{P & C Tax Update}
DOUG YOUNGREN
CPA, JD, Tax Partner
Doug is a tax partner in Plante Moran’s insurance
practice who oversees all aspects of the firm’s insurance
tax practice. He started his accounting career as an
auditor; he has a unique hands-on style that incorporates
his knowledge and experience as a CPA as well as an
attorney. He has written articles on subjects ranging from
offshore captive reinsurance to how a P & C company
can convert its capital losses into ordinary losses. He has
spoken on numerous occasions including at the Federal
Bar Associations Insurance Tax Seminar as well as at the
Farm Bureau Insurance Accounting conference.
A Brief Agenda
I.
Items Specific to P & C Insurance
II. SSAP 101: A Refresher
III. Tax Sharing Agreements
IV. The New Repair Regulations
V. Foreign Reporting
3
P&C Tax Updates
PLANTE MORAN
4
F.W. Services Inc. v. Commissioner
• Fifth circuit finds that premium payments that were held by
an insurer as a deposit against future deductibles that
were to be refunded to a business at the end of the term of
the policy are not deductible as an insurance premium.
• The ultimate holding in this case is related to risk shifting
since any excess premium would have been refunded and
if there had been a need for more, then an additional
payment would have been made.
5
Punitive Damages Treated as Regular
Business Expense Deductible When Paid
• In State Farm v. Commissioner, the U.S. Court of Appeals
for the Seventh Circuit decided to treat a bad-faith damage
award which was punitive as not a portion of loss reserves.
• The court held that while the portion of the award for
compensatory damages should be included in loss
reserves, the punitive portion should not.
• The court relied heavily on guidance issued by the NAIC.
According to that guidance, compensatory damages for
bad faith awards are taken into consideration for
calculating unpaid loss reserves, not punitive damages.
6
Foreign Company Qualifies as a Domestic Insurance
Company and Reinsurance Premiums Paid to it Are
Deductible Business Expenses
In PLR 201224018 the IRS ruled that a foreign captive
insurance company qualified as a domestic insurance
company for income tax purposes, and that reinsurance
premiums paid to a reinsurance pool are deductible.
1. The insurance is offered to 6 related insured corporations and other
entities;
2. To try to achieve risk distribution the Company takes part in a
reinsurance pool with 14 other non-related insurers;
3. The company cedes its risks to the pool and then through another
reinsurance agreement assumes a quota share back from the pool;
4. The IRS determined that none of the companies is paying for a
significant portion of their own risk and therefore there is risk distribution.
7
TAM 201149021 Can You “Insure”
Against a Market Decline?
The IRS has ruled that a policy of insurance that
insures against a market decline is not insurance.
The logic of the IRS under this TAM was twofold:
1. The risks under the contract were related to investment risk as
opposed to insurance risk.
2. Secondarily, the IRS concluded that the risk was one of a
universal nature (a market decline) as opposed to one in a
group of large numbers that might fortuitously happen to one
insured rather than to all. Therefore they concluded there was
no way to have risk distribution.
8
Acuity Mutual Insurance Co. v.
Commissioner, T.C. Memo 2013-209
Acuity used in-house actuary to compute total loss reserves for 2006
•
900 pages of analysis
•
8 separate actuarial methods
•
$660 million
Acuity also used an outside consulting actuary to independently review
loss reserves each year
•
Narrow range of reasonable reserves
 $577 million to $661 million
•
Loss reserves within range, so independent actuary signed a
statement of actuarial opinion stating so.
Acuity filed Annual Statement showing loss reserves of $660 million
9
Acuity Mutual Insurance Co. v.
Commissioner, T.C. Memo 2013-209
IRS issued notice of deficiency for 2006 stating Acuity’s loss reserves were
overstated by $96 million.
•
Argued that the annual statement controls only what is includible in
the loss reserves, not the amount of reserve itself
Tax court relied on Seventh Circuit case law to the effect that the NAICapproved annual statement is the starting point for computing unpaid
losses
•
Court disagreed with IRS’s argument, holding that the annual
statement should be the source of unpaid losses for federal tax
purposes
•
Acuity produced substantial evidence in support of its position that
the loss reserves are fair and reasonable
•
IRS did not produce persuasive evidence to the contrary
10
Acuity Mutual Insurance Co. v.
