA Certificate.  Congress slashed funding for the IRS.  The other day, an IRS International Tax Attorney told me that the IRS has “limited resources”.   This means a longer, much longer, wait for your FIRPTA Certificate.

The instructions state up to 90 days; but this is only if your submission is perfect.   Here is why.  Imagine an IRS office handling million of Form 8288-B and invision paper everywhere in the office.  The fastest way for an employee to clear his workload is to reject the Form.  He merely pushes a few buttons on the computer and the computer sends you a rejection letter.

Because of this you must have each and every required document attached.

Here are the four most common mistakes made by the “do it yourself”  applicant of the FIRPTA Withholding Certificate and some CPAs .

  1.  An unprofessional explanation of the transaction and “tax basis”.  I always provide a tax law citation such as IRC section 897 or the most important section 1445.  Each of these section have regulations.  For example you want to discuss the IRS rules in regulation section 1.1445-4.
  2.  No canceled checks proving the tax basis.  This mistake will quickly get your application rejection and this is why.  For the IRS to verify your gain (and thus taxes due), the IRS must have proof of your cost.   Just providing the IRS a copy of your purchase agreement means nothing because it may be phony.  The IRS is auditing you in advance of your sale.  You must give them proof of your cost.   Proof is your canceled checks.
  3. Incorrect calculation of “recapture depreciation”.    Recapture depreciation is taxed as ordinary income and not capital gain.    Proper calculation needs a computer program since depreciation is done on a “declining balance'”.
  4. Rushing in preparing the Form 8288-b.   The instructions to the form estimate four hours but in reality the longer you have owned the property the longer the preparation time.   As time goes on, you have more depreciation on the different components of property, more improvements for which you need proof (the invoices and canceled checks) and more photo copying of each of these item.

If you need help obtaining your Certificate, then call me, Brian Dooley, CPA, MBT at 949-939-3414.  Ask about our  expedited service where we prepare and Federal Express your Application to the IRS in 24 hours. 

Getting the Best of Both Worlds – International Tax Planning for S Corporations and their Alien Shareholders

Dual residents are citizens of nations that have a tax treaty with the U.S.  Most tax treaties have a “tie-breaker” rule that favors the country of citizenship.  

International Tax Planning for S Corporations and their Alien Shareholders – Getting the Best of two tax Worlds

Okay, here is the general rule. A general rule is that dual resident residents are treated as U.S. residents for purposes.  This link provides an IRS legal memorandum on the topic of the dual resident process.    For tax planning, the dual resident will use its home country tax treaty to elect to be a non-resident alien.  This way, he is not paying U.S. tax on his worldwide income. 

Dual residents are often shareholders of S corporation. Here the dual resident international tax planning needs to be cautious.

Until recently, the  IRS regulations provide that if a dual resident taxpayer is a shareholder in an S corporation and the alien claims a treaty benefit as a non-resident alien, the taxpayer is a non-resident alien for the S corporation’s rules.  As a result, the entity’s S corporation election will be terminated.[2]

Most tax planners will tell you that this continues to be the law.   If they do, then you know that you have the wrong international tax planner.

The dual resident alien usually wants to elect to be a non-resident alien.   The tax savings are huge.  For example, no self-employment tax, no controlled foreign corporation tax, no tax on foreign income, no passive income tax, no tax on U.S. bank income and no tax on gains on the U.S. stock market.  Yes, all of this is tax-free.

But here is the problem.  How to invest into a U.S. business.  The easiest is to invest using a domestic limited liability company.   But for the dual resident, his/her home country may not recognize the LLC for asset protection. Thus, why you are protected in the U.S., you are not protected outside the U.S.  The alternative is a corporation. A subchapter S corporation allows a single tax structure.

The IRS issued Treasury Decision 8733 provides that a  dual resident is allowed the best of both tax worlds.   First, he/she remains a non-resident alien legally avoiding the taxes mentioned above.

Next, the dual resident alien can elect to pay U.S. income tax on the S-corporation’s income as if the income was U.S. business income.  If he does, he is an allowed to be a shareholder of the corporation.

