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Inbound Investor U.S. Tax Playbook, Part 3: Operating and Repatriating Profits

Nick Eusanio, Esq., LL.M. Leave a comment

Overview:

Once a U.S. structure is established, it’s important to manage day-to-day compliance, withholding obligations, and cash repatriation in a way that aligns commercial objectives and tax efficiency.

This is where many inbound investors run into trouble. Overlooked filings, employee visits, or intercompany payments can inadvertently create additional tax exposure.

This article outlines some key operational compliance considerations for inbound investors — including how to manage U.S. trade or business (USTB) risk, how to comply with withholding and reporting rules, and how to repatriate profits efficiently under U.S. and treaty frameworks.

This article summarizes considerations for entity selection, including notation of federal, treaty, and state regimes, and practical planning points.

1. Core Federal Compliance Framework

Once an inbound structure is live, foreign investors must quickly identify original and extended due dates (and filings necessary to obtain extension), and establish a compliance calendar to track federal, state, and local tax compliance obligations.

Key federal tax filings to note include:

  • Form 1040-NR – For foreign individuals with U.S. income.
  • Form 1120-F – For foreign corporations with U.S. income, even if limited to effectively connected income (ECI) or protective filings.
  • Form 1120 – For investments held through a U.S. C corporation (or LLC taxed as a C corporation).
  • Form 1065 – For investments held through a U.S. partnership (or LLC taxed as a partnership).
  • Form 5472 – For U.S. entities that are at least 25% foreign-owned, reporting related-party transactions.
  • Form 1042 and 1042-S – For withholding on payments to foreign persons (interest, dividends, royalties, services)

Failure to file or report properly can lead to disallowance of deductions, interest, penalties, and loss of treaty benefits.

2. Understanding U.S. Trade or Business (USTB) and Effectively Connected Income (ECI)

A foundational question for any inbound operation is whether the foreign investor itself — or one of its affiliates — has become engaged in a U.S. trade or business.

Once a USTB exists, U.S.-source income that is effectively connected with that business becomes ECI, taxable on a net basis (income minus deductions) through Form 1120-F.

A. When USTB Exposure Arises

A USTB exists where a foreign person conducts regular, substantial, and continuous commercial (profit seeking) activity in the U.S. — either directly or through dependent agents. Examples include:

  • Operating or managing a U.S. branch, office, or fixed place of business.
  • Having employees or dependent agents who habitually conclude contracts in the U.S.
  • Providing services or technical work in the U.S. for U.S. clients.
  • Participating in U.S. real property development or leasing.

In contrast, passive investment (holding stock, notes, or real estate for appreciation) generally does not create a USTB, provided contracting, management and decision-making occur offshore.

B. Treaty Overlay and Permanent Establishment (PE)

Under most U.S. income tax treaties, a nonresident is taxed on business profits only if attributable to a permanent establishment (PE) — generally a fixed place of business or a dependent agent with contracting authority. This overlay provides important protection but can be lost through day-to-day activities by foreign executives or employees.

3. Managing Executive Travel, Employee Presence, and Secondments

One of the most common ways a foreign investor unintentionally creates a USTB or PE is through foreign executives or employees performing services in the U.S.

Even short-term visits can be enough to shift the tax profile of the entire structure if those individuals perform core operational or revenue-generating functions while in the U.S

Risk scenarios include:

  • Executives negotiating or signing contracts during U.S. visits.
  • Technical staff providing services to U.S. customers on-site.
  • Management personnel directing local operations or overseeing projects.\

These activities can create a U.S. fixed place of business or a dependent agent PE, exposing the foreign parent to U.S. net income tax, Branch Profits Tax (IRC §884), and potential treaty complications.

Mitigating Exposure Through Secondment and Intercompany Structures

Inbound groups can mitigate this risk through:

  • Secondment arrangements, where the U.S. affiliate formally “borrows” employees and assumes day-to-day control, paying costs on a reimbursed (no markup) basis.
  • Intercompany service agreements, where cross-border support is formalized with arm’s-length pricing and defined scope under IRC §482.

Properly structured, these arrangements can:

  • Prevent the foreign parent from being viewed as conducting business directly in the U.S. or mitigate the associated amount of income.
  • Preserve treaty protection by keeping activities within the U.S. entity’s control.
  • Support transfer pricing compliance and deduction eligibility.

4. Withholding Obligations and Cross-Border Payments

Even when a foreign investor avoids direct USTB/ECI exposure, U.S. withholding tax applies to certain payments to foreign persons.

Key categories include:

  • FDAP (Fixed, Determinable, Annual, or Periodical) Income: Interest, dividends, rents, royalties, and similar payments are subject to 30% withholding, unless reduced by treaty.
  • Service Fees: Fees for services performed outside the U.S. are generally exempt, but services performed in the U.S. can become ECI.
  • Dividend Equivalent Amounts (DEA): Amounts subject to the Branch Profits Tax (IRC §884) and payments under equity-linked instruments that replicate U.S. stock dividends (IRC §871(m)) can be treated as dividend equivalents and subject to withholding.

U.S. payors must report and remit these withholdings on Forms 1042 and 1042-S, other than for a DEA subject to Branch Profits Tax which is reported on Form 1120-F.
For a reporting corporation (either a 25% foreign-owned U.S. corporation or U.S. disregarded entity, or a foreign corporation engaged in a USTB), Form 5472 remains the key disclosure for any payments to related foreign parties, including royalties, management fees, or cost allocations.

