Episode 303: Foreign Investment and Tax Considerations in the U.S

By on July 21, 2023   /   Blog, Real Estate, The Legal Play Podcast   /   Leave a comment
Foreign Investment and Tax Considerations in the U.S

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The U.S. economy attracts more foreign investment than any other, as it is stable and largely trustworthy. In 2021 alone, foreign investors pumped nearly $5 trillion in inward investments, much of this dedicated to real estate development. Opening the economy to so much foreign investment brings certain risks with it, but the truth is that the vast majority of noncitizen investors are just wealthy people looking to further their own interests.

Optimizing those foreign interests in America comes with challenges. Many of them are legal or tax-related, so it’s standard operating procedure for foreign investors to work with domestic parties for investment purposes.

Here, we’ll address how this dynamic works and what steps can be taken to minimize a foreign investor’s U.S. tax liability.

A Foreign Investor and a Domestic Developer: An Ideal (Limited) Partnership

The first step for foreign investors is to connect with a U.S.-based partner to invest in. There are numerous brokerage services that can facilitate this connection and simplify the process for investors. There are, of course, brokerage fees attached to this.

A common tactic for foreign investors is to partner with a domestic developer – if we’re talking real estate investment. Whether it’s a piece of land, a hotel, a golf course or any other piece of commercial real estate, foreign investors frequently partner with U.S. real estate developers in need of a capital infusion. The U.S. partner executes the job on the ground while the foreign partner supplies cash.

Typically, the investor and developer form a limited partnership (LP) to manage this professional relationship. LPs are a favored choice for real estate development for a couple of reasons, including:

  • Limited liability for investors – In an LP arrangement, the domestic partner is considered the “general partner” while any foreign investors are considered “limited partners.” Limited partners are only liable up to the amount of their investment, so foreign investors have a liability shield that protects them.
  • Minimal commitment – Limited partners are not involved with the day-to-day operations tied to their investment. This responsibility falls on the general partner (the U.S. developer), so foreign investors can put their money to work without committing time.

Which Tax Structure Makes Sense for a Domestic Company Working with a Foreign Investor?

The foreign and domestic parties are usually tied together through an LP, but there’s still the matter of corporate tax structure.

When an LP is formed between a foreign investor and U.S.-based developer, the next step is usually to set up a domestic company that serves as the LP’s business instrument. In other words, a new corporation is formed to ensure tax and legal compliance, and to simplify the distribution process when it’s time to pay foreign investors.

In most cases, a C-corporation provides the desired tax structure for the new company. This company is formed in a state that has stable, corporation-friendly laws in place – Delaware, Nevada and Texas are three examples.

Why is a C-Corporation Tax Structure Preferred for Foreign Investment?

C-corporations are not pass-through entities. They are required to pay corporate taxes on top of capital gains, which are added to the company’s income. As such, they do not enjoy the same tax benefits as a pass-through organization. Further, loss and depreciation, which can offset corporate tax burdens, are usually not relevant during the initial years following the C-corp’s founding. With all this in play, what makes C-corps the optimal choice for foreign investors?

First, domestic developers often provide an increased rate of return to foreign investors to offset the increased tax burden.

Second, when leveraging a C-corp tax structure, certain withholding and reporting requirements are not triggered until distributions are paid out to investors. This simplifies tax planning and usually gives foreign investors additional flexibility in managing their investment instruments. Further, C-corporations have a long, well-established legal history that makes it easier for non-U.S. parties to invest in. In fact, foreign investors may not own stock or assets in some corporations, including S-corps. Tax laws prohibit it.

As such, C-corps provide an ideal mix of accessibility and planning advantages that foreign investors can fully leverage.

Why Foreign Investors are Better Served with a U.S.-Based Attorney and Accounting Expert

Unsurprisingly, tax laws and accounting procedures are complex where foreign investors are concerned. If not properly planned and reported, foreign investors may be on the hook for a deep tax cut or may be barred from investing altogether. Given the complexity involved, it’s necessary for investors to hire an attorney in their home country and a U.S.-based attorney. Ideally, this attorney has accounting expertise and experience working with real estate investors.

There are a few important advantages to working with a U.S. attorney, including:

  • Helping resolve any language or cultural barriers – There’s a great deal of paperwork associated with managing a foreign investment, and this can pose a language barrier that leads to costly mistakes. Cultural issues can also be in play, as the investor’s expectations may not align with what the developer is experiencing on the ground.

A U.S. attorney can smooth these issues over and work directly with the investor’s home attorney to ensure all parties are moving in the same direction.

