The Kiddie Tax – Part One
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Wealthy Americans: Reduce your exposure to the 3.8% tax on unearned income
November 28, 2015
Many U.S. businesses get their funding from local banks or private U.S. investors. Sometimes, however, there is an opportunity to get financing from abroad on more advantageous terms. One such opportunity was recently illustrated in a recent Wall Street Journal article. The article describes U.S. real estate developers receiving funds from foreign investors in exchange for green cards. When such an opportunity arises, certain U.S. income tax implications should be considered as part of the deal. In my first blog, I will discuss these tax implications as related to U.S. businesses. When a U.S. business receives funds from a foreign person, it could either be in a form of a loan or an equity investment. Throughout the term of this investment, the business makes interest payments, dividends, or profit payments, and in the end it will either repay or redeem the investment. However, the business is required to withhold a certain amount of tax and to remit it to the IRS for any payments made to the foreign person. Regardless of how the transaction is put together, the business will be required to inform the IRS of this investment. In order to properly address these issues, the business should have certain processes in place, and the people responsible for paying the foreign person should be aware of the consequences of failure to follow the applicable laws.

If you fail to withhold and remit the tax or notify the IRS about the transaction, the business is liable for the tax itself plus interest and penalties. The business may also bear penalties and interest for a failure to notify. It is even possible for a single individual within the business to be personally liable for these expenses and, therefore, care should be taken when dealing with such investments.

A business can make sure that its own withholding and reporting obligations are satisfied and it can structure this transaction in such a way as to make it easier and more attractive for the foreign person to invest money.

Any U.S. business interested in exploring this area further should contact an attorney at Ourednik Law Offices. Don’t get caught by the IRS!