For U.S. citizens, Green Card holders, and those considered U.S. persons for tax purposes, understanding and complying with international tax requirements is essential. These obligations primarily revolve around the Foreign Account Tax Compliance Act (FATCA), the Foreign Bank and Financial Accounts Report (FBAR), and IRS Form 5471. These regulations are designed to combat tax evasion and ensure transparency of international financial transactions and holdings.

FBAR (FinCEN Form 114)

U.S. persons must file an FBAR if they have a financial interest in or signature authority over one or more foreign financial accounts, with an aggregate value exceeding $10,000 at any time during the calendar year. Failure to file an FBAR can result in hefty penalties: up to $12,921 for non-willful violations and the greater of $129,210 or 50% of the account balance at the time of the violation for willful violations.

FATCA (Form 8938)

U.S. taxpayers with specified foreign financial assets that exceed certain thresholds must report these assets on Form 8938, filed with their annual tax returns. Penalties for failing to file Form 8938 start at $10,000 and can go up to $50,000 for continued failure after IRS notification. Additionally, understatement of tax attributable to non-disclosed assets can result in a 40% penalty on the understatement.

Form 5471

U.S. shareholders, officers, or directors of certain foreign corporations are required to file Form 5471 to report their connection to the foreign corporation and its activities. The initial penalty for failing to file Form 5471 is $10,000 for each annual accounting period of each foreign corporation that is not reported. Additional penalties of $10,000 may apply for each 30-day period of continuing noncompliance (after the IRS notifies the taxpayer of the failure to report), up to a maximum of $50,000 per return.

Treaty-Based Relief for Nonresidents

Individuals who are dual residents of the U.S. and another country may claim treaty benefits to be treated as a nonresident alien of the U.S. for tax purposes. This election can significantly affect their reporting requirements.

To claim treaty benefits, an individual must file IRS Form 8833, Treaty-Based Return Position Disclosure, with their tax return. This disclosure allows them to be treated as a nonresident alien, altering their tax and information reporting obligations under U.S. law.

While claiming treaty benefits may alter an individual's income tax obligations, it does not exempt them from FBAR filing requirements, as FBAR is determined by legal residency status and not tax residency. However, for FATCA, individuals treated as nonresident aliens for part of the tax year and who comply with all relevant filing requirements (including timely filing Form 1040-NR and attaching Form 8833) are not required to report specified foreign financial assets on Form 8938 for that part of the tax year.

Special considerations apply to Form 5471 for individuals claiming treaty benefits. Under certain conditions outlined in Reg. 1.6038-2(j)(2)(ii), such individuals may fulfill their reporting obligations by filing the audited financial statements of the foreign corporation, provided no other U.S. person is required to furnish information under section 6038 with respect to the foreign corporation.

Navigating the complexities of international tax compliance requires a thorough understanding of the regulations and the potential consequences of noncompliance. For those eligible to claim treaty benefits, understanding the specific alterations to your reporting obligations is crucial. Given the severe penalties for noncompliance, individuals with international tax obligations should consult with their tax service providers to ensure full compliance and to leverage treaty-based positions effectively.

As the November 2024 presidential election draws near, the tax policies of the two presumptive candidates, Joe Biden and Donald Trump, are at the forefront of economic discussions. Both candidates propose vastly different approaches to taxation, reflecting their broader economic philosophies. These policies not only signal the future direction of the U.S. economy but also have direct implications for businesses, individuals, and the overall fiscal health of the nation. Here's a comparative analysis of Biden and Trump's tax proposals.

 

Joe Biden

Joe Biden's tax policy under his proposed budget for fiscal year 2024 emphasizes increasing tax rates on corporate, individual, and capital gains income. Additionally, Biden aims to expand tax credits for workers and families and broaden the tax base to include more types of income.

 

Business Taxes

• Increase in Corporate Taxes:  Biden proposes raising the corporate income tax rate to 28%, aiming to fund infrastructure and social programs.

 

• Increase GILTI tax rate & repeal FDII deduction:  The plan includes increasing the global intangible low-taxed income (GILTI) tax rate from 10.5% to 21% and repealing favorable tax rates on foreign-derived intangible income (FDII).

 

• Expansion of Investment Income Tax:  The proposal extends the net investment income tax to cover nonpassive business income and increases taxation on the fossil fuel industry.

 

Individual Taxes

• Limit favorable long term capital gains tax rate:  For incomes above $1 million, long-term capital gains and qualified dividends would be taxed at ordinary income tax rates. Additionally, a minimum effective tax rate of 20% on an expanded measure of income for households with net wealth above $100 million is proposed.

 

• Estate and Wealth Taxes:  Biden's policy includes tightening rules related to the estate tax, aiming to prevent wealth accumulation through inheritance.