Commissioner, T.C. Memo 2013-209
What does this case mean?
• Memorandum decision, precedential value limited
• However, it demonstrates what documentation and processes
are necessary to prevail when the IRS claims unpaid loss
reserves are not fair and reasonable
• Makes it more difficult for the IRS to dispute ‘fair and
reasonable’ loss reserves just because they exceed the
amount that the IRS’s own actuaries would have determined
11
2013 Tax Rate Changes
Many changes for 2013
• Most at the individual level
• Top individual rate: 39.6% (up from 35% in 2012)
• Maximum capital gains rate: 20% (up from 15% in 2012)
• Medicare contribution tax: .9% on earned income (new for
2013)
• Net Investment Income tax: 3.8% on net investment income
(new for 2013)
• Top rate could be as high as 43.4%
• No change to C corporation income tax rates
• Graduated scale to maximum 35% corporate rate
12
2013 Considerations
Compensation structure of key employees
• In light of .9% Medicare Contribution tax
• Reasonable compensation issues
Depreciation
• 50% bonus expires December 31, 2013
• Section 179 expensing
• 2013: $2 million qualifying property limit, $500,000
maximum deduction
• 2014: $200,000 qualifying property limit, $25,000
maximum deduction
13
SSAP 101 Refresher
PLANTE MORAN
14
SSAP 101: A Refresher
Admissibility Test, Part 1
11.a.
Companies can admit DTAs to the extent that they have paid
federal income taxes in prior years that can be recovered during a
timeframe corresponding with IRS tax loss carryback provisions,
not to exceed 3 years
• P & C Federal carryback period for ordinary items is 2 years
• Life Federal carryback period for ordinary items is 3 years
• Federal carryback period for capital items is 3 years
• Year one of the carryback period is the current period
15
Admissibility Test, Part 2
Paragraph 11.b.
After the application of paragraph 11.a., companies may admit
DTAs expected to be realized within the applicable period, as
determined by the Realization Threshold Limitation tables, not to
exceed a percentage (as determined by the same Realization
Threshold Limitation table) of statutory capital and surplus
• RBC levels determine the reversal period as well as the capital
and surplus limitation percentage
• Non-RBC filers have their own table to determine admissibility
• Apply the percentage limitation to current period adjusted
capital and surplus, excluding EDP, DTAs, etc.
16
Admissibility Test, Part 2
The December 31 RBC ratio is calculated using the
end of year ExDTA ACL RBC ratio.
Same calculation as the ratio computed in the annual RBC Report.
TAC (Total Adjusted Capital) does not include any DTAs of the
reporting entity.
17
Admissibility Test, Part 2
Interim periods (March 31, June 30, September 30)
will use the following for the RBC ratio:
Total Adjusted Capital ExDTA for the current quarter as the
numerator
Authorized Control Level as filed for the most recent calendar year
as the denominator
18
Admissibility Test, Part 3
Paragraph
11.c.
Must consider
character
Any remaining (ordinary vs.
