Deducting interest paid to foreign or tax-exempt related entities is now tougher

Article Abstract:

The Revenue Reconciliation Act of 1989 restricts the deduction for interest paid to entities that are not subject to US tax in order to reduce the practice of earnings stripping. Earnings stripping reduces corporate earnings exposed to taxation through shareholder loans. Interest payments on the loan are generally deductible to the borrower and interest paid to foreign shareholders benefiting from a treaty are exempt from US withholding tax. However, loan interest paid to related parties exempt from US tax is disqualified. These earnings stripping provisions make financing of US assets more complicated and extensive, but stripping to reduce earnings can give benefits to taxpayers because debt is less expensive than equity. Earnings stripping loans allow up to half of the net operating income to be sheltered from US tax, thus lowering the effective tax rate to 17%.

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Professional corporation v. partnership: Which is preferable in today's conditions?

Article Abstract:

In the 1970s corporations often enjoyed advantages in taxation that partnerships did not, but since that time changes have occurred that make the relative advantages less clear. One factor is the tremendous change in the different tax rates of individuals and corporations, with the maximum income tax rate for individuals lowered to 50 percent from 70 percent, and to 20 percent for capital gains income from the earlier 35 percent. The corporate tax rate has remained at between 46 percent and 48 percent maximum and 28 percent on capital gains income. Both the tax and non-tax considerations that must be considered in choosing between formation as a partnership and incorporation, as well as partnership options, problems in forming partnerships, and professional corporation liquidations are discussed.

Laws, regulations and rules, Tax planning, Partnership, Partnerships

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Using a corporation to shelter investment income need not subject it to special tax

Article Abstract:

The 50 percent personal holding company (PHC) tax seeks to keep a company or corporation from being used to skip personal taxes for passive income, However, the two-step test for PHC status and the consideration of dividends paid provide techniques of limiting or avoiding liability for the tax. Due to the mechanical, instead of the subjective, effect of the holding concern provisions, tax planning must be direct for the avoidance or the use of personal holding companies.

Finance, taxation, & monetary policy, Planning, Investments, Tax shelters

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