Tax Update

Tax Update

In this section of Jnet, we provide brief updates on legislative, judicial, and administrative developments in tax that may impact Japanese companies operating in the United States.

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October 2016

Notice 2016-62: Pension plans, cost-of-living adjustments for 2017

On October 27, the IRS released an advance version of Notice 2016-62 providing the dollar limitations for qualified retirement plans for tax year 2017.

Changes for 2017

Notice 2016-62 [PDF 25 KB] and a related IRS release—IR-2016-141(October 27, 2016)—note the following changes in amounts from 2016 to 2017.

  • For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple's income is between $186,000 and $196,000 (up from $184,000 and $194,000).
  • The AGI phase-out range for taxpayers making contributions to a Roth IRA for married couples filing jointly is $186,000 to $196,000 (up from $184,000 to $194,000). For single taxpayers and heads of household, the income phase-out range is $118,000 to $133,000 (up from $117,000 to $132,000).
  • The AGI limit for the saver's credit—also known as the retirement savings contribution credit—for low- and moderate-income workers is $62,000 for married couples filing jointly (up from $61,500); $46,500 for heads of household (up from $46,125); and $31,000 for married individuals filing separately and for singles (up from $30,750).
  • The deduction for taxpayers making contributions to a traditional IRA is phased out for those who have modified adjusted gross incomes (AGI) within a certain range. For single taxpayers who are covered by a workplace retirement plan, the income phase-out range is increased to $62,000 to $72,000 (up from $61,000 to $71,000). For married couples filing jointly, when the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is increased to $99,000 to $119,000 (up from $98,000 to $118,000). For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

401(k) amounts

The limitations that remain unchanged from 2016 include the following:

  • The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan remains unchanged at $18,000.
  • The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan remains unchanged at $6,000.
  • The limit on annual contributions to an Individual Retirement Arrangement (IRA) remains unchanged at $5,500. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.
  • The AGI phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

FASB: Accounting changes for income taxes on intercompany transfers

The FASB, as part of its simplification initiative, issued an Accounting Standards Update that requires entities to recognize at the transaction date the income tax consequences of many intercompany asset transfers.

Rev. Proc. 2016-55: Inflation adjustments for 2017

On October 25, the IRS released an advance version of Rev. Proc. 2016-55 that provides the annual inflation adjustments for more than 50 tax provisions, including the tax rate schedules and other tax amounts as adjusted for inflation for 2017.

Rev. Proc. 2016-55 [PDF 101 KB] provides details about these annual adjustments. The tax year 2017 adjustments generally are used on tax returns filed in 2018.

Certain individual income tax amounts increase, others unchanged for 2017

As briefly explained in a related IRS release—IR 2016-139 (October 25, 2016)—the following items reflect the inflation adjustments for 2017:

Standard deduction

Taxpayers 2017
amount
Compared
to 2016 amount
Married
filing jointly
$12,700 Up
from $12,600
Single
/ married filing separately
$6,350 Up
from $6,300 
Heads
of households
$9,350 Up
from $9,300

Personal exemption: No change for 2017—$4,050

Personal exemption phase-out:

  • Personal exemption phase-out begins with adjusted gross income (AGI) of $261,500 ($313,800 for married filing jointly).
  • Personal exemption phases out completely at AGI of $384,000 ($436,300 for married filing jointly).
    39.6% income tax rate: For tax year 2017, the 39.6% tax rate applies for:
  • Single taxpayers whose income exceeds $418,400 (up from $415,050 in 2016)
  • Married taxpayers filing jointly whose income exceeds $470,700 (up from $466,950 in 2016)

Itemized deduction limits

  • The limitation for itemized deductions to be claimed on tax year 2017 returns of single taxpayers begins with incomes of $261,500 or more ($313,800 for married filing jointly). 

AMT exemption

  • The alternative minimum tax (AMT) exemption amount for tax year 2017 is increased to $54,300 for single taxpayers ($84,500 for married filing jointly). The 2016 exemption amount was $53,900 ($83,800 for married filing jointly). 
  • The AMT exemption begins to phase out for single taxpayers at $120,700 ($160,900 for married filing jointly).  

