Tag Archives: section 531

International Tax CPA Prepares Form 1120F and Avoid the Branch Profits Tax

The International Tax CPA know that the branch profits tax is a sneaky beast.   It has three prongs.  One is your interest expense. Next, the amount of equity in your U.S. business,  Lastly, the reason you have equity in your U.S. business.  This tax is reported on Form 1120F.

If you kept equity in your U.S. business to avoid the branch profits tax, then you owe the branch profits tax.   Form 1120F’s balance sheet is where you study this topic.

The branch profits tax is designed after the domestic corporate tax law known as the “accumulated earnings and profits tax”.  This law is found in tax code section 531.  This key factor is the accumulation of profits to avoid paying a dividend (and thus the income tax on the dividend).

International Tax CPA and the Form 1120F

My course to the California Society of CPA’s on international tax planning included the branch profits tax.  Below is part of the course.   If you need help with your international tax planning, then contact me at [email protected]

This course was for the international tax CPA. So, you may find the video too complicated. I suggested that you forward this blog to your CPA  (if he is not an international tax CPA).

Here (this link) is more information on the branch profits tax.  The tax is tricky.

If you have paid the tax, then let us see if we can get the IRS to refund branch profits tax to you.  I can tell you one way to know if your CPA has messed up.

If your business does not have a double entry set of accounting books (called a general ledger), then the branch profits tax calculation may be wrong.

Avoiding the Form 1120F- Foreign Corporation Branch Profits Tax Trap

Preparing the Branch Profits Tax section of the IRS form 1120F  has trapped many foreign investors in U.S. real estate and with US business operations.

 In addition to paying income tax on your profit, the foreign corporation pays tax again on the change in the value of its U.S. business. 

The branch profits tax is based upon a law from the 1950’s. The section 531, tax on accumulated earnings, was deadly to a small business.  However, now most small businesses operate in S-corporations or limited liability company. Since entities of this type are pass through, avoid section 531 does not apply.   Because of this many tax professionals are unaware of this law.

The branch profits tax is just as deadly to the foreign business.  This tax applies if the foreign corporation has income effectively connected with a U.S. business. The applies if the corporation has either a permanent establishment of a fixed place of business.

 If you want help preparing your Form 1120F, then call me Brian Dooley, CPA, MBT at 949-939-3414.

Some CPA’s are advising their clients that keeping assets on the American branch office balance sheet avoids the branch profits tax.    Just holding assets on the books,  does prevent the branch profits tax.  The assets must be continued to be used in an active corporate business.

Section 531 (a tax on accumulated distribution) is the concept used when the branch profit tax was enacted.  Under this section, the corporation must prove the business reason for keeping liquid assets.   The point of section 531 is to cause the second tax.  This is a tax on a dividend that the corporation has refused to distribute.

Likewise, the IRS can impose the branch profits tax when a foreign corporation with a US branch merely retains liquid assets just to avoid the tax.   

Upon a distribution of property to the shareholder of a foreign corporation, the 30 percent branch profits tax apply.  Similar to section 531, corporation needs to maintain ongoing director minutes, shareholder minutes and business plans explaining why assets are not distributed to the shareholder or the home office.

Learn about winning the IRS audit of the branch profits tax on this link.   On this link, find out more innovative methods to eliminate both the branch profits tax and foreign corporation income tax on this link.   If you need help with an international tax audit, then contact me at [email protected]

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Learn how to save taxes with “International Taxation in America for the Entrepreneur” using tried and true methods.

If you would like to us to prepare your Form 1120F,  then please call me, Brian Dooley CPA, at 949-939-3414.  

Learn move about international tax planning with my easy to read book, International Taxation in America for the Entrepreneur available at Amazon on this link.  The book takes about two hours to read.