We all know that today’s marketplace is global. What you may not know is how important it is to minimize your risk when it comes to foreign currency. Your company may be exposed to foreign currency risk even if you don’t do business in a foreign currency. However, there are ways to minimize those risks including foreign currency hedging. Hedging involves taking an equal and opposite position to protect against price fluctuations.
It is easy to see where you have foreign currency risk when you have foreign currency receivables or payables. If you sell some inventory worth $100,000 to a buyer in Europe for an agreed upon price of EUR 667,000 (based on an exchange rate of 1.5), if the payment does not take place immediately, then any market movement on the exchange rate until payment takes place will have a direct impact on your business. If you choose not to hedge that position, than you are truly gambling.
Perhaps you are thinking to yourself that you don’t have to worry about that since you deal in only US dollars. Even though you sell your products around the world, you only accept payment in US dollars and therefore are not subject to foreign currency risk. This could not be farther from the truth.
Suppose you sell your inventory again worth $100,000 again to a buyer in Europe and this time insist on US dollars. Again, assume that the terms or the contract call for payment in 60 days. If the dollar strengthens by 10 percent during that time period, you have effectively raised the price of your product to your client because the dollars are now more expensive. They may find a new seller who accepts Euro’s since it would cost them 10 percent less.
Even worse, suppose you are selling your product not in a European nation but in a country whose market is very volatile. If your normal terms are 30, 60, or even 90 days, what would happen if one day, the foreign currency was devalued overnight by 50 percent? Even though you only accept payment in US Dollars, you have tremendous foreign currency risk since now your client really owes you twice the amount it thought it did when it entered into the contract. In fact, this may cause them to not pay your bill altogether, which could be a huge loss.
Thus, whether you sell to foreign companies and accept foreign currency or only accept US Dollars, you need to consider a proper foreign currency hedging strategy to limit your risk and improve your profitability.
For more information on foreign currency hedging, contact our Tax Planning & Preparation Group at 440-449-6800.
Offsetting the Cost of the Health Care Package: Revenue Raisers
In addition to health-care related taxes and fees, several other areas have been targeted to raise more revenue as an offset to the overall cost of the entire Health Care package. These additional provisions are estimated to raise $28.1 billion over the 2010-2020 scoring period.
Biofuel Credit
The cellulosic biofuel credit was intended to reward taxpayers that use alternative fuels in industrial and other processes. The Patient Protection Act, as amended by the House Reconciliation Act, targets what some lawmakers perceive as certain industries’ abuse of the credit by denying the credit to a by-product known as “black liquor.” The provision applies to fuels sold or used on or after January 1, 2010.
Impact
This nonmedical revenue provision is a money maker, raising $23.6 billion. However, both this provision and the codifi cation of the economic substance doctrine are used as the primary revenue raisers in the version of the Extenders bill the Senate passed on March 10, thus jeopardizing a quick resolution of that bill between House and Senate negotiators.
Economic Substance Doctrine
The Patient Protection Act, as amended by the House Reconciliation Act, codifies the economic substance doctrine. A transaction would have economic substance only if the taxpayer’s economic position (other than its federal tax position) changed in a meaningful way and the taxpayer had a substantial purpose (other than a federal tax purpose) for engaging in the transaction. The provision applies to transactions entered into after date of enactment.
Impact
Violations are subject to stiff, automatically-applied penalties of 20 or 40 percent, depending on the underlying transaction and level of disclosure. This no-fault penalty regime concerns many advisors, especially in connection with corporate and partnership tax planning strategies in which tax reduction has been an acceptable principal reason for structuring certain deals.
Corporate Estimated Tax Payments
The Patient Protection Act, as amended by the House Reconciliation Act, increases the required corporate estimated tax payments factor for corporations with assets of at least $1 billion for payments due in July, August, and September 2014 by 14.5 percentage points.
Imformation Reporting
The Patient Protection Act, as amended by the House Reconciliation Act, imposes new information reporting requirements. Generally, businesses that pay any amount greater than $600 during the year to corporate and noncorporate providers of property and services will be required to fi le an information report with each provider and with the IRS.