  • Establishing a clear accounting trail for security law purposes – The U.S. has standing economic sanctions against a handful of nations, including Russia, Iran and others. Investment flowing from these countries is barred under U.S. securities law, so it may be necessary to create a clear accounting trail for certain investors. This is done to confirm that a particular investor is indeed allowed to seed a project with capital.
  • Helping avoid, or mitigate, double taxation – Double taxation is a widespread concern among foreign investors, as both the U.S. and the investor’s home country will both attempt to take a bite out of any distributions.

A U.S. attorney specialized in accounting practices will be aware of any tax provisions, such as tax treaties, that can be used to avoid or reduce the impact of double taxation, ensuring foreign investors are able to secure more of their distributions.

  • Planning around FIRPTA for taxation purposes – FIRPTA is a federal tax law created specifically for foreign real estate investments. Under FIRPTA, there are certain withholding and taxation requirements that property investments must follow if they are tied to a foreign investor.

For example, when a real estate property connected to foreign investment is sold, a certain portion (10 to 15 percent, depending on the sale price) must be withheld for tax purposes. There are exceptions to some of these taxation and withholding requirements, and an attorney knowledgeable in FIRPTA law can leverage them for foreign investors.

There are Major Complications Involved with Foreign Real Estate Investment, But They Can Be Managed with the Right Legal and Accounting Team in Place

Trillions in foreign investment are dumped into the U.S. every year, much of it allocated to real estate development. America’s excellent reputation as a safe investment haven means this trend isn’t going anywhere.

If you’re a non-U.S. investor looking to take advantage of this trend, a proven way to optimize your investment is to have experienced advisors and experts facilitating the process. This includes working with a U.S. attorney and accounting team that knows the ins and outs of U.S. tax law.

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Episode 302: Taxes for Internet Content Providers

By on February 20, 2023   /   Blog, The Legal Play Podcast   /   Leave a comment
Taxes for Internet Content Providers

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As millions of people now have a presence on the internet and receive income for that presence, it is increasingly important for them to enlist the services of a CPA or tax preparer that understands taxes for internet content providers. Failure to document income and expenses through official channels in a timely manner could result in serious consequences for internet content providers of any size.

What Is an Internet Content Provider?

Internet content providers are considered to be people or entities that provide content for the internet to generally either:

  1. Help generate ad revenue for a specific content providing platform that they then get a percentage of revenue from
  2. Establish subscription services that the content providing platform then gives them a percentage of revenue

Taxes for Internet Content Providers

Some internet content providers have the potential to make a lot of money on various platforms. For example, a person may be providing content regarding clothes such as taking pictures in clothes from certain designers. The clothing manufacturer may then figure out how many sales are attributable to a content provider’s website and then will pay the content provider money for that service. Depending on the rate of success, this could result in potentially significant income for an internet content provider.

Many of these people tend not to be traditional businesspeople who are intimately familiar with accounting and tax compliance. This is a mistake. Payments to an internet content provider are considered income and are taxable. In other words, it requires that these individuals keep detailed records of expenses and that they file annual tax returns. Failing to do so can create significant headaches and potentially serious consequences that could yield adverse effects for the individual themselves as well as their occupation as an internet content provider.

What Internet Content Providers Need to Know About Their Taxes

With the rise of a growing population of internet content providers, the Internal Revenue Service is taking notice. To ensure that these individuals do not fly under the radar and are not exempt from tax regulation, they are developing standards for auditing these individuals and platforms. Currently, the IRS is sending out 1099 forms to content providers to gather accurate information. Platforms and content providers are expected to comply with the criteria set forth by the IRS, such as:

  • Filing tax returns in a timely manner
  • Paying the appropriate amount of taxes

A Real World Example of Tax Issues for Internet Content Providers

Recently, OnlyFans creators were contacted by IRS criminal investigators. This platform is said to have a lot of different things, but much of their revenue comes from thousands and thousands of adult actors or content providers who have subscribers. As a result, the platform is making an impressive amount of money, which has attracted the attention of the Internal Revenue Service, which is now resulting in investigations and subpoenas for some of the top earning content providers.

The people being subpoenaed are then faced with having to figure out what to do. In general, some of the actions these individuals should consider taking are:

  • Enlisting the help of a reputable and experienced lawyer. Criminal investigations typically require legal representation, especially when it comes to the protection of fifth and sixth amendment rights. Ultimately, they will most likely end up having to share at least some bank account information and tax return documentation. Even if the person had a CPA handle the tax returns, that information may still end up being scrutinized.
  • Including all their income in documentation. This can require extensive legwork to gather all the information pertaining to the income an internet content provider has received.
  • Filing tax returns. Ideally, the content provider should have already filed a tax return. However, if they haven’t, they will need a professional’s guidance on when to do so and how to handle it. If the tax returns are incorrect, they may need amending and professionals can provide guidance on how to do this.

