Taxation Made Simple

Taxation Made Simple Sominder Nath Narang, Chartered Accountant, has over 30 years of experience in the field of Audit and Taxation.

16/12/2024

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International Taxation and Accounting (India, UAE, USA)
16/08/2024

International Taxation and Accounting (India, UAE, USA)

US Federal Income Tax Return - Failure to File PenaltyMore In PayThe Failure to File penalty applies if you don't file y...
17/05/2024

US Federal Income Tax Return - Failure to File Penalty

More In Pay

The Failure to File penalty applies if you don't file your tax return by the due date. The due date for Callander Year 2023 was 15th April, 2024.

The penalty you must pay is a percentage of the taxes you didn't pay on time.

How You Know You Owe the Penalty

The IRS sends you a notice or letter if you owe the Failure to File penalty.

How to Calculate the Penalty

To calculate the Failure to File penalty based on how late you file your tax return and the amount of unpaid tax as of the original payment due date (not the extension due date). Unpaid tax is the total tax required to be shown on your return minus amounts paid through withholding, estimated tax payments and allowed refundable credits.

Calculate the Failure to File penalty in this way:

The Failure to File penalty is 5% of the unpaid taxes for each month or part of a month that a tax return is late. The penalty won't exceed 25% of your unpaid taxes.
If both a Failure to File and a Failure to Pay penalty are applied in the same month, the Failure to File penalty is reduced by the amount of the Failure to Pay penalty for that month, for a combined penalty of 5% for each month or part of a month that your return was late.

If after 5 months you still haven't paid, the Failure to File penalty will max out, but the Failure to Pay penalty continues until the tax is paid, up to its maximum of 25% of the unpaid tax as of the due date.

If the return is more than 60 days late, the minimum Failure to File penalty is $485.00 or 100% of the underpayment, whichever i
Interest on a Penalty
IRS charges interest on penalties.

The date from which the Department begins to charge interest varies by the type of penalty. Interest increases the amount you owe until you pay your balance in full.

Remove or Reduce a Penalty

We may be able to help you remove or reduce some penalties if you acted in good faith and can show reasonable cause for why you weren't able to meet your tax obligations. By law IRS cannot remove or reduce interest unless the penalty is removed or reduced.

Dispute a Penalty
If you disagree with the amount you owe, you may dispute the penalty.

17/05/2024

GST on Lease Transactions

Let’s start with simple operating lease arrangement where goods, say, electricity generator whose normal sale price is Rs.1,00,000 is lying in stock at Puri, Orissa is sent to a customer-site situated in Bhilai, Chhattisgarh. The Lease transaction involves a supply of Goods.

Supplier is registered in Orissa and Recipient-customer is registered in Chhattisgarh.

Supplier makes an inter-State supply and issues invoice for Rs.12,000. This is the lease rental invoice of first month of a 10-month lease including interest built into this lease rental amount.

Goods travel from Puri to Bhilai and is clearly an inter-State movement of goods and IGST has been charged on the invoice.

At the end of first month, recipient-customer does NOT return the generator by transport from Bhilai back to Puri. It is retained in Bhilai to be used in the second month.

So, the question to consider is, whether 10-month lease agreement, is one agreement with 10 instalments to pay or is it 10 monthly agreements contained in one document

Quick answer that comes to mind is that it is ‘one agreement with 10 instalments to pay’. But it is well understood that time of supply does not get deferred simply because payment is collected in instalments. And if it is one agreement to supply, then it is one supply and, therefore, has one time of supply which is the first day of the first month. By this reasoning, entire GST at, say, 18% on Rs. 1,20,000 (Rs.12,000 x 10 instalments) will be payable in first month (within due date permitted).

On a more careful consideration of that question, it becomes clear that this lease (exceptions to be examined) is a ‘month-to-month’ agreement. And as all monthly agreements are identical, it is executed in a single document. Now there are 10 supplies and will have 10 times of supply and hence, GST is payable on Rs.12,000 at 18% each month.

