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TAX TIPS NEWSLINE Proudly Published in the USA

AUGUST 2017

Produced monthly for Clients & Friends of the Advisory Group Associates.

Our Mission. Sharing Solutions that deliver real value.

This “TAX TIPS NEWSLINE” is compiled by the founder of the Tax & Advisory firms, Frank

L. Zerjav, CPA and team of Professional Tax Associates, and then it is sent by email each month

because all taxpayers need tax and compliance knowledge. It’s a big part of your life and the

entities that you operate.

The CPA firm engages in proactive Strategic Tax Planning for family-owned or privately-held

businesses and their owners, professionals, investors and individuals. Our clients minimize their

tax burden by appropriate proven strategies, which help them to keep more of what they earn.

Advisory Group’s Tax Resolution Experts also engage in resolving tax problems with either

Federal or State tax agencies for clients who need these specialized, proven solutions and

options. Our devoted team of Professional Tax Advisors and Tax Resolution Experts do

care; their primary objective is the well-being of clients, their family and their survivors, as

well as their satisfaction with the work we do, while our goal is to be the premier choice of

Tax & Advisory firms, not the biggest firm by sharing solutions that deliver real value.

SUMMER HOURS: The office will close at 12pm on Fridays during June, July and August

Inside this Month’s Issue

Contact Us

Tax-Free Fringe Benefits You Have to Like

Starting a Business: Partnerships

Due Diligence is Critical When Buying a Business

Employee Business Expenses

Pension Planning – Young Business Owners

Educational Savings Plans

Home and Domestic Service Workers

Avoid Penalties Misclassifying Workers as Contractors

Tax Audit Tips: Travel & Entertainment

IRS Outsourcing Tax Debt to Private Collectors

Social Security Earnings Limit

Family Owned Businesses: Strategic Planning

Tax Reform as Biggest Challenge

Domestic & Foreign Child Adoptions: Tax Consequences

Wide Range of Services Offered

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Contact Us - There are many events that occur during the year that can affect your tax situation.

Preparation of your tax return involves summarizing transactions and events that occurred during

the prior year. In most situations, treatment is firmly established at the time the transaction

occurs. However, negative tax effects can be avoided by proper planning. Please contact us in

advance if you have questions about the tax effects of a transaction or event, including the

following:

• Pension or IRA distributions. • Sale or purchase of a residence or • Self-employment.

• Significant change in income or deductions. other real estate. • Charitable contributions of

• Job change. • Retirement. property in excess of $5,000.

• Marriage. • Notice from IRS or other revenue • Gifts (over $14,000 to an

• Attainment of age 59½ or 70½. department. individual).

• Sale or purchase of a business. • Divorce or separation. • Starting new business.

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TAX-FREE FRINGE BENEFITS YOU HAVE TO LIKE

It’s about as good as it gets when you see the words “tax-free” in the tax law.

Under the de minimis fringe benefit rules, your business deducts the cost of giving you or your

employees flowers, fruit, books, and similar property under special circumstances. The

recipients—you or your employees—receive these fringe benefits tax-free.

You can’t do this too often or spend too much money. But it’s easy to see that this is a great

benefit, especially when you give to yourself.

For your business to make this fringe benefit tax-free, it must meet two requirements—value and

frequency. Here, the IRS has not been very helpful in defining either criterion. With some

research, we arrived at $70 as the maximum value for the flowers, fruit, books, and similar

property.

How often is too often?

The IRS doesn’t say, but adds some common sense to the regulation with this guidance as to

when this fringe benefit is appropriate: “Examples of de minimis fringe benefits are ... flowers,

fruit, books, or similar property provided to employees under special circumstances (e.g., on

account of illness, outstanding performance, or family crisis).”

Don’t use gift cards or certificates. The IRS considers the coupon or gift card taxable to the

recipient no matter how small the amount, and even if that small amount is used solely to buy the

flowers or fruit.