Source: CCH, a Wolters Kluwer business
Health Care Reform & Medical Expense Deduction
Impact
The Patient Protection Act, as amended by the House Reconciliation Act, makes no adjustment to the allowable medical expense deduction for purposes of computing alternative minimum tax (AMT) liability. For now, the AGI fl oor for AMT purposes remains at 10 percent.
Comment
The Patient Protection Act, as amended by the House Reconciliation Act, does not extend the employer-provided health coverage gross income exclusion for employees’ spouses and dependent children to coverage provided to domestic partners. Pending legislation, the Domestic Partnership Benefits and Obligations Act of 2009 would provide the same employment benefits to federal employees in same-sex partnerships currently provided to married federal employees and their spouses, including healthcare, retirement, family leave, and other benefits.
Adult children coverage. The Patient Protection Act, as amended by the House Reconciliation Act, extends the employer-provided health coverage gross income exclusion to coverage for adult children up to age 26. To be eligible, they must be also eligible to be claimed as a dependent for tax purposes.
Adoptions. The Patient Protection Act makes the adoption credit refundable. It also raises the dollar limitation for the credit to $13,170 and extends the credit through 2011. The health care package also enhances the incentives for adopting children with special needs.
Medicare Part D
The Patient Protection Act eliminates the deduction for the subsidy for employers that maintain prescription drug coverage for retirees who are eligible for Medicare Part D.
Comment
The House Reconciliation bill delays the effective date of this provision by two years until 2013.
Source: CCH, a Wolters Kluwer business
Health Care Reform & FSAs and HSAs
The Patient Protection Act, as amended, also increases the additional tax on nonqualified distributions from health savings accounts (HSAs) from 10 percent to 20 percent and from Archer MSAs from 15 to 20 percent.
Impact
The Patient Protection Act as passed by the Senate would have applied to health FSA distributions and reimbursements for tax years beginning after December 31, 2010. The House Reconciliation bill delays the effective date by two years, to tax years beginning in 2013.
To prevent an end-run around the new FSA restrictions using cafeteria plan rules, the House Reconciliation Act provides that, if a benefi t is available under a cafeteria plan through employer provided contributions to a health FSA, the benefit will not be treated as a qualified benefi t unless the cafeteria plan provides that an employee may not elect for any taxable year to have salary reduction contributions in excess of $2,500 made to the arrangement.
Source: CCH, a Wolters Kluwer business
Health Care Reform & Market Sector Fees
The Patient Protection Act, as amended by the House Reconciliation Act, imposes annual nondeductible fees on various health-related industries, such as medical device manufacturers and importers, health insurance providers and others. The annual fees would be allocated across industry sectors according to market share. The patient Protection Act, as amended, delays the effective dates of the taxes on brand name pharmaceuticals sales by one year until 2011 and on health insurance providers for three years until 2014. The Patient Protection Act, as amended, also exempts qualified nonprofi t insurance providers serving lower-income and other targeted groups and some voluntary employee benefit associations.
Comment
The Patient Protection Act, as amended by the House Reconciliation Act, removes an annual fee that would have been imposed on medical device manufacturers. However, as a trade-off, the Patient Protection Act, as amended, adds an excise tax on medical device sales. However, certain medical devices routinely purchased by consumers, such as eyeglasses and hearing aids, would be exempt from the excise tax.
The Patient Protection Act, as amended by the House Reconciliation Act, would also require Code Sec. 501(c)(3) hospitals to conduct periodic community health needs assessments and adopt written financial assistance policies. Individuals who qualify for fi nancial assistance would be billed at the same rates as insured individuals. The bill would also add some consumer protection provisions to debt collection activities by nonprofi t hospitals.
Comment
The IRS would be required to review a nonprofi t hospital’s community benefi t activities at least once every three years.
Comment
The Patient Protection Act, as amended by the House Reconciliation Act, authorizes the IRS to share return information with the U.S. Department of Health and Human Services to curb Medicare fraud.
Heath Insurance Executive Pay. The Patient Protection Act modifies Code Sec. 162(m) as it applies to remuneration paid by health insurance providers to high-level executives. If at least 25 percent of the premium income to the insurer does not meet minimum essential coverage requirements under the Act, no Code Sec. 162(m) deduction would be allowed to the extent the remuneration exceeds $500,000, with a special provision for deferred compensation. No further changes were made in the House Reconciliation Act to this provision.