Now, that it is clear that lease is a month-to-month arrangement, the next question to consider is whether the lease rental invoice for the second month, will be inter-State (as the first month) or will it become an intra-State supply.

Recollect that generator is lying with the Recipient-customer at Bhilai at the end of first month and will be continued to be used in second month without actually being returned to Puri and then received back to Bhilai.

Now, location of supplier of services is defined in section 2(15) IGST Act but location of supplier of goods is NOT defined. To examine location of supplier of goods,
Ch 3: Levy and Collection of Tax Sec. 7-11 / Rule 3-7
must be had to ‘place of business’ as defined in section 2(85) of CGST Act which provides that it will be (i) place where business is ordinarily carried on, in this case, it would be Puri or (ii) place where goods are stored, in this case, it would be Bhilai or (iii) place from where supplies are made or supplies are received or (iv) place where books are maintained or (v) place of an agent appointed to carry on business. Applying the above 5 tests, it appears (ii) would be the appropriate test and hence location of goods in second month would be place of business.

Business of lease is not concluded every month. It has already been concluded at the start of first month.

As a result, location of supplier of goods will be the location of the goods for the supply by way of lease in the second month. Goods being located in Bhilai will be an intra-State supply by the Supplier who is located in Puri.

It is for this reason, that Schedule II contains Para-1(b) (and even 5(f) in case of license) that the supply of goods by way of lease will be ‘treated’ as supply of services.

When transaction is treated as supply of services, then location of goods becomes irrelevant and location of supplier of services (as defined in section 2(15) of IGST Act and 2(71) of CGST Act) will determine all months to be inter-State supplies; and

Supplier situated in Puri, Orissa will NOT be required to take registration in every State where customers’ sites are located in lease or license supplies.

USA / India Taxation - Filling, Reporting & Compliance. Sominder Nath Narang B Com (Hons), FCA. Income Tax (India), GST ...
08/05/2024

USA / India Taxation - Filling, Reporting & Compliance. Sominder Nath Narang B Com (Hons), FCA. Income Tax (India), GST (India) and Federal Tax (USA)

Double Taxation Avoidance Agreement between India and USA. Sominder Nath Narang, B.Com (Hons), FCA. Income Tax (India),...
06/05/2024

Double Taxation Avoidance Agreement between India and USA. Sominder Nath Narang, B.Com (Hons), FCA. Income Tax (India), GST (India), Federal Income Tax (USA).

Contact for your Questions or Queries on US Federal Income Tax. Sominder Nath Narang, Tax Practioner (India and USA). Co...
09/04/2024

Contact for your Questions or Queries on US Federal Income Tax. Sominder Nath Narang, Tax Practioner (India and USA). Contact 9313639555 India

16/03/2024

What Are the US Tax Requirements for Foreign Partnerships?

When it comes to US tax requirements for foreign partnerships, US expatriates should be aware of several key aspects. Firstly, the United States taxes its citizens and resident aliens on their worldwide income, including income from foreign partnerships. This means that if an American expat is a partner in a foreign business, their share of the partnership’s income must be reported to the IRS, regardless of where the money is earned or if it is repatriated to the US.

Additionally, US expats involved in foreign partnerships may need to file specific forms, such as Form 8865 (Return of U.S. Persons With Respect to Certain Foreign Partnerships) which requires detailed financial information about the partnership. This form is critical in cases where the US expat has a controlling interest or makes significant contributions to the partnership. Failure to comply with these reporting requirements can lead to substantial penalties.

Key Takeaways

• A foreign partnership that has “effectively connected income” or “US source income” generally must file Form 1065.
• A US person that has any income from a partnership, whether reported on a form K-1 or not, and whether from a US for foreign partnership.
• Certain US partners in foreign partnerships must file Form 8865.

What Is A Foreign Partnership?