5. State and Local Considerations

Inbound investors often underestimate the complexity of state-level tax exposure.

Key Concepts:

Even absent a federal USTB, a foreign company (or its U.S. affiliate) may face state income or franchise tax based on economic nexus — often triggered by as little as $100,000 of in-state sales or 100,000 in-state transactions. Some state economic nexus thresholds are more favorably based on both the amount of sales and the number of transactions in state for the year.

Some states, such as California, require multinational groups to file combined reports, which can pull in global income under:

  • Worldwide combined reporting, or
  • A water’s-edge election, limiting inclusion to U.S. entities and their CFCs, foreign partnerships and foreign branches.

The water’s-edge election (e.g., California Form 100-WE) can be a significant planning tool for inbound investors, reducing compliance complexity and exposure to foreign-source income inclusion.

6. Repatriation and the Branch Profits Tax

When a foreign corporation earns ECI, it faces not only regular U.S. corporate income tax but also a Branch Profits Tax (BPT) under IRC §884.

The BPT, generally at 30% (potentially treaty-reduced to between 0% and 15%), applies to deemed remittances of after-tax earnings from the U.S. branch to its foreign parent.
Conceptually, it mirrors the dividend withholding tax that would apply if operations were conducted through a U.S. subsidiary instead of a branch.

Practical planning often favors operating through a U.S. subsidiary to simplify compliance and provide clearer control over repatriation timing. Dividends, interest or royalties from a U.S. subsidiary are typically subject to withholding at 30%, potentially reduced by treaty to between 0% and 15%.

7. Practical Compliance and Strategic Takeaways

  • File protective Form 1120-F returns when there’s potential USTB exposure — to preserve deductions and refund rights.
  • Maintain intercompany documentation (service, cost-sharing, royalty, and loan agreements) under IRC §482.
  • Review treaty applicability and PE thresholds before executives or employees travel to the U.S. Consider potential secondment or intercompany service agreements to manage as necessary. Consider documenting treaty positions in a tax-technical opinion, supporting expected rates and treatment of covered income streams or payments.
  • Monitor withholding and information reporting on all cross-border payments.
  • Evaluate annually: state nexus and water’s-edge election options, and state tax credits and incentives compliance and opportunities.
  • Plan repatriation to manage Branch Profits Tax or dividend / interest / royalty / service fee payment withholding efficiently.

In Conclusion

Running a U.S. operation successfully requires implementing the right structure, plus ongoing attention to compliance, withholding, and cross-border activity.

Inbound investors who proactively manage USTB risk, withholding compliance, and repatriation planning can operate confidently and minimize problematic surprises from both the IRS and state tax authorities.

Thinking about investing in the U.S.? Start with a consultation to evaluate your company’s readiness and identify strategies for success. Connect with Nick Eusanio, Tax & Compliance Partner at DBL Law, to learn how proper tax planning and investment structure can help you achieve the best possible outcome.

Inbound Investor U.S. Tax Playbook, Part 2

Nick Eusanio, Esq., LL.M. Leave a comment

Structuring the Investment — Entity Choice & Tax-Efficiency

The United States is one of the most attractive places for foreign capital — deep markets, relative stability, and strong investor Once an inbound investor decides to enter the U.S. market, the next decision — how to structure the investment — can drive the ultimate tax result significantly. The U.S. system taxes differently depending on the type of entity, its ownership, and whether treaty benefits apply.. But the U.S. also has a uniquely complex tax environment.

This article summarizes considerations for entity selection, including notation of federal, treaty, and state regimes, and practical planning points.

1. Balancing Tax Efficiency, Liability Protection & Compliance

Every inbound structure should balance three objectives:

  1. Liability protection — containing business legal risk within the U.S. entity.
  2. Tax efficiency — minimizing both U.S. and home-country tax leakage.
  3. Administrative manageability — minimizing annual administrative tasks and costs.

While the right structure depends on the investor’s facts — activity and income type, treaty position, and cash planning — there are key guardrails to consider.

2. Basic Options: Direct or U.S. Blocker, Foreign Holding Company Considerations

A. Direct Investment by the Non-Resident

This is the simplest on paper — the investor (either a foreign individual or foreign holding company) directly holds the U.S. asset, partnership interest, or LLC (treated as a partnership or disregarded for tax purposes) interest.

  • Tax result: The investor is directly subject to:
    • U.S. tax on ECI and FDAP (with related withholding)
    • Branch Profits Tax (if foreign corporation owner)
    • FIRPTA (if any disposition of USRPI or USRPHC)
    • U.S. estate tax on U.S.-situs assets (if foreign individual owner)
    • Annual filing requirements for Form 1040-NR (individuals) or Form 1120-F (foreign corporations).
      • May require additional U.S. filings at entity level (e.g., U.S. partnership or LLC treated as partnership required to file Form 1065, related Schedules K-1 and Forms 8804 / 8805 / 8813 (withholding statements) issued).
    • Pros: No interposed entity unless desired (e.g., partnership, LLC); may reduce foreign-country complications.
    • Cons: Exposed to above-noted U.S. filing obligations and taxes and potentially no legal liability protections that would exist with a corporate structure (unless using U.S. LLC).
    • Potential use case: Small passive investments or treaty-protected portfolio holdings.U.S. “Blocker” Corporation (or LLC treated as a corporation for tax purposes)

B. U.S. “Blocker” Corporation (or LLC treated as a corporation for tax purposes)

A common approach for institutional or fund investors. The foreign investor capitalizes a U.S. C-corporation to hold the operating business, real estate, partnership or disregarded LLC interest.

