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Important Tax Filing Deadlines:
July 31, 2006 – Second Quarter Unemployment Insurance Contributions
BRIEFLY:
Tax Foundation: Tax Freedom Day arrived on April 30th in Illinois
Tax Freedom Day is the day when Americans finally have earned enough money to pay off their total tax bill for the year. In 2006, according to the Washington, DC-based Tax Foundation, Illinois taxpayers had to work until April 30th to pay their total tax bill, ranking the state 10th nationally. Illinois' Tax Freedom Day falls four days later than national Tax Freedom Day in 2006. The Tax Freedom Days of neighboring states are: Wisconsin, April 18th (ranked 12th nationally); Iowa, April 18th (ranked 36th nationally); Missouri, April 18th (ranked 35th nationally); Kentucky, April 19th (ranked 31st nationally); and Indiana, April 22nd (ranked 24th nationally).
Spanish-American War ended – but not federal tax assessed to fund conflict . . . until now
The U.S. Treasury has announced it would stop collecting the three percent federal excise tax on long-distance calls, a fee originally assessed in 1898. The government also said it will issue refunds requested by consumers and businesses that paid the fee over the past three years. Taxpayers will be able to request refunds when they file 2006 tax returns in early 2007.
Majority does not rule in Death Tax vote
The Senate last week failed to invoke closure on death tax repeal bill HR 8, coming up with 57 votes, not the required 60. Under current law, the tax is ramping down to full repeal in 2010, but will return to its original form in 2011. The House approved HR 8 on a 272-162 vote on April 13, 2005. IMA is monitoring this legislation closely and will keep you abreast of developments.
Proper planning key to preventing global business tax headaches
As the world gets flatter and competition emerges from all parts of the globe, many midsize companies are exploring ways to establish or expand their international foothold. The global marketplace can hold many tantalizing opportunities for growth, expansion and increased competitiveness. However, failing to properly understand the tax requirements of even the smallest international venture could result in big financial headaches for your midsize company.
Tax laws and procedures vary greatly from country to country, and they are constantly in flux. While tax issues rarely drive a company's decision to go global, those issues can dictate how you go about establishing your international business. They also can play a defining role in the venture's ultimate success or failure. Whether you plan to export a single product to Canada or build a major manufacturing facility in the Czech Republic, experts urge you to address tax issues before they take you by surprise.
The following tips may help keep your international ventures from becoming too taxing for your midsize business.
Examine your corporate structure
Your company's corporate structure can help determine what taxes you pay internationally. S corporations carry the highest risk for running afoul of international tax laws. If your S corporation is not appropriately set up, you could find yourself in double tax jeopardy — owing taxes both in the foreign country where you are doing business and in the United States, where you may be ineligible to claim available tax credits on incoming funds. Experts caution that even the most lucrative foreign business venture can struggle or fail when faced with a cumulative tax rate of up to 60 percent.
Additionally, countries vary widely in how they legally view U.S. limited liability corporations (LLCs) in business dealings. Canada, for example, does not recognize LLCs as having international treaty rights. So LLCs attempting to conduct business in Canada would be excluded from the benefits of the U.S.-Canada Income Tax Treaty that provides for lower (or no) income-tax withholding on certain cross-border payments.
Beware of indirect taxes
Just as companies doing business in the United States must collect and report sales tax, make sure you know what indirect taxes each company you do business with is required to collect. Some common indirect taxes include:
Value-added tax (VAT): Companies doing business in European countries must contend with VAT requirements, and most other countries have their own equivalent as well. Unlike a sales tax, value-added taxes are levied at every level of production, from sourcing to manufacturing to selling. Often, tax credits (VAT paid on purchases) are available to compensate companies for some or all VAT expenditures.
Customs duties: These can vary both by country and by product. Make sure you are set up to pay the required duty and file any requisite paperwork.
Environmental taxes: Environmental taxes and other local taxes may vary by region or jurisdiction as well as by country. Be careful to investigate all local taxes that may apply.
Consider an IC-DISC
Is your business a closely held corporation and primarily owned by individual taxpayers, and does it produce more than 50 percent of a product in the United States? If so, you could be eligible for a permanent 20 percent tax savings by creating an interest charge-domestic international sales corporation (IC-DISC). An IC-DISC is a tax-saving vehicle. Qualifying for an IC-DISC requires little in the way of infrastructure in a foreign country to obtain the associated tax benefits. An old export tax benefit is now more attractive because of lower income-tax rates that didn't exist just a few years ago. Your company cannot take advantage of these IC-DISC benefits until forming the IC-DISC, which is a very simple procedure.