For US tax purposes, the Internal Revenue Code generally defines a “partnership” as a syndicate, group, pool, joint venture, or other unincorporated organization through or by means of which any business, financial operation, or venture is carried on and which is not a corporation or a trust or estate. In easier terms, a partnership is generally when two or more people go into business together not as a corporation.

In addition, the Internal Revenue Code generally defines “foreign”, for purposes of a partnership, as a partnership that is not created or organized in the United States or under the law of the United States or of any state in the United States.

How Does A Foreign Partnership Report?

The US tax reporting obligations of a foreign partnership will be determined based on whether the partnership is subject to a general rule (which is further subject to some exceptions)

General Rule

A foreign partnership, for US tax purposes, must file Form 1065, “U.S. Return of Partnership Income,” if either:
• The foreign partnership has gross income effectively connected with the conduct of a trade or business within the United States (“effectively connected income”); or
• The foreign partnership has gross income derived from sources in the United States (“US source income”).
• A foreign partnership with effectively connected income or US source income must file Form 1065, even if its principal place of business is outside the United States or all of its partners are foreign persons.

In easier-to-understand terms, any partnership that earns income from the US must file a partnership return on Form 1065, even if all partners are foreign persons.

Principles of US Partnership Taxation

In understanding the US taxation of foreign partnerships, it is important to note the following two basic principles:
• Form 1065 is an information return used to report the income, gains, losses, deductions, credits, and other information from the operation of a partnership. The partnership does not pay tax on its income, and
• Instead, the partnership passes any income directly to its partners, and the partners are the ones required to pay taxes. Schedule K-1 of Form 1065 is used by the partnership to report income and other tax items to its partners.

Tax Obligations of US Partners

A US person who is a partner in a foreign partnership is subject to the general rule that a US citizen is taxed on worldwide income. Thus, a US person:
• Those who receive a Schedule K-1 reporting income from a foreign partnership filing Form 1065 (as described above) are subject to US taxation on such income; and
• Those who otherwise have income (not subject to the General Rule and otherwise) from a foreign partnership are subject to US taxation on such income.

In addition, a US partner in a foreign partnership can be subject to another tax obligation – Form 8865, “Return of U.S. Persons With Respect to Certain Foreign Partnerships”.

Not filing a form 8865 when required could result in penalties starting at $10,000 per year which can quickly increase.

Helping Expats with Foreign Partnerships

Foreign partnerships raise complex US tax issues. We specialize in helping expats manage their US tax obligations. As part of our services, we have years of experience in assisting expats with foreign partnership issues, and we can help you, too, with your foreign partnership situation.

Sominder Nath Narang
B.Com (Hons), FCA

29/12/2023

Federal Taxation (USA)

Consult for your Federal Tax queries Sominder Narang (B.Com (Hons), FCA)

20 popular tax deductions and tax breaks

Here are some of the most popular tax breaks for the 2023-2024 tax filing season..

1. Child tax credit
The child tax credit, or CTC, is a tax break for families with children below the age of 17. To qualify, you have to meet certain income requirements as well.

In 2023 (taxes filed in 2024), the child tax credit could get you up to $2,000 per child, with $1,600 of the credit being potentially refundable.

2. Child and dependent care credit
The child and dependent care credit, or CDCC, is meant to cover a percentage of day care and similar costs for a child under 13, a spouse or parent unable to care for themselves, or another dependent so you can work. Generally, it's up to 35% of $3,000 of expenses for one dependent or $6,000 for two or more dependents.

3. American opportunity tax credit
The American opportunity tax credit, sometimes shortened to AOC, lets you claim all of the first $2,000 you spent on tuition, books, equipment and school fees — but not living expenses or transportation — plus 25% of the next $2,000, for a total of $2,500.

4. Lifetime learning credit
The lifetime learning credit lets you claim 20% of the first $10,000 you paid toward tuition and fees, for a maximum of $2,000. Like the American opportunity tax credit, the lifetime learning credit doesn’t count living expenses or transportation as eligible expenses. You can claim books or supplies needed for coursework.

