The Ventura Pranas Quarterly Newsletter: January – March 2021
- IRS updates on Individual Tax Returns
- Resources you might find useful
- You Ask, We Answer
- Parallel Universes
- 2022 road map for taxes post Biden
- Prabha’s office location in the new year
To stay posted on all tax law updates, follow us on LinkedIn
Summer greetings from Ventura Pranas!
As the second wave of the pandemic has hit India, we’ve gone right back to working from home for all our employees. As a result, we rely heavily on virtual calls, follow up and email communication between team members and with clients.
Due to the present hike in covid cases, we are unaware when any of us will be affected or when we will be back in the office.
However, we are aware the Tax deadline for filing 1040 is fast approaching. The due date for individuals is May 17, 2021. As a measure to protect our clients against any inadvertent delays, we have filed extensions for all our clients. If we are able to file on time, the fact that we filed an extension already will not affect you. It is simply a safeguard.
If all documents are provided, we will continue to work on the returns and process them in the order that they are received.
We appreciate your co-operation in this regard and requesting you to bear with us.
We pray for the safety of you and your family.
FBAR Deadline is now October 15, 2021 since we already took care of the extensions in April 2021.
Gift tax Returns due April 15, 2021 if extended due October 15, 2021. For all our clients requiring Gift returns, we filed extensions on April 15, 2021 So please note that there is time but we urge you to provide us the details as soon as possible.
IRS Updates - IRS Announces May 17, 2021 Deadline for Individual Returns
We have some vital information from the Treasury Department and the Internal Revenue Service on the deadline for individual tax returns. As always with legal and tax issues, there are caveats and exceptions, so here’s the breakdown for you:
Federal income tax filing due date for individuals for the 2020 tax year will be automatically extended from April 15, 2021 to May 17, 2021. This relief does not apply to estimated tax payments that are due on April 15, 2021. (These payments were still due on April 15, 2021). Taxes must be paid as taxpayers earn or receive income during the year, either through withholding or estimated tax payments.
Overpayment from 2020 to 2021 generated by the payment accompanying the filing of a return or extension on April 15thh (one month early) will be credited to the taxpayers account on April 15th and will be considered a timely filed Q1 estimated tax payment. Waiting until May 17th to file or extend will make the overpayment one month late for estimated tax purposes.
Please note that while the due date for FBAR’s was April 15, 2021, FBAR’s are granted automatic extensions to Oct 15, 2021. The filing of Form 1040 or form 4868 (or any other return or extension) has NO IMPACT on the FBAR due date.
Treasury, IRS provide guidance on tax relief for deductions for food or beverages from restaurants
Businesses can temporarily deduct 100% beginning Jan. 1, 2021
WASHINGTON – The Treasury Department and the Internal Revenue Service issued Notice 2021-25 providing guidance under the Taxpayer Certainty and Disaster Relief Act of 2020. The Act added a temporary exception to the 50% limit on the amount that businesses may deduct for food or beverages. The temporary exception allows a 100% deduction for food or beverages from restaurants.
Beginning Jan. 1, 2021, through Dec. 31, 2022, businesses can claim 100% of their food or beverage expenses paid to restaurants as long as the business owner (or an employee of the business) is present when food or beverages are provided and the expense is not lavish or extravagant under the circumstances.
Federal - Form 8962, Premium Tax Credit (PTC) - Due to the recently passed American Rescue Plan Act of 2021, the Advanced Premium Tax Credit does not need to be repaid.
Resources you might find useful
In the last decade running Ventura Pranas, we’ve developed some very close relationships with our clients. Being privy to financial information and planning often means being a part of several big life decisions, which has added more meaning to our work.
Ever so often, we come across resources and referrals that aren’t covered in our accounting services, but from which we feel you might gain of value. The two consulting businesses we are featuring in this newsletter, Jupiter Education Consulting and Gradvine, may be helpful in planning the college education of your child.
Jupiter Education Consultants
Jupiter Education Consultants has developed a range of services designed to help minimize college costs and maximize financial grant and scholarship eligibility.
According to data submitted to U.S. News by 1,093 ranked schools, only 15% of students received merit aid in fall 2018 on average. All Ivy League schools do not offer academic merit scholarships. College costs in the U.S are high, and the pandemic is likely to affect college funding for the foreseeable future, which in turn limits student grants. Families will find it difficult to afford a college education without making a huge dent into their savings or lifestyle.