  • Tax result / Pros:
    • The Blocker “absorbs” ECI, paying 21% corporate income tax.
    • When profits are distributed, they are dividends subject to 30% withholding under IRC §881 (often reduced by treaty).
    • Avoids the Branch Profits Tax that would otherwise apply to a foreign corporation’s U.S. branch.
    • Potential insulation from FIRPTA (or ability for same with additional tiered structuring).
    • Simplifies compliance — the foreign owner does not file Form 1120-F or 1040-NR; only the U.S. corporation files Form 1120 (and partnership files Form 1065 if there is a U.S. partnership in the structure).
  • Con: “Double” taxation — once at the corporate level and again on distribution — though effective rates can be moderated by treaty reductions or reinvestment strategies.

3. Withholding Tax & Using Treaties Strategically (Without Over-Engineering)

The U.S. imposes withholding tax on most payments to foreign persons, such as: dividends, interest, royalties, rent, service fees, and deemed branch remittances (DEA). This withholding tax is generally levied at a statutory rate of 30%, unless reduced by treaty. U.S. payors are responsible for withholding and reporting this tax via Form 1042 / 1042-S. Failure to withhold properly can shift liability for the original tax, plus penalties and interest, to the payor as withholding agent.

Treaties can dramatically reduce withholding and sometimes exempt outbound payments or business profits from U.S. taxation altogether.

Checklist for claiming treaty benefits:

  1. Confirm investor’s residency certificate from home jurisdiction.
  2. Evaluate specific treaty qualification articles (residency, dividends, interest, royalties, business profits, etc.).
  3. Evaluate Limitation on Benefits (LOB) treaty article — are applicable requirements (such ownership and / or activity tests) satisfied?
  4. Issue Form W-8BEN or W-8BEN-E to payor(s).
  5. Disclose treaty position on Form 8833 if taking a treaty-based return position required to be reported.

4. Financing the U.S. Operation: Debt vs. Equity

Foreign investors often capitalize U.S. ventures through related-party debt, seeking to deduct interest while repatriating profits as interest payments (often subject to lower withholding than dividends).

Consideration:

  • Debt / equity analysis (common law, and IRC §385 if applicable): Debt can be reclassified as equity, disallowing deductions and potentially creating other unintended tax impacts in certain structures.
  • IRC §163(j) (generally applicable to taxpayers with average annual gross receipts of $30 million+) limits interest deductions to 30% of adjusted taxable income.
  • IRC § 267 loss disallowance and matching rules regarding timing of deduction and income recognition for accrued but unpaid interest between related parties.
  • IRC § 267A deduction disallowance for interest (and royalty) payments to related parties in hybrid transactions or with hybrid entities if the payment isn’t included int eh recipient’s income under foreign tax law.
  • Withholding: 30% on interest, unless reduced by treaty or portfolio interest exemption applies.
    • Branch context: If the foreign corporation operates a U.S. branch, adjustments under Treas. Reg. §1.884-4 apply to determine the portion of deemed interest also subject to BPT at 30% (unless reduced by treaty), if any (i.e., the amount of excess interest not apportioned to ECI taxed at 21%).
  • Base Erosion and Anti-Abuse Tax (BEAT) under §59A, which targets large corporations (generally those with $500 million+ in average annual gross receipts) making base-eroding payments like interest to related foreign parties.
  • Documentation: Written loan agreements, arm’s-length terms and pricing / interest rates, contemporaneous intercompany pricing support.

5. State Tax Structuring Overlay

States have their own tax bases, nexus thresholds, and combination rules. Depending on the investment type and amount, and the state or states involved, state tax can be a material consideration.

Key Concepts:

  • Nexus: Physical presence (property, payroll) or economic nexus from sales into a state.
  • Separate vs. Combined Filing:
    • Some states tax entities separately.
    • Others (e.g., California, New York, Illinois) require or permit combined/unitary reporting for related entities.
  • Water’s-Edge Elections:
    • Limit the combined group to U.S. members (and certain CFCs).
    • Usually binding for 7 years (Cal. Rev. & Tax Code §25113).
    • Must be modeled carefully — including impacts on foreign tax credit planning and apportionment.

Practical tips:

  • Where possible, isolate U.S. operations in one entity (or the fewest otherwise necessary entities) per state nexus profile.
  • Consider flexibility in deployment of property / assets, debt, and people in context of state credits and incentives, state apportionment, net worth tax, and separate vs. combined or unitary reporting rules.
  • Evaluate broader U.S. legal entity structure in multi-state operating structures (e.g., corporate holding company with use of wholly-owned disregarded / flow through LLCs or subsidiary corporations) for potential state tax planning or simplification.