Indoor Tanning Tax. The Patient Protection Act, as amended by the House Reconciliation Act, imposes a tax of 10 percent on qualified indoor tanning services effective for services provided on or after July 1, 2010.
New Therapies Tax Credit. On the positive side of the ledger for the health industry, the Patient Protection Act creates a new two-year temporary tax credit to encourage investments in new health care therapies for tax years beginning in 2009 and 2010.
Source: CCH, a Wolters Kluwer business
Health Care Reform & High-Cost Plans
The Patient Protection Act, as amended by the House Reconciliation Act, also provides higher premium levels for retirees and employees in certain high-risk professions: $11,850 for individual coverage and $30,950 for family coverage. Retired individuals age 55 and older would also be eligible for the higher thresholds.
Employers will be required to disclose the value of employer-provided health insurance to employees annually on Form W-2.
Impact
Designed principally to limit so-called “Cadillac plans,” the excise tax for these high-end policies would be imposed pro rata on issuers. For self-insured plans, the plan administrator (including employers that act as plan administrators) would pay the excise tax. The Patient Protection Act, as amended by the House Reconciliation Act, delays application of the excise tax from 2013 until 2018 to give plans “time to implement and realize the cost savings of reform.” Because of this delay, however, the Reconciliation Act eliminates the three-year transition relief that had been available in the Patient Protection Act for coverage in 17 high-cost states.
An insurer would be free to pass along the excise tax to consumers in the form of higher premiums as an alternative to, or in combination with, finding cost-cutting opportunities.
Cost of living adjustments. While the House Reconciliation Act raises the base dollar premium levels for classification as Cadillac plans (the original levels had been set at $8,500 for individuals and $23,000 for families), it takes away the more generous infl ation-index in the original Patient Protection Act. The threshold amounts originally would have been indexed for infl ation using CPI-U plus one percent. The House Reconciliation Act keeps that inflation adjusted calculation for 2018 and 2019 only. Thereafter, the amounts would be adjusted only using the base CPI-U. The dollar thresholds will be increased automatically in 2018 if the Congressional Budget Offi ce is incorrect in its forecast of the premium inflation rate between 2010 and 2018. Estimates are that the new indexing will more than offset any benefits given under the higher base dollar premium levels.
The House Reconciliation Act removes completely from the Patient Protection Act the value of dental and vision plan benefi ts from determining the excise tax thresholds. The House Reconciliation Act also provides adjustments to the thresholds to account for plans that carry a higher premium cost because of the participants’ age or gender.
Example
Dan, age 40, elects family coverage under an employer-provided fully-insured health care policy covering major medical and dental with a value of $37,000. The amount subject to the proposed excise tax would be the $9,500 above the $27,500 threshold for family coverage. Dan’s employer would report $9,500 as taxable to the insurer. The insurer calculates and pays the tax to the IRS.
Source: CCH, a Wolters Kluwer business
Health Care Reform & Additional Medicare Tax
The Patient Protection Act, as amended by the House Reconciliation Act, broadens the Medicare tax base for higher income taxpayers by:
1. Imposing an additional of 0.9 percent on earned income in excess of $200,000 for individuals and $250,000 for families; and
2. Imposing an unearned income Medicare contribution of 3.8 percent on investment income for individuals with AGI above $200,000 and joint fi lers with AGI above $250,000.
Impact
The 3.8 percent Medicare “contribution” would be effective starting in 2013. This additional Medicare tax would apply only to the employee portion of the tax. When added to the 0.9 percent tax also imposed by the Patient Protection Act on these high-income earners’ portion of their Hospital Insurance (HI) payroll tax, $210 billion is estimated to be raised over the 2013 to 2019 period.
Impact
Neither the $200,000 nor $250,000 amounts are indexed for inflation.
Net investment income includes interest, dividends, royalties, rents, gain from disposing of property, and income earned from a trade or business that is a passive activity. Self-employed individuals, as well as estates and trusts, would also be liable for the additional tax.