Foreign earned income exclusion

For tax year 2017, the foreign earned income exclusion is $102,100 (up from $101,300 for tax year 2016)

Earned income credit (EIC)

The tax year 2017 maximum EIC amount is $6,318 for taxpayers filing jointly who have three or more qualifying children (up from a total of $6,269 for tax year 2016).

Benefits

For tax year 2017:

  • The monthly limitation for the qualified transportation fringe benefit is $255.
  • The monthly limitation for qualified parking is $255.
  • The dollar amount used to determine the penalty for not maintaining minimum essential health coverage is $695 (this amount is for calendar year 2017).
  • The adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $112,000 (up from $111,000 for tax year 2016).

Estate and gift tax amounts

  • Estates of decedents who die during 2017 have a basic exclusion amount of $5,490,000 (up from a total of $5,450,000 for estates of decedents who died in 2016).
  • For 2017, the exclusion from tax on a gift to a spouse who is not a U.S. citizen is $149,000 (up from $148,000 for 2016).
  • The annual exclusion for gifts remains at $14,000 for 2017.  

Colorado: Management Fees Taxable When Combined With Sales of Taxable Services

The Colorado Department of Revenue recently issued a General Information Letter addressing whether a company's so-called management fee was subject to sales tax. The taxpayer provided repair and maintenance services for clients that owned large fleets of motor vehicles. As part of its services, the taxpayer maintained a database with details of all maintenance performed on the client's vehicles. Clients were charged a "management fee" for access to the database, which was separately-stated on client invoices.

Under Colorado law, computer software made available to consumers by an application service provider (ASP) is not tangible personal property and, therefore, charges for access are not subject to sales tax. However, if the sale of a nontaxable service is inseparable from the sale of a taxable service, i.e., the buyer is required to buy the nontaxable service as part of its purchase of taxable goods, then the charges for nontaxable services are included in the sales tax base. The Department concluded that if the taxpayer's clients were required to purchase the management service when purchasing repair and maintenance services, then the management fee was included in the calculation of sales tax. This was the result even if the management fee was separately stated on the invoice.

Louisiana: Proposed Regulations Released on Market-Based Sourcing and Related Party Expense Disallowance Rules

A proposed regulation issued by the Department of Revenue is intended to implement certain corporate tax changes enacted earlier this year—provisions that require a corporation to add back otherwise deductible interest expenses and costs, intangible expenses and costs, and certain management fees incurred with related members. The proposed regulation defines key terms that were not defined in the law—such as "management fees," "intangible expenses," and "indirectly paid." Much of the proposed regulation provides guidance on when the statutory exceptions to the addback requirements will be allowed, and how they must be documented.

Another proposed regulation addresses sourcing sales other than sales of tangible personal property. During the second special session, Louisiana lawmakers adopted single-factor apportionment and market-based sourcing. Effective for tax years beginning on or after January 1, 2016, sales other than sales of tangible personal property will be sourced to Louisiana if the taxpayer's market for the sale is in the state. The proposed regulation sets forth rules for determining to what extent a taxpayer’s market for a sale is in Louisiana, rules for reasonably approximating the market state if the state of assignment cannot be determined under the regular rules, and guidance on the when receipts are excluded from the sales factor entirely. A public hearing on both proposed rules will be held on November 30, 2016.

Tennessee: New Rule Adopts Economic Nexus Standard for Out-of-State Dealers

The Tennessee Department of Revenue recently approved a new rule that adopts an economic nexus standard for sales and use tax purposes. The rule applies to out-of-state dealers that engage in regular or systematic solicitation of Tennessee consumers by any means. Under the rule, if such dealers make sales exceeding $500,000 to Tennessee consumers during the calendar year, they are considered to have substantial nexus with the state. By March, 1, 2017, out-of-state dealers meeting these tests are required register with the Department of Revenue. They must begin collecting and remitting sales and use taxes by July 1, 2017. Dealers that meet the $500,000 threshold after March 1, 2017 are required to register and begin collecting and remitting by the first day of the third calendar month following the month in which the dealer met the threshold.

