Bus 225D – Individuals and Foreign Corps Instructor: Carol Rutlen, CPA

2 Other expat issues –Moving expenses –Principal residence –State rules –Expatriation rules Extended business trips –Benefits of extended business trips –What is an extended business trip –Requirements to meet extended business trip status –Reporting requirements –Practical issues Agenda for Class 4 - Overview

3 Moving Expenses – General Rules Deduct certain moving costs –Change in principal place of employment –Distance test: new job site at least 50 miles from farther from old principal residence than old job site –Time test: 39/78 weeks Deduct reasonable expenses of –Moving household goods and personal effects (includes lodging, excludes meals) –Traveling from old residence to new residence –Storage If employer reimburses or pays directly, may exclude amounts from income if paid from accountable plan

4 Moving Expenses - Sourcing § (e)(5)(i) reimbursement compensation for future services –Moving to foreign country → foreign sourced –Moving to US → US sourced –Written policy of reimbursing to and from → both foreign sourced §911(d)(6) – denies deductions allocable to excluded income Moving expenses allocable to foreign earnings if taxpayer qualifies for §911 for at least 120 days in that year [§911-3(c)(5)(ii)(A)]

5 Problem 2008 $6,000 allowable moving expenses $15,000 wages 2009 $82,400 wages Move date: November 1, 2008 Nonaccountable plan to reimburse moving expenses

6 Impact on Principal Residence Section 469(j)(7) –Rental of principal residence while on assignment –Passive activity rules Passive losses can’t be deducted from nonpassive income Except active participation in rental real estate activity $25,000 passive losses from rental real estate can be deducted from nonpassive income –469(j)(7) “The passive activity loss of a taxpayer shall be computed without regard to qualified residence interest (within the meaning of section 163(h)(3).” –Mortgage interest in excess of $25,000 limitation on loss can be itemized deduction

7 Rental of Principal Residence DescriptionAmount Income (2,000 x 12)24,000 Property Tax-7,500 Mortgage Interest-36,000 Other Expenses-5,000 Depreciation-10,000 Loss-31,500

8 Impact on Principal Residence Section 121- exclusion of gain from sale of principal residence –“Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer's principal residence for periods aggregating 2 years or more.” –Gain excluded $250,000 ($500,000 joint returns) –Applies to only 1 sale or exchange every 2 years

9 Section 121 – Exclusion of Gain Exclusion won’t apply to gain allocated to nonqualified use Aggregate period of nonqualified use during the period such property was owned by the taxpayer Period property owned by taxpayer Nonqualified use –Period of 12/31/08 during which property not used as a principal residence of taxpayer or taxpayer’s spouse or former spouse –Exceptions to period of nonqualified use

10 Exceptions to Nonqualified Use 5-year period which is after the last date property is used as the principal residence Period (not to exceed aggregate of 10 years) is serving in military, etc. Any other period of temporary absence (not to exceed an aggregate of 2 years) due to change of employment, health conditions, or unforeseen circumstances

11 Foreign Mortgage Sale of residence and payoff of mortgage treated as two transactions A principal residence is valued at the gross value A mortgage is not netted against the value of a residence A foreign denominated mortgage carries foreign exchange gains/losses

12 Impact on Principal Residence 1/1/021 € = $ 1 Buy home 110,000 €$110,000 Mortgage100,000 €$100,000 1/1/101 € = $.75 Sell home 140,000 €$105,000 Mortgage100,000 €75,000 Gain(loss) from sale Gain from mtg 30,000 € -0- ($5,000) 25,000

13 Impact on Principal Residence 1/1/021 € = $ 1 Buy home 110,000 €$110,000 Mortgage100,000 €$100,000 1/1/101 € = $ 1.25 Sell home 140,000 €$175,000 Mortgage100,000 €125,000 Gain(loss) from sale Gain(loss) from mtg Personal/nondeductible 30,000 € -0- $65,000 ($25,000)

14 State Rules Each state has specific residency rules May allow Sec 911 and FTC May honor tax treaties California residency test –Out of state 18 months (546 days) under an employment related contract –No more than 45 days in CA during taxable year –Intangible income can’t exceed $200,000 in taxable year CA doesn’t allow 911, FTC, or treaties

