Tax Planning Archives - MGO CPA | Tax, Audit, and Consulting Services

Integrating Insurance and Tax Planning for Your Craft Beverage Business

This article was co-authored by Todd Collins, Vice President of HMK Insurance, an Alera Group Company

Key Takeaways:

Breweries, distilleries, and vineyards face significant economic, financial, and regulatory challenges that impact profitability.
Strategic decisions around insurance and taxes can help companies manage costs and take advantage of tax incentives.
Coordinating guidance from tax and insurance advisors specializing in the craft beverage industry can optimize financial and risk management strategies.

Maryland and Pennsylvania have a thriving craft beverage industry, made up of hundreds of breweries, distilleries, and vineyards. As a business in this dynamic region, you have incredible opportunities. However, you also operate in a tightly regulated space where high insurance premiums and taxes on production, distribution, and retail operations often squeeze profit margins.

Integrated insurance and tax planning can help reduce these pressures, providing protection and potential tax savings.

Tax Hurdles for Craft Beverage Companies

Across the U.S., the alcohol industry must deal with a complex web of federal, state, and local tax laws covering income, excise, and sales taxes, as well as licensing fees. These taxes and fees add up as producers are taxed at multiple stages of production and sales.

The market’s saturation has only intensified competition. With both rising production costs and taxes, small- and medium-sized producers must find innovative ways to stay profitable. Leveraging tax benefits and taking strategic steps to lower insurance costs can help offset some of these financial pressures.

Integrating Insurance Strategy with Tax Strategy

Insurance premiums can substantially burden small businesses, particularly for alcohol producers whose operations are often capital-intensive. Property insurance rates have risen steadily in recent years, while climate change has increased the risk of fires, floods, and other severe weather events. Breweries, distilleries, and vineyards may require higher coverage limits for bank financing or contractual obligations, so finding cost-saving opportunities becomes paramount.

Fortunately, your company has several options for integrating insurance and tax strategies. They include:

Tax-deductible premiums: Your insurance premiums are tax-deductible, providing a direct reduction in taxable income.
Business interruption insurance: Proceeds from business interruption insurance — which provides critical cash flow during unexpected shutdowns — are considered taxable income. However, companies can usually offset that income with ongoing business expenses to neutralize the tax impact.
Property insurance savings: Breweries, distilleries, and vineyards invest heavily in equipment and physical infrastructure, making property insurance essential. Your business can lower property insurance premiums by opting for higher deductibles. Although a higher deductible won’t result in dollar-for-dollar savings, it can ease the financial burden of premiums.
Avoiding over-insurance: Carefully selecting liability and property coverage limits can prevent over-insurance, especially for smaller operations that may not need the highest levels of protection.
Navigating crop insurance: Crop insurance is scarce and often inaccessible for small vineyards growing their own grapes or breweries cultivating hops. However, your business can deduct casualty losses in the year they incur. When affordable coverage isn’t available, it’s worth discussing the potential risks of self-insurance versus the value of buying coverage with an insurance advisor.
Exploring captive insurance: For larger producers spending upwards of $150,000 annually on premiums, captive insurance arrangements are becoming increasingly popular. Captives offer the ability to self-insure through a dedicated subsidiary, potentially leading to lower long-term insurance costs. However, captives are not feasible for smaller producers, given the scale required to justify their setup and operational costs.

Your company can reduce costs and maintain cash flow by strategically aligning insurance and tax planning.

Work with Trusted Advisors to Align Insurance and Tax Strategies

Given the complex interplay between insurance and taxes, breweries, distilleries, and vineyards need experienced guidance. MGO, a leading tax advisory firm, and Alera Group, an independent insurance agency offering commercial insurance, employee benefits, and personal insurance solutions, can provide invaluable insights for alcohol producers looking to optimize their financial and risk management tactics. Together, we help clients identify and manage potential risks and benefit from tax-efficient planning.

In today’s challenging economic environment, you need to look beyond traditional strategies to remain competitive. Integrating tax and insurance planning can provide cost savings, protect cash flow, and offer advantages to support your overall financial stability.

For more detailed insights and personalized help, reach out to MGO’s Vineyards and Wineries team to learn how MGO and Alera Group can support you.