6. Key Takeaways

  • Start with cash return in mind. Structure for efficient repatriation.
  • Contain ECI. Blockers or treaty planning can reduce compliance and tax cost.
  • Limit BPT exposure. It’s often the hidden double tax.
  • Remember FIRPTA. Structure real estate holdings to avoid FIRPTA.
  • Treaty benefits aren’t automatic. Evaluate, document, and claim them properly.
  • Don’t ignore state rules. Multiple states with differing rules can complicate matters, determine materiality and perform tax impact diligence and identify opportunities accordingly.

A well-planned structure can provide legal protections and tax efficiencies.

Coming Next

Part 3: Operating and Repatriating Profits: In our next article, we’ll explore what happens once the investment is operational: withholding regimes, filing obligations, profit distributions, and how to repatriate capital without triggering unnecessary tax.

Missed Part 1? Read it here.

Thinking about investing in the U.S.? Start with a consultation to evaluate your company’s readiness and identify strategies for success. Connect with Nick Eusanio, Tax & Compliance Partner at DBL Law, to learn how proper tax planning and investment structure can help you achieve the best possible outcome.

Business Sale Basics, Part 4: Close & Integrate or Transition

Nick Eusanio, Esq., LL.M. Leave a comment

Closing a business sale is just the beginning. Learn how to manage integration or transition effectively to protect and drive value in Part 4 of our Business Sale Basics series.

Closing the sale is a major milestone, but it’s not the end of the journey. Proper planning for integration or transition ensures long-term success for both you as the seller and the buyer. Again, due consideration for these matters has already been given in Part 2 of our series (Structure the Sale).

Post-Closing Considerations

1. Integration / Transition Planning

Clear documentation in one or more appropriate agreement(s) is key to ensuring the intended transition mechanics. Consider the following factors when drafting appropriate documentation.

  • How and when the buyer will assume operations.
  • How and when will the owner / seller notify existing employees, customers and vendors / suppliers of the sale? What steps are necessary to ensure business continuity for these groups?
  • Whether and what level of involvement the owner / seller will continue to have in the company and for what time period.
    • If the owner / seller remains involved:
      • What type and level of pay and benefits will be continuing?
      • Will the owner / seller retain any percentage ownership in the equity of the company (i.e., a rollover interest)?
    • If the owner / seller is exiting:
      • Address any interim transition period / consulting arrangement, earn-out, or other phased exit plan.

2. Tax and Regulatory Compliance

Post-closing reporting is just as important as pre-closing planning. Consider the following compliance items after closing.

  • Required tax filings for the transaction.
  • Required industry / regulatory filings for the transaction.
  • Tracking for installment sale payments or deferred compensation.

3. Avoiding Post-Closing Disputes

A seller who has successfully navigated the process following our Business Sale Basics: 1. Prepare the Pieces, 2. Structure the Sale (Legal & Tax), 3. Align Team, Finance, & Industry Factors can expect to be in good position to avoid post-closing disputes. Below are some key factors expected to be in place and continuing to achieve that goal.

  • Keep documentation clear to reduce claims risk.
  • Follow through on representations and warranties.
  • Maintain open communication with the buyer during transition.

Thinking about selling your business? Start with a pre-sale consultation to evaluate your company’s readiness and identify strategies to preserve and maximize value. Connect with Nick Eusanio, Tax & Compliance Partner at DBL Law, to learn how proper tax planning and deal structure can help you achieve the best possible outcome.

Business Sale Basics, Part 3: Align Team, Finance, & Industry Factors

Nick Eusanio, Esq., LL.M. Leave a comment

Employees, financing, and industry / regulatory factors can make or break a business sale. Learn how to address these critical elements in Part 3 of our Business Sale Basics series on Aligning these Factors.

Business sales are more than numbers on a balance sheet. Employees, financing, and industry-specific regulatory considerations play a critical role in the success of a transaction. Well-prepared sellers project credibility and value by aligning these items in the deal. This article serves as a continuation of Part 2 of our series (Structure the Sale), as each of these factors is important in structuring the transaction.

1. Employee & Management Factors

Retaining key employees and ensuring the business isn’t overly tied to the selling owner are often key factors for buyer confidence and demonstrating value. A thoughtful seller should align these factors in the deal by considering the items below.

  • Invest the necessary training time and resources to improve management team business / technical capabilities and integration with operations personnel and customers to reduce dependency on the owner.
  • Document steps to accomplish the above and ideally matching metrics to substantiate the value retained or created, for sharing with the buyer team.
  • Ensure key management and operations team members are valued in the deal by negotiating appropriate provisions for continuing employment including roles and levels of salary, benefits and bonuses. Don’t forget to provide for any special items like remote versus on-site work, parking, company phones and cars, or similar benefits.

2. Financing the Transaction

Understanding the buyer’s funding method for the deal is important to both timing and negotiations. Below are some key points to consider with respect to financing, timing and related negotiations.

  • Bank / 3rd party financing versus seller financing.
  • For seller financing, a well-crafted promissory note and security agreement with appropriate collateral are key considerations.
  • Be aware of potential covenants or guarantees, particularly any ‘earn-out’ provisions.

3. Industry and Regulatory Factors

Various industries have unique licensing, permitting, regulatory or other compliance requirements that can impact a sale. Heavily regulated industries like health care, financial services / banking, or insurance may require specific disclosures or approvals. Below are some key items to consider from an industry / regulatory perspective.

