Entertainment and Meals

Transcription

1 Entertainment and Meals Entertainment. Deductions are eliminated for entertainment expenses under Sec. 274(a)(1) expenses directly related to or associated with entertainment. Effective: Amounts incurred or paid after Dec. 31,

2 The term entertainment is defined in Reg (b)(1)(i) as any activity that is of a type generally considered to constitute entertainment, amusement, or recreation, such as entertaining at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing, vacation and similar trips. 3 New Subsection (a) of Section 274: 4

3 Sec. 274(e) (1) (9) exceptions remain such as: expenses for goods, services, and facilities that are treated as compensation to an employee; expenses paid or incurred by the taxpayer, in connection with the performance of services for another person, under an accountable reimbursement arrangement. 5 Meals: Expenses for employer-operated eating facilities are 50% deductible through 2025, then become nondeductible 6

4 Under pre-tcja law, the 50% limit did not apply to expenses for food or beverages that were excludable from the recipient's gross income under section 132(e) as a de minimis fringe benefit. 7 Section 274(e)(1): Same as prior law. 8

5 New Section 274(n)(2): New 50% limit on meals (100% after 2025) Sec. 274(e)(1) is no longer an exception. 9 Section 274(a)(4): Exception remains: Same as prior law. 10

6 Treas. Reg. section (f)(2)(v), in interpreting section 274(e)(4), provides that any expenditure by a taxpayer for a recreational, social, or similar activity (or for the use of a facility in connection therewith), primarily for the benefit of his employees generally, is not subject to the limitations on allowability of deductions provided for in paragraphs (a) through (e) of this section. Ordinarily, this exception applies to usual employee benefit programs such as expenses of a taxpayer (a) in holding Christmas parties, annual picnics, or summer outings, for his employees generally, or (b) of maintaining a swimming pool, baseball diamond, bowling alley, or golf course available to his employees generally (emphasis added). FSA 974A. 11 New Subsection (o) of Section 274 (after 2025) 12

7 Section 132(e)(1) and (2): Same as prior law. 13 Section 119(a)(1): Same as prior law. 14

8 Section 274(k) Business Meal Exception -- Same as prior law. 15 TAM (5/16/1997) distinguishes business meals from entertainment. 16

9 S Corporation Changes Relief for Converting From S to C 18

10 If S status is revoked within 2 years of enactment, and the S corp. is eligible then: Cash Distributions after the PTTP are characterized based upon the ratio of AAA/E&P. 19 Eligible if: (1) is an S corporation the day before the enactment; (2) during the two-year period beginning on the date of such enactment revokes its S corporation election under Section 1362(a); (3) all of the owners on the date the S corporation election is revoked are the same owners (and in identical proportions) as the owners on the date of such enactment. 20

11 Section 481 adjustment for accounting method changes: A 6 tax year period beginning in the year of change. 21 Changes To Electing Small Business Trusts 22

12 Allows nonresident alien individual to be a current beneficiary of an ESBT. The charitable contribution deduction of an ESBT is not determined by the rules for trusts but rather by the rules applicable to individuals. So percentage limitations and carryforward provisions applicable to individuals apply to the portion of an ESBT holding S corporation stock. 23 Effective Date: The nonresident alien beneficiary provision takes effect on January 1, The change to the charitable deduction applies to tax years beginning after December 31,

13 Partnership Changes Carried Interest Rule (New Sec. 1061) 26

14 Change the LTCG one-year holding period to a three-year holding period for certain capital gains of a taxpayer with respect to applicable partnership interests. LTCG under 3 years becomes STCG. An applicable partnership interest is one transferred to (or held by) a taxpayer in connection with the performance of services. 27 Sec (a)(1) In General 28

15 Does LTCG with respect to such interests refer to LTCGs upon the transfer of the PSP interest or the partner s distributive share of partnership LTCGs? Regulatory guidance is needed for this and other aspects of sec (c)(1) Applicable Partnership Interest 30

16 (c)(2) Applicable Trade or Business 31 (c)(3) Specified Asset real estate held for rental or investment 32

17 (c)(4) Exceptions 33 The provision is effective for tax years beginning after December 31,

18 Charitable Contributions and Foreign Taxes are Limited to Outside Basis (Sec. 704(d)) 35 Mandatory 743(b) Adjustment (Deemed 754 Election) 36

19 Current Law: Mandatory if a substantial built-in loss : total adjusted basis of partnership assets exceed total FMV by >$250, Example -- 10% PSP Interest (no discount/no debt) $ 70,000 Inheritance (DOD FMV)* - 100,000 Inside Basis = <30,000> Sec. 743(b) Adj. *DOD FMV (10%) Asset Tax Basis 1,000,000 Asset FMV 700,000 A discount increases the downward adjustment 38

