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1031 ADVISOR January 2010 |
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1031 Exchanges Can Offset Obama-Proposed Tax Increase on Foreign Source Income Reducing income taxes on foreign source income used to be the elite preserve of the multi-national set. However, businesses (large and small, public and private) now conduct significant business overseas. Preserving cash by reducing your client’s taxes will turn you into your client's local hero! Current Tax Regime: Foreign source income of controlled foreign corporations (CFC) not effectively connected to the US is not taxable until returned to the US via dividend payments. This allows businesses to maximize their tax deferral until the income is received by the US business or the CFC is sold. Currently, passive income and income effectively connected to the US is taxed under current rules. If this income includes gains from the sale of business assets, these taxes can be eliminated. Proposed legislation: By 2011, the current proposed bill will eliminate current tax deferral enjoyed by controlled foreign corporations of US businesses. However, income gains that arise from the sale or exchange of assets can be deferred by utilizing Section 1031 exchanges on these transactions. These include gains from the sale or exchange of intangible assets, tangible property and real estate, as long as the business reinvests in same or similar assets. Example 1: A US business transfers intellectual property (IP) to a controlled foreign corporation (an IP holding company) for further development of the intellectual property and the manufacture of goods using the intellectual property. The grant of an exclusive license for the use of some or all of the intellectual property may be treated as a sale by the foreign IP holding company, which would increase the taxable income of the US business. Example 2: In the case of US taxable income with includible foreign source income, the foreign tax credit may be ineffective since many countries do not tax gains from the sale of capital assets. If the gains are deferred pursuant to Section 1031, then the US business will be able to defer taxes on its foreign source gains. Impact of Tax Deferral:
Implementation: How can this be handled without causing the Corporate Treasurer to bust an artery? Rely on 1031 Asset Manager® and Strategic Property Exchanges, LLC to safely guide you and your client through the ins and outs of a Section 1031 exchange. From designing strategies to matching assets, cash management, and tax compliance with a tax opinion, you can count on Strategic Property Exchanges, LLC to safely guide your client through the process.
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