While financial grant programs are designed to help the meritorious and those in need of financial assistance, aid often goes towards those who are most knowledgeable about the intricacies of the system. This is where Jupiter Education Consultants come in. All the partners have put their own children through the US admissions process (and secured sizeable grants), and therefore carry their first-hand experiences and expertise gained into the counselling.
Visit their website www.JupiterEduConsultants.com to learn more and request a free, no obligation consultation. All information regarding your personal finance will remain strictly confidential.
Gradvine is a personalized education mentoring platform aimed at young students in their formative years. They put students in touch with mentors who have successfully made it to the top universities the world over for help with their applications. Founded by alumni from Dartmouth College and Carnegie Mellon University, they believe, “subject matter expertise and the ability to build a coherent narrative are essential in building a strong college application”.
At Gradvine, every mentor working on your application essays has gone to a top-notch school and has successfully navigated the competitive application process.
Their end-to-end service consists of a brainstorming session, a recommended list of universities, and personalized guidelines for essays. How the applicant explains the relevance of the university's offerings to their ultimate goals is critical in determining the strength of the application. Delving beyond superficial mentions and displaying an in-depth understanding of how particular courses, resources, and professors at the university will further the applicant's journey towards her/his goal is imperative to make it to the best universities.
To learn more about Gradvine, visit their website: https://gradvine.com
You Ask, We Answer
Q: What is the Tie breaker test per the DTAA?
A: Article 4 of the US and India DTAA provides these tests. Three main tests have to be satisfied to apply the residency status.
- Permanent Home Test ( again interestingly can be rented or owned).
- Closer Economic Relations Test usually dictated in favor of the country in which ones net worth is concentrated.
- Habitual Abode which usually points to the country in which the taxpayer’s family resides.
- Citizenship test
Interestingly the tests have to be applied serially. One would progress to the next if the answer to each is not conclusive.
See below on how it should be applied.
Q: How should the tie breaker test be applied?
A: It’s very important to remember that the following tests need to be applied serially. If an individual is a resident of both Contracting States, then his status shall be determined as follows:
- he shall be deemed to be a resident of the State in which he has a permanent home available to him;
- if he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (centre of vital interests).
- if the State in which he has his centre of vital interests cannot be determined, or if he does not have a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has a habitual abode.
- if he has a habitual abode in both States or in neither of them, he shall be deemed to be a resident of the State of which he is a national.
- if he has a habitual abode in both States or in neither of them, he shall be deemed to be a resident of the State of which he is a national.
Q: Why would a taxpayer opt to be treated as a non-resident from Indian income tax purposes if he meets the conditions of being treated as a resident of another country?
A: Under DTAA, you have an option to treat yourself as a non-resident Indian for Income tax purposes although you might meet the number of days test under the income tax act. The benefit of being an NRI and therefore not having to tax foreign income in India has the following advantages:
- Income earned abroad that is typically taxed at special rate or tax exempt is taxable at ordinary rate in India for a resident Indian. Therefore filing as an NRI takes this negative impact off.
- Compared to US tax rates, Indian taxes are higher in many cases or at par.
- Claiming foreign tax credit is comparatively simpler in the US than claiming relief in India.
- The intense Indian Income tax scrutiny proceedings and responding to various notices is a time consuming process when you have a foreign nexus like foreign income, foreign assets or relief on your return. The US IRS encourages and does exceedingly well with the remote assessments / scrutiny hearings unlike India. Our officers are just getting a handle on this. Some of the officers under ACIT rarely have a comprehension of the sources of foreign income and how it is taxed in the US. This usually results in painstaking explanations to the IT department. So if you do not have to report foreign income and foreign assets in India, you are likely sparing yourself of a great deal of hardship.
Q: If you are a non-resident for Income tax purposes, does that make you a non-resident for FEMA purposes?
A: Not necessarily.
A person resident in India is defined in Section 2 (v) of FEMA, 1999 as under:
A person residing in India for more than 182 days during the course of the preceding financial year but does not include –
(A) A person who has gone out of India or who stays outside India, in any of these cases:
- For or on taking up employment outside India, or
- For carrying on outside India a business or vocation outside India, or
- For any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period
(B) A person who has come to or stays in India, in any of these cases:
- For or on taking up employment in India
- For carrying on in India a business or vocation in India
- For any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period
Definition of a ‘person resident in India’ as contained in Section 2 (v) of FEMA 1999 is in two parts. The first part defines the status with reference to the period of stay in India and the second part is by way of exclusion. A plain reading of the definition indicates that a person is a ‘resident’ on satisfying the test of the period of stay, but such a person is excluded if he is covered under any of the exclusion clauses.