Understand withholding taxes
Many companies venturing into foreign markets for the first time are unpleasantly surprised when hit by local withholding taxes. Virtually every country has a withholding-tax regime. If your company does not have a physical presence in a country, and you are not protected by international treaty or another means, you could easily find yourself owing significant withholding taxes on your gross income. Experts advise you to investigate all taxes that may apply to a venture before deciding whether it will boost your bottom line or land you in the red.
For example, a contractor does some construction work for a client located in a country where the contractor does not regularly conduct business. If the project costs $1 million and generates $100,000 profit after expenses, the contractor might still have to pay withholding tax of, perhaps, 30 percent of the $1 million gross — leaving them with an unexpected $300,000 tax bill. Setting up the foreign business properly in the beginning usually will prevent unpleasant tax surprises.
Evaluate transfer pricing
A transfer price is the amount of money that one unit of an organization charges for goods and services to another unit within that organization. When the two units are located in different countries, most industrialized nations require businesses to produce a comprehensive transfer-pricing report to prove they are charging a fair, or "arm's-length," price for those goods and services.
Getting a transfer-pricing report for your company's transactions can be expensive, but failing to have the proper documentation can be much more costly. This is especially true when one country makes a transfer-pricing adjustment but an offsetting adjustment cannot be made in the other country, which is often the case. This results in a double tax on the same income. The proper transfer-pricing analysis can also help your company direct the income to the proper, most efficient tax jurisdiction. The taxpayer can use very substantial databases to find options that can help minimize worldwide income taxes.
Beware of know-it-alls
Because of the complex, ever-changing nature of international tax issues, be sure to seek out expert support in the country where you do business. Some advisors may specialize in international trade with one or two countries, but nobody can keep track of all applicable laws in every country. Be sure your international tax advisor will work closely with local resources in the country where you do business to ensure you can reap the greatest tax advantages at the least risk.
For more information contact Ian Halligan, RSM McGladrey Manager, International Tax at ian.halligan@rsmi.com.
Taxwire: Trailer tax package to be included in pension bill
A Senate Republican aide tells Taxwire that although a "trailer" tax cut package has not received much attention during negotiations over pending pension reform legislation, the outstanding issues related to the trailer package will not prevent the bill from moving forward.
The trailer package, expected to be included in the pension legislation when conferees reach agreement on a final conference report, will extend several tax cuts that were not extended under the recently enacted tax reconciliation legislation (PL 109-222). The aide said the length of extension of most of those tax cuts — which include the deduction for state and local sales taxes as well as the popular research credit and other so-called business extenders — will likely be limited to only one year, although that issue has yet to be resolved.
The aide added that concerns over the cost of the trailer package, particularly among members of the House, will likely prevent any agreement on revenue offsets in the bill, which would be necessary to extend the tax cuts for a greater length of time. Under Senate budget rules, the final cost of the tax package must come in under about $23 billion. Otherwise, the bill will be subject to a point of order that requires 60 votes to overcome.
None of the remaining issues are "deal breakers," the aide said, and therefore will not prevent the legislation from moving forward when the time comes.
Final domestic production rules released; online software guidance added
Taxwire reported recently that the U.S. Treasury and the IRS issued final regulations on May 24 on the domestic production activities deduction along with proposed guidance on the treatment of online software and the calculation of the deduction's W-2 wage limitation.
The final rules, which will generally be effective for tax years beginning on or after June 1, 2006, largely follow the proposed rules issued in October 2005, but they also introduce several new definitions and simplification measures. The final rules do not address changes made by the Tax Increase Prevention and Reconciliation Act of 2006 to the W-2 wage limitation and the rules for allocating partnership wages.
Under section 199, companies may generally deduct three percent of income from domestic production activities for 2005 and 2006. The deduction amount will gradually increase to nine percent by 2010. Qualifying activities include the manufacture of personal property, such as clothing, goods and food; software development; film and music production; the production of electricity, natural gas or water; and the provision of construction, engineering and architectural services.
The biggest direction change in the new guidance was not in the final rules, but in the temporary and proposed rules, which expand the availability of the deduction to some online software and all online games.
IRS reminds businesses to classify workers correctly
The rash of natural disasters that hit the United States last year caused many businesses to hire additional workers to help them meet increased demand for their goods or services. These businesses must make sure they treat their workers properly to make sure everyone can meet their tax obligations.
Most workers fall into two categories:
- Independent contractors
- Common-law employees
The main factor a business must use in determining how to classify its workers is the degree of control the business has over its worker. The more control the business has over a worker; the more likely it is that the worker is an employee rather than an independent contractor.
A business must base its determination as to whether a worker is an employee or an independent contractor on all facts and circumstances of its relationship with the worker. Businesses can use Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, to have the IRS make the determination.
It is critical that the business correctly determine whether the individuals providing services are employees or independent contractors. An employer must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. In addition, other tax issues, including the provision of certain employee benefits, depend upon the proper classification of workers.
