Proposed Regulations Address Foreign Tax Credit Rules
Dec 27, 2022
The IRS has recently issued proposed regulations relating to the foreign tax credit covering:
- Guidance on the reattribution asset rule for purposes of allocating and apportioning foreign taxes
- The cost recovery requirement
- The attribution rule for withholding tax on royalty payments
Reattribution Asset Rule
The 2022 foreign tax credit final regulations provide rules for allocating and apportioning foreign income tax arising from a disregarded payment. Foreign gross income included by reason of the receipt of a disregarded payment has no corresponding U.S. item because Federal income tax law does not give effect to the payment as a receipt of gross income. The new proposed rules therefore characterize the disregarded payment under Federal income tax law for purposes of assigning this foreign gross income to the statutory and residual groupings.
These rules treat the portion of a disregarded payment, if any, that causes U.S. gross income of the payor taxable unit to be reattributed as a “reattribution payment” under either the rules for gross income attributable to a foreign branch in the case of a taxpayer that is an individual or domestic corporation; or the rules for gross income attributable to a tested unit in the case of a taxpayer that is a foreign corporation. The excess of a disregarded payment over the portion that is a reattribution payment is treated either as a contribution from one taxable unit to another taxable unit owned by the first taxable unit, or as a remittance of a taxable unit’s current and accumulated earnings.
Cost Recovery Requirement
Under the cost recovery requirement, the base of a foreign tax permits the recovery of significant costs and expenses attributable, under reasonable principles, to the gross receipts included in the tax base. The proposed regulations provide additional guidance with respect to whether the test is met in certain cases where foreign tax law contains a disallowance or other limitation on the recovery of a particular cost or expense that may not reflect a specific principle underlying a particular disallowance in the Code. The proposed regulations also provide that the relevant foreign tax law need only permit recovery of substantially all significant cost or expense, based on the terms of the foreign law. A safe harbor is provided for applying the requirement.
Attribution Requirement for Royalty Payments
The attribution requirement allows a credit for foreign tax only if the country imposing the tax has a sufficient nexus to the taxpayer’s activities or investment in capital. Under the source-based attribution requirement, a foreign tax imposed on the nonresident’s income on the basis of source meets the attribution requirement only if the foreign tax sourcing rules are reasonably similar to the U.S. sourcing rules. With respect to royalties, foreign tax law must source royalties based on the place of use of, or the right to use, the intangible property, consistent with how the Code sources royalty income.
The proposed regulations provide an exception (the single-country exception) to the source-based attribution requirement if a taxpayer can substantiate that the payment on which the royalty withholding tax is imposed was made pursuant to an agreement that limits the right to use intangible property to the jurisdiction imposing the tested foreign tax. The exception applies only when the taxpayer has a written license agreement that meets certain requirements.
The proposed regulations also modify the separate levy rule to provide that a withholding tax that is imposed on a royalty payment made to a nonresident pursuant to a single-country license is treated as a separate levy from a withholding tax that is imposed on other royalty payments made to such nonresident and from any other withholding taxes imposed on other nonresidents.
William Vaughan Company will continue to monitor proposed changes on foreign reporting. For immediate questions or concerns, please contact our team of experienced tax professionals.
Categories: Tax Compliance
Ohio Tax Update: State Offers Dollar-for-Dollar Tax Credit for Scholarship Fund Donations
Dec 14, 2022
Starting with the 2021 tax year, the state of Ohio began offering dollar-for-dollar tax credits to individuals who donate to an Ohio-certified scholarship granting organization, or SGO. Defined by the state, SGOs are organizations exempt from federal taxation under section 501(c)(3) of the Internal Revenue Code, that prioritize awarding academic scholarships for low-income students to attend primary and secondary schools (K-12), and that receive certification from the Office of the Ohio Attorney General.
Individuals that donate to an SGO can expect to receive a tax credit equal to 100 percent of their contribution (up to $750,) while married couples could receive up to a $1,500 credit. In addition to claiming the state tax credit, eligible charitable contributions can also be claimed on federal income tax returns if the taxpayer opts to itemize their deductions.
Currently, there are 25 certified SGOs in the state of Ohio, all of which are listed on the Ohio Attorney General’s website.
“This is a very easy credit for Ohio taxpayers to take advantage of,” says William Vaughan Company Tax Partner, Sandi Towns. “Those who have donated to Ohio-certified SGOs in 2022 need simply include their proof of donation letter(s) with other tax documents given to their accountants.”
Says Towns, “William Vaughan Company’s tax team will continue to monitor this and other tax credit updates, however I urge anyone wishing to take advantage of these credits to contact their accountant in order to determine which credits make the most sense for their specific tax and financial situation.”
Sandi Towns, CPA/PFS, CFP®
Categories: Tax Planning
Bonus Depreciation Phase-Out
May 24, 2022
Properly qualifying assets for bonus depreciation can have a significant impact on a business’s bottom line. If an asset qualifies as long-term business property under tax rules, bonus depreciation may allow a business owner to deduct the entire cost of that asset in the year of acquisition.