Choosing the Right Business Structure for Your U.S. Expansion

This article is part of an ongoing series, “Navigating the Complexities of Setting Up a Business in the USA“. View all the articles in the series here.

Key Takeaways:

Assess different business structures to find the best fit for your U.S. operations and strategic goals.
Understand how each entity type affects your tax obligations and benefits.
Look for legal and tax advice to navigate complex regulations and improve your business setup.

Choosing the right business structure is a critical step in setting up your U.S. operations. The structure you select will affect your tax obligations, legal liability, and potential to raise capital. Additionally, the entity you choose may impact your day-to-day business operations and long-term strategic goals.

Importance of Selecting the Appropriate Business Entity

Selecting the right business entity affects everything from how profits are taxed to the level of personal liability for owners. It also dictates the regulatory requirements you must follow — which can vary significantly depending on the chosen structure.

Types of Business Entities

The main types of business entities available in the U.S. include:

C Corporation (C-Corp) — A standard corporation subject to corporate income tax. This structure is beneficial for businesses that plan to reinvest profits into the company or seek public investment.

Limited Liability Company (LLC) — A flexible entity that can be taxed as a sole proprietorship, partnership, or corporation. It offers liability protection while providing tax flexibility.

Foreign corporation with or without a U.S. branch — This setup allows a foreign company to do business in the U.S. without forming a separate legal entity. However, it comes with its own set of tax and legal considerations. It is crucial to consider both sides of the equation when deciding the entity structure, as cross-border operations can be complex and require careful planning.

Keys Factors to Consider When Selecting an Entity.

When choosing a business structure, consider the following:

Tax implications — Different structures have varying tax rates and filing requirements
Legal considerations — The level of liability protection varies by entity type. C-Corps and LLCs generally offer more protection against personal liability than sole proprietorships or partnerships
Operational needs — Consider how the chosen structure will affect your business operations. For instance, C-Corps can raise capital more easily through stock sales, while LLCs offer greater flexibility in management and profit distribution. Additionally, forming a U.S. entity may simplify transactions with other U.S. businesses versus operating as a foreign corporation with a U.S. branch.

Making the Right Entity Decision for Your U.S. Expansion

Selecting the right business entity is crucial for the success of your U.S. operations. To determine what the right entity is for you, it is important to evaluate all factors — including tax implications, legal protections, and operational needs. Consulting with legal and tax professionals can help you make an informed decision that aligns with your business goals.

Need help choosing the right business structure for your U.S. expansion? Reach out to our International Tax team today to get professional guidance tailored to your specific needs.

Setting up a business in the U.S. requires thorough planning and an understanding of various regulatory and operational challenges. This series will delve into specific aspects of this process, providing detailed guidance and practical tips. Our next article will discuss navigating the U.S. tax system, a crucial consideration for any foreign business looking to enter the U.S. market.

Understanding U.S. Taxes for Your Foreign Business

This article is part of an ongoing series, “Navigating the Complexities of Setting Up a Business in the USA“. View all the articles in the series here.

Key Takeaways:

Follow U.S. tax requirements by understanding federal, state, and local obligations.

Adjust your business strategy for the U.S. market by accounting for sales tax variations.

Utilize tax treaties to minimize tax burdens and navigate international tax rules effectively.

Navigating the U.S. tax system is a critical aspect of doing business in the United States. Unlike other countries with a single national tax system, the U.S. has a multi-layered structure that includes federal, state, and local taxes. Each layer has its own set of regulations and compliance requirements, which can be varied and complex.

For foreign businesses, this system can be challenging — especially if you are accustomed to a more centralized tax framework. In the U.S., tax obligations can arise not only from physical presence but also from sales or services delivered into a state, requiring your business to report to multiple agencies. It is important to recognize these distinctions for both compliance and tax strategy.

Federal Tax Obligations

What creates a taxable presence for federal income taxes is uniform across the country. Your business must file annual income tax returns with the Internal Revenue Service (IRS), detailing your income, expenses, and tax liabilities. Federal taxes include corporate income taxes, certain payroll taxes, and other specific levies.

While federal taxes are uniform across the country, they may be overridden by an enforceable income tax treaty (more on those below). The uniformity of federal taxation is also, unfortunately, not consistent for state taxation.