The rule is subject to review by committees in both houses of the Tennessee legislature, and legislative approval is required before the rule can become permanent. Given the potential for controversy over the rule, the ultimate outcome is a bit uncertain. Interestingly, in its response to the comments submitted on the rule, the Department stated it believes the rule is "permissible under the Commerce Clause" and that there is a "strong possibility" that the U.S. Supreme Court will distinguish or reconsider Quill. The Department also reminds taxpayers that, in lieu of collecting the local rate applicable to each jurisdiction, remote sellers have the option of collecting a single local rate of 2.25 percent, in addition to the 7.0 percent state rate, on all sales made to in-state customers. Please stay tuned to TWIST for future updates on the Tennessee rule and the efforts to overturn Quill.

Section 385 final regulations: Initial reactions

On October 13, the Treasury Department and IRS released final and temporary section 385 regulations (hereinafter the "Final 385 Regulations") addressing the treatment of related party debt for U.S. tax purposes. These regulations had been proposed on April 4, 2016 (the "Proposed 385 Regulations"). (Please see the separate full article on this subject)

Final regulations: Research credit for internal use software

On October 3, the Treasury Department and IRS released for publication in the Federal Register final regulations (T.D. 9786) concerning the application of the credit for increasing research activities pursuant to section 41 for computer software that is developed by or for the taxpayer, for the taxpayer’s internal use—i.e., "internal use software."

The final regulations [PDF 247 KB] adopt rules that were proposed in January 2015, with changes reflecting amendments made in response to comments that were received about the proposed regulations. Examples are included in the final regulations to illustrate application of the general process of experimentation requirements to software.
The final regulations will be published in the Federal Register on Tuesday, October 4, 2016, and are applicable to tax years beginning on or after the date of their publication in the Federal Register. The effective date from the proposed regulations is generally retained with slight modifications; however, the preamble states that the IRS will not challenge return positions consistent with all of the paragraph of (c)(6) of these final regulations or all of the paragraph of (c)(6) of the proposed regulations for any tax year that ends on or after January 20, 2015.

KPMG observation

The publication of internal use software (IUS) final regulations is a significant achievement by Treasury and the IRS, and the regulations will hopefully lead to significantly less controversy between taxpayers, practitioners, and the IRS.

The final regulation affect nearly every business, and many companies have been shying away from claiming credits resulting from their software development activities used to support their business because the area has been fraught with controversy for the past 15-plus years. As a result, now is a good time for taxpayers to further review whether they may be eligible for research credits regarding software development.

September 2016

Sourcing multi-year compensation, stock options, for foreign tax credit limitation

The IRS Large Business and International (LB&I) division publicly released a "practice unit"—part of a series of IRS examiner "job aides" and training materials intended to describe for IRS agents leading practices for specific international and transfer pricing issues and transactions—that concerns the sourcing of multi-year compensation arrangements, including stock options, with respect to the foreign tax credit limitation.

Specifically, the practice unit provides:

  • An overview for the sourcing of multi-year compensation arrangements, including stock options, for the purpose of computing the foreign tax credit limitation
  • A brief explanation of how equity-based compensation, such as statutory stock options and non-statutory stock options, is taxed

The practice unit (release date of September 23, 2016) is available on the IRS practice unit webpage.

KPMG observation

The LB&I division uses the practice units to identify areas of strategic importance to the IRS, provide insight as to how IRS examiners will approach various transactions, and generally provide an understanding of the context in which an IRS examiner will approach a particular issue or transaction. Taxpayers (and their tax advisers) facing an IRS examination or concerned with issue(s) presented by the practice units will want to review the relevant practice units, so as to have a better understanding of the issues that may arise either prior to or during an examination. For instance, the IRS practice units typically provide information that can help taxpayers:

  • Plan for appropriate documentation during return preparation
  • Effectively approach certain elections or certain transactions 
  • Respond appropriately to IRS correspondence

For taxpayers selected for a pending IRS examination, the practice units can provide information that may assist with preparation for the examination. For taxpayers actually under examination, the practice units may provide information that can assist taxpayers respond to IRS requests.