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STARTING A BUSINESS: PARTNERSHIPS

Unlike a C- Corporation, a Partnership is not a taxable entity. Rather, each partner is taxed

directly on his or her share of Partnership profits or losses. This is an advantage over operating as

a C- Corporation where profits could be taxed twice, once at the corporate level and again at the

owner level when dividends are distributed to shareholders. However, IR Code Section 1202

offers an incentive to purchase qualified small business stock (QSBS) which if held for more

than five years will be 100% tax-free gain upon redemption or sale of originally issued stock.

A new business often has losses in the early years. By operating as a Partnership, you can use

your share of the Partnership’s losses to offset income from other sources, such as investments

and compensation from employment. However, to be able to deduct losses currently, you must

satisfy the so-called passive activity loss (PAL) rules. As a general rule, as long as you materially

participate in the business conducted by the Partnership, you will meet the PAL rules.

A partner is not considered an employee of the Partnership. Instead, in addition to income taxes,

partners also pay self-employment tax on the Partnership income (double taxes). One component

of self-employment tax is the Social Security portion, which is computed on earnings up to

$118,500 for 2016 ($127,200 for 2017), and the Medicare portion, which has no upper limit.

Another important legal downside of operating as a Partnership is that partners are exposed to

unlimited liability from lawsuits that arise in connection with the business even when they are

based on the acts or omissions of a partner. This is to be contrasted with operating a business as a

corporation where, as a general rule, only the corporation’s funds are at risk not the owner (s)’.

Fortunately, you do not have to forgo the tax advantages of operating as a flow through entity as

a Partnership to limit your potential liability. You can operate as an S- Corporation to minimize

your liability exposure (while improving the owner’s asset protection) and yet be taxed similarly

(but not identically) to the way you would be taxed if you operated as a Partnership since self-

employment taxes are not paid on flow through income or dividend distributions. A reasonable

salary needs to be paid to each shareholder-employee.

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DUE DILIGENCE IS CRITICAL WHEN BUYING A BUSINESS

If you are considering or in process of buying an existing business since you believe that the

existing business represents less of a risk than starting a new business from scratch, - due

diligence is critical.

Here are just a few examples of how due diligence works in your favor:

• If you are buying the assets of the target business, make the target comply with the

applicable bulk sales law so that creditors cannot “follow the assets” to the new owner

(you) and make claims against you.

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• To avoid being surprised by security interests and liens perfected under the Uniform

Commercial Code (UCC), conduct a UCC filing search.

• Inspect local court records to identify undisclosed liens or judgments against the target

business or the existence of current or past litigation against the business, its owner(s), or

its officers.

• Review the target business entity’s income, payroll, property, sales, use, and excise tax

returns for several years to identify exposure to underpaid taxes.

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EMPLOYEE BUSINESS EXPENSES

Now may be a good time to evaluate the expenses you incur as an employee in connection with

your work. While your employer may be reimbursing you for some of these expenses, there may

be others for which you are bearing the cost yet not utilizing the tax benefit. Through proper

substantiation, it is possible that you may be able to obtain greater reimbursement from your

employer. Alternatively, you may be entitled to deduct such expenses as miscellaneous itemized

deductions.

In order to be reimbursed and/or deducted, trade or business expenses must be ordinary,

necessary, and reasonable. They also must be properly substantiated. Examples of qualifying

expenses include:

Travel, transportation, meal, or entertainment expenses

Safety equipment, small tools, or supplies

Uniforms required by your employer that are not suitable for everyday wear

Required protective clothing

Dues to professional organizations

Subscriptions to professional journals

Cell or Smart Phones

Certain expenses for the business use of your home

Computer costs

Work-related educational expenses

You may also benefit from a review of the business expenses related to the use of your home. If

you qualify for the home office deduction, you may be able to deduct part of your home’s normal

operating expenses, such as utilities and insurance, etc. The tax-savings opportunities available

to you are dependent not only on the type of work you do at home, but where in your home you

perform it.

The rules for deducting these expenses, as well as substantiating your deduction, vary

according to the type of expense involved. It is important to retain all records and receipts

that document the time, place, and business purpose of each expense. Please contact one of

our Professional Tax Advisors to discuss your particular situation and the potential

tax-free reimbursements from your employer.