A business generally does not have to withhold or pay any federal taxes on payments to independent contractors. However, independent contractors are subject to self-employment tax and should plan accordingly.
If a business incorrectly classifies a worker, the business could be subject to penalties.
There may be relief for employers who want to correct any errors they may have made by classifying an employee as an independent contractor.
IRS Headliner 152, IRS Offers Tips on How to Correct Misclassification of Employees, contains additional information about correcting worker classification.
Also, additional information about worker classification and classification correction are in:
- Publication 15-A, Employer's Supplemental Tax Guide
- Publication 1779, Independent Contractor or Employee brochure.
- Publication 1976, Independent Contractor or Employee? Section 530 Employment Tax Relief Requirements
IRS unveils procedure enabling commercial property owners to qualify for energy efficiency deduction
On June 2, 2006, the Internal Revenue Service issued an advance copy of a notice on how commercial building owners or leaseholders can qualify for the tax deduction for making their building energy efficient. The notice establishes a process to certify the required energy savings in order to claim the deduction.
The commercial building deduction, which was enacted in the Energy Policy Act of 2005, allows taxpayers to deduct the cost of energy-efficient property installed in commercial buildings.
The amount deductible may be as much as $1.80 per square foot of building floor area for buildings that achieve a 50-percent energy savings target. The notice provides that buildings below the 50-percent threshold may, nevertheless, qualify for a deduction of up to 60 cents per square foot of building floor area if they meet a 16 percent energy savings target.
Before claiming the deduction, the taxpayer must obtain a certification that the required energy savings will be achieved. The notice prescribes the content of that certification and the qualifications that must be met by the person providing the certification.
The notice also announces that the Department of Energy will create and maintain a public list of software that must be used to calculate energy savings for purposes of providing the certification. It also provides a process that software developers must use if they desire to have their software included on that list.
Visit http://www.irs.gov/pub/irs-drop/n-06-52 for a copy of the entire Notice 2006-52, Deduction for Energy Efficient Commercial Buildings.
Changes in 2005 e-file directions for international forms
IRS is revising "Tax Year 2005 Directions for Corporations Required to e-file" to allow taxpayers to use PDF format as a filing option for international forms. IRS is also eliminating the requirement limiting the paper option to taxpayers filing more than 25 of an international form. Corporate taxpayers required to e-file will have the option of filing their international forms in PDF or paper. Key changes include:
- Taxpayers using the PDF option are required to file duplicate paper copies with the Philadelphia Submission Processing Center.
- Taxpayers using the PDF option may not scan the forms; the most recent version of the software must be used and if the total PDF file is more than 1GB, the paper option must be used.
- The advantages of PDF over paper to both taxpayers and the IRS are clear. IRS encourages the use of PDF.
IRS plans surveys to improve taxpayer services
The Internal Revenue Service will survey nearly 50,000 people this month to help the agency improve the way it provides taxpayer services.
An Opinion Survey of Taxpayer Resources and Services will be sent to 40,000 taxpayers as part of the Taxpayer Assistance Blueprint (TAB), a multi-year effort by the IRS to review its customer service operations and craft plans for continued improvements.
"We are committed to providing a balanced program of quality service and equitable enforcement of the law. This Blueprint will provide a solid foundation on which to base decisions about our taxpayer services portfolio," said IRS Commissioner Mark W. Everson.
Taxpayers chosen at random will be asked 25 questions about IRS services. The survey does not ask for any financial or personal information nor should any be divulged. Individual responses will remain confidential.
The survey will measure how satisfied respondents are with the information they get from the IRS and how well it equips them to understand and meet their federal tax obligations. Questions will address the content, usefulness, format, graphics and delivery of IRS forms and publications. Customers will have the option of taking the survey by telephone or via the internet.
The survey will be repeated in future years, which will allow the IRS to improve taxpayer services based on taxpayer needs.
DATES OF NOTE:
November 8, 2006
IMA's Annual Sales & Use Tax Update
Northern Illinois University
Naperville
8:30 am–12:30 pm
Presenter: Joe Bigane, Senior Tax Partner in the Tax and Financial Services Division of Wolf & Company. This seminar is specific to manufacturers.
For more information, contact Kimberly McNamara, telephone: 630-368-5300, ext. 2109, email: kmcnamara@ima-net.org
Tax Policy Memo is published quarterly for IMA members by the Illinois Manufacturers' Association,1211 W. 22nd St., Ste. 620, Oak Brook, IL 60523, (630) 368-5300.
Editor: Stefany Henson, Director of Publications (shenson@ima-net.org).
Reproduction of all or any part is prohibited except by permission of authorized IMA personnel.
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