Foreign Partnerships With U.S. Business Ties: Foreign Partnerships - - PowerPoint PPT Presentation

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Foreign Partnerships With U.S. Business Ties: Foreign Partnerships With U.S. Business Ties: Challenges for U.S. Taxpayers

Best Practices for Complying With Federal Form 8865

T d ’ f l f

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific WEDNES DAY, NOVEMBER 3, 2010

Today’s faculty features: George Kilts, International Tax S enior, Cherry Bekaert & Holland, Vienna, Va. Li Zhang, Manager, Spott, Lucey & Wall Inc., S an Francisco Ron Cohen, Partner, Greenstein Rogoff Olsen & Co., Fremont, Calif.

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Foreign Partnerships with U.S. Business Ti Ch ll f U S T Ties: Challenges for U.S. Taxpayers Webinar

• Nov. 3, 2010

George Kilts, Cherry Bekaert & Holland gkilts@ cbh.com Li Zhang, S pott Lucey & Wall Inc. li.zhang@ spottluceywall-cpas.com Ron Cohen, Greenstein Rogoff Olsen & Co. ron@ groco.com

Today’s Program

Accurately Completing Form 8865 And Its S chedules [Li Zhang and George Kilt s] S lide 6 – S lide 21 Associated Form 8865 Issues [Li Zhang] Hypothetical Taxpayer Case S tudy S lide 28 – S lide 29 S lide 22 – S lide 27 [George Kilt s] Form 8865 Client Experiences [Ron Cohen] S lide 30 – S lide 31

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Li Zhang Spott Lucey & Wall Inc

ACCURATELY COMPLETING

Li Zhang, Spott Lucey & Wall Inc. George Kilts, Cherry Bekaert & Holland

ACCURATELY COMPLETING FORM 8865 AND ITS SCHEDULES

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Who Must File – Category 1 Filer

• Controlling 50% partners
• Control means more than 50% interest of capital, profits, or

p , p , loss in such partnership.

• Constructive ownership rules apply when the interest in a

partnership is determined. Example : A U.S. person became a controlling 50% partner due to the interest attributed from his Canadian mother.

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Who Must File – Category 2 Filer

• Controlling 10% partners
• A U S person owns a 10% or greater interest while the
• A U.S. person owns a 10% or greater interest, while the

partnership is controlled by U.S persons, each owning at least 10% interest.

• Attribution rules apply for purposes of determining a 10%

interest.

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Who Must File – Category 3 Filer

• Reportable transfers
• U.S. person owns directly, indirectly or by attribution at least a

10% interest of the foreign partnership immediately after the transfer transfer.

• The value of the property transferred (including related person)

d $100 000 exceeds $100,000.

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Who Must File – Category 4 Filer

• Reportable events
• Acquisitions (> 10% direct interest or > 10% increase)
• Acquisitions (> 10% direct interest or > 10% increase)
• Dispositions (< 10% direct interest or > 10% decrease)
• Changes in proportional interests (> 10% increase or decrease)

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Who Must File - Exceptions

• General exceptions
• Multiple Category 1 filers
• Constructive owners
• Members of an affiliated group corporations filing a consolidated

return

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Who Must File – Exceptions (Cont.)

• Other general exceptions
• Foreign partnership files Form 1065
• Foreign partnership files Form 1065
• Certain Category 2 filers
• Certain Category 4 filers
• Partners in a domestic partnership that contributed property to a

foreign partnership

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Ownership Disclosure On Form 8865

• Schedule A: Disclosure of direct and constructive ownership
• Schedule A-1: Disclosure of a 10% or more direct interest
• Schedule A-2: Disclosure of affiliated foreign or domestic partnerships

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Form 8865 - Schedules

• U.S. Treasury Department Circular 230 Disclosure: Any U.S. tax

U.S. Treasury Department Circular 230 Disclosure: Any U.S. tax advice contained herein (or in any attachment) was 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 or applicable state or local tax law provisions. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice.

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8865 Schedule B – Income Statement

• Report income statement of foreign partnership in U.S. GAAP
• Reported in U.S. dollars

– Exchange rate

• Inter-company transactions
• Same as Form 1065: Use the instructions for Page 1 of Form 1065

Sa e as

• 065: Use t e

st uct o s o age

• 065
• Note: If the foreign partnership has filed a Form 1065 or 1065-B, you do

not need to complete Schedule B for Form 8865. Attach a copy of page 1

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p py p g

• f the Form 1065 to the Form 8865.

8865 Schedules D And K

• These forms are the same as the domestic partnership Form 1065

schedules. S h d l D ( i l i d l )

• Schedule D (capital gains and losses)

– Part 1: Short-term capital gains and losses – Part 2: Long-term capital gains and losses – Same as Form 1065; use the 1065 instructions for Schedule D

• Schedule K (partner’s distributive share items)

– Line 16: Foreign transactions Line 16: Foreign transactions – Same as Form 1065; use the instructions for Schedule K Form 1065

• Note: If the foreign partnership has filed a Form 1065 or 1065-B, you do

not need to complete Schedules D and K for Form 8865 Attach a copy of

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not need to complete Schedules D and K for Form 8865. Attach a copy of the Form 1065 Schedule D & K to the Form 8865.