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PENSION PLANNING - YOUNG BUSINESS OWNERS

Various types of qualified retirement plans are available, however at an young age, a so-called

defined contribution plan probably would work best. It should enable you to build up the largest

retirement fund possible.

Different kinds of limits apply to the various kinds of qualified retirement plans. With a defined

contribution plan, the main limit is to the amount that can be contributed and deducted to each

participant’s account for any given year. Generally, the limit is the lesser of 100 percent of

compensation or $54,000 as indexed for inflation for the 2017 tax year. The amount of

compensation that can generally be taken into account when making these calculations is

$270,000 (as indexed for inflation for 2017).

While contributions are limited, there is no limit to the amount of benefits you can ultimately

collect from the plan. Your contributions are invested, and grow tax-deferred until withdrawn.

You can continue to make deductible contributions as long as you continue working, no matter

how large your account grows.

With a defined benefit plan, which is more like a traditional pension plan, there are limits to the

amount of benefit you can ultimately receive (which is reduced if you decide to retire early). And

deductible contributions that can be made for younger participants are smaller than are possible

with a defined contribution plan.

Something else that you will probably like about the defined contribution plan is that it is easier

and less costly to administer. A defined benefit plan needs periodic valuations and actuarial

computations.

If you set up a defined contribution plan and have employees, it also must cover those employees

of your business. However, new and younger employees will not necessarily have to receive

contributions. Your plan also can be integrated with social security benefits so that a greater

percentage of plan contributions go to employees above the wage base.

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EDUCATIONAL SAVINGS PLANS

As a parent with young children, you are faced with many rewards and challenges. One of which

may be saving for the high cost of a college education. However, there are two tax-favored

options that might be beneficial: a qualified tuition program and a Coverdell education savings

account. In addition, you might also want to invest in U.S. savings bonds that allow you to

exclude the interest income in the year you pay the higher education expenses. Each of these

options has their benefits and limitations, but the sooner you choose to make the investment in

your child’s future, the greater the tax savings.

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Qualified Tuition Program (QTP). A qualified tuition program (also known as a 529 plan for

the section of the Tax Code that governs them) may be a state plan or a private plan. A state plan

is a program established and maintained by a state that allows taxpayers to either prepay or

contribute to an account for paying a student’s qualified higher education expenses. Similarly,

private plans, provided by colleges and groups of colleges allow taxpayers to prepay a student’s

qualified education expenses. These 529 plans have, in recent years, become a popular way for

parents and other family members to save for a child’s college education. Though contributions

to 529 plans are not deductible, there is also no income limit for contributors.

529 plan distributions are tax-free as long as they are used to pay qualified higher education

expenses for a designated beneficiary. Qualified expenses include tuition, required fees, books

and supplies. For someone who is at least a half-time student, room and board also qualifies as

higher education expense.

Coverdell education savings accounts (ESA). Coverdell education savings are custodial

accounts similar to IRAs. Funds in a Coverdell ESA can be used for K-12 and related expenses,

as well as higher education expense. The maximum annual Coverdell ESA contribution is

limited to $2,000 per beneficiary, regardless of the number of contributors. Excess contributions

are subject to an excise tax.

Entities such as corporations, partnerships, and trusts, as well as individuals can contribute to one

or several ESAs. However, contributions by individual taxpayers are subject to phase-out

depending on their adjusted gross income. The annual contribution starts to phase out for married

couples filing jointly with modified AGI at or above $190,000 and less than $220,000 and at or

above $95,000 and less than $110,000 for single individuals.

Contributions are not deductible by the donor and distributions are not included in the

beneficiary’s income as long as they are used to pay for qualified education expenses. Earnings

accumulate tax-free. Contributions generally must stop when the beneficiary turns age 18, except

for individuals with special needs. Parents can maximize benefits, however, by transferring the

older siblings’ account balance to a younger brother, sister or first cousin, thereby extending the

tax-free growth period.

U.S. Savings Bonds. If you redeem qualified U.S. savings bonds and pay higher education

expenses during the same tax year, you may be able to exclude some of the interest from income.