  • Review licensing, permits, and regulatory compliance requirements for your industry.
  • Understand other regulatory frameworks that may apply based on the type (e.g., cross-border transaction, involvement of sensitive information or data, etc.) or value of the transaction (for instance, anti-trust, securities, cybersecurity and infrastructure security, export control system, foreign investments, etc.).
  • Ensure necessary additional documents or agreements are prepared and negotiated as part of the sale based on applicable regulatory regimes.

Thinking about selling your business? Start with a pre-sale consultation to evaluate your company’s readiness and identify strategies to preserve and maximize value. Connect with Nick Eusanio, Tax & Compliance Partner at DBL Law, to learn how proper tax planning and deal structure can help you achieve the best possible outcome.

Are Personal Injury Settlements Taxable in Kentucky or Ohio?

Nick Eusanio, Esq., LL.M. Leave a comment

When it comes to personal injury settlement proceeds, the U.S. federal and state income tax treatment can significantly affect how much of your recovery you keep. Whether you’re a personal injury plaintiff, attorney, or tax advisor, thoughtful structuring and characterization of a settlement is essential.

Here’s a high-level summary of how federal, Ohio, and Kentucky income tax law treats personal injury settlement proceeds, and how to structure a settlement agreement for tax efficiency.

💡Personal Injury Settlements Can Be Tax-Free

Under Internal Revenue Code (IRC) § 104(a)(2), certain damages received on account of personal physical injuries or physical sickness are not taxable. So, these proceeds aren’t included in federal gross income under IRC § 61, which otherwise broadly includes “all income from whatever source derived.”

To support tax-free payments, especially for Kentucky or Ohio taxpayers, attention to the relevant legal framework and aligning structuring and documentation of the settlement are critical.

🔍 The Federal Income Tax Framework: IRC and Treasury Regulations

Under federal income tax law:

  • IRC § 61 is the starting point, which states that gross income includes all income of a taxpayer unless a specific exclusion applies.
  • IRC § 104(a)(2) excludes from gross income damages received (other than punitive damages) on account of personal physical injuries or physical sickness.
  • Treas. Reg. § 1.104-1(a), (c) confirms that the exclusion applies to both lump-sum and periodic payments and clarifies the scope of injuries that qualify.
    • For instance, it is also possible to exclude settlement amounts attributable to emotional distress, but that emotional distress 🧠 must be directly related to the personal physical injury sustained, unless the amount is for reimbursement of actual medical expenses related to the emotional distress and such amount wasn’t previously deducted under IRC § 213.
    • 💭 Note: Punitive damages and damages unrelated to physical injury—like reputational harm or contract claims—are taxable.

🏛️ State Income Tax Law: Ohio and Kentucky Generally Follow Federal Law

  • Ohio Revised Code § 5747.01(A) and Kentucky Revised Statutes §§ 141.010 and 141.019 state that both Ohio and Kentucky generally conform to the federal definition of gross income, with certain state-specific adjustments.
  • So, if your settlement proceeds are excluded under IRC § 104(a)(2), they are also excluded from Ohio and Kentucky state income tax, unless a specific modification exists (which does not in Ohio or Kentucky income tax law).

📝 How to Structure the Settlement Agreement

The tax characterization of a settlement isn’t solely based on what the payment is called—it depends on what the payment is actually for. Still, clear language in the agreement helps support favorable tax treatment.

Recommended provisions to include:

  1. Purpose – Clearly state that the agreement is a settlement instead of pursuing a potential or existing claim or legal action under statutory or common law involving personal physical injuries or physical sickness.
  2. Characterize Settlement Proceeds into Appropriate Buckets –  
    State amounts of any payments attributable to personal physical injuries or sickness and affirm that the parties intend those payments to be excluded from gross income under IRC § 104(a)(2) and Treas. Reg. § 1.104-1(a), (c). Specifically allocate any settlement proceeds to other buckets if relevant, like punitive damages which are taxable.

⚖️ Final Word

Not every settlement dollar is tax-free. But with smart planning and a well-structured agreement, plaintiffs in Kentucky and Ohio can often shield personal injury settlements from both federal and state income taxes.

Tax advice should always be tailored to the specific facts of the case—so if you’re drafting a settlement agreement or receiving a payout, consult with a tax attorney who knows how to structure these arrangements properly.

Should My Small Business Accept Credit Cards? What Can I Do to Offset the Credit Card Processing Fee the Network Charges?

Nick Eusanio, Esq., LL.M. Leave a comment

Generally, your small business should accept credit card payments; it just makes business sense.

Many small business owners and entrepreneurs ask the question: “Should my small business accept credit cards?” Generally, from a pure business/financial standpoint, the answer is yes, for these reasons:

  1. Don’t Lose Business – By not accepting credit card payments, a business risks losing customers. A customer who wants to pay by credit card may not want or be able to pay by any other method. Perhaps the customer doesn’t carry cash or checks, or just deems paying by credit card more convenient or secure. It simply does not make sense to turn away a would-be paying customer, just because the credit card company will charge a fee to process the transaction.
  2. Convenience = ^ Sales – Second, those same customers who value the convenience of paying by credit card are likely to buy more, and/or more often from your company.
  3. Recurring/Automatic Payments – Related to the second reason, accepting credit cards enables setting customers up for recurring/automatic payments if they use your company’s goods or services regularly.
  4. Cash Flow – From a cash flow standpoint, a credit card payment is immediate like cash, but doesn’t carry the risk of a personal check that could bounce for insufficient funds. Also, as noted above, not all customers carry cash or want to use cash, and many will buy more if they can use credit.
  5. Accounting & Record-keeping – Credit card payments can be easily integrated and synchronized with your bookkeeping software, increasing accuracy and ease of accounting and documentation while minimizing costs for additional labor to do so.