State and Local Tax Considerations

State and local taxes vary significantly across the U.S. Individual states can impose income taxes, sales taxes, property taxes, and other business-related taxes on your company. The complexity is further compounded by the fact that different authorities may have unique regulations about what triggers tax obligations — such as physical presence, sales volume, or the delivery of services.

The triggers at the state level do not necessarily coincide with the federal triggers. This can be both an opportunity for tax planning for your company and a potential pitfall if you are not careful.

Value-Added Tax Versus Sales Tax

Unlike the value-added tax (VAT) systems in many other countries, the U.S. sales tax system varies widely from state to state. While businesses in places like Europe often deal with a single national VAT system, the U.S. requires navigation through state and local sales tax regulations — each with its own rates and rules, creating a complex compliance landscape.

While VAT is a tax applied at each stage of the supply chain based on the added value, U.S. sales tax is typically collected only at the ultimate point of sale to the end consumer. This distinction can influence pricing strategies, cash flow management, and overall tax planning for your business.

Impact of Income Tax Treaties

Tax treaties between the U.S. and other countries can influence how your foreign business is taxed. These treaties often provide benefits such as reduced tax rates, exemptions from certain taxes, or simplified compliance requirements. However, they require careful navigation for proper application. The presence of a tax treaty between the U.S. and your home country can affect how you should structure your business operations when entering the U.S. market.

Tax treaties aim to avoid double taxation and ease international trade. They typically cover aspects like income tax on royalties, dividends, interest payments, as well as defining what constitutes a taxable presence. Understanding these treaties is essential for improving tax liabilities and staying compliant with regulations in both the U.S. and your home country.

Navigating U.S. Taxes for Your Foreign Business

Successfully managing U.S. taxes requires a comprehensive understanding of federal, state, and local tax obligations, the nuances of sales tax versus VAT, and the strategic use of income tax treaties. To optimize your tax position and minimize compliance risks, you should prioritize thorough planning and seek professional advice.

How MGO Can Help

MGO’s International Tax team can help you navigate these complexities and develop effective strategies for your U.S. operations. Our experienced team can assist you with tax planning, compliance, treaty analysis, and structuring your business for optimal tax efficiency. For more detailed insights and help, reach out to our team today.

Setting up a business in the U.S. requires thorough planning and an understanding of various regulatory and operational challenges. In this series, we will delve into specific aspects of this process, pro

Is Your Manufacturing Company Missing Out on R&D Tax Credits?

Key Takeaways:

R&D tax credits reduce tax liability and provide a financial boost for manufacturing companies investing in innovation.

Qualifying for R&D tax credits involves creating new or improved products or processes and requires thorough documentation.

Misconceptions about R&D tax credits limit potential benefits. Both large and small companies can qualify for incremental improvements.

In the ever-evolving landscape of manufacturing, innovation is still the cornerstone of success. Yet, amidst the constant drive for advancement, many manufacturing companies overlook a valuable opportunity to enhance their financial health: research and development (R&D) tax credits.

These incentives are designed to reward your company for research and development efforts, providing a significant financial boost. Understanding and using these credits can make a substantial difference to your company’s bottom line.

Understanding R&D Tax Credits

R&D tax credits are federal incentives aimed at encouraging companies to invest in innovation. These credits are available to businesses that engage in activities related to developing new products, processes, or technologies. The scope of qualifying activities is broad — encompassing everything from developing new software systems to refining manufacturing processes.

For manufacturing companies, this means a wide range of projects could potentially qualify for these credits. Whether you are creating a new product line, improving existing products, developing more efficient production methods, or designing, there is a good chance your efforts could be eligible for R&D tax.

The Financial Impact

The financial benefits of R&D tax credits are considerable. These credits directly reduce your tax liability on a dollar-for-dollar basis. Essentially, for every dollar invested in qualifying R&D activities, a part of this cost can be recouped through these credits.

This reduction in tax liability can significantly enhance your company’s financial statements — freeing up capital for reinvestment in further innovation and growth. Additionally, for certain taxpayers under qualifying criteria, R&D tax credits also can be used to offset payroll tax liabilities.

R&D tax credits are not limited to federal taxes either. Many states offer other incentives, creating an even greater opportunity for financial savings. By taking advantage of both federal and state R&D tax credits, your manufacturing company can maximize its benefits.