DTAs can be capital)
admitted to
the extent that
they can be
offset by any
DTLs
Must
consider
reversal
patterns of
temporary
differences
19
Tax Loss Contingencies
• SSAP 101 replaced “probable” with “more likely than not” (50%) in
SSAP 5R in relation to tax loss contingencies
• If it is more likely than not that a tax position will not be sustained
upon examination, must establish a tax loss contingency
• Tax loss contingencies are included in the definition of current
income taxes under paragraph 3.a. of SSAP 101 (also includes
related penalties and interest)
20
Tax Loss Contingencies
• Assumes an examination with full knowledge of all relevant
information
• If loss contingency is more than 50% of the benefit, must record
contingency at 100%
• If the loss contingency relates to a temporary difference, do not
record the contingency until an event occurs. Receive a Notice of
Proposed Adjustment from the IRS
21
Possible Outcomes and the Probability
of Occurring
Tax Benefit
To Be Realized
Cumulative
Probability
Probability
$500
10%
10%
$400
10%
20%
$300
25%
$200
10%
55%
$100
45%
100%
45%
22
P & C Example Multiple Year Carryover
Gross Deferred Tax Assets
Timing of Temporary Differences
2013
2014
2015
Gross DTA
Turning in 2013
Turning 2014
Turning in 2015
OTTI
$50,000,000
$50,000,000
LRD
190,000,000
60,000,000
45,000,000
Other
5,000,000
-
-
Total
$245,000,000
Temporary Benefits Reversing in One Year
Temporary Benefits Reversing in Two Years
Temporary Benefits Reversing in Three Years
$110,000,000
-
$45,000,000
85,000,000
$85,000,000
$110,000,000
$45,000,000
$85,000,000
23
P & C Example Multiple Year Carryover
2013
Temporary Differences
Projected Taxable Income
Reversing Temporary
Differences
Adjusted Taxable Income
Regular Tax
Tax Savings if Regular Tax
Applied (at 35% Rate)
Without
Reversing
2014
With
$150,000,000 $150,000,000
Without
Reversing
2015
With
Without
Reversing
With
$70,000,000 $70,000,000 $140,000,000 $140,000,000
(110,000,000)
(45,000,000)
(85,000,000)
150,000,000
40,000,000
70,000,000
25,000,000
140,000,000
55,000,000
52,500,000
14,000,000
24,500,000
8,750,000
49,000,000
19,250,000
38,500,000
15,750,000
29,750,000
Taxable Income for AMT
150,000,000
40,000,000
70,000,000
25,000,000
140,000,000
AMT/ACE Adjustment
280,000,000
280,000,000
60,000,000
60,000,000
120,000,000 120,000,000
Adjusted Taxable AMT
430,000,000
320,000,000
130,000,000
85,000,000
260,000,000 175,000,000
AMT at 20%
86,000,000
64,000,000
26,000,000
17,000,000
52,000,000
35,000,000
Greater Tax
Actual Tax savings (at 20%
Rate)
Reduction in Tax Savings as
a Result of AMT
86,000,000
64,000,000
26,000,000
17,000,000
52,000,000
35,000,000
22,000,000
9,000,000
17,000,000
(16,500,000)
(6,750,000)
(12,750,000)
55,000,000
24
SSAP 101 – Tax Planning
2013
Temporary Differences
Projected Taxable Income
Without
Reversing
2014
Without
Reversing
With
2015
Without
Reversing
With
With
$589,215,000 $589,215,000 $164,117,647 $164,117,167 $328,235,294 $328,235,294
Reversing Temp Differences
(110,000,000)
(45,000,000)
Adjusted Taxable Income
589,215,000
479,215,000
164,117,647
Regular Tax
Tax savings if Regular Tax
Applied (at 35% Rate)
206,225,250
167,725,250
57,441,176
Taxable Income for AMT
589,215,000
AMT/ACE Adjustment
38,500,000
(85,000,000)
119,117,647 328,235,294 243,235,294
41,691,176
114,882,353
85,132,353
15,750,000
29,750,000
479,215,000
164,117,647
119,117,647 328,235,294 243,235,294
0
0
0
Adjusted Taxable AMT
589,215,000
479,215,000
164,117,647
AMT at 20%
117,843,000
95,843,000
32,823,529
23,823,529
65,647,059
48,647,059
Greater Tax
Tax Savings Before Tax
Planning
Tax Savings After Tax
Planning
206,225,250
167,725,250
57,441,176
41,691,176
114,882,353
85,132,353
0
0
0
119,117,647 328,235,294 243,235,294
22,000,000
9,000,000
17,000,000
$38,500,000
$15,750,000
$29,750,000
25
Valuation Allowance Stat and GAAP
A valuation allowance is required under GAAP if it is
determined that a gross deferred tax asset cannot be
realized, in whole or in part.
The standard is the more likely than not standard:
1. Based upon all available evidence unless it is more
likely than not that a deferred tax asset will be
realized a valuation allowance is required.
2. Sources of taxable income that can be used to
support a conclusion that a DTA will be realized
include:
a. reversals of existing DTLs;
b. carryback capacity under the tax law;
c. projections of future taxable income;
d. income from tax planning strategies.
