Tag Archives: tax loophole

If you are turning off the lights, you’re paying too much income taxes

tax planning, international tax strategies, foreign tax strategies, foreign tax plan, international tax plan, offshore tax, cloud tax planning, ecommerce tax planning, internet tax planning, small business tax planning,

LED light bulbs cost less than one cent per day and last 20 years. Yet, I continue to turn off the lights when I leave a room. I notice I am thinking about taxes the same in the same way.

I am always turning off lights.  It bugs my wife. The electricity for a LED light bulb is a penny a day.  She prefers coming into a room with versus darkness.

Many small businesses owners have pre-LED light bulb tax plans.  Yet, they have a 21st Century business.   For example, hosting an e-commerce business in Nevada can reduce state income taxes.

Importers can now use a new type of IRS approved foreign corporation to eliminate taxes.

Ten years ago, Congress created the “solo 401K plan”.  This plan is exempt from many of the “prohibited transactions rules.

The Internal Revenue Code was written in 1954 (with small changes in 1986)  closing 1940 loopholes. The 1954 Code provides the framework of how we tax business.

The million of pages of new laws use the 1954 frame. The new laws try to close the loopholes caused by flaws of the 1954 Code. Yet, they do not close the biggest loophole of all, e-commerce. Why? It did not exist until this Century.

Cashing in on this big loophole requires thinking in the 21st Century and not in the 1900’s.  For example, are you still seeing your CPA for year end tax planning?  It made sense in the 1990’s.  Now, tax planning is long term and strategic.

This weekend I backed up my car just like I did in the 1980s.  I looked over my left shoulder. I also ran over a curb.  Sitting next to me was my wife. She saw me approach the curb on the video from the car’s backup camera (required in new cars because of the death of children who were behind cars backing up).

 Thankfully, she told me to look where I am going. This is also good advice for tax planning.

Lesson: Doing the things the old fashion way is natural to us.   This includes our tax planning. Domestically, the Roth IRA / 401K is substantially smarter than the traditional IRA or 401K plan. Yet, many of us still have the traditional IRA. 

For example, E-Commerce businesses can become international merely by placing their computer server in a foreign country.  Nations, such as Canada,  do not tax this income (except for sales to Canadians).  Puerto Rico charges a four percent income tax.  If you are in Puerto Rico for more than 183 days a year for two a years in Puerto Rico, you can collect your profits tax-free (more on this link).

This blog has only two ideas.  To be honest with you, Americans 19th Century Tax Code is creating thousands of new loopholes.  Few are found on the internet.  The loopholes are unique to your business.  The point is to get your CPA to keep the lights on and not to look over his shoulder when he backs up.   

tax planning, international tax strategies, foreign tax strategies, foreign tax plan, international tax plan, offshore tax,

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

If you have an eCommerce business or doing business outside of the United States, then check out my easy to  read book on Amazon.  The Kindle on sale for $9.50, on this link.

Innovative tax planning looks at the advantages of the million page of tax law written for the last century.  If you would like to brainstorm your ideas, then please call me, Brian Dooley, CPA, MBT at 949-939-3414 for a free consultation.

U.K. and Europe’s Tax War on the U.S. Treasury Heats Up.

The Financial Times of London  reported that the Obama administration is continuing its protest of the gangster-like theft by the EU and the UK government’s.   This week President Obama told the EU to back off from taxing Apple (more on this link).

But if you can’t make your wealth, you need to take it from others.  This is called taxes.

As the socialist spending of the UK and the EU countries increase European poverty in France, Spain, Greece and Italy, the EU continues its raid on the U.S. Treasury.  

To get America’s money, these countries merely break the tax treaty that has prevents tax wars.  Each tax treaty has a “permanent establishment”  safeguard.  So, far the White House is silently allowing the English and the Europeans to win this war. 