Pennsylvania: Department of Revenue Issues Information on Upcoming Amnesty

On July 13, 2016, Governor Tom Wolf of Pennsylvania signed House Bill 1198, which made several changes to the Commonwealth's tax code and established a tax amnesty program for a to-be-determined period. The Department of Revenue recently issued comprehensive guidance, including guidelines and an FAQ document, explaining various aspects of the upcoming amnesty. Notably, the Department confirmed that the amnesty program will be held from April 21, 2017 through June 19, 2017.

The guidelines document outlines the steps and requirements for participation in the program and states that the Department will be issuing notices to delinquent taxpayers that may wish to take advantage of the amnesty opportunity. A taxpayer with an active administrative or judicial appeal is eligible to participate in the program, but must withdraw any administrative or judicial appeal relating to periods accepted under amnesty. House Bill 1198 adopted a five percent post-amnesty penalty for taxes owed that are not satisfied during the amnesty period. The penalty will not apply to taxpayers with active appeals, or entities that are in bankruptcy. Finally, the guidance confirms that participation in the 2017 amnesty will bar a taxpayer from participating in any future amnesty, and that taxpayers that participated in the 2010 amnesty are prohibited from participating in the 2017 program.

Texas: Receipts from Sales of Natural Gas Sourced to Where Loaded on Chartered Vessels

The Texas Comptroller recently issued a private letter ruling addressing how receipts from sales of "liquefied natural gas" (LNG) should be sourced under Texas' rules for sourcing sales of tangible personal property. The taxpayer at issue liquefied the natural gas at its Texas facility, then loaded the gas onto vessels for export. The purchasers of the LNG did not own the vessels, but chartered the vessels under so-called time charter agreements. Under these agreements, the vessel's owner furnished a crew and operated the vessel, but the charterer (here the taxpayer's customer) designated the ports of call and the cargo to be carried. The taxpayer requested guidance on whether its customers took delivery of the LNG when it was loaded onto a chartered vessel docked in a Texas port.

Under Texas law, receipts from sales of tangible personal property are apportioned to Texas if the purchaser takes delivery of the property in Texas–even if the property is subsequently transported outside of the state. A Texas regulation further provides that tangible personal property loaded onto a vessel or tanker that the purchaser of the property leases and controls, or owns, is sourced to Texas if the vessel is docked in Texas. Thus, the issue was whether the taxpayer's customers were in control of the vessels chartered under the so-called time charter agreements. The taxpayer suggested that the appropriate standard to apply was "operational control," which narrowly considers which party is operating the vessel and is responsible for ensuring that it is operated safely and in compliance with Maritime law. In the instant case, operational control would remain with the vessel's owners and the taxpayer's customers would not be deemed to be in control. The Comptroller, relying on a federal case addressing whether a time-charter agreement should be treated as a lease or service agreement under the Internal Revenue Code, rejected this approach. The charter agreements in the federal case were very similar to the ones entered into by the taxpayer's customers and indicated that the charterer maintained control over every aspect of the use of the vessel. The Comptroller concluded that the control over the use of the vessel was more important than the operational control exercised by the crew. Thus, when the LNG was loaded onto a vessel in a Texas port and the vessel was chartered by the LNG purchaser under a time-charter-agreement with industry-standard terms, the LNG was considered delivered in Texas and the receipts were included in the Texas sales factor numerator. Please contact Doug Maziur at 713-319- 3866 with questions on this private letter ruling.

August 2016

Final regulations: Defining "married couples" for tax purposes

On August 31, the Treasury Department and IRS released for publication in the Federal Register final regulations (T.D. 9785) concerning the definition of married couples for purposes of provisions in the Code.

The final regulations [PDF 250 KB] reflect the holdings of the U.S. Supreme Court in Obergefell v. Hodges and Windsor v. United States as well as IRS guidance provided in Rev. Rul. 2013-17.