For example, the S-corporation is a retail store.  Mr. Wilson a U.K. citizen and a dual resident is a shareholder.  He has not elected to be U.S. resident.  However, he has elected to follow the IRS rules in Treasury Decision 8733.   The S-corporation also earns interest income on its bank deposits.  Mr. Wilson earned $100,000 investing in the U.S. stock market.

The income from the store and the interest income are taxable as business income.  However, the dual resident alien continues to avoid self-employment tax.   The $100,000 gain in the stock market is not taxable by the IRS. 

The IRS  Treasury Decision 8733    states “under section 7701(b) provide that for purposes of determining the U.S. income tax liability of a dual-status alien who is a shareholder of an S corporation, the trade or business or permanent establishment of the S corporation shall be passed through to the dual status alien pursuant to section 1366(b).”

Here is what is happening. The taxpayer and the S corporation entering into an agreement to be subject to tax and withholding as if the dual resident were a non-resident alien partner in a partnership.  This means that the S-corporation withholds tax on his share of the income.  The tax is withheld at the highest tax rate.  This tax is refundable when the dual resident alien files his income tax return.

If the dual resident taxpayer does this then:
1.  the character and source of the S corporation items included in the dual resident shareholder’s income are determined as if realized by the shareholder and
2. the dual resident shareholder is considered as carrying on a business within the United States through a permanent establishment if the S corporation carries on such a business.[4]

This exception is not available if the S corporation was a C corporation[5]

Special IRS reporting: A dual resident taxpayer who is an S corporation shareholder must:
1. comply with the filing requirements and
2  must include an additional declaration indicating that he understands that claiming a treaty benefit as a non-resident will terminate the S corporation’s election unless the exception applies. [6]   IRS Form 8833, Treaty-Based Return Position Disclosure (under Section 6114 or 7701(b)) is required if the payments or income items reportable because of that determination are more than $100,000.

By the way, this blog article is the only article on this topic.  It represents on of the many innovations international tax plans found only in my book, International Tax Planning in America for the Entrepreneur, on this link.  You will learn many tried and true tax plans that no one else knows.

We recommend that you work with the IRS and get their okay of your tax plan with a private letter ruling (get more information on this link).

[1] Warning:  The regulations 301.7701(b)- 7(b).  state that the filing of a Form 1040NR by the dual resident taxpayer may affect the determination by the Immigration and Naturalization Service as to whether the individual qualifies to maintain a residency permit.

[2] Regulation 301.7701(b)-7(a)(4)(iii).

[3] Regulation 301.7701(b)-7(a)(4)(ii).

[4]  Regulation 301.7701(b)-7(a)(4)(iv).

[5]  Regulation 301.7701(b)- 7(a)(4)(iv).

[6] Regulation 301.7701(b)-7(c)(3). In part 10 FSA (field service advice) 1992-50 states   “[10]  A dual resident taxpayer who is assigned residence to the treaty partner’s country and claims to be treated as a resident of that country will be treated as a nonresident of the United States solely for purposes of computing their U.S. income tax liability. For purposes other than the computation of their U.S. income tax liability, the individual will be treated as a U.S. resident under the Internal Revenue Code. To take advantage of the treaty “tie- breaker” rule exception, a dual resident taxpayer must timely file a completed Form 1040NR tax return with a statement in the form required by section 301.7701(b)-7(c) of the regulations, attached to the return. The filing of a Form 1040NR with the attached statement is required under section 301.7701(b)-7(b) whether or not the individual has any income subject to U.S. tax.”

Learn about the Small Business Foreign Tax Credit and How the Credit Saves Taxes

How the  Foreign Tax Credit Saves Taxes for an S-corporation of a Limited Liability Company (LLC)

When you read about Apple or GE not paying American taxes, it is because of the foreign tax credit (for taxes they paid to the foreign government).   

The purpose of the foreign tax credit law is to avoid double income taxation. It works well for publicly traded corporations. However, it does not work for individual owning a foreign entity unless he does fancy footwork to have the entity be a “pass-through” for the IRS.