Qualifying for R&D Tax Credits

To qualify for R&D tax credits, your company must engage in activities that align with the Internal Revenue Service (IRS) definition of research and development. The IRS uses a four-part test to decide eligibility:

Permitted purpose: The activity must aim to create a new or improved product or manufacturing process. This could involve designing a new part, developing a more efficient assembly line, or creating a product with enhanced functionality.

Elimination of uncertainty: The activity must look to analyze and eliminate technical uncertainty about the development or improvement. For example, this might involve deciding the best materials to use in a new product or figuring out how to streamline a production process to reduce waste.

Process of experimentation: The activity must involve a process of experimentation, such as systematic trial and error. In a manufacturing context, this could mean testing different prototypes, experimenting with various production techniques, or conducting pilot runs to evaluate the feasibility of new methods.

Technological in nature: The activity must be based on principles from physical or biological sciences, engineering, or computer science. For manufacturers, this often includes using advanced engineering principles, integrating new software systems into production lines, or applying scientific research to improve product quality.

Documentation is critical in this process. Detailed records of your R&D activities — including project descriptions, expenses, and outcomes — will support your claim and confirm compliance with IRS requirements. From the first hypothesis to final testing, keep thorough documentation of every step to substantiate your eligibility for R&D tax credits.

Common Misconceptions

Many manufacturing companies believe R&D tax credits are only for large corporations with dedicated research labs. This is far from the truth. Businesses of all sizes can qualify for R&D credits, and the types of activities that qualify are often broader than many realize.

Other common misconceptions:

R&D tax credits only apply to groundbreaking innovations.

The process to identify and capture these credits is too cumbersome.

In reality, both these beliefs are unfounded. It’s not just groundbreaking innovations — incremental improvements to products or processes can also qualify. If your company is making strides in efficiency, quality, or performance, these efforts may be eligible for R&D tax credits. And capturing these credits doesn’t have to be cumbersome. Engaging the services of a trusted professional will help you efficiently and effectively work through the process.

Maximizing Your R&D Tax Credits

R&D tax credits are not just a way to reduce your current tax liability; they are also a significant tax-planning tool. These credits can reduce estimated tax payments and income taxes, thereby increasing cash flow and influencing future financial planning as your company grows.

To maximize the benefits of R&D tax credits, you need to implement a strategic approach. Consider these key steps:

Find qualifying activities: Conduct a thorough review of your operations to find all potential R&D activities. Look beyond obvious projects to uncover less clear qualifying activities.

Maintain detailed documentation: Keep comprehensive records of your R&D projects — including goals, methodologies, and expenses. Proper documentation is essential for substantiating your claims.

Consult with tax professionals: Work with tax advisors who specialize in R&D tax credits. They can help you navigate the complexities of the application process and improve your claim.

Review and update annually: Regularly review your R&D activities and expenses to confirm you are capturing all eligible credits. As your company evolves, so will your R&D activities.

Unlock Your Potential with R&D Tax Credits

R&D tax credits are a powerful tool for manufacturing companies striving for innovation and growth. By understanding the eligibility criteria and keeping diligent documentation, your company can unlock significant financial benefits.

Do not let misconceptions prevent you from exploring this valuable opportunity. Engage with knowledgeable tax professionals to navigate the process and maximize your benefits.

How MGO Can Help

Our dedicated Tax Credits and Incentives team can help your manufacturing company leverage R&D tax credits to support your innovation. Reach out to our team today to learn more.

Case Study: How MGO Helped an ISO-Certified Manufacturer Maximize the R&D Credit

Background:

Since Congress created the Research and Development (R&D) credit in the 1980s, it has been an essential tax strategy for companies investing in innovation — providing much-needed support to offset R&D expenses.

Prior to 2022, companies could deduct these expenses in the year paid or elect to amortize them over 60 months. However, a provision included in the Tax Cuts and Jobs Act of 2017 — that didn’t take effect until January 2022 — required businesses to capitalize and amortize these expenses.

This change has been devastating for businesses that invest heavily in innovation. No longer able to write off these expenses immediately, many organizations struggle to maintain cash flow. In some cases, it even threatens business continuity.

While congressional efforts are underway to reverse the requirement to amortize research and experimental expenses, businesses can claim the R&D tax credit to generate tax savings in the meantime.