While these actions can be helpful for those on the OnlyFans platform, they may also be useful for any internet content provider.

 

The above includes good warnings to those who are internet content providers. The IRS is getting more sophisticated about recognizing this population of earners and the income they are bringing in. The government agency is taking active steps to ensure that these individuals are documenting their income and tax returns in a proper way.

This can look like keeping track of the money a person earns and the expenses they incur as a result of providing internet content. Their income and expenses must be accounted for and in the right way. This is true for content providers of any size.

Internet content providers need to have professionals that know how to prepare tax returns, comply with tax laws, and protect them from adverse tax or legal consequences from their otherwise legitimate business.

If you are an internet content provider and have questions about documenting your income with the Internal Revenue Service or filing tax returns, it can be a good idea to reach out to both an attorney and professional tax preparer today.

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Episode 301: Subpoena of Tax Records

By on February 20, 2023   /   Blog, The Legal Play Podcast   /   Leave a comment
Episode 301 Subpoena of Tax Records

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Taxes can be a complex topic, but even more so when it comes to what happens when there is a subpoena of tax records of a taxpayer and/or their certified public accountant by the Internal Revenue Service or another federal government agency.

It is a mistake for an individual or financial to assume that they must automatically comply with a subpoena for tax documents. There could be instances in which the subpoena could be considered unlawful, in which case once that determination is official, it would not require that an individual or tax preparer comply with it.

In order to protect themselves and their rights, both individuals and CPAs must be aware of what happens once a subpoena for tax records or documents issued and what steps should be taken in response.

What Happens When a CPA Receives a Subpoena of Tax Records

The CPA must respond to a lawful subpoena. However, the question becomes if the subpoena is deemed lawful or not. A taxpayer who is subject to a subpoena has the right to challenge it. This can be a difficult position for financial planners as they must protect the confidentiality of documents they have produced for a taxpayer, as well as the documents provided to them by the individual. Yet, they are required by law to respond to a lawful subpoena, with lawful being the keyword.
If a CPA receives a tax subpoena, it generally requires several actions including:

  • The tax preparer should immediately enlist the help of a reputable lawyer who is familiar with tax law.
  • If the law allows transparency in this specific situation, the CPA should make their taxpayer client aware that the records have been subpoenaed. This, in turn, gives the client notice so they can hire an attorney for themselves. The lawyer can then challenge the validity of the subpoena in question.

What Happens When an Individual Taxpayer Receives a Subpoena of Tax Records

While it is possible that a person’s CPA could receive a subpoena, it is equally plausible that an individual themselves could receive one. If an individual taxpayer receives a subpoena, the following steps should be taken:

  • A taxpayer who receives a subpoena is required to respond to it.
  • The person should hire an attorney for representation and to defend their fifth and sixth amendment rights.
  • If a taxpayer does not already have a tax preparer, they should hire one to help analyze if the data being subpoenaed could be incriminating, contradict tax returns, or could pose other problems for the investigation itself or the individual. A professional financial planner can also better determine if the information being requested is something that is really needed, or if it is something the government would eventually receive anyway.
  • The individual should ask their CPA if they should be fighting the subpoena or just providing the information that has been requested. Ultimately the tax preparer, should be able to help the taxpayer understand if the order will have any real effect on them or not.

A Real World Example of a Subpoena of Tax Records

When a federal government agency subpoenaed the tax records of the Donald Trump organization, the appointed CPA did not immediately turn over those documents to the government without question. They first fought the presumption that the subpoena was lawful by taking it all the way to the Supreme Court. The taxpayer, Trump, and his organization also fought the validity of the subpoena.

Ultimately, federal law says that the court makes the final ruling. In this particular case, the court ruled that at least some of the tax documents in question should be turned over to the government. That is in the process of being done now and then it will be reviewed by designated government entities.

This was not a situation where just because the subpoena of tax records was issued, automatic compliance by Trump or the CPA took place. The subpoena did not mean that tax documents should be automatically turned over without any consideration to whether the subpoena is indeed lawful. That said, the attorney and tax preparer were not able to ignore the subpoenas either.

With this example in mind, to best resolve a situation that involves a subpoena of tax documents from a government agency it requires solid assurance from professional financial planners and attorneys. This advice can provide valuable and accurate guidance as to what the next step should be.

 

Should an individual taxpayer or their CPA receive a subpoena of tax records, it is essential that they reach out to a reputable and qualified attorney for representation as soon as possible. This is necessary to best protect their rights and the privacy of their tax records.

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