The Financial Times of London reports, that European Commission is intensifying its attack on American digital and wealth companies.  The list includes, Skype, Netflix, Amazon, Apple and Google.   And why not?  All the U.K  and EU taxes will be paid by you and me.    Why? Will read a little more.  (Update Sept. 17, 2016: Microsoft has moved  Skype from the U.K. laying off all the British employees; Update Sept 19, 2016 the UK wants McDonalds to pay half a $billion despite the U.S-U.K. Tax Treaty). 

Since I first posted this article, the UK intimidated Starbucks to make a “donation” of million of dollars.  The EU has gone after McDonald’s fast food.  Maybe it is time for the U.S. to get tough.  We can save $billions by letting bringing home our troops in Germany.

The Times reports “The EU’s intensifying assault on big American tech groups has triggered mounting criticism in the US, including by President Barack Obama, of European protectionism.”  But there is more at stake.  It is money….lots of money.

The Raid on the U.S. Treasury

The Europeans and the British are simply ignoring the tax treaty with the United States. For a century, these treaties do not tax a foreign business unless they have a “fixed place of business” and a “permanent establishment” in the other country.  The EU and the UK is squeezing money out of American businesses by ignoring these rules.

The raid on the U.S. Treasury is from a flaw in U.S. tax law:  The U.S. is one of the few countries that taxes its businesses on their worldwide income.  EU countries do not tax  worldwide income.    Thus, by targeting American business, they know that Uncle Sam will be force to give them money.  And why not.. .it is the history old battle between the haves (USA) and the have nots (UK and EU).

(Learn how small international businesses are protecting themselves at the end of this article.)

When the UK and the EU violate the treaty and grab taxes from an American business, “foreign tax credit” law requires the US Treasury to pay the foreign income tax. 

 The U.S. Treasury needs U.S. companies to compete in the global market.  The  Federal, and state are about 43%.   While EU companies pay taxes at 25% and  foreign profits are tax free. EU firms have more money to expand into international markets and into their domestic markets.

The U.S. Treasury reimburses Americans their foreign taxes.  This is known as the “foreign tax credit” (American business pays tax at 43%  while EU firms pay tax at 20% to  25% and nothing on foreign profits).

 Congress Blasts EU for Raiding the U.S. Treasury, on this link, but does nothing. 

Starbucks is an example of the EU and UK successful raid on the U.S. Treasury.   Starbucks announced that it was moving its headquarters to Britain so that it can pay more taxes.  Yes, it is moving to increase their taxes which will be paid by us.  

By the way Starbucks and Amazon have both paid more than a $billion dollars in value added tax each year and every year to the UK and the EU.  But, these governments want more… they want all that they suck from you and me. 

 U.K. and E.U. international taxation is based on the location of the firm headquarters.  Starbucks headquarter is in Holland.  The Netherlands is one of the few European countries that provides a lower tax to  create jobs.  The Dutch tax laws are always in the news.  The U.S., U.K. and E.U. disdain Holland for its tax policy. 

Starbucks UK tax is paid by the American population.  Because the U.S. taxes everyone’s worldwide income, we all get a credit for the foreign income taxes we pay (the “foreign tax credit”). The British Government  knows  this.

Starbucks, after being bullied in the British press and threaten by the UK Government, gave up and move  its headquarters to the UK to pay more UK taxes. 

This week, the UK Government is bullying Amazon. As an American company, Amazon is protected by the US-UK Tax Treaty.  However, this protection requires the Department of the Treasury to say “no” to the UK.

Small business international tax planning

The advantage of being a small business is being small.  They do not have    1000s of employees in the UK and Europe.  So, small business with the help of a smart computer can run their operation from zero tax haven countries.

The two best are the Isle of Man (in the North Irish Sea) and the British Virgin Islands.  In third place are two U.S. tax havens – Puerto Rico (business and personal tax at 4%) and the U.S. Virgin Islands with a 90% tax abatement.
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How to Save Taxes Offshore in Three Minutes

The latest headlines on the “Luxembourg Leaks” might have left you with the impression that hundreds of  corporations committed tax evasion by shuffling money to Luxembourg.