The intended interpretation would be that the tests laid down by the operative part and the exclusion part are to be applied independently.
Similar position would obtain in the case of a person coming to or staying in India. He is excluded from being a resident when he comes to India otherwise than for employment and becomes a resident if he comes to India for employment, business or with an intention to stay for an uncertain period.
So, the residency under FEMA is based on how may days a person stayed in India in the previous year unless they leave the country for an indefinite period of time as stated in (A) above. To know whether a person is a resident as per FEMA for FY 2021-22, we need to look into his stay in India in FY 2020-21 and also his intent to stay in India or abroad as the case may be in the case of an arrival and a departure respectively.
Q: What are the downsides of being treated as a Resident purposes for FEMA?
A: Well, for one, there are restrictions on the amount you can transfer under LRS – it is limited to S250,000 currently.
Also, residents cannot freely gift shares in an Indian entity to their non-resident relative – it is capped at $ 50,000 per Financial year or 5% of the paid up capital of the company, whichever is lower.
Certain gains and income accruing to a FEMA resident have to be compulsorily brought into India within a certain period of time. Can be as little at within 7 days or as long as 90 days.
Lastly, residents cannot sell agricultural land to a non-resident.
Q: What are the upsides of being treated as a non-resident from a FEMA angle?
A: There are financial upsides, which is why a lot of people who can, opt for non-resident status. One can repatriate up to $ 1 million each financial year unlike a resident under FEMA.
Also, a resident outside India can transfer any foreign security to a resident in India by way of gift. Further they can create any kind of vehicle abroad without going through tedious RBI approvals.
Q: Can one toggle back and forth from being non-resident of India using DTAA rules in one year (s) to becoming resident of India under Income tax act in other year (s)
A: Yes, indeed one can but as with anything has to be strongly supported by facts and circumstances. A clear documentation and being able to provide evidential material is of utmost important.
In the event a taxpayer qualifies as a NRI under the DTAA and a Resident under the Income tax Act, the DTAA prevails over the India Income tax act.
Stories and scenarios you can relate to, for families in the US and in India, to help you understand the complexity (and humour) involved in financial planning. Please note that the following is simply a case study. Any references to names and situations are entirely coincidental.
The setting: a technology company, TechWheel, with three founders, Nico, Dev and Asha.
Nico and Dev have been close friends since college, and once they started working, they played basketball in the evenings at a local indoor court, where they met and befriended Asha. Together, they founded Tech Wheel in 2004.
This story illustrates their different scenarios in relation to taxation, largely due to their country of residence, despite all of them having a US citizenship.
Let’s look at Nico’s case. Nico met his wife, Prema, during one of his many trips to India and he was keen on heading operations for the company in India. Nico is a US citizen, lives in Bangalore, is married to an Indian citizen, and has two children. One of them is in the United States attending graduate school, and the other lives and works in India.
Rahul is not a US citizen, but he’s a US resident now so he’s both liable for US taxes as also any benefits under the tax code that would otherwise apply to Citizens. When he makes his exit, he gets $1MM dollars and it’s all tax exempt. Govind is eligible to sell a proportionate percentage of his stock amounting to $5MM (as he was the founder his stake was far higher than Rahul’s), but because he’s an Indian resident he loses approximately 28.5% in taxes payable to India. When Govind files his returns, he won’t have to pay anything to the US government as he can invoke the QSBS provisions. However, because he’s an Indian resident, he won’t get the benefit on a world wide basis. Granted he can try to reinvest some of the proceeds in India under section 54F and avail an exemption from capital gains.
Dev, the second co-founder, is also a US citizen living in India, but his wife who is the third co-founder, lives in the US. Dev’s wife Asha, is a US citizen. Together, they have two children who are both in school.
Asha, the third co-founder, chose to live in the US, and she has the support of her family to help her raise her children. Both she and her husband, Dev, fly back and forth frequently to spend time together.
Nico, Dev and Asha had been nurturing TechWheel for a long time, before they received an offer for the company to be bought. All three of them exited, and now they each want to:
- Optimize taxes on their capital gains from the exit.