Here is the problem: For the individual shareholder, income earned by a foreign corporation does not allow you credit for the foreign income taxes  Why?  No reason.  It is just the law, and yes, it is not fair.  Just keep reading for the solution. 

If the corporation has paid an income tax, you are not allowed to offset your US tax. You will pay tax twice. First, the corporation will pay the foreign tax.

Next, you will pay US (and state) income tax on the Subpart F income or when the corporation invests in US property or when you receive a distribution (whichever event occurs first).

Here is the solution.  Your foreign corporation needs to change to or elect to be a pass-through entity for U.S. tax law.  Three type of pass-through entities exist.  They “disregarded,” “partnership” and “Subchapter S corporation.”  These topics are discussed in my book.  However, first I would like to explain the issue with a hypothetical example.:

You own a foreign corporation doing business in the United Kingdom. The corporation’s net income in the tax year is $1,000. The UK income tax $250. Your corporation invests its profits in the US stock market. You have a “deemed dividend” of $750 taxable to the US. Your US tax is an additional $250. Thus, of the $1,000 earned, your worldwide tax is $500.

Once you are allowed the foreign tax credit, you use IRS  Form 1116  or Form 1118 to claim your money.

Here is the best international tax strategy: The UK corporation becomes a “pass-through” entity for US tax purposes. Some, not all, foreign corporations can elect to be a “disregarded entity.”

A corporation that does not qualify for the election can arrange to have a charter as a domestic corporation. This is known as “dual resident corporation.” At this point, the corporation is both foreign (UK) and domestic. As a domestic corporation, the corporation can elect to be a Subchapter S corporation.

Back to the example, the $1,000 of income passes through to your individual income tax return. The $250 UK corporate income tax is a credit against your US income tax. You are U.S. taxable on $1,000. Assuming a US income tax of $300, your tax after the foreign tax credit is $50.

As a pass-through entity, none of the controlled foreign corporation rules applies. 

Learn how the foreign tax credit works and how you can save money with my easy two-hour to read book,  International Taxation in America for the Entrepreneur.  Learn more on this link or call me, Brian Dooley, CPA, MBT, for a free foreign tax brainstorming consultation at 949-939-3414

Congress issues its manifesto bragging of retroactive tax laws powers.

Saving taxes with legitimate offshore tax planning.

Congress Learns How to Void the 5th Amendment

Despite businesses’ concern about uncertainty in their tax debts, Congress issues its manifesto on retroactive tax laws.

Conceited about its absolute power, Congress brags of a retroactive period of twelve years, if it so desires.

A portion of the manifesto is below.  However, to get the real flavor and to read about the Congress’ 12-year retroactive theory, you must read the full document. If you would like the paper, then please email me, Brian Dooley, CPA, MBT,  at [email protected].

“One issue often raised is that it may seem unfair to change the tax laws once a taxpayer has done something based on the law as it existed at the time. The fact that taxpayers may have concluded a transaction in reliance on prior law is generally not critical to the analysis as “reliance alone is insufficient to establish a constitutional violation.”15 As the Court has made clear, “[t]ax legislation is not a promise, and a taxpayer has no vested right in the Internal Revenue Code.”16

“In other words, Taxation is neither a penalty imposed on the taxpayer nor a liability which he assumes by contract. It is but a way of apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and must bear its burdens. Since no citizen enjoys immunity from that burden, its retroactive imposition does not necessarily infringe due process. . . .17”

In today’s polarization of the left and the right, tax planning requires you to watch the news.   For example, Donald Trump plans to make significant changes in the tax law.  These changes could be retroactive.   For example, in

For example, in January you completed a tax-free trade.   In may, the law is repealed retroactive to January 1st.  Your trade is now taxable.  Unfortunately, you do not have the money to pay the tax since you invested all of the money into the replacement property.  

In the 1970’s we saw this when Jimmy Carter was President.  The courts held the retroactive law.  In this case, the tax law was passed in 1976 retroactive to 1974!

If you would like to brainstorm your tax planning, then please call me, Brian Dooley CPA, at 949-939-3414 for a free one hour consultation.