Challenge:

An International Organization for Standardization (ISO) certified manufacturing company specializes in machining high-tolerance plastics and metals using computer numerical control (CNC) technology. With 96 employees and an annual revenue of $11 million, the company invests heavily in R&D and has incurred roughly $1 million in qualified research expenses.

This manufacturing company had a unique opportunity to claim the R&D tax credit because companies can claim the credit on costs related to implementing ISO to improve processes and quality in their businesses.

Approach:

MGO leveraged its extensive knowledge of R&D tax credits to thoroughly analyze the company’s R&D activities — including implementing continuous improvement and process improvements to streamline quality controls.

By accurately documenting all qualifying expenses and ensuring they align with the four-part test, MGO was able to help the client maximize their R&D credit benefit.

Value to Client:

With MGO’s help, this company successfully claimed the R&D credit — resulting in a net credit benefit of $90,000 in a single year, including federal and state tax credits.

This strengthened the company’s market position by enabling it to reinvest in research, maintain its ISO certification, and improve its ability to fund further innovation, contributing to its long-term competitiveness in the industry.

Your Trusted R&D Tax Credit Advisor

MGO’s tax professionals have more than 30 years of experience helping you document, file, and defend tax credit claims.

Contact MGO today for a complimentary R&D tax credit eligibility analysis to determine if this tax incentive can help fuel innovation and growth in your organization.

Case Study: How MGO Helped a Product Development Company Maximize the R&D Credit

Background:

Since the 1980s, the Research and Development (R&D) credit has been providing businesses with incentives to innovate.

An essential component of qualifying for the R&D tax credit is incurring research and experimental (R&E) expenses.

Until recently, businesses were able to deduct these expenses in the year paid or make an election to amortize them over 60 months. However, a provision in the Tax Cuts and Jobs Act of 2017 changed how businesses deduct R&E expenditures.

Starting in 2022, businesses must capitalize and amortize these expenses over 60 months rather than immediately deducting them. This change has been financially devastating for companies investing in innovation.

Challenge:

A product development company focused on the nutrition and fitness markets faced significant expenses associated with developing innovative workout products and ingestible pre- and post-workout recovery supplements.

With an annual revenue of $122 million, the company made considerable investments in R&D — totaling $2 million to $4 million over the last several years.

Since the company could not deduct those expenses in the year they were incurred, it needed to recoup some of the costs to sustain its research initiatives.

Approach:

MGO brought its extensive tax experience to the table to help this product development company navigate the complexities of the R&D credit.

We verified the company’s R&D activities aligned with the four-part test to qualify for the credit and all projects were rigorously documented with records directly linking them to the four-part criteria.

Value to Client:

Through careful evaluation and strategic planning, MGO helped the client secure a substantial net federal and state R&D credit benefit of $250,000 for a single tax year. The company used these credits to offset its federal and state tax burden.

This demonstrates the significant impact that R&D credits can have on a company’s financial health. The $250,000 credit enabled the client to reinvest in its innovative product pipeline, maintain a competitive advantage, and continue developing groundbreaking nutrition and fitness products.

Your Trusted R&D Tax Credit Advisor

MGO’s tax professionals have more than 30 years of experience helping you document, file, and defend tax credit claims.

Contact MGO today to discover how we can help you maximize R&D tax credits to support your growth and innovation journey. Our team is ready to guide you through the complexities of tax incentives and deliver tailored solutions that fuel innovation and business growth.

Charting Your Financial Path Beyond the Game

Key Takeaways:

Many professional athletes go on to achieve even greater financial success in their lives after sports through pro-active financial planning and capitalizing on post-career opportunities.
Having the right financial advisory team is crucial for transitioning athletes to make smart money decisions across areas like investments, business ventures, taxes, estate planning, and risk management.
With proper guidance, athletes can turn their playing careers into lifelong financial stability and growth through entrepreneurship, investments, and other lucrative second careers.

As a professional athlete, you’ve spent years honing your skills, building your career, and making a name for yourself. But what happens when the final whistle blows and your playing days are behind you?

The good news is many athletes move on to highly successful and lucrative ventures after their time in sports — some even making more money than they did during their athletic careers. With the right financial support and strategic planning, you can be one of them.

From Athlete to Entrepreneur: Maximizing Post-Career Opportunities

The transition to life after sports can be incredibly rewarding, opening doors to new and exciting opportunities. Many professional athletes have not only avoided the financial pitfalls often associated with post-career life but have also thrived financially.