In some instances, credit card processing fees can be strategically offset or recouped.

Often, despite the above reasons, small business owners and entrepreneurs remain hesitant to accept credit card payments because of their aversion to paying the transaction fee to the credit card network. This concern has led many start-up founders and small business owners to consider what they can do to offset the credit card processing fees that the network charges. To do so, numerous small businesses have creatively tried to pass the credit card processing fees along to the customer. But, are small businesses allowed to pass credit card fees along to the customer?

Currently, there is no federal prohibition, but 10 states have laws prohibiting a merchant from charging customers a surcharge to pay by credit card (CA, CO, CT, FL, KS, ME, MA, NY, OK, and TX). In California and New York, court orders have enjoined the state from enforcing the prohibition laws, but those cases remain on appeal. In Florida, an appeals court reversed a trial court order that upheld Florida’s law limiting surcharges, but that case remains subject to further litigation. So, what can a small business owner do to offset or recoup credit card surcharge fees?

Biz&TaxHax Tip:

If you are an entrepreneur or small business owner considering charging your customers a fee for paying by credit card, following is some guidance for minimizing the effect of credit card transaction fees to your business:

  1. Review Credit Card Network Agreements – Although there is no federal prohibition, and your state may not be one that prohibits imposing a surcharge for credit card users, companies should review their agreements with the various credit card networks to determine whether a contractual prohibition or limitation exists. Agreements with the credit card networks may prohibit or otherwise limit or restrict the merchant from charging the transaction processing fee to the customer. So it is important to review all agreements with credit card networks before imposing any surcharge on credit card users to avoid potentially breaching those agreements.
  2. Review Applicable Law for Specifics – Even if your business operates in a state where there is a prohibition on imposing a “surcharge” to credit card users, these laws may be drafted such that the company can avoid the prohibition by simply offering a discounted price to cash (non-credit card) payers. In other words, the company could simply set the price for its products or services at a particular amount that would cover the credit card processing fee cost, and then advertise to customers that if they pay by cash, they get a discount from the regularly stated price. Of course, if your company operates in a state with a surcharge prohibition, you should review the particular statutory/regulatory language before using this discounted price method, to ensure that this method would not also violate the law.
    • Read Credit Card Network Agreements Again & Clearly Post Discounted Prices for Cash Payments – Note, this practice may still violate some credit card network agreements, so it’s important to read the agreements carefully. Also, be careful to clearly and conspicuously post the discounted price for customers paying by cash to avoid any possible concerns with consumer protection/deceptive trade practices laws.

As always, it’s important to consult an attorney familiar with your company’s specific facts and circumstances and the applicable law before making any decision or taking any action that may affect contractual or regulatory compliance obligations of your company. An experienced lawyer can fully evaluate your facts and circumstances along with applicable law and guidance to develop the most effective, efficient, and proper solution to your business compliance and planning needs.

What is the Ohio Financial Institutions Tax (FIT)? The Top 10 Things You Need to Know.

Nick Eusanio, Esq., LL.M. Leave a comment

Effective January 1, 2014 forward, all for profit financial institutions doing business in Ohio or otherwise having nexus with Ohio under the U.S. Constitution must report and pay the Ohio Financial Institutions Tax. The Ohio FIT is a tax on the privilege of doing business, similar to the Ohio Commercial Activity Tax (CAT), but is focused directly on financial institutions. Below are the top ten things you should know when considering a potential Ohio FIT issue.

  1. How Did the Ohio FIT Originate and Did the Ohio FIT Change Any Other Ohio Tax?

Amended Substitute House Bill 510 (the Bill) made the Ohio FIT effective January 1, 2014. Interestingly, the Bill repealed both the former Ohio Dealer in Intangibles Tax (DIT) and Corporation Franchise Tax (CFT) for tax years beginning January 1, 2014 and continuing. Now, taxpayers that qualify as dealers in intangibles (stockbrokers, mortgage lenders, securities dealers, finance and loan companies) are subject to the Ohio FIT, provided they fall under the FIT’s definition of a taxpayer. If such a taxpayer does not meet the FIT definition, that taxpayer is likely subject to the Ohio CAT.

  1. Who is Subject to the Ohio FIT?

There are three types of taxpayers that are generally subject to the Ohio FIT:

  • Bank Organizations;
  • Holding Companies of Bank Organizations; and
  • Nonbank Financial Organizations.

Under the FIT, a Bank Organization includes: (i) a national bank organized and operating under the National Bank Act; (ii) a federal savings association or federal savings bank chartered under 12 U.S.C. 1464; (iii) a bank, banking association, trust company, savings and loan association, savings bank, or other banking institution organized or incorporated under the laws of the U.S., any state, or a foreign country; (iv) any corporation organized and operating under 12 U.S.C. 611 (and following provisions); (v) any agency or branch of a foreign bank, as defined in 12 U.S.C. 3101; or (vi) an entity licensed as a small business investment company under the Small Business Investment Act of 1958.