Qualified bonds are EE savings bonds issued after 1989, and Series I bonds (first available in

1998). The tax advantages are minimized unless the redemption of the bonds is delayed a

number of years, therefore some planning is required.

The exclusion is available only for an individual who is at least 24 years of age before the issue

date of the bond, and is the sole owner, or joint owner with a spouse. Therefore, bonds purchased

by children or bonds purchased by parents and later transferred to their children, are not eligible

for the exclusion. However, bonds purchased by a parent and later used by the parent to pay a

dependent child’s expenses are eligible. The exclusion is, however, phased out and eventually

eliminated for high-income taxpayers.

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Of course, in planning for higher-education costs, parents may also choose to use funds from an

individual retirement account or a traditional form of savings. In addition, higher education costs

may be supplemented with scholarships, loans and grants. However, having a viable plan as

early as possible in a child’s life will make maximum use of a family’s financial resources and

may provide some tax benefit.

If you would like to explore how these opportunities can work for you and have one of our

Professional Tax Advisors evaluate your situation and discuss options, please do not hesitate to

contact us.

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HOME AND DOMESTIC SERVICE WORKERS

Your family may need outside assistance to provide care and supervision for your children or

elderly parents while you work. You may hire cleaning help or a landscaper to assist with the

upkeep of your home, or someone to walk your dog during the work week. These lifestyle

choices simplify your daily routine, but there are rules you must follow when compensating your

domestic workers. We can help you determine what your responsibilities are with respect to your

workers, and ensure that you comply with the payment and reporting rules that apply to your

situation.

For instance, understanding the difference between an employee and an independent contractor

is very important. If you are an employer, you are required to withhold and contribute a matching

amount of FICA and Medicare taxes from your domestic worker’s income. However, if your

workers are independent contractors, you are only required to report payments of $600 or more

on a Form 1099-MISC, Miscellaneous Income. Failing to make the right classification could cost

you money.

Alternatively, if you incur qualified expenses on behalf of a child under age 13, or a disabled

spouse or dependent, you may be able to claim a child and dependent care tax credit. The credit

that can be claimed ranges from 20 to 35 percent of qualified employment-related expenses, but

is subject to a cap which is calculated as a percentage of these expenses. The maximum amount

of eligible expenses is $3,000 if you have one qualifying dependent and $6,000 if you have two

or more qualifying dependents.

FOR PERSONS WHO RECEIVE DOMESTIC SERVICES PAY

You may be considered a domestic services worker if you perform household duties as part of

your daily work routine. Generally, services performed by cooks, waiters, babysitters, butlers,

housekeepers, maids, valets, caretakers, chauffeurs, and companions are considered domestic

services.

However, you may be performing these services as an employee rather than an independent

contractor, and this distinction could be very important in determining how to report your

income, and pay your employment and income taxes. Generally, the right to control how duties

are executed and what tasks are performed is sufficient to make a worker an employee.

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For example, if you are a babysitter in the parents’ home, you are probably a domestic employee.

If you earn $2,000 or more in 2017, your employer is required to withhold FICA and Medicare

taxes from your income, and you must contribute an equal amount of FICA and Medicare taxes.

Subject to certain limitations, your employer may also be required to pay federal unemployment

tax (FUTA), but is not obliged to withhold income taxes unless there is a mutual agreement to do

so. However, you are liable for federal and state income tax on your earnings, and may be

required to make quarterly estimated tax payments.

Conversely, if you watch children in your own home, you are most likely an independent

contractor. Your clients must report your remuneration of $600 or more on a Form 1099-MISC,

Miscellaneous Income. Your income is subject to self-employment and income tax, and along

with any related business connected expenses, should be reported on Form 1040, Schedule C.

However, since your business expenses are not reported on Form 1040, Schedule A, they are not

limited to the 2% of adjusted gross income (AGI) threshold.

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AVOID PENALTIES MISCLASSIFYING WORKERS AS

CONTRACTORS

As you know, one potential business tax reduction strategy is to hire independent contractors

instead of employees. If a worker’s classification fits within the tax law, it’s a legitimate strategy

that can save you thousands of dollars.