- Set up trusts in the US for estate and income planning
The sale of TechWheel involved the sale of a US parent company with an Indian subsidiary. The Indian Subsidiary is less than 50% of the value upon sale, under Section 9 of the Indian Income Tax Act and therefore these was no indirect tax attribution to India. It’s important to note here that the sale of the stock is a Qualified Small Business Stock (QSBS).
How does the sale play out for each of the founders on the income tax front?
In the US, all three founders (Nico, Dev and Asha) are US citizens so they are eligible for QSBS on the sale and can exclude gains to the extent of the higher of 10 times basis or $10 million.
In India, both Nico and Dev are Indian residents applying number of days under income tax, so although in the US they are tax free, in India they are exposed to 28.45% with the Indian high 37% surcharge.
Asha, the third founder who is a US citizen living in the US naturally has no tax in India, and potentially no tax in the US to the extent of the higher of 10 times basis or $10 million.
When it comes to estate planning in the US, all three founders are US citizens, so they are exposed to US Estate Duty. They all want to set up irrevocable trusts for the benefit of their children and spouses.
Nico and Dev can set up their respective trusts by contributing stock to a trust. Ideally, they should choose to set up a non-grantor trust in the US in a non-taxable state (such as Nevada). This will ensure that their capital gains are exempt under the QSBS rules, and being a non-grantor trust, the assets and income in the trust fall outside the ambit of the Indian Income tax authorities.
Asha can set up a trust by contributing stock to a trust. She has the choice, unlike Nico and Dev, to set up a non-grantor or a grantor trust in the US, in a non-taxable state. This will ensure the capital gains will remain exempt under the QSBS rules, and Nevada is a tax-free state. However, since Asha is not subject to taxes in India, she can set this up as either a grantor or a non-grantor trust. A grantor trust will ensure taxation in her hands. Non-grantor will be at the trust shrunken slabs. However if all the gains are capital gains it will not matter. This taxpayer can potentially use two $10 million exemptions between the grantor and non-grantor trust and accomplish estate and huge income tax benefits.
Now let’s look at the transaction in relation to FEMA (Foreign Exchange Management Act) in India. Here’s where an additional layer of complications arise.
For both Nico and Dev, as long as they are residents from FEMA, they cannot set up a foreign trust by contributing foreign stock without RBI permissions unless they can prove they are either a non-resident of FEMA, or the assets were purchased out of NRI earnings.
For Asha, however, as a US resident, she is free to set up any trust in the US without let or hinderance for income and estate tax planning.
We, at Ventura Pranas, spent a lot of time working out the details of Nico, Dev and Asha, running each of their details through various potential scenarios before we arrived at the following:
For Nico, we established that he is a resident of India under income tax rules but as an NRI under FEMA rules. In addition, the asset was first purchased out of earnings abroad in his NRI days, which means he could indeed open a trust in the US to contribute the assets. We were able to accomplish his income tax planning – using QSBS exemption in the US – and not have a tax incidence in India.
For Dev, we established that is he an income tax resident of the US by applying the tie-breaker rules under the DTAA. As a result, he was able to accomplish income tax savings immediately. Further, we established him as a non-resident under FEMA and as a result he was able to set up a non-grantor foreign trust in the US and accomplish estate planning, as well as receive the $10 million exemption under QSBS. The trust, formed in the tax-free state of Nevada, was shielded from State income taxes.
For Asha, it was easy to establish her as an NRI for both income tax and FEMA (from India standpoint). She was able to set up two trusts – one grantor and one non-grantor- in the US and was able to receive twice the QSBS exemptions.
We share these scenarios with you to highlight how inter-connected details are based on citizenship and residency, and how that can impact your financial planning. Should you have a complex financial situation you need assistance with, reach out to us – our services recently extend to wealth advisory and estate planning.
2022 road map for taxes post Biden
Details of Biden’s Tax Plan
Every new government heralds a change in the country’s priorities and of course, their outlook on the economy. The administrative change in the United States is going to result in big changes in taxation. We’ve tried to highlight the details of Biden’s tax plan (information from the Tax Foundation) below:
The Biden tax plan includes the following payroll tax, individual income tax, and estate and gift tax changes:
It imposes a 12.4 percent Old-Age, Survivors, and Disability Insurance (Social Security) payroll tax on income earned above $400,000, evenly split between employers and employees. This creates a gap in the current Social Security payroll tax, where wages between $137,700, the current wage cap, and $400,000 are not taxed.