How could  these wildly profitable businesses lower their effective tax rates to less than 1 percent?

The exposé of 548 secret tax rulings reported by the International Consortium of Investigative Journalists (ICIJ) last week showed us that hundreds of the biggest companies in the world slashed their tax bills through creative tax planning.  .

If you’re whining about paying too much in taxes, do something about it!   Take three minutes to watch this entertaining and informative video. I promise you’ll learn some powerful—and legal—tax saving tactics.

If you need to up the quality of your tax planning, then contact me, Brian Dooley, CPA, MBT, at [email protected]

To the general public, something smells unsavory, improper, or at the very least, unethical.  Is it illegal? Even the ICIJ’s experts couldn’t make that claim. At most, the companies and their advisors at PricewaterhouseCoopers used “aggressive tax-reduction strategies.”

Ahh . . . precisely what CPAs are paid to do. Finding legal methods to reduce tax liabilities through international tax planning is my area of expertise.

The amusing video inspired me to share a few quick lessons (based on my 30-plus years of international tax planning):

1.   Sophisticated tax planning isn’t about year-end deductions.  It is about related party transactions that legitimately shift income to a lower tax company. Domestically, you may want to consider Nevada by using the new small business trust for share of an S-corporation.

2.   There is always another “tax loophole. U.S. tax law is one million pages of conflicting laws. Congress creates tax loopholes—sometimes for their buddies, sometimes by accident. In any case, they are legal. So dig in and start working with your CPA to find loopholes that benefit you.

The Starbucks tax planning, Google tax planning and Amazon tax planning reduce European taxes. Not only do they provide a model for small business international tax planning,  they also remind small business to invest into their tax planning.

Please remember that legitimate offshore tax planning includes applying  to the IRS for a private ruling.  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).

IRS Explains How to Not e-File your return and Avoid Identity Theft

irs super computer, robo audit, why file a paper,

The IRS super robot is fast and smart. It can read every e-filed tax return in less than one day.

Yikes. Another break-in at the IRS!  

Seems that the IRS is an easy mark for street gangs having “laptop parties.”  Good news… buying illegal drugs is harder because the gangs have social gatherings, called laptop parties,  where they steal your tax return.

Every year, the IRS has lost $5 billion dollars in e-files tax refunds from Identity Theft.   Trying to get your money back requires the help of your Congressman.

Solution:  Stop your e-filing and file paper income tax return.

But there is one more big reason.  Your chances of avoiding an  IRS audit are increased.  As my radio show explained, the IRS is relying on its supercomputer and its robot auditor (robot-audits).   The flaw is the robot auditor cannot read a paper return.

If you missed the 30-minute radio show on the IRS super computer and their robo-audits, then here is a link to  Blog Tax Talk radio shows.

The IRS website provides the following information.

16. Can my clients choose not to e-file?

“Yes. Even if you are a specified tax return preparer, your clients may independently choose to file on paper. Preparers should document each client’s choice to file in paper format and keep a signed copy of the statement on file. See FAQ 17 below for the statement. Do not send the statement to the IRS or attach it to the client’s tax return. Instead, specified tax return preparers should attach Form 8948,”

“Preparer Explanation for Not Filing Electronically, to your client’s paper return and check box 1. Include your PTIN on each tax return where requested. If your clients are filing a joint return, only one spouse’s signature is necessary on the choice statement.”

IRS Defies Congress and Keeps Major Loophole with Related Party Loans

Saving taxes with Congresses tax reform

Saving taxes with the pending tax reform requires an innovative tax plan.

Related party loans are an excellent way to shift income and protect assets.   Congress told the IRS to update its regulations to take into account credit risks of the related party.   The IRS said “no.”

Shifting income to a lower tax entity is easy when using debt to transfer the income producing asset.  The IRS required related party loan interest rate is below one percent regardless of the financial strength of the related party.