Sometimes the classification isn’t clear-cut. You may think you have the independent

contractor classification correct, but when the IRS does the audit, you learn that those contractors

are W-2 employees. This can cost you a huge sum of money in back payroll taxes.

This happened to the Mescalero Apache Tribe: the IRS hit it with a large payroll tax bill when it

reclassified many of the tribe’s independent contractors as employees. The tribe did us a big

favor by making some new law and also highlighted some things that I wanted to share with you

about classifying workers as independent contractors.

The law requires that you withhold taxes on the wages that you pay to your employees. If you

don’t, you are liable for the withholding and FICA (i.e., Social Security and Medicare) taxes that

you neglected to remit to the IRS.

Thus, if the IRS reclassifies your independent contractors as W-2 employees, you are on the

hook for the taxes you should have taken from the paychecks, employer’s portion of FICA taxes

plus penalties.

However, you have a way out of a big chunk of this potential tax bill: if you can show the worker

paid the taxes, then you aren’t liable for them. This rule prevents the taxes from being

double-paid. For this favorable treatment, which is on a worker-by-worker basis, you need the

worker to sign IRS Form 4669, Statement of Payments Received.

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Of course, your first step should be to make sure that you classify your workers correctly using

the law as your guide. If you use independent contractors, one important “Safe Harbor” is to be

certain that Forms 1099-MISC are issued annually to independent contractors from the

information they submitted on Form W-9, Request for Taxpayer Identification Number (TIN).

You don’t want an IRS employee classification audit and the headaches that come with it.

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TAX AUDIT TIPS: TRAVEL & ENTERTAINMENT

How would your tax records hold up in an IRS audit?

What? You don’t have much in the way of records, but you think you could get them in shape

before the IRS gets to you? Think again. This is highly unlikely to work, for three reasons:

1. You have violated the timely records rule, and the IRS is likely to figure this out.

2. You likely don’t have the receipts required.

3. You likely don’t know what you are supposed to document.

Think of the wasted time you would spend creating records that may well give you nothing for

the effort. That’s what happened to Nathan E. Lang.

• Lang claimed $16,327 as employee expenses. The IRS audited Lang’s tax return. How

much did the IRS allow in employee-expense deductions? Answer: zero.

• Lang claimed $17,875 in proprietor expenses on Schedule C. How much did the IRS

allow in Schedule C deductions? Answer: zero.

You might ask: how could the IRS disallow everything? Answer: Lang dug his own grave with

bad records. Lang took his case to court. The Tax Court explained the rules that apply to Lang’s

deductions as follows:

The IRS is presumed correct in denying all of Lang’s deductions.

Lang has the burden of overcoming this presumption and proving that the IRS is

wrong.

Under Cohan, the court may estimate certain deductible expenses if Lang provides

sufficient evidence for estimates; however, in deciding the deductible amounts, the

court must bear heavily against Lang, as such inexactitudes are of his own making.

The court may not apply Cohan estimates to travel; meals and entertainment; or

listed property, such as a passenger vehicle. The court must disallow these deductions

in full if they fail the strict substantiation requirements of Section 274(d) as to

amount; time and place; business purpose; and, in the case of meals and

entertainment, business relationship.

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You are probably like most businesspeople: you don’t get up in the morning excited about

keeping your tax records. It’s also likely that you don’t get happy about reconciling your

checkbooks or putting ink or toner in your printers, just as the farmers you know don’t get

excited about cleaning out their barns.

But if you want to be in business and not suffer when the IRS audits your tax returns, you need

to keep tax records. This takes a little time and requires some knowledge. TAKE THE ACTION

NEEDED: create the tax records that you need to avoid trouble, especially the type of trouble

that Lang suffered.

Contact one of our Professional Tax Advisors to discuss any questions or concerns regarding

your particular situation.

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IRS OUTSOURCING TAX DEBT TO PRIVATE DEBT

COLLECTORS

You may have someone you know who mentioned that they have some old tax debts that the IRS

has not tried to collect for some time.