26
Valuation Allowance Stat and GAAP
I. For statutory purposes the valuation allowance
reduces “gross deferred tax assets” resulting in
“adjusted gross deferred tax assets” which are then
subjected to the admissibility tests;
II. In the Q&A to SSAP 101 it is emphasized that the stat
valuation allowance is determined on a separate
company basis;
III. For internal control purposes it is important to note
that the four sources of taxable income used to support
a conclusion that no valuation allowance is required
must be properly documented.
27
AMT Impact with NOL carryover
Regular Tax
Book income
2014
2015
2016
3,000,000
4,000,000
3,760,000
20% of UEP BOY
(2,000,000)
(5,000,000)
(6,000,000)
20% of UEP EOY
5,000,000
6,000,000
5,500,000
LRD BOY
(3,000,000)
(2,000,000)
(3,000,000)
LRD EOY
2,000,000
3,000,000
2,850,000
Taxable income B/4 NOL
5,000,000
6,000,000
3,110,000
(25,000,000)
(20,000,000)
(14,000,000)
-
-
-
5,000,000
6,000,000
3,110,000
750,000
650,000
650,000
5,750,000
6,650,000
3,760,000
(5,175,000)
(5,985,000)
(3,384,000)
NOL Carryover
Taxable income after NOL
AMT
Regular taxable income
AMT adjustments
AMT Taxable income B/4 NOL
AMT NOL Limited to 90%
AMT Taxable income
Times rate
AMT Tax
Total
575,000
20.00%
115,000
665,000
20.00%
133,000
376,000
20.00%
75,200
323,200
28
Tax Sharing Agreements – A Brief
Overview
PLANTE MORAN
29
Tax Sharing Agreements
Three Basic Reasons for the agreements:
I. Earnings and profits
II. Stock Basis
III. To determine how to split the actual liability in $$$
- the only limitation here is really the extent of the tax
advisor’s imagination
30
Tax Sharing Agreements
Earnings and profits:
1. Basic Method 1 - Contribution to consolidated taxable income;
a. This method is the default method if the company
doesn’t elect;
b. This is really the companies share of taxable income;
c. no members separate taxable income is treated as being
less than zero under this method;
d. no credit given for credits or losses or other tax
attributes.
31
Tax Sharing Agreements
Earnings and profits:
2. Basic Method 2 – Separate return tax liability;
a. Ratio of all members separate return tax liabilities;
b. Intercompany transactions must be taken into account;
c. No dividends received deduction for dividends between the
members of the consolidated group;
d. No members separate tax return liability is treated as being
less than zero.
.
32
Tax Sharing Agreements
Earnings and profits:
3. Basic Method 3 – Allocation of tax increases from consolidation;
a.
First you allocate the tax liability to each member under basic
method 1;
b.
Any tax increases of a member arising from the consolidation are
then apportioned to each other member that has a reduction in
tax liability. This is determined by comparing the tax liability
calculated under Basic Method 1 with what would have been
allocated under basic method 2.
4. Other Basic Methods with the approval of the secretary.
33
Tax Sharing Agreements
Earnings and profits:
5. Tax attribute absorption methods;
a.
Wait and see method causes a member who uses the tax
attribute of another member to only pay for that usage when
the member who originated the tax attribute loses the use of it
when it could actually reduce its own liability;
b. The “percentage method” permits the group to allocate to loss
and credit members the consolidated tax benefits attributable
to the use of their losses and credits without taking into
account (as you would in the wait and see method) the ability
of a member to absorb these attributes itself. It is also known
as the immediate payment method;
c.
Any other method approved by the secretary.
34
Tax Sharing Agreements
Stock Basis:
For purposes of calculating stock basis there is only one method.
The federal income taxes of the group are allocated among the
members by applying 1552 and the percentage method of Treas.
Reg. Section 1.1502-33(d)(3) using 100% as the percentage;
There are no other options…
35
Tax Sharing Agreements
Sharing the liability for state law or payment purposes between the
member:
While there may be advantages to having the same methods for E
& P, Stock basis and for sharing actually $$ between the entities it
is not required.
No reasonable method of sharing the actual dollars paid and
shared of taxes as between the entities is off limits.