20 New Law: Also mandatory adjustment if a loss of over $250K would be allocated to the transferee partner, if all assets were sold for FMV 39 Sale by Alice to Connie Alice 1/3 O.B. $4 mil. Bart 1/3 O.B. $4 mil. Connie 1/3 O.B. $4 mil. Bldg. FMV $10 mil. Adj. Basis: $5 mil. Bldg. FMV $5 mil. Adj. Basis: $7 mil. ABC Partnership 40

21 No More Deemed Terminations Under Sec Gain Recognized on Sale by of PSP Interest by Foreign Partner 42

22 Background 43 Grecian Magnesite Mining (GMM), Industrial & Shipping Co., SA, 149 TC No (July 13, 2017) Foreign Corporation's Disposition Of Interest In U.S. Partnership (55 Page Opinion) 44

23 The new law reverses the impact of this judicial decision for sales after 12/31/ Redemption of FC by PSP GMM Other Partner s Greek Corporation 12.6% Other Assets Premier -- U.S. LLC/PSP 46

24 GMM Greek Corporation 12.6% Other Partners Other Assets Premier -- U.S. LLC/PSP U.S. Real Property $10.6 Mil. 47 GMM realized $6.2 million of gain and $2.2 million was attributable to Premier s U.S. real estate. 48

25 GMM stipulated at trial that the gain attributed to the U.S. Real Property was U.S. ECI (taxable) per section 897(g) 49 Tax Court Holding #1 GMM s gain was foreign source based upon the default rule in section 865 that gain on the sale of personal property is sourced based upon residence of the seller. And not U.S. source under the U.S. Office rule. 50

26 As a result, the $4 mil. of remaining redemption gain was not taxable by the U.S. unless ECI 51 IRS Position IRS relied upon Rev. Rul which adopted a look-thru approach similar to section 751 but for ECI generating assets rather than hot assets. 52

27 Tax Court View of Ruling Rev. Rul is not simply an interpretation of the IRS's own ambiguous regulations, and we find that it lacks the power to persuade. Its treatment of the partnership provisions is cursory in the extreme, not even citing section Tax Court Holding #2 GMM s proceeds from the redemption of the U.S. LLC/PSP was not effectively connected with a U.S. trade or business. 54

28 Sequence followed by the Tax Court: section 736(b)(1) leads to section 731, which in turn leads to section 741, but [IRS] evidently thinks such an analysis stops short. 55 Section 741 says that gain on the sale of a PSP interest shall be considered as gain or loss from the sale or exchange of a capital asset. Observation: Same reasoning should protect against SE tax on redemption a U.S. partner. 56

29 Conference Agreement Gain or loss from the sale or exchange of a partnership interest is effectively connected with a U.S. trade or business to the extent that the transferor would have had effectively connected gain or loss had the partnership sold all of its assets at fair market value as of the date of the sale or exchange. 57 The transferee of a partnership interest to withhold 10 percent of the amount realized on the sale or exchange of a partnership interest 58

30 The proposal is effective for sales and exchanges after December 31, Estate, Gift, and GSTT

31 Estate, Gift, and GSST relief by doubling basic exclusion amount (BEA) from $5 mil. to 10 mil. (inflation adjusted after 2011). So $11.2 Mil. BEA in 2018 (instead of $5.6 mil. Married couple, with portability or bypass trust, can shield $22.4 mil. For estates of decedents dying and gifts made between January 1, 2018 and December 31, No change in ability to step-up (or down) income tax basis at death. No change in current rules for nonresident aliens ($60K exclusion from estate tax and no exemption from gift tax). 62

32 Treasury regulations will clarify how to address differences between the date of death BEA and the date of gift BEA (per the Conference Agreement). 63 International Tax

33 DISC s Terminated Current DISCs and IC DISCS in 2018 terminated. NO Change % Exemption (via DRD) for Foreign-Source Non-Subpart F Dividends (Sec. 245A) ( - $215.5 Bil. over 10 years) 66

34 C Corporations only 67 Exempt (via 100% DRD) 100% of the foreign-source portion of dividends received by a U.S. corporation from a foreign corporation in which the U.S. corp. owns at least 10%. Most hold foreign stock one year. 68

35 No exemption if the dividend is deductible by foreign corporation in computing foreign tax ( hybrid dividend). Sec. 245A DRD does not apply to S corporations (Sec. 1363). Effective TYBA Dec. 31, U.S. C Corporation Dividend 100% DRD 10% to 100% Foreign Corp Earning Foreign Source Non-Subpart F Income TYBA 12/31/