That was probably true once but not any longer, since private collection of tax debts is back.

As part of the Fixing America’s Surface Transportation (FAST) Act, lawmakers wrote a

provision that requires the IRS to outsource inactive tax receivables to private collection

agencies.

About nine months ago, the IRS announced it had contracted with four private collection

agencies to operate the program:

• CBE Group in Cedar Falls, Iowa

• Conserve in Fairport, N.Y.

• Performant in Livermore, Calif.

• Pioneer in Horseheads, N.Y.

And then a little over two months ago, the IRS released new Internal Revenue Manual sections

putting in place the procedures for this new program.

This means that your friends could now receive a Notice CP4O telling them that the IRS

assigned their case to a private collection agency.

If that happens to them and you think they are good people whom our Professional Tax

Resolution Experts have the knowledge and experience to help, please have them contact us and

say you referred them.

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SOCIAL SECURITY EARNINGS LIMIT

A large number of retired individuals are back into the workforce. In addition to earning a salary,

these individuals may also be receiving Social Security benefits. Depending on the individual’s

age, benefits may be reduced and included in the recipient’s gross income.

Taxpayers at and above full retirement age can continue to earn unlimited amounts without any

reduction in Social Security benefits. Full-retirement age was 65 for many years. However,

beginning with 1938 birthdates or later, that age gradually increases.

If you were born January 2, 1943, through January 1, 1955, then your full retirement age for

retirement insurance benefits is 66. If you work and are full retirement age or older, you may

keep all of your benefits, no matter how much you earn. If you are younger than full retirement

age, there is a limit to how much you can earn and still receive full Social Security benefits. If

you are younger than full retirement age during all of 2017, $1 will be deducted from your

benefits for each $2 you earn above $16,920.

If you reach full retirement age during 2017, $1 will be deducted from your benefits for each

$3 you earn above $44,880 until the month you reach full retirement age.

A portion of Social Security benefits is included in the gross income of a recipient whose total

income exceeds applicable base and adjusted base amounts. The base amounts and adjusted base

amounts vary with the filing status of the recipient.

Since income tax is not required to be withheld on Social Security, you may need to pay

estimated tax. One of our Professional Tax Advisors can help you determine if you should pay

estimated tax. Additionally, even though Social Security benefit payments are not automatically

subject to withholding, a taxpayer may request to have federal income tax withheld from them.

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FAMILY OWNED BUSINESSES: STRATEGIC PLANNING

Strategy and succession are critical for survival of a family-owned business and as their trusted

advisor, CPAs play a key role.

CPAs advising family-owned business owners have opportunities to nudge leadership toward

planning for strategy and succession that can address shortcomings and lead to a more

successful, sustainable business.

A strategic business planning process for a family-owned business should include a careful

discussion and evaluation of:

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• The changing landscape of the current business environment.

• Changes in consumer habits and needs.

• The products and services that they currently offer.

• Capabilities they possess that may be underutilized.

Family-owned businesses tend to get tunnel vision about their products and services and may not

take time to step back and evaluate the real strengths and capabilities they have developed.

Family-owned businesses typically prepare budgets a year or two ahead of time, and they may

evaluate potential investments and acquisitions, so they are thinking about some of the elements

that are involved in strategic planning.

While failure to plan strategically can result in lost business opportunities, neglecting succession

planning can cause a family-owned business to suffer either sudden interruption upon the

unexpected death of a key leader, or a more gradual loss of the talent needed to sustain success.

Problems with commingling of family and business resources, cash flow, equity, and debt can

complicate succession planning in family businesses. Succession issues can be particularly

challenging when multiple family members share ownership and responsibilities for the business

without parameters that are clearly written out.

With an appropriate decision-making structure in place, a family-owned business can focus on

strategic initiatives that are in everyone’s best interests. For effective strategic planning,

family-owned companies should:

• Focus on goals, not tactics. A strategic plan establishes the company’s goals and

direction, while a business plan lays out the tactics needed to pursue the goals.

• Invite input. People are more motivated to achieve goals that they helped create.