36
Repair and Maintenance Regulations
PLANTE MORAN
37
Repairs and Maintenance
Final regulations issued September, 2013
• Simplify and refine some of the temporary regulations and
create new safe harbors
• Move away from facts and circumstances and subjective
nature of current standards
• Taxpayer friendly
Effective for years beginning on or after January 1, 2014
• Option to apply to 2012 or 2013
38
Basics
Code Section 263
• Capitalization of amounts paid to acquire, produce, or improve
tangible property
Code Section 162
• Deduction of all ordinary and necessary business expenses,
including certain supplies, repairs, maintenance
New Regulations
• General framework for distinguishing capital expenditures vs
deductible supply, repair, maintenance costs
39
Five Main Areas
• Materials and Supplies (1.162-3)
• Repairs and Maintenance (1.162-4)
• Capital Expenditures (1.263(a)-1)
• Amounts paid for the acquisition or production of tangible
property (1.263(a)-2)
• Amounts paid for the improvement of tangible property
(1.263(a)-3)
40
Five Main Changes
• Revised/simplified de minimis safe harbor for capitalization of
amounts paid to acquire or produce property
• Extension of the safe harbor for routine maintenance to
buildings
• Annual election for buildings that cost $1M or less to deduct up
to $10,000 of maintenance costs
• New annual election to capitalize repair costs that are
capitalized on taxpayers books and records
• Refinement of the criteria for refining betterments and
restorations
41
De Minimis Capitalization
Temporary Regs:
• Safe harbor to deduct certain tangible property up to
aggregate ceiling
• This approach is allowed for 2012 and 2013
Final Regs:
• Safe harbor at the invoice or item level
• $5,000 per invoice or item, if applicable financial
statement
• $500 per invoice or item, if no applicable financial
statement
42
De Minimis Capitalization
• Applicable Financial Statement
• Certified Audited Financial Statement
• Not a review or compilation
• Financial Statements required to be submitted to a federal or
state agency
• Includes insurance company Annual Statements
• In general, entities included in consolidated audited financial
statements are eligible for the larger de minimis option
43
De Minimis Capitalization
Accounting Policy
• To take advantage of the $5,000 de minimis rule, taxpayers
must have written book policies in place at the start of the tax
year that specify a per-item dollar amount (up to $5,000) that
will be expensed for financial accounting purposes.
• The policy can set different thresholds for each asset
class.
• Previous Years
• The IRS has declined to grant transitional relief for
taxpayers who would otherwise have been able to apply
the de minimis rule under the temporary regulations to
their 2012 /2013 tax year.
44
De Minimis Capitalization
Example: Taxpayer N purchases 50 computers for $400 each.
• N has applicable financial statements and an accounting
policy to expense amounts paid for units of property costing
less than $500
• Computers are expensed for financial accounting purposes
45
Routine Maintenance
Cost of certain routine maintenance need not be capitalized
• Recurring activities
• More than once during the life of the property
• Expect to perform to keep property in ordinarily efficient
operation condition
Final regulations now include buildings and structural components
• More than once over 10 year period
• No need to consider treatment of costs on financial statements
46
Safe Harbor for Small Buildings
• Allows taxpayers to deduct amounts paid for repairs,
maintenance, and improvements
• Gross receipts must be less than $10 million
• Unadjusted basis must be less than $1 million
• Deduction can’t exceed the lesser of:
• $10,000 or
• 2% of the unadjusted basis
• De minimis rule and routine maintenance count towards the
$10,000
47
Election to Capitalize Repair and
Maintenance Costs
• Annual election to opt out of expensing repair and maintenance
costs
• Must be capitalized on books and records as well
• Depreciate expenses
48
Improvements
• Generally: if a unit of property has been improved, the
improvement must be capitalized.