The Ohio FIT defines Nonbank Financial Organizations as persons or entities, other than bank organizations or holding companies, which are engaged in business primarily as Small Dollar Lenders. A Small Dollar Lender is a person or entity that: (i) primarily loans to individuals; (ii) loans amounts of $5,000 or less; (iii) issues loans with terms of 12 months or less; and (iv) is not a Bank Organization, credit union, or captive finance company.

  1. Who is Not Subject to the Ohio FIT?

The following is a list of taxpayers that are generally not subject to Ohio FIT:

  • Insurance companies;
  • Captive finance companies;
  • Credit unions;
  • Institutions organized exclusively for charitable purposes;
  • Diversified savings and loan holding companies;
  • Grandfathered unitary savings and loan holding companies, any entity that was a grandfathered unitary savings and loan company on January 1, 2012, or any entity that is not a Bank Organization or owned by a Bank Organization and that is owned directly or indirectly by an entity that was a grandfathered unitary savings and loan holding company on January 1, 2012;
  • Institutions organized under the Federal Farm Loan Act or a successor of such an institution;
  • Companies chartered under the Farm Credit Act of 1933 or a successor of such a company;
  • Associations formed pursuant to 12 U.S.C. 2279c-1.
  1. What is the Tax Base for the Ohio FIT?

The Ohio FIT is imposed upon a taxpayer’s Ohio Equity Capital. Ohio Equity Capital is the taxpayer’s Total Equity Capital in proportion to the taxpayer’s gross receipts sitused in Ohio. A taxpayer’s Total Equity Capital is the sum of the following items for the taxable year: (i) common stock at par value; (ii) perpetual preferred stock and related surplus; (iii) other surplus not related to perpetual preferred stock; (iv) retained earnings; (v) accumulated other comprehensive income; (vi) treasury stock; (vii) unearned employee stock ownership plan shares; (viii) other equity components.

Biz&TaxHax Tip: For Ohio FIT purposes, a taxpayer may obtain its Total Equity Capital from the FR Y-9 (a financial statement that a financial institution holding company must file with the Federal Reserve Board) or from its Call Report (a consolidated report of condition and income that a bank organization must file with its federal regulatory agency). Alternatively, if the taxpayer does not have a FR Y-9 or Call Report, it must calculate its Total Equity Capital in accordance with GAAP.

Once a taxpayer has identified or calculated its Total Equity Capital for the taxable year, it multiplies that amount by its Ohio FIT Apportionment Factor for the taxable year to calculate Ohio Equity Capital. The Apportionment Factor for Ohio FIT is equal to the ratio of Ohio Gross Receipts for the tax year to Gross Receipts Everywhere for the tax year.

  1. How Does the Ohio FIT Situs/Source Gross Receipts?

The Ohio FIT situses/sources Gross Receipts based on the:

  • Location of benefit to the customer; or
  • Location of the taxpayer’s regular place of business.

So, Gross Receipts become Ohio Gross Receipts for purposes of Ohio FIT if either: (i) the taxpayer’s customer receives the benefit of the taxpayer’s services or funds provided in Ohio; or (ii) the taxpayer’s regular place of business is located in Ohio. The taxpayer’s Ohio Gross Receipts identified under this situsing/sourcing method are used as the numerator for the Apportionment Factor.

  1. What is the Tax Rate for the Ohio FIT?

Ohio FIT is imposed at the following rates, by Ohio Equity Capital:

  • First $200 million of Ohio Equity Capital: 0.008 (0.8%);
  • Ohio Equity Capital > $200 million, but < $1.3 billion: 0.004 (0.4%);
  • Ohio Equity Capital > $1.3 billion: 0.0025 (0.25%).
  1. Is there a Minimum Tax Amount for Ohio FIT?

Yes. Ohio FIT taxpayers must pay a minimum tax of $1,000.

  1. How Does an Ohio FIT Taxpayer File a Return and Pay the Tax?

Before filing any Annual Report or Estimated FIT Report, a taxpayer must register as a FIT taxpayer by:

  • Registering under the reporting person/entity and listing all of the consolidated members; and
  • If two or more entities are consolidated for purposes of filing a FR Y-9 or Call Report, the financial institution for FIT consists of all entities included in the FRY-9 or Call Report.

Taxpayers are required to file any Ohio FIT Annual Report or Estimated FIT Report and make any payment electronically through the Ohio Business Gateway (OBG).

  1. When are Ohio FIT Returns and Payments Due?

The Ohio FIT Annual Report is due October 15th of the tax year, with no available extension. The Tax Year is the Annual Report year in and for which the tax is paid. The Taxable Year is the calendar year preceding the year in which the Annual Report is filed and the tax paid. The taxpayer’s tax base (Total Equity Capital, Ohio Equity Capital, Apportionment Factor) is calculated from the activity/capital existing during the Taxable Year.