5. Student loan interest deduction
The student loan interest deduction lets borrowers write off up to $2,500 from their taxable income if they paid interest on their student loans.

6. Adoption credit
The adoption credit is a nonrefundable tax break that helps taxpayers cover a certain amount of qualified adoption costs per child. The credit begins to incrementally decrease at certain income levels and completely phases once your modified adjusted gross income (MAGI) exceeds the given threshold for that tax year.

For 2023 (taxes filed in 2024), the credit maxes out at $15,950. The credit is phased out at MAGI of $279,230 or more.

7. Earned income tax credit
This earned income tax credit (EITC) is a refundable tax break for low-income taxpayers with and without children.

For 2023 (taxes filed in 2024), the credit ranges from $600 to $7,430, depending on how many kids you have, your marital status and how much you made.

8. Charitable donation deduction
If you itemize, you may be able to write off the value of your charitable gifts — whether they’re in cash or property, such as clothes or a car — from your taxable income. Per the IRS, you can generally deduct up to 60% of your adjusted gross income.

9. Medical expenses deduction
In general, you can write off qualified, unreimbursed medical expenses that are more than 7.5% of your adjusted gross income for the tax year.

10. Deduction for state and local taxes
You may deduct up to $10,000 ($5,000 if married filing separately) for a combination of property taxes and either state and local income taxes or sales taxes.

11. Mortgage interest deduction
The mortgage interest tax deduction is touted as a way to make homeownership more affordable. It cuts the federal income tax that qualifying homeowners pay by reducing their taxable income by the amount of mortgage interest they pay.

12. Gambling loss deduction
Gambling losses and expenses are deductible only to the extent of gambling winnings. So, spending $100 on lottery tickets isn’t deductible — unless you win, and report, at least $100, too. You can’t write off more than the amount you win.

13. IRA contributions deduction
You may be able to deduct contributions to a traditional IRA, though how much you can deduct depends on whether you or your spouse is covered by a retirement plan at work and how much you make.

14. 401(k) contributions deduction
The IRS doesn’t tax what you divert directly from your paycheck into a traditional 401(k). In 2023, the contribution limit is $22,500 ($30,000 if 50 or older). In 2024, that limit rises to $23,000 ($30,500 for those 50 and above).

These retirement accounts are usually sponsored by employers, although self-employed people can open their own 401(k)s.

15. Saver’s credit
The saver's credit runs 10% to 50% of up to $2,000 ($4,000 if filing jointly) in contributions to an IRA, 401(k), 403(b) or certain other retirement plans. The percentage depends on your filing status and income.

16. Health savings account contributions deduction
Contributions to HSAs are tax-deductible, and the withdrawals are tax-free, too, as long as you use them for qualified medical expenses.

17. Self-employment expenses deduction
There are many valuable tax write-offs for freelancers, contractors and other self-employed people.

18. Home office deduction
If you use part of your home regularly and exclusively for business-related activity, the IRS lets you write off certain self-employment deductions for associated rent, utilities, real estate taxes, repairs, maintenance and other related expenses.

19. Educator expenses deduction
If you’re a school teacher or other eligible educator, you can deduct up to $300 spent on classroom supplies. Spouses who are both educators and file jointly get a deduction of $300 each, making them eligible to claim up to $600 on their return.

20. Solar tax credit
The solar tax credit, also known as the "residential clean energy credit," can get you up to 30% of the installation cost of solar energy systems, including solar water heaters and solar panels.

Bonus: Electric vehicle tax credit
The nonrefundable EV tax credit ranges from $3,750 to $7,500 for tax year 2023. Taxpayers can also get a credit of up to $4,000 for used cars. Eligibility depends on a number of rules, including income, price of the vehicle and whether the car meets IRS manufacturing guidelines for qualified EVs.

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14/10/2023

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