• Be prepared for change. After examining the goals for the future and the present

situation, you will create a business plan to execute the strategic plan. And you may discover that

different approaches are needed to roles and the way the business operates.

• Set a timeline and assign responsibilities. Although the CEO and board own the plan,

other managers will drive specific elements of it, and they will need resources to accomplish

objectives.

• Measure and adapt. Key performance indicators help in evaluating progress.

• Communicate. Share both the plan and the progress you are making toward

accomplishing it. This can help build momentum toward your goals.

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GETTING HELP

Family-owned businesses need to consult experts, when necessary, to assist them as they strive

to build their plans for strategy and succession. CPAs, as their trusted advisor can play an

important role for family-owned businesses as they attempt to create a successful structure.

Often their succession plan is not fully developed or sustained over time, so it does not provide

the security the business needs.

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TAX REFORM AS BIGGEST CHALLENGE

An 85 percent majority of corporate tax executives perceive tax reform as the biggest challenge

they’re facing in the months ahead, according to a new survey.

The survey, by Bloomberg BNA, polled more than 250 corporate tax executives at public and

private corporations around the country. Most of them perceive the overhaul of the federal tax

code as their chief concern as they worry about the impact it will have on their companies. Over

half the survey respondents are uneasy about some of the possible reforms, including proposals

for a border adjustment tax, territorial tax system and limitations on interest deductions.

Corporate tax executives are also worried about international tax changes, including

country-by-country reporting requirements, cited as a challenge by over six out of 10 tax

practitioners. Almost three out of 10 of them expect their companies will operate in more

international jurisdictions in the year ahead.

Tax executives are also dealing with challenges at their companies, especially the absence of

alignment between their accounting systems and their tax compliance or provision processes.

Despite the expected tax reform overhaul, 52 percent of the tax managers polled anticipate no

change in staffing levels while 40 percent are looking to add more employees. Mergers and

acquisitions are on the horizon, with 81 percent of the respondents expecting their companies to

pursue such deals in the year ahead.

“As highlighted by the survey’s findings, corporate tax professionals are facing a wealth of

challenges as they look to prepare their businesses for what could be seismic changes,” said

George Farrah, editorial director of Bloomberg BNA’s Tax & Accounting division, in a

statement.

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DOMESTIC & FOREIGN CHILD ADOPTIONS: TAX CONSEQUENCES

We favor Americans adopting American children from foster care when feasible, but current

U.S. tax law benefits domestic and foreign child adoptions.

The tax law enables adopters to replace American adoptees with foreign adoptees. As a result,

Americans children are waiting longer than ever in foster care for their permanent families.

IR Code Section 23 of the tax code permits the child’s adopter to receive both the adoption credit

and employer-provided adoption assistance benefits. (Section 23 specifies qualified adoption

expenses, child eligibility, limitations, and timing and filing requirements. IRS Topic 607

describes the general tax provisions. Form 8839 provides instructions.)

Domestic and Foreign Adoptees

Section 23 applies to a potential adopter seeking to adopt a child. That adoptee can be an

American child or a foreign child. Section 23(e) imposes timing compliance restraints for a

foreign adoptee.

• A domestic potential adopter, seeking to adopt a U.S. child, can take into account

the qualified adoption expenses the potential adopter paid before the year in which the

adoption became final. The potential adopter can claim these amounts as a credit for the

tax year following the year the potential adopter makes payment. The potential child

adopter can claim these adoption benefits even though the potential adopter never

finalizes the adoption, and even if the potential adopter never identified the child for the

domestic adoption.

• The potential adopter of the foreign child can claim eligible expenses before the

adopter undertakes its adoption effort or after the adoption. The adoption must be final

before the adopter can claim the tax benefit.

Foreign Children

Undertaking a foreign adoption is not for the faint of heart. The prospective parent begins with

the potential applicable transnational adoption process, the Hague Convention on the Protection

of Children and Co-operation in Respect of Intercountry Adoption. Some 75 countries, including

the United States, are members of the Hague Adoption Convention.