• The UOP is determined to be improved if after it is placed in
service, the activity performed on the property exceeds the
BAR standard.
oBetterment
oAdaptation
oRestoration
49
Unit of Property
Group of functionally interdependent components
• Parts of a machine, the machine is the unit of property
Buildings are units of property
• Major systems are separate units of property
•
HVAC
•
Plumbing
•
Electrical
50
Betterments
A betterment is an expenditure that:
• Fixes a material condition or defect that existed prior to the
taxpayer’s acquisition of the UOP or arose in the production of
the UOP
• Is for a material addition to the UOP (including physical
enlargement, expansion or extension)
• Is reasonably expected to materially increase in capacity,
productivity, efficiency, strength, or quality of the UOP or the
output
51
Adaptation
• Adapting a unit of property for a new or different use
• Inconsistent with the taxpayer’s intended, ordinary use at time
placed in service
• No major changes with final regulations
52
Restorations
• Repair for casualty loss where a basis adjustment or loss has
been taken
• Return a UOP to ordinary efficient operating condition, if
deteriorated and no longer functional for intended use
• Results in rebuilding the UOP to like new condition at end of
class life
• Final regs permit deduction for amount spent in excess of
adjusted basis of the damaged property, provided they would
otherwise be considered deductible repair expenses
• Still required to capitalize amounts paid to restore property
that would be capitalized without regard to the casualty loss
rule
53
Dispositions
No final regulations
• Re-proposed and temporary regulations
• Changes were substantial enough that the IRS decided it
needed to give taxpayers another opportunity to comment
Revenue Procedure 2014-17 provides guidance for automatic
changes in method of accounting
• Once final the regs will apply to January 1, 2014
• Should apply to 2012 as well
54
Dispositions
Old rule:
• If a structural component of a building was retired, can’t
dispose
• Continue depreciating old AND new component
Proposed & Temporary Regs:
• Take loss for retirement of structural component
• Depreciate new component
• Statistical sampling allowed (see Rev. Proc. 2014-17)
• Partial distribution elections
55
Transitional Guidance
• IRS expects that nearly all companies will have a change in their
accounting method
• Transition guidance was issued in early 2014 in Revenue
Procedure 2014-16 and 2014-17
• How to apply the regulations for years prior to 2014
• Change of accounting procedures
56
Key Takeaways
• Ensure written accounting policy is in place by the end of the year
to take advantage of de minimis capitalization
• Certain items are elective
• Consider reverse tax planning
• Tight timeline for compliance
• Be prepared!
57
Foreign Reporting
PLANTE MORAN
58
Reporting Foreign Assets –
Current Requirements
Report of Foreign Bank and Financial Accounts (FBAR)
• Not a “tax return”
• Bank Secrecy Act of 1970
• Fin Cen Form 114
• Filed by United States Persons with a financial interest in or
signature authority over a foreign financial account
• Aggregate value of accounts must exceed $10,000 at any time
during a calendar year
59
Reporting Foreign Assets –
Current Requirements
Report of Foreign Bank and Financial Accounts (FBAR)
Financial Account
• Bank account
• Securities account
• Insurance or annuity policies with cash value
• Commodities or futures options
• Mutual or other comingled funds
• With determinable asset value
Foreign Determination
• Location as opposed to nationality of institution is determinative
60
Reporting Foreign Assets –
Current Requirements
Report of Foreign Bank and Financial Accounts (FBAR)
Financial Interest – U.S. person is owner of record or has legal title
Owner or legal title holder defined as:
• Person acting as agent for U.S. person
• Corporation with 50% of vote or value owned by U.S. person
• Partnership with 50% of profits or capital owned by U.S. person
• Trust
• U.S. person is grantor and has ownership interest, or
• Greater than 50% interest in assets of trust, or
• U.S. person has appointed protector subject to U.S. persons
instruction
61
Reporting Foreign Assets –
Current Requirements
Report of Foreign Bank and Financial Accounts (FBAR)
Signature Authority
• Authority of an individual to control the disposition of money,
funds, or other assets held in financial account by direct
communication
• Authority can be alone or in conjunction with another individual
Personal financial managers often have such authority
Limited exceptions for public companies/certain banks
62
Reporting Foreign Assets –
Current Requirements
Report of Foreign Bank and Financial Accounts (FBAR)
FBAR filings
• Must be received by June 30
• Mailbox rule does not apply
Potential Penalties
• Up to 50% of account value for each failure to file
• Criminal penalties may include prison
63
Reporting Foreign Assets –
Current Requirements
Form 8938
Required by IRC Section 6038D
Tax form filed with annual income tax return
Filed by “Specified Individuals” with an interest in “Specified
Foreign Financial Assets”
64
Reporting Foreign Assets –
Current Requirements
Form 8938
Specified Individuals
• U.S. citizen or resident alien
• Nonresident alien spouse electing to be taxed as US resident
• Individuals not required to file U.S. tax return are NOT required to file
8938
Reporting thresholds
• Unmarried taxpayers living in U.S.