Distributions from qualified retirement plans, including pensions and certain retirement accounts, would be exempt from paying the additional tax. For example, income from individual retirement accounts (IRAs), 401(a) money purchase plans, 403(b) and 457(b) plans would be exempt.
Comment
The final version of the additional Medicare payroll tax appears to be a compromise between the House’s proposed income tax surtax on higher-income individuals and the Senate’s original “Cadillac plan” excise tax.
Impact
The additional Medicare tax on qualified higher income taxpayers would not start until 2013. Issues over how certain deferred compensation arrangements would be taxed are certain to arise.
Source: CCH, a Wolters Kluwer business
Effects of Health Care Reform on Small Businesses
The Patient Protection Act, as amended by the House Reconciliation Act, provides a temporary sliding-scale small employer tax credit to help offset the cost of employer-provided coverage. Generally, a small employer is one with fewer than 25 employees and average annual wages of less than $40,000.
In 2011 through 2013, eligible employers may qualify for a tax credit for up to 35 percent of their contribution toward the employee’s health insurance premium. In 2014 and beyond, eligible employers who purchase coverage through a state exchange may qualify for a credit for two years of up to 50 percent of their contribution. Qualified tax-exempt employers would be eligible for a reduced credit. Salary reduction contributions are not counted.
Impact
Employers with 10 or fewer employees and average annual wages of less than $20,000 would be eligible for the full credit.
Comment
Qualified small businesses would be able to purchase insurance for their employees through state-based web portals to be known as mall Business Health Options Programs (SHOP). These insurance exchanges would allow small businesses to pool together to spread their financial risk.
Cafeteria Plans. The Patient Protection Act relaxes the cafeteria plan rules to encourage more small employers to offer tax-free benefi ts to employees, including those related to health insurance coverage. It does so by carving out a safe harbor from the nondiscrimination requirements for cafeteria plans for qualifi ed small employers.
Source: CCH, a Wolters Kluwer business
Effects of Health Care Reform on Employers
Employers (essentially large and mid-size employers for purposes of the House Amended Patient Protection Act) that fail to offer minimum essential coverage during any month for which a full-time employee has enrolled in a subsidized plan using the premium assistance tax credit or cost-sharing reductions would be liable for an additional tax. That penalty would equal the product of the applicable payment amount (with respect to any month, 1/12 of $2,000) and the number of full-time employees employed by the employer during such month.
Impact
The penalty would apply to employers with 50 or more workers but would subtract the first 30 workers from the payment calculation. Businesses with fewer than 50 employees would be exempt from any employer responsibility.
Example
ABC Co. has 51 fulltime employees and does not offer its employees minimum essential coverage. ABC Co. will pay an amount equal to 51 minus 30 (or 21) times the applicable per employee payment amount (up to $2,000 per full-time employee).
Employers offering coverage to employees who qualify for premium assistance tax credits or cost-sharing reductions would also be liable for an additional tax if waiting-period restrictions are imposed. Large employers with extended enrollment waiting periods (generally those exceeding 90 days) would be liable for an additional tax. Generally, if employer provided insurance exceeds 9.5 percent of the employee’s household income or the employer plan has an actuarial value of less than 60 percent, the coverage will not qualify as minimum essential coverage.
Employers and other entities providing minimum essential coverage would be required to fi le information returns with the IRS identifying the individual, the coverage and the amount of premium, if any, paid by the individual. Penalties would be imposed for failure to file an information return.
Source: CCH, a Wolters Kluwer business
Effects of Health Care Reform on Individuals
The Patient Protection Act, as amended by the House Reconciliation Act, requires individuals not otherwise eligible for Medicaid or Medicare or other government sponsored coverage to maintain minimum essential coverage beginning after 2013. Individuals who fail to maintain minimum essential coverage would be liable for a penalty. The Patient Protection Act uses a formula to calculate the penalty taking into account the taxpayer’s household income and a flat dollar amount.
The Patient Protection Act, as amended by the House Reconciliation Act, imposes a nondeductible flat dollar-amount penalty of $95 per person without minimum essential coverage in 2014. The nondeductible penalty rises to $325 per person without minimum essential coverage in 2015 then to $695 per person without minimum essential coverage in 2016 and is indexed for inflation thereafter.