The flaw in the tax law is that all promissory notes have the same economic substance irrespective of the creditworthiness of the borrower.  The IRS requires an  interest rate of about one to three percent on an unsecured loan to a related party.   Yes.. it is a sham rate and it is necessary.  No need to look at the credit worthiness.   The IRS rules require an abusive tax sham for you to use.

The promissory note must be signed at the time of the loan. Currently, the IRS informal and unofficial policy has allowed loan agreements to be signed before the tax return is due.  Never backdate a document.  The promissory note states the effective date, which is the time the loan was made.  You must have a double-entry general ledger and record the transaction as a loan.  

The most famous case in the Rushing Trust case (on this link) where a related party installment sale note of a family trust was considered to be for adequate consideration.  The trust issued the note and purchased the asset from the settlor.  The trust had almost no capital.  The trust was not creditworthy.  The court held that section 482 (related party transactions) and section 1001 (sale of property) were satisfied.

If you would like to brainstorm your tax planning ideas, then please call me, Brian Dooley CPA, at 949-939-3414 for a free one-hour consultation.  You can learn other great international tax planning strategies with my easy to read book, International Taxation in America for the Entrepreneur.  Amazon has the Kindle on sale for $9.50 on this link.

Hear my episode of Tax Talk on related party loan tax strategies by clicking below.

The Great Recession caused Congress to demand all Federal agencies to look their regulations and to correct them if they did not take into account creditworthiness under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Well, the IRS started to follow the law; and then decided to say “No” to Congress.  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.

Below is the IRS’s  announcement.  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).

Background

Section 939A(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203 (124 Stat. 1376 (2010)), (the “Dodd-Frank Act”), requires each Federal agency to review its regulations that require the use of an assessment of credit-worthiness of a security or money market instrument, and to review any references or requirements in those regulations regarding credit ratings.

Section 939A(b) directs each agency to modify any regulation identified in the review required under section 939A(a) by removing any reference to, or requirement of reliance on, credit ratings and substituting a standard of credit-worthiness that the agency deems appropriate. Numerous provisions of the Code are affected.

These temporary regulations amend the Income Tax Regulations (26 CFR part 1) under sections 150, 171, 197, 249, 475, 860G, and 1001 of the Code. These sections were added to the Code during different years to serve different purposes. These temporary regulations also amend the Manufacturers and Retailers Excise Tax Regulations (26 CFR part 48) under section 4101 that provides registration requirements related to Federal fuel taxes.

Explanation of Provisions

These temporary regulations remove references to “credit ratings” and “credit agencies” or functionally similar terms in the existing regulations. Some changes involve simple word deletions or substitutions. Others reflect the revision of a sentence to remove the credit rating references. In some cases, multiple sentences have been modified.

Where appropriate, substitute standards of credit-worthiness replace the prior references to credit ratings, credit agencies or functionally similar terms. Language revisions serve solely to remove the references prohibited by section 939A of the Dodd-Frank Act and no additional changes are intended.

Section 1.150-1. Section 1.150-1 provides definitions for purposes of sections 103 and 141 through 150. Section 1.150-1(b) defines issuance costs to mean costs to the extent incurred in connection with, and allocable to, the publication of an issue within the meaning of section 147(g). Section 1.150-1(b) lists as non-exclusive examples of issuance costs: underwriters’ spread; counsel fees; financial advisory fees; rating agency fees; trustee fees; paying agent fees; bond registrar, certification, and authentication fees; accounting fees; printing costs for bonds and offering documents; public approval process costs; engineering and feasibility study costs; guarantee fees, other than for qualified guarantees (as defined in § 1.148-4(f)); and similar costs.

These temporary regulations replace the § 1.150-1(b) reference to rating agency fees with “fees paid to an organization to evaluate the credit quality of the issue.” No substantive change is intended.

Section 1.171-1. The temporary regulations change credit rating in § 1.171-1(f) Example 2 (i) to credit quality. The change does not affect the analysis in the example. Also, the temporary regulations make other nonsubstantive changes to the example (for example, the dates in the example are updated).