An Ohio FIT taxpayer must make estimated quarterly payments on the dates listed below, and as follows:

  • January 31st – 1/3 of the tax or minimum tax of $1,000, whichever is greater;
  • March 31st – 1/2 of the remaining balance of tax due;
  • May 31st – second 1/2 of the remaining balance of tax due.
  1. How Can a Taxpayer Obtain a Refund for Overpayment of Ohio FIT?

To claim a refund for Ohio FIT, file Form FIT REF Application for Financial Institutions Tax Refund.

Biz&TaxHax Tip: A taxpayer does not need to file Form FIT REF if the original Annual Report reflects the overpayment of tax. But, if a taxpayer must file an Amended Annual Report and it shows a refund due, the taxpayer must file Form FIT REF also to claim the refund.

Based on the above, there are a couple other important considerations relating to Ohio FIT: (1) Ohio FIT has a broader nexus standard (it looks a lot like economic nexus) than the predecessor Corporation Franchise Tax, meaning it will likely apply to more taxpayers; and (2) some entities (such as small dollar lenders or community banks) may be mistakenly paying Ohio CAT instead of Ohio FIT.

As always, in considering your potential Ohio FIT reporting and payment obligations, as well as any planning, it is best to consult an experienced Ohio tax attorney or Ohio tax consultant. An Ohio tax lawyer or Ohio tax consultant can fully evaluate your facts and circumstances along with applicable law and guidance to develop the most effective, efficient, and proper solution to your Ohio FIT compliance and planning needs.

Tax Tips for Entrepreneurs and Business Owners Part 3: The Home Office Expense Deduction

Nick Eusanio, Esq., LL.M. 1 Comment

The Tax Tips for Entrepreneurs and Business Owners series continues with this third article, concentrated on the home office expense deduction. This article focuses on the importance of the home office deduction for the entrepreneur or small business owner. The below discussion includes an explanation of the home office expense deduction, the test to qualify for and available methods to claim the deduction, and some key tips.

What is the Home Office Expense Deduction and How Can My Small Business Qualify?

The home office deduction allows a small business owner or entrepreneur to reduce tax liability based on expenses related to business use of a portion of his home. To qualify, the small business owner or entrepreneur must: (1) Regularly & Exclusively Use of part of his home as his (2) Principal Place of Business.

Generally, if a business owner regularly–say a few hours per day–works in a space solely dedicated as his home office, he should meet the regular and exclusive use requirements. But, this is a facts and circumstances based test, subject to many pitfalls. For instance, assume the area you utilize as a home office also contains gym equipment that you use to exercise. This could cause you to fail the exclusive use portion of the test, and lose the home office deduction.

Usually, if a business owner or entrepreneur at least uses his home office to complete administrative or management tasks without substantially using any other fixed office to do them, he can satisfy the principal place of business element. So, salespeople, tradespeople, or professional service providers (e.g., people who do most of their income-producing activity outside the home) are normally able to meet the principal place of business test by at least doing the administrative and management duties at the home office. Again, though, this determination depends heavily on facts and circumstances. So, overall, it is essential to consult with an experienced tax lawyer to review your specific situation before claiming the home office expense deduction.

Which Office Expenses Can I Deduct Related to My Small Business?

An entrepreneur or small business owner qualifying for the home office deduction may cut his tax bill by deducting the following types of expenses:

  1. Mortgage Interest;
  2. Insurance;
  3. Utilities;
  4. Repairs; and
  5. Depreciation.

These categories of expenses are important when a taxpayer uses the regular, or actual expenses method for computing the home office deduction. But, many entrepreneurs or small business owners prefer to calculate the home office deduction using the simplified method, as the record keeping requirements are less burdensome. An explanation of the home office expense deduction methods follows.

How Can I Claim the Home Office Expense Deduction?

  1. Regular/Actual Expenses Method. This option calculates the home office expense deduction based on the proportion of square feet the business owner’s home office bears to the total square footage of the home. As an example, if the home office is 200 square feet and the total square footage of the home is 1600, the deductible portion of the home is 12.5% (200/1600). Once you identify the deduction percentage, add up the items from each category of deductible expenses (see above) and multiply that amount by the deductible percentage to compute the amount of the deduction.
  2. Simplified Method. The IRS started allowing a simplified option for the 2013 tax year forward. Under this method, the business owner can simply multiply the allowable home office square footage (up to 300 square feet) by the defined rate (for 2014, $5 per square foot) to compute the home office expense deduction. So, if an entrepreneur used 200 square feet of his home for solely business purposes during 2014, his home office deduction would be $1,000 (200 x $5).

BizAndTaxHax Tips: Importantly, assuming you utilize the regular method, if you include the depreciation on your home as a deductible expense and later sell your home at a profit, you must pay capital gains tax on the total amount of depreciation deductions you claimed. Also, it is significant to note that the amount of the home office expense deduction is limited. Your deducted home office expenses may not exceed the amount of income attributable to your business–meaning you cannot use your home expenses to create a tax loss to shelter your income. Finally, the home office expense deduction varies for certain different types of businesses or industries. So, as always, you should discuss your specific situation with a tax attorney and your accountant to obtain specific advice concerning deductible expenses for your home office.

An experienced tax lawyer can help you determine whether your home office qualifies for the home office expense deduction, and assist with keeping the required documentation to support the deduction. If you are a Columbus or Ohio entrepreneur or small business owner and need help preparing for tax return filing season and planning for the future, contact me for a free initial consultation.