In this newsletter you will find information on updates and changes in the law on both the Federal and State level. If you have any questions, please contact Andrew Sullivan at (504) 569-2900.
We will be hosting our 32nd Annual Seminar for Certified Public Accountants on the following dates. To access the 2015 CPA Seminar registration brochure, click here.
Northshore Seminar – October 28th, 2015
Program 1pm-4:50pm, Reception 4:50pm
Clarion Inn & Suites
501 N. Hwy 190
Covington, LA 70433
New Orleans Seminar – November 17th, 2015
Program 1pm-4:50pm, Reception 4:50pm
2 Poydras Street
New Orleans, LA 70140
IRS Reminds Employers of Importance of Classification of Service Providers
In a recent fact sheet, the IRS reminded employers that they are responsible for correctly classifying workers as employees or independent contractors. See FS-2015-21. While independent contractors are responsible for paying over their own federal employment and income taxes, employers must withhold and pay over the federal employment and income taxes of its employees. If an employer improperly classifies an employee as an independent contractor, the employer may be liable for the employment taxes for the service provider and may also be subject to certain penalties and interest associated therewith. Accordingly, it is important for employers to ensure that service providers are properly classified as employees or independent contractors.
For federal employment tax purposes, the usual common law rules are applicable to determine whether a worker is an independent contractor or an employee. Under the common law rules, an employer must examine the relationship between the worker and the business. All evidence of the degree of control and independence in this relationship should be considered. The facts that provide this evidence fall into three categories: (i) Behavioral Control; (ii) Financial Control; and (iii) the Relationship of the Parties.
Behavioral Control includes facts that show whether the business has a right to direct and control what work is accomplished and how the work is done, through instructions, training, or other means. When the business has the right to direct and control the worker, this suggests that the service provider is an employee rather than an independent contractor. The Behavioral Control factors fall into the categories of: (i) type of instructions given; (ii) degree of instruction; (iii) evaluation systems; and (iv) training.
Financial Control includes facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job. The factors to consider include: (i) the extent to which the worker has unreimbursed business expenses; (ii) the extent of the worker’s investment in the facilities or tools used in performing services; (iii) the extent to which the worker makes his or her services available to the relevant market; (iv) the method by through the business pays the worker; and (v) the extent to which the worker can realize a profit or incur a loss.
Relationship of the Parties includes facts that show the type of relationship that the parties have. The factors to consider include: (i) written contracts describing the relationship that the parties intended to create; (ii) the type of benefits that the employer provides to the worker, such as insurance, pension plan, vacation pay, or sick pay; (iii) the permanency of the relationship; and (iv) the extent to which services performed by the worker are a key aspect of the regular business of the company.
This has been a hot topic for the IRS for several years and we have seen many worker misclassification audits recently. Businesses may also file a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, in order to help the business determine whether its workers are employees or independent contractors. In this form, the business lays out all of the relevant facts governing the relationship with the service provider and answers a number of questions. The potential drawback to filing this form for the business is that the business may not agree with the determination that the IRS makes at the end of the process, which is binding on the IRS unless there is a change in the facts or law that form the basis for the ruling. There is no formal appeal process after the SS-8 process, but the business may identify facts in the original submission which the business thinks were not fully considered.
IRS Looks to Eliminate Exception for Foreign Goodwill Transfers
The IRS recently released proposed regulations aimed at eliminating an Internal Revenue Code exception providing for favorable tax treatment on offshore transfers of foreign goodwill and going concern value.
As background, under Section 367(d) of the Code, if a U.S. company transfers certain intangible property to a foreign corporation, the U.S. transferor is treated for tax purposes as having sold the property in exchange for annual payments over the lifetime of the property. However, there is an exception from this rule for transfers of foreign goodwill and going concern value (defined for this purpose as “the residual value of a business operation conducted outside of the United States after all other tangible and intangible assets have been identified and valued”).
The IRS stated that it has become aware that taxpayers are attempting to avoid taxable gain on outbound transfers of intangible property by taking the position that a significant portion of the value of the property consists of foreign goodwill or going concern value. Accordingly, the IRS is proposing regulations to eliminate the exception.
Under the proposed regulations, if a U.S. company transfers foreign goodwill or going concern value to a foreign corporation, it could elect to either recognize gain at the time of the transfer or have the transfer be taxed under the general provisions of Section 367(d) applicable to other intangible property. The IRS stated that the removal of the foreign goodwill exception would apply to transfers to foreign corporations made after the issuance of final regulations.
President Obama Calls for Tax Increase on Carried Interests in Budget Talks
In recent budget talks, President Obama asked Congress to consider an end to the preferential tax treatment given to “carried interests” under the Code. Carried interests are taxed at capital-gains rates (the top rate is currently 23.8%), rather than at the significantly higher ordinary income-tax rates (the top rate is currently 43.4%).
This income inequality has made private-equity managers the target of individuals (both Democrats and Republicans) seeking the 2016 presidential nomination, and some Congressional Republicans have expressed openness to the idea of raising the tax rates on carried interests. According to the Department of Treasury, taxing carried interests as ordinary income would raise approximately $18 billion dollars over a decade. Nevertheless, industry representatives feel that taxing carried interests at ordinary rates would adversely affect startup ventures and small businesses.
Exchange of Certain Rights Qualify for Like-Kind Exchange Treatment
In PLR 201531009, the IRS held that a taxpayer’s exchange of certain manufacturing and/or distribution rights with respect to a particular group of products, for other manufacturing and/or distribution rights with respect to the same group of products, qualified as a like-kind exchange qualifying for non-recognition treatment under Section 1031 of the Code.
In general, Section 1031(a)(1) of the Code provides that no gain or loss is recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of a like-kind which will also be held by the taxpayer for productive use in a trade or business or for investment. The terms “like-kind” refer to the nature or character of the property and not to its grade or quality. Treas. Reg. § 1.1031(a)-1(b). Accordingly, whether intangible personal property is of a like-kind to other intangible personal property usually depends on: (i) the nature or character of the rights involved; and (ii) the nature or character of the underlying property to which the intangible personal property relates. Treas. Reg. § 1.1031(a)-2(c)(1).
The IRS found that the differences in the agreements exchanged (i.e., in the length of the term, renewable periods, geographical territories covered, quality control provisions, marketing activity obligations, etc.) were insubstantial as relating to the grade or quality of the rights involved rather than to the nature or character thereof. Accordingly, the IRS determined that the agreements exchanged were property of a like-kind for purposes of Section 1031.
2015 Draft 1040
The IRS has released draft 1040 forms for the 2015 tax year. Some of the key changes between 2015 and 2014 include: (1) no bonus depreciation for 2015 (in December 2014, bonus depreciation was extended as part of the tax extenders legislation); (ii) lower section 179 expensing for 2015 than for 2014 ($25,000 limit is in effect for 2015 as of today); and (iii) the standard mileage rate is $0.575.
In July 2015, the Senate Finance Committee voted to extend bonus depreciation and increased section 179 expense limitations, but there has been little movement other than this vote. If there is any change to the status of the extension of bonus depreciation and/or increased section 179 expense limitations, we will provide an update.
If you would like to receive BHBM Email Tax Alerts to stay informed on the latest changes in tax law, subscribe here.