36 U.S. Corporation Deemed Dividend 10% to 100% Foreign Corp. Subpart F Income 71 U.S. Individual Deemed Dividend 10% to 100% Foreign Corp. Subpart F Income 72

37 Dividend Max Rate with NIIT 23.8% U.S. Individual U.S. Parent Corporation Dividend 100% DRD Foreign Subsidiary 73 What about a foreign branch? 74

38 U.S. Parent Corporation Foreign Income taxed at 21% Max. Rate offset by FTC Foreign Branch If foreign rate is lower than 20%, then U.S. tax on the difference, but also possible new deduction for Foreign-derived Intangible Income (FDII) 75 What about a U.S. pass-thru? 76

39 U.S. Sole-Prop., Ptr., S shareholder Foreign Source Income Not Eligible for 20% deduction but FTC is available Foreign Branch 77 U.S. Individual Dividend (no DRD) No Indirect FTC 10% to 100% Foreign Corp Earning Foreign Source Non-Subpart F Income 78

40 Deduction For Foreign-derived Intangible Income (FDII) New Sec. 250 (-64.4 billion) 79 C Corporations only (not S or individuals) 80

41 A U.S. C corporation is allowed a deduction equal to 37.5 percent (i.e., a preferential tax rate of 12.5 percent) on its foreign-derived intangible income (FDII) earned in the United States. 81 FDII = deemed intangible return = roughly net income after certain adjustments, reduced by the deemed TANGIBLE return of 10% x adjusted basis of tangible assets. 82

42 Deduction eligible income is income derived in connection with property sold, leased, or licensed to, and services provided to foreign persons. Ultimate use of product sold must be foreign. 83 U.S. Parent Corporation Foreign Income taxed at 21% Max. Rate but FDII deduction Foreign Branch New Deduction for Foreign-derived Intangible Income (FDII) 84

43 U.S. Sole-Prop., Ptr., S shareholder No FDII Deduction Foreign Branch 85 Transition Tax On Deferred Foreign Income (Sec. 965) (+ $184.8 Bil.) 86

44 About two-thirds of the hit comes from the repatriation tax, while writing down U.S. deferred tax assets also contributed, the company said in a filing on Friday. 87 C Corporations and S Corps. and Individuals 88

45 One-time tax on a US shareholder owning at least 10% of a foreign corporation on the shareholder's pro rata share of the foreign corporation's post-1986 tax-deferred earnings. Rate is 15.5% (if accumulated earnings held in cash or cash equivalents) or 8% (if accumulated in illiquid assets). 89 The tax can be paid over 8 years and a portion of FTCs are available. Shareholder with 10%-or-greater stake in a corporation with post accumulated deficits can offset accumulated earnings. 90

46 U.S. Parent Corporation Deemed Dividend (Via 10% to 100% Subpart F) Foreign Corp Post-1986 Deferred Accumulated Earnings in last tax year beginning before 1/1/ U.S. Individual Deemed Dividend (no undirect FTC) Foreign Corp. Subpart F Income 10% to 100% 92

47 S Corporations S Corporations are subject to the transition tax (but denied the benefit of the 100% DRD Deduction on CFC dividends) Should an S corp. owing 10% of a foreign corporation convert to C? 93 Special Rule for S Corporations Any shareholder of an S corporation can elect to defer the transition net tax liability until a triggering event occurs S status change, liquidation, termination, transfer of shares 94

48 U.S. S corporation Deemed Dividend 10% to 100% Foreign Corp Post-1986 Deferred Accumulated Earnings in last tax year beginning before 1/1/ Current Year Inclusion of Global Intangible Income (GILTI) income (+ $135.5 billion) In Effect: a new category of Subpart F income. 96

49 A U.S. shareholder of CFC must currently include in income (via deemed dividend) its global intangible low-taxed income (GILTI) in a manner similar to how it includes subpart F income. 97 (Includes Individuals) U.S. tax on at a reduced rate on CFC income above a routine return on tangible (if paying foreign and U.S. tax less than a 13.12% (considering the reduced FTCs) 98

50 Only 80% of the foreign taxes paid on the income would be allowed as a foreign tax credit. Excluded from GILTI: effectively connected income, subpart F income, foreign oil and gas income, or certain related party payments. 99 Applies to C Corps, S Corps and Individuals BUT, only C corporations get the deduction for foreign-derived intangible income earned in the U.S. (discussed above) Incentive to convert S to C. 100

51 U.S. Individual Deemed GILTI Dividend 10% to 100% CFC 101 Inventory Sourcing 102

52 Sales of Inventory are sourced solely based upon production (outbound and inbound). TYBA