8865 Schedule L – Balance Sheet

• The balance sheet should agree with the partnership’s books and records.

Attach a statement explaining any differences p g y

• Translated into U.S. dollars in accordance with U.S. GAAP

– Exchange rate

• Note: Any inter-company transactions shown on the balance sheet should
• Note: Any inter-company transactions shown on the balance sheet should

also be shown on Schedule N.

• Note: If the foreign partnership has filed a Form 1065, you do not need to

complete Schedule L for Form 8865 Attach a copy of Schedule L from complete Schedule L for Form 8865. Attach a copy of Schedule L from the Form 1065 to the Form 8865.

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8865 Schedule M B/S for Interest Allocation B/S for Interest Allocation

• Interest expense: Fungible
• Interest expense is allocated based on foreign and U.S. assets.
• Foreign assets related to passive and general category income
• Should be prepared in U S dollars under temporary Regs §1 861
• Should be prepared in U.S. dollars under temporary Regs. §1.861-

9T(g)(2) and 1.861-12T

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8865 Schedules M-1 And M-2

• Same as Form 1065: Use the 1065 instructions for Schedule M-1
• Note: If the foreign partnership filed Form 1065 or 1065-B, do not

g p p , complete Schedules M-1 and M-2 on Form 8865. Instead, attach to Form 8865 a copy of the Schedules M-1 or M-2 from Form 1065 or 1065-B.

• Schedule M-1: Include all reconciliation items such as guarantee

payments, and travel & entertainment expenses

• Schedule M-2

– Show what caused the changes in the direct partners’ capital accounts during the partnership’s tax year, as reflected on the partnership’s books and records

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books and records – All items should be reported in U.S. dollars.

8865 Schedule N – Interco. Transactions

• Report inter-company transactions between the foreign partnership,

partners and other related persons/entities p p

• This is used by the IRS in transfer pricing audits. The IRS requires a

minimum amount of transfer pricing documentation for related party minimum amount of transfer pricing documentation for related party transactions.

• Transfer pricing
• Transfer pricing
• HIRE Act

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8865 Schedule N (Cont.)

• Reported in U.S. dollars using the average exchange rate for the

partnerships tax year p p y

• Required for Category 1 filers. Category 2 filers are required to complete

columns (a), (b), and (c) of Schedule N.

• Columns (a), (b), (c) and (d)

Columns (a), (b), (c) and (d)

• Lines 1-9: Partnership related-party sales
• Lines 10-19: Partnership related-party costs

L li 20 d 21 L t t t di b l ithi th

• Loans lines 20 and 21: Largest outstanding balance within the year
• Inter-company transactions shown on Schedules B and L should be

shown on Schedule N.

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ASSOCIATED FORM 8865

Li Zhang, Spott Lucey & Wall Inc.

ASSOCIATED FORM 8865 ISSUES

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Check-The-Box Election

• In general, the taxpayer is allowed to make an election to treat the

foreign entity as:

• A taxable corporation (Form 5471)
• An entity disregarded from its owner (From 8858), or
• A partnership, if there is more than one owner (Form 8865).

Note: Check-the-box election is not available for entities on the per se list (Regulation §301.7701-2)

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Check-The-Box Election (Cont.)

• Default rules for foreign entities
• A partnership if it has two or more members and at least one
• A partnership, if it has two or more members and at least one

member does not have limited liability A ti if ll b h li it d li bilit

• A corporation, if all members have limited liability
• A disregarded entity, if it has a single owner that does not have

limited liability

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Check-The-Box Election (Cont.)

• Form 8832 (entity classification election)
• It must be filed within 75 days.
• Late election relief is available if certain requirements are met

(Rev. Proc. 2009-41).

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Check-The-Box Election (Cont.)

• The following should be completed in order to qualify for the late

election relief:

• Form 8832 must be filed within three years and 75 days from the

requested effective date of the entity’s classification election.

• A declaration that elements required for the relief have been

satisfied must be attached to the form.

• A reasonable cause statement must be attached.

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Check-The-Box Election (Cont.)

• Final solution for a late entity election
• Final solution for a late entity election
• A private letter ruling may be requested for a late entity election relief,

if R P 2009 41 d t l if Rev. Proc. 2009-41 does not apply.

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HYPOTHETICAL TAXPAYER

George Kilts, Cherry Bekaert & Holland

CASE STUDY

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H h i l T C S d Hypothetical Taxpayer Case Study

• George Kilts will be referring to the accompanying background

materials exhibit during this part of the program It will be materials exhibit during this part of the program. It will be posted both to the audience materials Web page and to the webinar platform, and Mr. Kilts suggest you may want to print a copy of the exhibit in advance of the program a copy of the exhibit in advance of the program.

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FORM 8865 CLIENT

Ron Cohen, Greenstein Rogoff Olsen & Co.

FORM 8865 CLIENT EXPERIENCES

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F 886 Cli E i Form 8865 Client Experiences

I N t D i thi ti M C h l t d ib I. Note: During this section, Mr. Cohen plans to describe compliance scenarios his firm has faced filing Form 8865s on behalf of clients verbally, without using a detailed outline.

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