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Foreign Financial Bank Account Reporting Guidance Revised; Limited Relief Extended
AFFECTING
Certain taxpayers with foreign financial accounts
DETAILS
On February 25 and 26, 2010, the Treasury Department and Internal Revenue Service issued three items of guidance concerning the filing of Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (“FBAR”). The Service first issued Notice 2010-23 and Announcement 2010-16, which generally extend the relief granted in prior guidance. The other guidance consists of proposed regulations concerning the FBAR filing requirements. Notice 2010-23
In August 2009, the Service issued Notice 2009-62, which extended until June 30, 2010, the filing date for certain individuals (1) with signature authority over (but not a financial interest in) a foreign financial account, or (2) with signature authority or a financial interest in a foreign commingled fund. To address public comments received since the issuance of Notice 2009-62 and to provide immediate guidance in answering tax-return specific questions concerning investments in foreign financial accounts, Notice 2010-23 provides the following relief:
1. The filing date for persons with signature authority over (but not a financial interest in) a foreign financial account is extended to June 30, 2011. The extended date applies to reporting for such accounts for the 2010 and prior calendar years. When filing an FBAR under this extension, the FBAR guidance in effect at the time the FBAR is filed must be followed.
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IRS Considering Increased Reporting of Taxpayers: Uncertain Tax Positions
AFFECTING:
IRS Considering Heightened Disclosure of Taxpayers’ Uncertain Tax Positions
DETAILS:
On January 26, 2010, the Internal Revenue Service issued Announcement 2010-9, in which the Service has indicated that it is considering changes to reporting requirements regarding certain taxpayers’ uncertain tax positions. The Service is developing a new tax-reporting schedule with which taxpayers would report with their annual federal income tax return their uncertain tax positions and the potential magnitude of tax positions.
In announcing the changes it is considering, the Service refers to the requirement under Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (“FIN 48”),1 that taxpayers identify and quantify their uncertain tax positions for financial accounting purposes. The Service believes that the information reported under FIN 48 would assist in the examination of tax returns by bringing to light areas of interest or magnitude to warrant further inquiry, as well as assisting examination teams in identifying all issues more efficiently.
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For more information, post a comment below or contact our Tax Planning and Preparation Group at 440-449-6800.
Obama Unveils $3.83 Trillion Budget; Tax Proposals Focus On Job Creation, Revenue
President Obama presented Congress with his fiscal year (FY) 2011 federal budget proposals on February 1, and the $3.83 trillion budget emphasizes job creation and deficit reduction. Tax incentives for individuals and businesses total approximately $300 billion with an additional $100 billion allocated to job creation. On the other hand, proposed tax increases would raise $1.4 trillion. Although rate increases for higher-income taxpayers would bring in the lion’s share of that revenue, the budget calls for over $450 billion in other revenue raisers. Those increases impact many categories of taxpayers but, perhaps most directly, those with international operations.
IMPACT: While many of the president’s FY 2011 tax proposals previously appeared in his FY 2010 budget, notable differences are apparent not only in scope but also in details. Also different from last year is that many of the president’s proposals are likely to be enacted this year. The administration must show that it can get something done on the legislative front. With job creation front-andcenter on the national stage, success in passing high-profile tax legislation this year is a likely priority for the president and the Democratic- controlled Congress. More tax legislation this year is guaranteed by the expiring Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) income tax rate cuts, the already expired estate tax, and a long list of other must-pass “expiring provisions” –including an alternative minimum tax (AMT) patch—that will all need retroactive treatment.
COMMENT: Some of the president’s tax proposals have already gained momentum on Capitol Hill. The Senate may vote on the jobs creation component of the president’s FY 2011 budget before mid-February. Senate Democrats are drafting a jobs bill, which is expected to include a credit for small businesses that hire new employees, along with an extension of bonus depreciation and enhanced Code Sec. 179 expensing.
- Individuals – Tax Breaks
- Retirement Savings
- Individuals – Tax Increases
- Business Incentives
- Financial/Insurance Products
- International Tax Reform
- “Loophole Closers”
- Compliance/Enforcement
- Other Revenue Raisers
- Estate/Gift Taxes
- Energy Taxes
- Other Initiatives
Source: CCH, a Wolters Kluwer business
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