15 Other States Pennsylvania: generally follows Federal but see REV-625 Virginia: Follows Federal Maryland: Follows Federal NY: Follows Federal Minnesota: Follows Federal

16 History of Expatriation Rules IRC Sec 877 – expatriating individuals continue to be taxed as US citizens Pre 1996 IRS must prove expatriation tax motivated + US citizen 2004 revisions New rules effective for expatriations after June 16, 2008

17 New Expatriation Rules Applies to US citizens Applies to green card holders for 8 years or more during the 15 preceding tax years Threshold for applicability – §877(a)(2) –Average annual income tax liability over 5-year period greater than $145,000 or –Net worth ≥ $2 million or –Taxpayer fails to certify compliance with US tax laws for prior 5 years

18 Expatriation Rules If meet threshold test, all property is deemed sold on day before expatriation date for FMV –If property owned when became a US resident, basis at least = FMV on date residency established –Losses may not be recognized until property disposed $627,000 exclusion for 2010 Special rules –Deferred compensation: 30% tax withheld on payment –Nongrantor trusts –Tax deferred accounts

19 Expatriation Rules Additional tax may be deferred until property sold –Election irrevocable –Property-by-property election –Tax triggered when property sold –Deferral terminates upon death –Must provide security to IRS –Interest is charged on amount deferred

20 EBT Status Business trip vs. short-term assignment vs. long-term assignment Taxation of travel expenses on business trip –§ 162(a)(2) –Reg. § Business trip vs. EBT Use –Don’t meet 911 qualifications –Foreign nationals in US

21 § 162 Trade or Business Expenses (a) In general. There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including— (1) a reasonable allowance for salaries or other compensation for personal services actually rendered; (2) traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business;

22 Ordinary and Necessary Expenses What types of expenses? Meet substantiation requirements of §274(d) –Adequate record –Amount of expense –Time and place of expense –Business purpose

23 While Away From Home Tax home –Regular place of abode in a real and substantial sense § (b)-(2)(c)(1) –Rosenspan v. US §162 expenses vs. moving expenses Temporary vs. indefinite

24 Rev. Rul Used prior to current job and work contacts maintained in that area Living expenses duplicated Family members residing in abode or taxpayer continues to use for lodging

25 Examples (Rev. Rul ) Example 1: Expected to last 10 months Lasts 10 months Example 2: Expected to last 18 months Lasts 10 months Example 3: Expected to last 10 month After 8 months, extended 7 additional months

26 Other Issues Break in service (CCA ) –3 weeks or less not significant –7 month break significant No duplicate living expenses Allocation between employee and family –§ 274(m)(3) no deduction with respect to spouse or dependent accompanying taxpayer –Incremental cost (e.g., housing) –Directly attributable cost (e.g., airfare)

27 Reporting § (b)-2 –Not wages if paid under accountable plan –Otherwise wages – subject to withholding and reporting Accountable plan –Business connection –Substantiation –Returning amounts in excess of expenses

28 Per Diem – Rev. Proc Domestic: International: ontent_id=184&menu_id=78 ontent_id=184&menu_id=78 Amount of expense deemed substantiated is per diem allowance Only amounts paid in excess of per diem rates must be accounted for as wages COLA vs. per diem

29 Short-Term Converting to Long-Term What happens when assignment gets extended? –Basic incompatibility of EBT and 911 –Where is the tax home? –What was management’s intent? –Examine the facts and circumstances Convert to long-term when intent changes –Different reporting requirements, e.g., treatment of per diems and housing –Host country taxability may change

30 EBT – Homework Mr. Wu has been sent to Bangkok, Thailand, for a 6-month assignment. At the end of his assignment Mr. Wu returns to the US. Per diem: M&I = $70 Hotel = $150 What is subject to withholding and reporting? Per diem rates M&I 72 Hotel146

31 Other expat issues –Moving expenses –Principal residence –State rules –Expatriation rules Benefits of extended business trips What is an extended business trip Requirements to meet extended business trip status Reporting requirements Practical issues Agenda for Class - Overview