Here are a few notable examples of athletes who’ve achieved significant financial success with their second careers:

Kenny Smith

Kenny “The Jet” Smith played 10 years in the National Basketball Association (NBA), winning back-to-back championships with the Houston Rockets in 1994 and 1995. While Smith made just under $12 million over his playing years, as an analyst on the Inside the NBA alongside Ernie Johnson, Charles Barkley, and Shaquille O’Neal, Smith reportedly takes home $16 million per year.

Maria Sharapova

While Sharapova earned over $300 million during a career where she became just the tenth woman to win all four major championships, she retired at the young age of 32 in 2020. Since that time, she has established herself as an investor and entrepreneur — working with health and wellness brands like Therabody and Tonal — while also serving on the board of directors for luxury fashion house Moncler Group.

Derek Jeter

Jeter played 20 seasons at shortstop for the New York Yankees, winning 5 World Series titles before retiring in 2014. After earning over $265 million in MLB salary, Jeter went on to found Jeter Publishing with Simon & Schuster and the media company The Players’ Tribune in 2014, which publishes first-person stories from athletes. From 2017, he became part-owner and CEO of the Miami Marlins.

David Beckham

Playing 21 seasons of professional soccer for teams like Manchester United, Real Madrid, the LA Galaxy, Beckham racked up league titles and millions in contract dollars. Retiring in 2013, he transitioned into a successful business career — starting the management company DB Ventures and collaborating with brands like HUGO BOSS. In 2018, Beckham brought Major League Soccer to Miami as co-owner of Inter Miami CF.

These examples demonstrate the wealth creation potential that exists long after an athletic career ends. Of course, it’s not just about what you do after your playing days are over; it’s also about what you do with your money.

The Role of Financial Advisors in Your Post-Career Success

The right financial advisors can help you navigate the complex financial landscape, assisting you to make smart decisions that will benefit you in the long term. Here are some key areas where advisors can support you:

Investment Planning

Post-career, it’s essential to make your money work for you. Financial advisors can help you develop a diversified investment portfolio tailored to your risk tolerance and long-term goals. This could include stocks, bonds, real estate, and business ventures.

Business Ventures

Many athletes transition into entrepreneurship. Advisors can provide invaluable support in evaluating business opportunities, developing business plans, and managing your ventures. Whether you’re interested in starting a restaurant, a retail chain, or a tech startup, having the right guidance can make all the difference.

Tax Planning

High earnings often come with complex tax obligations. A financial advisor can help you navigate these complexities, enabling you to take advantage of tax-saving opportunities and stay compliant with regulations.

Estate Planning

Protecting your wealth for future generations is crucial. Advisors can assist you in creating an estate plan that distributes your assets according to your wishes, minimizing tax liabilities and providing for your loved ones.

Retirement Planning

Even if you’re transitioning into a second career, planning for retirement is essential. Advisors can help you set up retirement accounts, plan for long-term care, and establish a steady income stream throughout your retirement years.

Risk Management

Life is unpredictable, and managing risk is a crucial part of any financial plan. Advisors can help you select the right insurance policies and develop strategies to protect your assets against unforeseen events.

Taking the Next Step in Your Post-Playing Journey

Transitioning from a professional athlete to a successful entrepreneur, broadcaster, coach, or executive is not just a dream; it’s a reality for many who have walked in your shoes. With strategic planning and the right financial support, you can turn your athletic success into lifelong financial stability and growth.

Remember, the game doesn’t end when you leave the field; it simply evolves. Embrace the opportunities ahead and put the right team in place to guide you through every step of your post-career journey.

How We Can Help

Our dedicated Entertainment, Sports, and Media team has extensive experience guiding professional athletes through all phases of their career journeys. We offer comprehensive financial services tailored to help you achieve continued success. Reach out to our team today to discuss how we can support your post-career goals.

Are You Ready to Optimize Your Tax Efficiency for Rescheduling?

Key Takeaways:

Cannabis companies face critical tax decisions following the notice of proposed rulemaking to reschedule cannabis.
Areas of consideration include reviewing open and estimated tax years, as well as assessing your current structure and its costs/benefits moving forward
Companies should also prepare for potential M&A opportunities and explore tax credits and incentives that could become available in a post-rescheduling world.