A notice of proposed rulemaking was issued in October 2015. Treasury and the IRS received written comments concerning the proposed regulations. After considering those comments, the proposed regulations—as revised—are adopted as final with today's release.

As noted in the preamble to today's final regulations, the purpose of the regulations is to define marital status for federal tax law purposes. The IRS and Treasury have determined that marriages of couples of the same sex are to be treated the same as marriages of couples of the opposite sex for federal tax purposes.

Effective date

The final regulations are effective September 2, 2016 (the date of their publication in the Federal Register). Rev. Rul. 2013-17 will be obsolete as of that date; however, taxpayers may continue to rely on guidance related to the application of Rev. Rul. 2013-17 to employee benefit plans and the benefits provided under such plans, including Notice 2013-61, Notice 2014-37, Notice 2014-19, Notice 2014-1, and Notice 2015-86 to the extent they are not modified, superseded, obsoleted, or clarified by subsequent guidance.

Rev. Proc. 2016-48: Retroactive section 179 expensing, 50% bonus deprecation

On August 26, the IRS released an advance version of Rev. Proc. 2016-48 that provides guidance to taxpayers with a tax year beginning in 2014 and ending in 2015 and that had filed their 2014 federal income tax returns prior to enactment of the Protecting Americans From Tax Hikes Act of 2016 (PATH Act) on how to adopt these measures on their 2014 returns:

  • The permanent extension of the rule under section 179 allowing taxpayers to expense an amount of certain depreciable property
  • The five-year extension (from 2015 through 2019) of the 50% "bonus depreciation" deduction
  • The five-year extension of an election allowing a corporation to forgo bonus depreciation—and to use straight-line depreciation—on its qualified property, and instead to accelerate the ability to use additional alternative minimum tax (AMT) credits, through 2019 (through 2020, if a taxpayer has qualified long-production period property in that year)

North Carolina: Governor Announces Corporate Income Tax Rate Reduction Will Occur

Because tax collections have exceeded a threshold amount, the corporate income tax rate will be reduced from 4.0% to 3.0% beginning January 1, 2017.

Notice 2016-48: Guidance for implementing changes to ITIN program

On August 4, the IRS released an advance version of Notice 2016-48 to implement changes made to the individual taxpayer identification number (ITIN) program as made by legislation enacted in December 2015 (the Protecting Americans from Tax Hikes Act of 2015 or the “PATH Act”).

Notice 2016-48 [PDF 53 KB] explains the legislative changes, reports how the IRS will implement the changes, and states the potential consequences for taxpayers who do not renew an ITIN as required. Notice 2016-48 sets forth guidance concerning:

  • The ITIN application process
  • Rules for when ITINs must be renewed beginning in 2017
  • How to renew an ITIN (based on whether the ITINs have or have not been used in the past three consecutive years) and rules for ITINs issued before 2013 and currently in use
  • Consequences for taxpayers that do not renew an ITIN
  • The effects on holders of expired ITINs who have or become eligible for a social security number (SSN)
  • The use of an ITIN solely on an information return

With this guidance, the IRS explained that ITINs issued before 2013 and that have been used on a federal tax return in the past three years will need to be renewed pursuant to the following renewal schedule:

  • ITINs issued before 2008 will remain in effect until January 1, 2017. 
  • ITINs issued in 2008 will remain in effect until January 1, 2018. 
  • ITINs issued in 2009 or 2010 will remain in effect until January 1, 2019. 
  • ITINs issued in 2011 or 2012 will remain in effect until January 1, 2020.

A related IRS release—IR-2016-100 (August 4, 2016)—notes that some of the changes require taxpayers to renew their ITINs beginning in October 2016 and that ITINs that have not been used on a federal tax return at least once in the past three years will no longer be valid for use on a tax return unless renewed by the taxpayer.  

For more information, please contact:
Mie Igarashi | +1 404 222 3212 | mieigarashi@kpmg.com

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This article represents the views of the authors only, and do not necessarily represent the views or professional advice of KPMG.

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