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FIRPTA Changes, Transit Benefits Reporting, Charitable Donations

Lee Zimet, CPA, J.D., LL.M. 02.18.2016 | eVisor

PATH Act Impacts FIRPTA Rules

The enactment of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) on December 18, 2015 made significant changes to Foreign Investment in Real Property Tax Act (FIRPTA) rules for foreign investment in US real estate.

FIRPTA rules generally require foreign persons to take into account, for US income tax purposes, gain or loss from the disposition of US real property interests (USRPI). A USRPI includes an interest in US real property, as well as certain interests in a US real property holding company (USRPHC).  A USRPHC is a US corporation for which 50% or more of the assets (by value) consist of USRPIs.

Here are the significant changes:

Withholding Rate: Prior to the PATH Act, the withholding rate under FIRPTA was 10% of the gross proceeds. The Act increases the rate to 15% for dispositions after February 16, 2016. However, the 10% rate is retained for sales of residences intended for personal use by the purchaser if the purchase price does not exceed $1 million. In addition, the current personal residence exemption is retained if the purchase price does not exceed $300,000.

The change in the withholding rate does not affect the underlying tax liability. The 15% withholding is on the gross proceeds, but the underlying tax liability is on the net gain, if any. Nonresident aliens and foreign corporations generally pay tax under FIRPTA at graduated tax rates that, depending upon the amount and type of net gain, can be higher or lower than 15%. Foreign corporations can also be subject to a branch profits tax on the net gain under FIRPTA.

Foreign Pension Funds: The PATH Act exempts from taxation under FIRPTA any USRPI held directly or indirectly through one or more partnerships by a qualified foreign pension fund or a foreign entity that is wholly-owned by a qualified foreign pension fund.

A qualified foreign pension fund is an organization or arrangement (i) that is created or organized outside the US; (ii) that is established to provide retirement or pension benefits to current (or former) employees of one or more employers; (iii) which does not have a single participant with a right to more than 5% of the assets or income of the fund; (iv) that is subject to governmental regulation in the country in which the fund was formed or operates; (v) which provides annual information reporting about participants to the relevant tax authorities in the country in which the fund was formed or operates, and (vi) the country in which the fund was formed or operates provides income tax benefits to the fund or the participants.

A country is considered to provide tax benefits if the contributions to the fund are deductible or excluded from gross income or taxed at a reduced rate or the net investment income of the fund is deferred or the income is taxed at a reduced rate.

The exemption for foreign pension funds applies to dispositions and distributions after December 18, 2015 (the date of enactment). For transactions after that date, no FIRPTA withholding will be required.

Note: For an analysis of the PATH Act's impact on FIRPTA rules as they apply to foreign investment through a REIT, click here.

Questions? Contact your Berdon advisor or Lee Zimet, CPA, J.D., LL.M.

Procedures for the Retroactive Application of Increased Transit Benefits

For all of 2015, the maximum exclusion for a commuter vehicle or transit pass was $130 per month, while the amount allowed for parking was $250 per month. The Consolidated Appropriations Act of 2016 retroactively reinstated parity between the benefits - increasing the commuter vehicle and transit pass benefit limit for 2015 to $250 per month.  The IRS has now issued procedures1 for employers who paid benefits in excess of $130 per month in 2015 and who wish to make corrections for the fourth quarter.

The notice provides simplified procedures for filing Form 941, Employer's Quarterly Federal Tax Return, for the fourth quarter of 2015 to reflect changes in the excludable amount for transit benefits provided in all quarters of 2015 and in filing Forms W-2.  The procedures address over-collected FICA taxes that came about from the lower transit benefit amount.  In such cases, employers are generally required to repay or reimburse employees the amount of over-collected FICA tax.  However, employers cannot adjust overpayments of income tax after the end of the calendar year.  Moreover, although employers can refund over-collected FICA taxes after the end of the tax year, they cannot refund over-collected additional Medicare tax after the end of the year. 

1 Notice 2016-06

Questions? Contact your Berdon advisor or Saul Brenner, CPA, J.D., LL.M.

Still No Relief for Substantiation of Charitable Donations of $250 or More

Responding to thousands of negative public comments, the IRS has withdrawn proposed regulations that would have permitted charities to file a new information return by February 28 each year to substantiate charitable contributions of $250 or more in value.

The new "Donee Report" would have required nonprofits to collect information, including donor social security numbers, which was viewed as exposure to an increased risk of identity theft.  Combined with increased costs and burdens on nonprofits, the cons were deemed to outweigh the pros and the new information reporting proposed for these donations has been scrapped.

At this time, there are still no procedures for the implementation of the statutory exception to the contemporaneous written acknowledgement requirement for substantiating charitable contribution deductions of $250 or more.

For those who have made charitable donations in 2015, if you don't meet IRS substantiation requirements for a donation, the IRS could deny the corresponding deduction you're claiming. To comply, generally you must obtain a "contemporaneous" writen acknowledgement from the charity stating the amount of the donation, whether you received any goods or services in consideration for the donation, and the value of any such goods or services.

There is still time to receive substantiation for all of your 2015 donations: "Contemporaneous" means the earlier of 1) the date you file your tax return, or 2) the extended due date of your return. So as long as you haven't filed your 2015 return, you can contact the charity and request a written acknowledgement - you'll just need to wait to file your return until you receive it. (But don't miss your filing deadline; consider filing for an extension if needed. ) 

Questions? Contact your Berdon advisor or Kevine Levine, CPA.