The prospective parent needs to ascertain whether the adoption is covered by the Hague

Adoption Convention procedures. Rev. Proc. 2010-31, 2010 I.R.B. 413, covers Hague adoptions.

Rev. Proc. 2005-31, 2005 I.R.B. 26 covers non-Hague adoptions The U.S. Department of State’s

Office of Children’s Issues issued an intercountry adoption guide, but it does not address the

relevant tax adoption issues.

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According to the State Department, at present 500,000 children are in the U.S. foster care

system, while 115,000 children are waiting to be adopted. Dave Thomas’ Foundation for

Adoption pegs the number of children waiting in foster care at 110,000.

The Hague Convention limits the child’s age to a 16-year maximum. The adopter must be

married, or be an unmarried person at least 25 years of age. The adopter must certify to the

child’s lack of infectious diseases. The convention does not require a comprehensive medical

assessment.

Some countries use guardianship decrees as part of the adoption process. The State Department

specifies that Islamic Family Law decrees might not meet the U.S. immigration law

requirements. In many cultures, but not all, the adopter provides “gifts” for the child’s prior

abode. The United States might treat the making of such gifts as a bribe.

The United States government now plays an active role in the international adoption process.

The intended adopter must secure approval from U.S. Citizenship and Immigration Services.

This USCIS process focuses on the intended adopter, not on the child being adopted. This U.S.

government process includes a home study about the adopter, together with detailed personal,

financial and medical information about the family, plus personal references, proof of the

adopter’s health, life insurance, fingerprint clearances, verification of employment and more.

The potential adopter needs to file Form I-600A for non-Hague adoption cases, requiring 12

pages of intrusive data and paying a minimum $775 fee. The adopter can file Form l-800A for

Hague adoption cases, including 16 pages of more intrusive data and paying a minimum $775

fee. The adopter’s state of residence impacts this adoption process.

Foreign countries have their own adoption rules. Some countries permit single family adoptions;

others don’t. The foreign country might require the adopter have a requisite revenue source, or

might impose a religious test—an issue that our State Department avoids. A number of countries

impose age requirements on the adopter. Nevertheless, the adopter needs to have a sense of

fortitude and patience to proceed with the adoption process.

An adoptee must meet home country residence rules before the adoption process begins. If an

adopter is seeking to adopt a child from a non-Hague country, this child must be an “orphan,” a

term that has its own country-by-country definition. Hague Convention countries use the term

“Convention adoptee.” The adoption process differs if the child’s birth parents are still living.

The adopter must obtain a release under local law providing a legal and irrevocable release for

adoption from these parents.

Applying U.S. immigration rules are difficult for the adopter, even if the adopter undertakes to

apply the USCIS rules, foreign rules and state rules, and even if the adopter has legal custody of

the child before securing full adoption. The adopter can apply for an IH-4 immigrant visa for a

child from a Hague Convention country or apply for an IH-4 immigrant visa for a child from a

non-Hague Convention country. The State Department encourages the adopter to secure U.S.

citizenship for that child “as soon as possible.”

16

The U.S. imposes different visa rules if the adopter finally adopts the child abroad. The adopter

can apply for an IH-4 VISA for a child from a Hague Convention country or apply for an IR-3

immigration visa from a child from a non-Hague convention country.

The IR-3 VISA indicates that the adoption process has been complete in the child’s native

country. Under an IR-3 VISA, the child is immediately granted citizenship upon entering the

U.S., if at least one of the adoptive parents is a U.S. citizen. The IR-3 VISA also ensures that all

rights and responsibilities of the biological parents have been properly severed and grants those

same rights and responsibilities to the adoptive parents as if the adoption had taken place

domestically.

The IR-4 VISA is granted when one or more of the above requirements are not met. In these

instances, any state required pre adoption procedures or rules must be completed in the U.S.

Parents and child are not afforded the same rights and responsibilities as a domestic adoption and

the child is not granted U.S. Citizenship until the adoption process is completed.

International adoptions are extremely costly for the adopter. The potential adopter must

run the gamut of both foreign adoption procedures and U.S. adoption procedures.

******

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