• $50,000 on last day of year or $75,000 at any time during year
• Married filing joint return living in U.S.
• $100,000 on last day of year or $150,000 at any time during year
• Unmarried taxpayers living outside U.S.
• $200,000 on last day of year or $300,000 at any time during year
• Married filing joint return living outside U.S.
• $400,000 on last day of year or $600,000 at any time during year
65
Reporting Foreign Assets –
Current Requirements
Form 8938
Specified Foreign Financial Asset
• Financial accounts with a foreign financial institution
• Stock or securities issued by non-U.S. entity
• Financial instruments with non-U.S. issuer or counterparty
• Interest in non-U.S. entity
• Interest in foreign trust or estate
• Interest in foreign pension or deferred compensation plan
Definition of “Interest” in
• Any income, gains, losses, deductions, credits, gross proceeds,
or distributions would be reported on annual tax return
66
Reporting Foreign Assets –
Current Requirements
Form 8938
Specified Foreign Financial Asset - Exceptions
• Assets held through US or foreign custody account
• Foreign custody account must be reported
• Assets held by non-disregarded entities
• Interest in entity may be reportable
• Look through applies to disregarded entities
• Real estate if not held through foreign entity
• Foreign social security
• Assets reported on certain other forms
67
Reporting Foreign Assets –
Current Requirements
Form 8938
Form must be filed with income tax return
Penalties
• $10,000 for failure to file timely
• If IRS provides notice of failure, and report is not filed within 90
days
• Additional $10,000 for each 30 day period, up to $50,000
maximum
68
Reporting Foreign Assets –
Future Requirements
Entity Reporting – Periods beginning after
December 31, 2011
Specified Domestic Entities
• Corporation, Partnerships, Trust meeting certain criteria
• Must be formed or availed of for purposes of holding
specified foreign financial assets
69
Reporting Foreign Assets –
Future Requirements
Entity Reporting – Periods beginning after December
31, 2011
Specified Domestic Entities
• Corporations and Partnerships
• Foreign financial assets meeting the $50,000/$75,000
threshold
• Entity is “closely held”
• At least 50% of gross income is passive or 50% of assets
generate passive income
Or
• At least 10% of gross income is passive or 10% of assets
generate passive income in situation where entity is formed
to avoid reporting obligations under 6038D
70
Reporting Foreign Assets –
Future Requirements
Entity Reporting – Periods beginning after December
31, 2011
Specified Domestic Entities
• Trusts
• Foreign financial assets meeting the $50,000/$75,000
threshold
• Specified person is beneficiary
71
Reporting Foreign Assets
FBAR and Form 8938 – Comparison
Thresholds
Interest in asset/account
Balance reported
Filing mechanics
Penalties
Indirect ownership
Entity interests
72
Reporting Foreign Assets - FATCA
Attempts to prevent tax evasion through foreign
entities or financial institutions
Potential withholding imposed
Applies to
Foreign Financial Institutions (FFI)
Non-Financial Foreign Entities (NFFE)
73
Reporting Foreign Assets - FATCA
Foreign Financial Institutions
Accepts deposits in the ordinary course of business
Holds financial assets for the account of others as a substantial part
of its business
Is engaged primarily in the business of investing or trading in
securities, commodities, or partnerships
Exemptions
Companies holding subsidiaries engaged in a trade or business
Hedging centers of non-financial group
Start up companies in non-financial business
Non-financial entities in liquidation or bankruptcy
74
Thank you.
Thank you for attending
Doug Youngren, CPA, JD, Tax Partner
312.980.2944
doug.youngren@plantemoran.com
75
Disclaimer
This presentation is part of Plante Moran marketing of
professional services, and is not written advice directed at the
specific facts and circumstances of any person and/or entity.
This written advice is not intended or written to be used, and
cannot be used, for the purpose of avoiding penalties that may
be imposed under the Internal Revenue Code.
76