Section 1.197-2(b)(7). The temporary regulations remove “the existence of a favorable credit rating” from the examples of supplier-based intangibles in the third sentence of § 1.197-2(b)(7). No substantive change in the treatment of a favorable credit rating as a supplier-based intangible under Section 197 is intended.

Section 1.249-1. The temporary regulations change credit rating and ratings of credit rating services in § 1.249-1(e)(2)(ii) to credit quality and widely published financial information. In the existing regulations, a change in the credit rating of an issuer or obligation is one of the facts and circumstances used to determine how much of a repurchase premium is attributable to the cost of borrowing and not to the conversion feature of a convertible bond. Credit rating services are used as a means to determine the credit rating of an issuer or obligation. None of these changes affect the substantive rules in the existing regulations.

Section 1.475(a)-4(d)(4)Example 1Example 2, and Example 3 in § 1.475(a)-4(d)(4) are revised to remove references to credit ratings or credit rating agencies. In these three examples in the existing regulations, credit rating or specific references to certain ratings by certain credit ratings agencies (such as AA/aa or AAA/aaa) were used to set up the factual scenario that illustrates the factors that go into the determination of whether it is appropriate for a dealer to take a credit risk adjustment.

These terms were also used to describe the credit risk adjustment implicit in the yield curve used to discount the present value of the cash flows. This adjustment affects whether any additional credit risk adjustments are warranted.

These examples also used credit rating agency to set up the factual scenario that a counterparty’s credit-worthiness was based upon an industry standard of a certain credit quality and illustrates the factors that go into the determination of whether it is appropriate for a dealer to take a credit risk adjustment. The changes that have been made to the language of the examples do not alter the purpose of the illustrations and present the factual issues in a more generalized way.

Section 1.860G-2. Section 1.860G-2(g)(2) defines qualified reserve fund as an amount that is reasonably required to fund expenses of the REMIC or amounts due on regular or residual interests in the event of defaults on the underlying pool of mortgages. In defining the amount reasonably required, § 1.860G-2(g)(3)(ii) refers to the amount required by a nationally recognized independent rating agency as a condition of providing the rating for the REMIC interest desired by the sponsor. Because an alternative and fully adequate standard of reference are already outlined in these regulations, these temporary regulations remove the rating agency alternative standard.

Section 1.1001-3. Section 1.1001-3 provides rules for determining whether a modification of a debt instrument results in exchange for purposes of § 1.1001-1(a). These temporary regulations remove the terms rating and credit rating from § 1.1001-3 and replace those terms with credit quality. Section 1.1001-3(d) Example 9 is revised so that the event that triggers an option to increase a note’s rate of interest is a breach of certain covenants in the note, rather than a specific decline in the corporation’s credit rating.

The temporary regulations also revise § 1.1001-3(g) Example 5 so that the debt instrument described in the example allows a party to be substituted for the instrument’s original obligor by the party’s credit-worthiness, rather than the party’s credit rating. The temporary regulations also revise § 1.1001-3(g) Example 8 to explain that a bank’s letter of credit supporting a debt instrument is substituted for another bank’s letter of credit when the first bank encounters financial difficulty, thus removing references to rating agencies and either bank’s credit rating.

Section 48.4101-1(f)(4). Section 4101 requires certain persons to be registered by the IRS for purposes of several fuel tax provisions of the Code. Under § 48.4101-1, the IRS will register an applicant for registration only if, among other conditions, the applicant has adequate financial resources to pay its expected fuel tax liability. To make this determination, § 48.4101-1(f)(4)(ii)(B) instructs the IRS to look to the applicant’s financial information. These temporary regulations remove the examples of the types of documents the IRS should review and instructs the IRS to look at all information relevant to the applicant’s financial status.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866, as supplemented by Executive Order 13563. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. For applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6), please refer to the Special Analysis section in the preamble to the cross-referenced notice of proposed rulemaking in the Proposed Rules section in this issue of the Federal Register. Under section 7805(f) of the Code, these regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

Drafting Information

These regulations were drafted by personnel in the Office of Associate Chief Counsel (Financial Institutions and Products), the Office of Associate Chief Counsel (Income Tax and Accounting), the Office of the Associate Chief Counsel (International) and the Office of the Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the IRS and the Treasury Department participated in their development.