 

• Expansion of Tax Credits: The Child Tax Credit and Earned Income Tax Credit would see significant enhancements, alongside an expansion of premium tax credits.

 

• Individual Income Tax Rate Increase: An increase in the top individual income tax rate to 39.6% for high earners and an extension of certain TCJA tax changes for those making under $400,000.

 

Donald Trump

Donald Trump's tax policy focuses on maintaining low tax rates, particularly for businesses and high-income individuals, and implementing aggressive tariffs, especially against China.

 

Business Taxes

• Maintain Corporate Tax Rate:  Trump intends to keep the corporate income tax rate at 21%, maintaining the TCJA level.

 

• Estate Tax Cut: The plan includes making the TCJA's estate tax cuts permanent, benefiting high-net-worth estates.

 

• Import Tariffs:  A notable policy is the imposition of a universal baseline tariff on all U.S. imports and a significant 60% tariff on imports from China, aiming to encourage domestic production and address trade imbalances.

 

Other Proposals

• Taxation of University Endowments:  Trump proposes taxing large private university endowments, targeting institutions that he perceives as having significant untaxed wealth.

 

The tax policies of Joe Biden and Donald Trump present clear contrasts in their vision for America's economic future. Biden's approach focuses on increasing tax rates for higher earners and corporations to fund social programs and infrastructure, aiming for a more equitable tax system. On the other hand, Trump's strategy emphasizes low taxes to spur economic growth and aggressive tariffs to correct trade imbalances. As voters head to the ballot box in November 2024, the economic implications of these policies will undoubtedly play a crucial role in their decision-making process.

In the ever-evolving landscape of tax regulation and compliance, a significant development has emerged regarding the deduction and capitalization of expenditures related to patent infringement litigation and other intangible assets. This update highlights key insights from recent court rulings and IRS positions that may affect businesses engaged in trade or business activities, particularly in the pharmaceutical industry.

The Internal Revenue Code (IRC) §162(a) permits deductions for all ordinary and necessary expenses incurred in carrying on a trade or business. Conversely, §263(a) mandates the capitalization of costs for permanent improvements or betterments to increase the value of property. Specifically, regulations under §1.263(a)-4 provide guidance on capitalizing amounts paid to acquire or create intangibles, including costs related to legal disputes over intangible property rights.

Central to determining the deductibility of litigation expenses is the "origin of the claim" test, established by United States v. Gilmore and further interpreted in subsequent cases. This objective test considers the nature and origin of the claim resulting in the expense, disregarding the taxpayer's motives or the formal titles of pleadings. Generally, legal fees related to business operations are deductible, whereas those tied to capital transactions must be capitalized.

A pivotal case, Mylan, Inc. v. Commissioner, has brought clarity to the treatment of legal fees incurred in patent infringement litigation. The Third Circuit affirmed that expenses from abbreviated new drug application (ANDA) filings are deductible as ordinary and necessary business expenses under §162(a). The court rejected the IRS's broader interpretation of "facilitate" in determining the need to capitalize costs associated with obtaining or creating intangibles.

This ruling is particularly relevant for pharmaceutical companies engaged in ANDA processes, distinguishing between costs that must be capitalized (e.g., preparing notice letters) and those deductible (e.g., defending against patent litigation). The decision underscores the specificity required in assessing whether expenses facilitate the acquisition of an intangible asset.

Taxpayers who have deducted legal fees related to patent litigation may find affirmation in their position, reducing uncertainty. Those who have capitalized such costs might reconsider and evaluate the potential for deducting these expenses moving forward, and consider filing an account method change to claim benefit under Sec. 481(a) for previously capitalized amounts.

A federal district court in Alabama, in the case of National Small Business United v. Yellen, ruled the Corporate Transparency Act (CTA), which mandates businesses to report beneficial ownership information as unconstitutional, siding with the National Small Business Association and other plaintiffs. The court found the act exceeded Congress's authority, arguing it lacked constitutional backing for its broad requirement on businesses to disclose detailed ownership information. Despite recognizing the act's aim to deter financial crimes, the court highlighted its failure to align with constitutional precedents, emphasizing the legislative overreach beyond enumerated powers.

The CTA sought to combat money laundering by requiring over 32 million entities to provide comprehensive details about their owners and, for new entities, their applicants, with strict penalties for noncompliance. However, the court criticized the act for not fitting within Congress's commerce or taxing powers and suggested the possibility of constitutionally acceptable legislation, referencing past laws as examples.

The ruling dismissed the government's defense based on various constitutional powers, focusing on the act's broad scope and its intrusion into areas traditionally governed by state laws.  As of this point, it is unclear whether the Treasury Department's Financial Crimes Enforcement Network (FinCEN) will appeal the decision.  Therefore, until FinCEN issues an official press release or statement, all businesses should continually comply with the BOI filing requirements.  We will provide updates regarding any further developments as they arise.