This will be the last year for 100% bonus depreciation as enacted by Tax Cuts and Jobs Act (TCJA). Starting in 2023, bonus depreciation is scheduled to drop to 80% and will continue to drop by 20% each year thereafter until finally there will be no bonus depreciation starting in 2027.
Prior to the enacting of bonus depreciation, the premier tool for businesses to expense asset purchases was Section 179. Section 179 is still scheduled to be fully available and the current amount of Section 179 deduction allowed is $1,080,000 and the phase-out of the deduction starts once you place eligible assets into service of $2,700,000 and no Section 179 deduction is allowed after $3,780,000 of assets placed in service for that year. Unlike bonus depreciation, Section 179 deductions are only allowed to the extent of taxable income.
Although tax incentives like Section 179 and bonus depreciation can be beneficial, these provisions should only be used in situations that make long-term financial sense for your operation. It is important to always consider your tax circumstances and cash-flow requirements when using these tools. Connect with your William Vaughan Company advisor with additional questions.
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Categories: Tax Compliance, Tax Planning
Michigan Grant Money Now Available Through Grow MI Business Funds
Mar 15, 2022
What is Grow MI Business?
Grow MI Business is a grant program launched by the state of Michigan to deliver roughly $409 million of support to eligible businesses across the state impacted by COVID. The program, signed into law at the end of last year, allows companies who were open for business before October 1, 2019, to get back a percentage of their loss in total state sales through a grant of up to $5 million.
Qualifying businesses must meet the following criteria, as noted on the program website:
- Businesses with a decline in total Michigan sales between the calendar year 2019 and 2020 equal to or greater than 5 percent.
- Businesses that are not tax-exempt
- Businesses not classified as a government entity
- Must fall under one of the following qualifying business type categories:
- Entertainment Venue, including auditoriums, arenas, banquet halls, cinemas, concert halls, conference centers, performance venues, sporting venues, stadiums, and theaters;
- Recreational Facility or Place of Amusement, including amusement parks, arcades, bingo halls, bowling alleys, casinos, nightclubs, skating rinks, water parks, and trampoline parks;
- Cosmetology or Barber Services;
- Exercise Facility or Gym;
- Food Service Establishment;
- Nursery Dealer or Grower;
- Athletic Trainer;
- Body Art Facility; or
- Hotel or Bed & Breakfast
How do I apply?
Online applications are available now through March 31, 2022 (11:59 p.m. EST). You can find additional information along with the application on the Apply for Business Resources (ABR) website, here.
Applicants will be required to submit documentation to verify financial hardship including:
- Financial Documentation and Information to verify their decline in Michigan total sales from the calendar year 2019 to the calendar year 2020 for businesses in operation on October 1, 2019.
- Financial Documentation and Information to verify their fixed costs for the calendar year 2020 for businesses that were not in operation on October 1, 2019, but started before June 1, 2020.
- Beneficiary Agreement with terms and conditions that have been electronically signed.
Please note, unlike other COVID-based funding programs, Grow MI Business is NOT a first-come, first-serve program. Instead, it may be prorated depending on the number of eligible businesses that apply.
For more information on eligibility, requirements, and award methodology, please visit Michigan.gov/abr.
Your William Vaughan Company advisor can guide you through the process and help you provide the necessary information to qualify.
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New USDA Loan Program Focused on Food Supply Chain Revitalization
Feb 08, 2022
The U.S. Department of Agriculture (USDA) Secretary, Tom Vilsack recently announced that the USDA is deploying $100 million under the new Food Supply Chain Guaranteed Loan Program to make nearly $1 billion available in loan guarantees. The objectives are to support new investments in infrastructure for food aggregation, processing, manufacturing, storage, transportation, wholesaling, and distribution, and to also increase capacity and create a more resilient, diverse, and secure U.S. food supply chain.
What is the Food Supply Chain Guaranteed Loan Program?
The Food Supply Chain Guaranteed Loan Program is a part of the USDA’s Build Back Better initiative to strengthen critical supply chains and our food system. This program guarantees loans of up to $40 million for qualified lenders to finance food system projects, specifically for the start-up or expansion of activities in the middle of the food supply chain.
Eligible borrowers must be directly engaged in the middle of the food supply chain, specifically the aggregation, processing, manufacturing, storing, transporting, wholesaling, or distribution of food. Examples of the types of entities that may qualify for the program include meat processors and food hubs. Lenders may provide the loans to eligible cooperatives, corporations, for-profits, nonprofits, Tribal communities, public bodies, and people in rural and urban areas.
How can funds be used?
Funds are available on a first-come, first-serve basis and may be used to:
- start-up or expand food supply chain activities such as aggregating, processing, manufacturing, storing, transporting, wholesaling, or distributing food.
- address supply chain bottlenecks.
- increase capacity and help create a more resilient, diverse, and secure U.S. food supply chain.
How do I apply?
The USDA is accepting electronic applications from lenders through the Food Supply Chain Online Application System until funds are expended. Paper applications will not be accepted.
To access the online application system, lenders must submit a request to email@example.com.
USDA Rural Development encourages applications for projects that advance the recovery from the COVID-19 pandemic, promote equitable access to USDA programs and services, and reduce the impacts of climate change on rural communities. For more information, visit www.rd.usda.gov/priority-points.