List of Subjects

26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 48

Excise taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 48 are amended as follows:

PART 1 — INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.150-1 is amended as follows:

1. Paragraph (a)(4) is added.

2. In paragraph (b), the definition of Issuance costs is revised.

The additions and revisions read as follows:

§ 1.150-1 Definitions. (a)

(4) [Reserved] For further guidance, see § 1.150-1T(a)(4).

(b) * * *

Issuance costs [Reserved]. For further guidance, see § 1.150-1T(b), Issuance costs.

* * * * *

Par. 3. Section 1.150-1T is added to read as follows:

§ 1.150-1T Definitions (temporary).

(a) through (a)(3) [Reserved]. For further guidance, see § 1.150-1(a) through

(a)(3).

(4) Additional exception to the general applicability date. Section 1.150-1T(b), Issuance costs, applies on and after July 6, 2011.

(5) Expiration date. The applicability of § 1.150-1T(b), Issuance costs, expires on or before July 1, 2014.

(b) Bond through the definition of Governmental bond [Reserved]. For further guidance, see § 1.150-1(b) Bond through the definition of Governmental bond.

Issuance costs mean costs to the extent incurred in connection with, and allocable to, the publication of an issue within the meaning of section 147(g). For example, issuance costs include the following costs but only to the extent incurred in connection with, and allocable to, the borrowing: underwriters’ spread; counsel fees; financial advisory fees; fees paid to an organization to evaluate the credit quality of an issue; trustee fees; paying agent fees; bond registrar, certification, and authentication fees; accounting fees; printing costs for bonds and offering documents; public approval process costs; engineering and feasibility study costs; guarantee fees, other than for qualified guarantees (as defined in § 1.148-4(f)); and similar costs.

(c) Issue date through paragraph (e) [Reserved]. For further guidance, see § 1.150-1(b) Issue date through paragraph (e).

Par. 4. Section 1.171-1(f) Example 2 is revised to read as follows: § 1.171-1 Bond premium.

* * * * *

(f) * * *

Example 2. [Reserved]. For further guidance, see § 1.171-1T(f) Example 2.

* * * * *

Par. 5. Section 1.171-1T is added to read as follows:

§ 1.171-1T Bond premium (temporary).

(a) through (f) Example 1 [Reserved]. For further guidance, see § 1.171-1(a) through (f) Example 1.

Example 2Convertible bond — (i) Facts. On January 1, 2012, A purchases for $1,100 B corporation’s bond maturing on January 1, 2015, with a stated principal amount of $1,000, payable at maturity. The bond provides for unconditional payments of interest of $30 on January 1 and July 1 of each year. Also, the bond is convertible into 15 shares of B corporation stock at the option of the holder. On January 1, 2012, B company’s nonconvertible, publicly-traded, a three-year debt of comparable credit quality trades at a price that reflects a yield of 6.75 percent, compounded semiannually.

(ii) Determination of basis. A’s basis for determining loss on the sale or exchange of the bond is $1,100. As of January 1, 2012, discounting the remaining payments on the bond at the yield at which B’s similar nonconvertible bonds trade (6.75 percent, compounded semiannually) results in a present value of $980. Thus, the value of the conversion option is $120. Under § 1.171-1(e)(1)(iii)(A), A’s basis is $980 ($1,100 – $120) for purposes of §§ 1.171-1 through 1.171-5. The sum of all amounts payable on the bond other than qualified stated interest is $1,000. Because A’s basis (as determined under § 1.171-1(e)(1)(iii)(A)) does not exceed $1,000, A does not acquire the bond at a premium.

(iii) Effective/applicability date. This Example 2 applies to bonds acquired on or after July 6, 2011.