The federal government’s proposal to move cannabis from Schedule I to Schedule III carries significant tax implications beyond the (non-)application of 280E. It’s essential for your business to navigate this new landscape and make informed decisions to optimize your tax position.

Here are four key areas to consider:

1. Reviewing Open and Estimated Tax Years

Now is the time to review prior year tax returns, considering recent court cases and other factors to determine if protective claims or amended returns are warranted and could be beneficial. Evaluating how recent events should impact your 2024 quarterly estimated tax payments and future tax strategies is crucial.

2. Structuring for Post-280E Tax Efficiency

Legal and operating structures designed for a 280E environment may no longer be optimal post-rescheduling. Assess the costs and benefits of maintaining your current structure and explore tax-efficient alternatives to avoid phantom income and simplify transactions between related companies.

3. Navigating M&A Tax Considerations

With merger and acquisition (M&A) activity expected to accelerate, it is crucial to optimize your company’s tax structure for potential transactions. Whether you’re an acquirer or a target, understanding the tax due diligence process and making informed decisions in light of the rescheduling announcement is essential.

4. Leveraging Tax Credits and Incentives

Post-rescheduling, cannabis companies can finally take advantage of federal, state, and local tax credits and incentives previously unavailable. Identifying and qualifying for credits related to research and development, employees, clean energy, and more will be beneficial for your business.

How MGO Can Help You

MGO’s dedicated Cannabis practice has the experience and knowledge to help you navigate the complex tax implications and opportunities of rescheduling. Reach out to our team today.

Update: How the Latest Ruling on Farhy v. Commissioner Could Affect Your Penalty Assessments

Executive Summary

In April 2023, the U.S. Tax Court made news when it ruled in favor of businessman Alon Farhy, who challenged the Internal Revenue Service (IRS)’s authority to assess penalties for the failure to file IRS Form 5471.
IRS Form 5471 is the Information Return of U.S. Persons With Respect to Certain Foreign Corporations.
In May 2024, the U.S. Court of Appeals for the D.C Circuit reversed the Tax Court’s initial ruling — underscoring the significance of context in assessing penalties for international information returns.

UPDATE (May 2024):

Recent developments in the Farhy v. Commissioner case have captured significant attention in the tax and legal sectors. On May 3, 2024, the U.S. Court of Appeals reversed the Tax Court’s initial decision, highlighting the importance of statutory context in penalty assessments for international information returns. This ruling emphasizes the need for a closer examination of statutory language, altering perspectives on penalty applicability for non-compliance.

The implications of this case extend to taxpayers and practitioners, as detailed in analyses by MGO (see below). The decision underscores the need for meticulous compliance practices and adept navigation of the complexities of U.S. international tax law, along with a deep understanding of judicial interpretations of tax regulations.

MGO’s professionals are well-positioned to assist clients in navigating the complexities arising from the recent Farhy v. Commissioner decision. With a comprehensive understanding of the changing landscape in penalty assessments for international information returns, we provide guidance to help companies adapt to new judicial interpretations and maintain compliance with evolving tax regulations.

ORIGINAL ARTICLE (published June 8, 2023):

On April 3, 2023, the U.S. Tax Court came to a decision in the case Farhy v. Commissioner, ruling that the Internal Revenue Service (IRS) does not have the statutory authority to assess penalties for the failure to file IRS Form 5471, or the Information Return of U.S. Persons With Respect to Certain Foreign Corporations, against taxpayers. It also ruled that the IRS cannot administratively collect such penalties via levy.

Now that the IRS doesn’t have the authority to assess certain foreign information return penalties according to the court, affected taxpayers may want to file protective refund claims, even if the case goes to appeals — especially given the short statute of limitations of two years for claiming refunds.

Our Tax Controversy team breaks down the Farhy case, as well as what it may mean for your international filings — and the future of the IRS’s penalty collections.

The IRS Case Against Farhy

Alon Farhy owned 100% of a Belize corporation from 2003 until 2010, as well as 100% of another Belize corporation from 2005 until 2010. He admitted he participated in an illegal scheme to reduce his income tax and gained immunity from prosecution. However, throughout the time of his ownership of these two companies, he was required to file IRS Forms 5471 for both — but he didn’t.

