FAS CPA & CONSULTANTS

It´s about The Entity!  The most important question for small business owners are: is my current business entity tax optimal, or can I do better?  Large businesses operating as C corps got a considerable reduction in their tax rates – down from 35% to 21%, but small businesses have a wealth of new options to reduce tax liability too.

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For many years, U.S. companies and their residents could own foreign companies that were inactive business and at the same time could access extremely lower tax rates while the income generated was not returned to the United States. This was before the Tax and Employment Cuts Act was effectively in place, as Accounting Today recently reported about the impact of the Trump tax reform on international companies with U.S. owners  Active business income occurs when almost all of the company's gross profits come from its commercial activities.  But on the other hand, we have what is known as a passive activity, which will occur when a company has income specifically from investors or rental, and when this was not managed by a U.S. resident. However, companies will have a limit on how much passive activity they can have. If they overcome it, they will run the risk of becoming passive companies.  One of the changes brought about by the new tax reform is the possibility of reducing, even a little, the high rate that U.S. residents had. With the new reform, the percentage will decrease to 37%. The companies managed to benefit more from this new reform since their percentage decreased to 21%. This new percentage means that the difference in percentages with countries such as Ireland is considerably reduced. In turn, greater compliance on the part of residents could generate a major shift towards the United States for those people who own a business.

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The approval of the application for an International Financial entity (IFE) license in Puerto Rico is divided into two stages as per provision in the Act 273:  

IFE organization permit:

1. Submit an application to the OCFI for a permit to organize an IFE. 

2. Submit articles of Incorporation and bylaws. 

3. Provide personal statements for 10% or more shareholders. 

4. Pay a $5,000 nonrefundable fee and same annual fee if approved.  

IFE licensing to start operations:

1. Have an authorized capital of $5,000,000 and at least $1,500,000 paid capital to start. 

2. Have $300,000 financial guarantees acceptable to OCFI. 

3. Rent an office space. 

4. Hire at least 4 employees. 

5. Comply with US Bank Secrecy Act, U.S. Patriot Act and Office of Foreign Asset Control (OFAC).  

Act 273 was first adopted to allow international Puerto Rican banks to compete with the offshore banking centers in the Caribbean and to improve the conditions for conducting international banking in the country. The IFE carries a big deal of scrutiny and due diligence and the board of directors and officers should be qualified US bankers with a long proved history in the US banking industry. Currently access to the US federal banking system is suspended for new IFEs.

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An offshore bank account is a fundamental piece of your international diversification strategy. It’s especially important and helpful in present days when currency controls and government regulations are becoming even more intrusive, slowing down international business and transaction flow. An offshore bank account allows you to internationalize your business and to place part of your wealth outside of the country without risking freeze or confiscation of assets by the government.  

An Offshore Bank Account will allow you to diversify your investments, facilitate asset protection, and is the first step in moving you and/or your assets abroad. Below are only few of the benefits, associated with offshore bank accounts.

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Forming an offshore company can create many advantages for your business. But the truth is some jurisdictions are better than others in general and also, specifically in your unique situation. While it is best for a company that trades in the EU to be formed in Bulgaria or Cyprus, a non-U.S. citizen will benefit the most if the set up an offshore company in Wyoming or Delaware, USA.

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General tax principles that apply to property transactions apply to transactions using virtual currency. 

Among other things, this means that:  

1. Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes. 

2. Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payers must issue Form 1099. 

3. The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer. 

4. A payment made using a virtual currency is subject to information reporting to the same extent as any other payment made in property.”

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Funds typical structure is design as a master fund structure. This is the cornerstone to protect investors and create a classification for U.S., foreign and non-profit clients. The master fund will be divided into a U.S. Feeder Fund and a Foreign Feeder Fund. Within the same structure the investment manager is also a foreign entity.  There are many offshore jurisdictions such as Cayman, Bermuda or Bahamas that can be used as the base for the foreign feeder fund and the investment manager. Cayman is usually the location of choice for many reasons, including its proximity to the U.S. and its legislation in addition to be a first tier offshore center.

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Real Estate Investment is a great alternative to create wealth if coupled with tax planning. As a real estate investor, you need to put in place the most effective company structure, usually a LLC and maximize the use of options available to reduce your tax bills, such as depreciation and amortization.  

Creating a tax plan for your real estate venture is the best strategy to maximize tax shelters. This will save you time to dedicate to your real estate business and the painful experience of a large tax bill. Between, gift tax, capital gain tax, estate tax and income tax, a plan that helps you anticipate and put in place the actions to benefit from the tax code proactively using deductions available:  

1. Depreciation 

2. Amortization 

3. Interest Expense 

4. Fixer-Uppers vs Rental Property Investment 

5. Self-Directed IRA vs Solo IRA 

6. 1031 Exchange 

7. Gift Tax 

8. Capital Gain Tax 

9. Estate Tax 

10. Trusts

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The benefits that an offshore company includes zero corporate tax, flexible business laws, asset protection, and confidentiality, protection from political and economic changes and the risks, associated with them. In order to maintain a tax exempt, the offshore company must not trade on the territory of the country of incorporation.

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Even as an Expat, you still need to file a tax return and, depending on your income, pay taxes, as long as you have a U.S. citizenship. Your worldwide income is taxable even if you filed a tax return and paid taxes in the country where you reside. If your taxable income is over $20,000 a year and you are married; or $10,000 and single; or made over $400 per year as self-employed or contractor, you  need to file a tax return.

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