It reverts the top individual income tax rate for taxable incomes above $400,000 from 37 percent under current law 39.6 percent.
It taxes long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6 percent on income above $1 million and eliminates step-up in basis for capital gains taxation.
It caps the tax benefit of itemized deductions to 28 percent of value for those earning more than $400,000, which means that taxpayers earning above that income threshold with tax rates higher than 28 percent would face limited itemized deductions.
It restores the Pease limitation on itemized deductions for taxable incomes above $400,000 and it phases out the qualified business income deduction (Section 199A) for filers with taxable income above $400,000.
It expands the Earned Income Tax Credit (EITC) for childless workers aged 65+; provides renewable-energy-related tax credits to individuals. It also expands the Child and Dependent Care Tax Credit (CDCTC) from a maximum of $3,000 in qualified expenses to $8,000 ($16,000 for multiple dependents) and increases the maximum reimbursement rate from 35 percent to 50 percent.
For 2021 and as long as economic conditions require, it increases the Child Tax Credit (CTC) from a maximum value of $2,000 to $3,000 for children 17 or younger, while providing a $600 bonus credit for children under 6. The CTC would also be made fully refundable, removing the $2,500 reimbursement threshold and 15 percent phase-in rate.
It reestablishes the First-Time Homebuyers’ Tax Credit, which was originally created during the Great Recession to help the housing market. Biden’s homebuyers’ credit would provide up to $15,000 for first-time homebuyers.
It expands the estate and gift tax by restoring the rate and exemption to 2009 levels.
The Biden tax plan also includes the following proposed business tax changes:
- Increase in the corporate income tax rate from 21 percent to 28 percent.
- A minimum tax on corporations with book profits of $100 million or higher. The minimum tax is structured as an alternative minimum tax—corporations will pay the greater of their regular corporate income tax or the 15 percent minimum tax while still allowing for net operating loss (NOL) and foreign tax credits.
- Doubling of the tax rate on Global Intangible Low Tax Income (GILTI) earned by foreign subsidiaries of US firms from 10.5 percent to 21 percent.
- In addition to doubling the tax rate assessed on GILTI, Biden proposes to assess GILTI on a country-by-country basis and eliminate GILTI’s exemption for deemed returns under 10 percent of qualified business asset investment (QBAI).
- Establish a Manufacturing Communities Tax Credit to reduce the tax liability of businesses that experience workforce layoffs or a major government institution closure
- Expand the New Markets Tax Credit and makes it permanent.
- Offer tax credits to small business for adopting workplace retirement savings plans.
- Expand several renewable-energy-related tax credits, including tax credits for carbon capture, use, and storage as well as credits for residential energy efficiency, and a restoration of the Energy Investment Tax Credit (ITC) and the Electric Vehicle Tax Credit. The Biden plan would also end tax subsidies for fossil fuels.
Other proposals not modeled due to a lack of detailed information include:
- Imposing a new 10 percent surtax on corporations that “offshore manufacturing and service jobs to foreign nations in order to sell goods or provide services back to the American market.” This surtax would raise the effective corporate tax rate on this activity up to 30.8 percent.
- Establishing an advanceable 10 percent “Made in America” tax credit for activities that restore production, revitalize existing closed or closing facilities, retool facilities to advance manufacturing employment, or expand manufacturing payroll.
- Equalizing the tax benefits of traditional retirement accounts (such as 401(k)s and individual retirement accounts) by providing a refundable tax credit in place of traditional deductibility.
- Eliminating certain real estate industry tax provisions.
- Expanding the Affordable Care Act’s premium tax credit.
- Creating a refundable renter’s tax credit capped at $5 billion per year, aimed at holding rent and utility payments at 30 percent of monthly income.
- Increasing the generosity of the Low-Income Housing Tax Credit.
Prabha’s Office Location
Would you like to meet with Prabha?
To speak with Prabha or a member of the team, get in touch with her scheduling team at firstname.lastname@example.org and tell us in brief what you would like to discuss with her. Alternatively, email Prabha directly at email@example.com.
Prabha’s office location:
Prabha is Los Angeles until May 31, 2021.
From June to August 15, 2021 Prabha will be in Chennai.
Tentatively, Prabha has a trip back to Los Angeles planned for August 20 – October 20, 2021.