The COVID-19 pandemic and accompanying economic downturn continues to create unprecedented challenges for individual and business taxpayers. Federal and state governments are contending with significant budget deficits but have successfully enacted several tax relief measures including increased flexibility, additional time to meet tax obligations, and relief from a number of compliance actions. Below are some highlights of recent developments in the U.S. tax arena in connection with the COVID-19 pandemic as well as several planning opportunities to consider with your Andersen advisor.
Internal Revenue Service (IRS) recently released a series of questions and answers in response to a perceived decline in the quality of transfer pricing documentation. IRS emphasized that insufficient documentation will not help avoid a penalty adjustment. This reinforces prior IRS guidance requiring transfer pricing reports to meet certain minimum quality standards.
Prior to the Tax Cuts and Jobs Act (TCJA), U.S. Revenue Ruling 91-32 governed the U.S. income tax treatment when a foreign partner (i.e., nonresident alien individual or foreign corporation) transferred (sold/exchanged/disposed of) their interest in a partnership doing business in the U.S. The ruling treated the gain or loss of a partner’s sale of interests as U.S. effectively connected (EC) gain/loss and thus, subject to U.S. taxation to the extent of the partner’s interest in the underlying U.S. based partnership assets.
Due to the pandemic, businesses of all sizes nationwide have been forced to cease operations after being deemed nonessential. Many of the enterprises that have been permitted to remain open have experienced increased costs and drastic reductions in revenue. Valuations can play a critical role in decision-making for companies and individuals in financial distress or bankruptcy and obtaining a well-supported appraisal may even allow companies and individuals to take advantage of valuable tax opportunities during this time.
Current interest rates are at historic lows, providing families unprecedented planning opportunities. Using debt to finance wealth transfers can be very effective and efficient, particularly for individuals who have used their lifetime gift exemption. If these transactions are executed properly, asset appreciation can be transferred to the next generation with little to no gift tax implications. This article will look at just some of these interest-rate driven transactions
Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.