The IRS then mailed him a notice in February 2016, alerting him of his failure to file. He still didn’t file, and in November 2018, he assessed $10,000 per failure to file, per year — plus a continuation penalty of $50,000 for each year he failed to file. The IRS determined his failures to file were deliberate, and so the penalties were met with the appropriate approval within the IRS.

Farhy didn’t dispute he didn’t file. He also didn’t deny he failed to pay. Instead, he challenged the IRS’s legal authority to assess IRC section 6038 penalties.

The Tax Court’s Initial Ruling

The U.S. Tax Court then held that Congress authorized the assessment for a variety of penalties — namely, those found in subchapter B of chapter 68 of subtitle F — but not for those penalties under IRC sections 6038(b)(1) and (2), which apply to Form 5471. Because these penalties were not assessable, the court decided the IRS was prohibited from proceeding with collection, and the only way the IRS can pursue collection of the taxpayer’s penalties was by 28 U.S.C. Sec. 2461(a) — which allows recovery of any penalty by civil court action.

How This Decision Affects Your International Penalty Assessments

This case holds that the IRS may not assess penalties under IRC section 6038(b), or failure to file IRS Form 5471. The case’s ruling doesn’t mean you don’t have an obligation to file IRS Form 5471 — or any other required form.

Ultimately, this decision is expected to have a broad reach and will affect most IRS Form 5471 filers, namely category 1, 4, and 5 filers (but not category 2 and 3 filers, who are subject to penalties under IRC section 6679).

However, the case’s impact could permeate even deeper. For years, some practitioners have spoken out against the IRS’s systemic assessment of international information return (IIR) penalties after a return is filed late, making it impossible for taxpayers to avoid deficiency procedures. The court’s decision now reveals how a taxpayer can be protected by the judicial branch when something is deemed unfair. Farhy took a stand, challenged the system, and won — opening the door for potential challenges in the future.

It’s uncertain as to whether the IRS will appeal the court’s decision. But it seems as though the stakes are too high for the IRS not to appeal. While we don’t know what will happen, a former IRS official has stated he expects that, for cases currently pending review by IRS Appeals, Farhy will not be viewed as controlling law yet.

The impact of the ruling is clear and will most likely impact many taxpayers who are contesting — or who have already paid — IRC 6038 penalties. It may also affect other civil penalties where Congress has not prescribed the method of assessment in the future.

How You Should Respond to the Court’s Decision

You should move quickly to take advantage of the court’s decision, as there is a two-year statute of limitations from the time a tax is paid to make a protective claim for a refund. It’s likely this legislation wouldn’t affect refund claims since that would be governed by the law that existed when the penalties were assessed. Note that per IRC section 6665(a)(2), there is no distinction between payments of tax, addition to tax, penalties, or interest — so all items are treated as tax.

If you’ve previously paid the $10,000 penalty, it’s important to file your protective claim now, unless you’ve entered into an agreement with the IRS to extend the statute of limitations, which can occur during an examination. Requesting a refund won’t ever hurt, but some practitioners believe the IRS may try to keep any penalty money it collected, even if the assessment is invalid — because, in its eyes, the claim may not be. Just know, you can file your protective claim for a refund, but may not get it (at least not any time soon).

The Farhy decision could likewise be applied to other US IRS forms, such as 5472, 8865, 8938, 926, 8858, 8854. Some argue the Farhy decision may also be applied to IRS Form 3520.

How MGO Can Help

Only time will tell if the court’s decision will open the government up to additional criticisms for other penalty assessments. If you have paid your penalties and are wondering what your current options are, MGO’s experienced International Tax team can help you determine if you’re eligible to file a refund claim.

Four Steps to Recover Sales Tax Overpayments with a Reverse Tax Audit

Sales and use tax rates and regulations change often, and the rules vary widely from state to state. As a result, many businesses find themselves “over-complying” with sales tax rules and neglecting potential savings. For taxes that have already been paid (and that are still within the statute of limitations), you can submit a claim for refund — through a process that is often referred to as a “reverse audit.” In this video, we explore how collaborating with our State and Local Tax team can help you perform a reverse audit to improve your bottom line.

To read more about Reverse Sales Tax Audits read our article here.

To get started working with the MGO State and Local Tax team, click the link HERE.