S Corporations; Foreign Dependency Exemption; and Foreign Bank Accounts

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, November 15, 1998

Copyright 1998 Robert L. Sommers, all rights reserved.

Question: I own 65% of an S corporation which operates several pizza franchises. So far in 1998, we've made $36,000 in profits and reinvested them in the company. How am I taxed?

Answer: An S corporation is a "pass-though" entity (in general, owners report their pro-rata share of income, deduction, loss and credits on their tax returns). Therefore, you claim your pro-rata income share, whether or not you reinvest it in the company. Determine your company's income under the tax laws. Note: "Profits" for accounting purposes may not be the same as "income" for tax purposes.

Once you determine your S corporation's income (assume $40,000), your pro-rata share will be 65% of that amount ($26,000), to be declared on Form 1040, Schedule E, line 27.

Note: Income distributions from an S corporation to its shareholders are usually not subject to unemployment tax, unless the income is generated from personal services performed by the shareholders.

Remember, California has a separate S corporation tax equal to the greater of annual minimum tax of $800 ($600 for the first payment by certain new corporations) or 1.5% of net income.


Question: I am an Egyptian citizen working as a physician in the U.S. I send $10,000 a year to support of my mother in Egypt. May I deduct these payments?

Answer: No. Support payments to a relative are not deductible on your U.S. tax return. If your mother met the dependency exemption requirements, however, you could claim her as a dependent.

Unfortunately, the dependency exemption is limited to citizens, nationals or resident in the U.S., Canada or Mexico during some of the calendar year. Your mother, as a citizen and resident of Egypt, does not meet these conditions.

In addition to the citizen and residency tests, the following limitations apply: (1) gross income must be less than $2,700 for the calendar year, unless the dependent is the taxpayer's child under age 19, or a full-time student under age 24; (2) generally, the taxpayer must furnish more than 50% of the support; (3) there must be a family relationship, including in-laws, or the dependent must live in the taxpayer's home as a member of the household for the entire year; and (4) the dependent must not have filed a joint return with a spouse, unless the dependent is a married child and was not required to file a return for the year (a joint return was filed to claim a refund).


Question: I have a foreign bank account. What are my tax obligations?

Answer: If you are required to file U.S. tax returns, in general, you must disclose any interest in (or signature authority over) a foreign bank, securities or other financial account. You report the information on Form 1040, Schedule B, Part III, box 11a. However, check "no" if the combined value of your foreign accounts was less than $10,000 during the whole year.

If you check "yes" to box 11a, you must maintain records for five years showing the name and number for each account, and the name and address of the foreign bank or person with whom the account is held, the type of account and the maximum value of the account during the tax year. Also, you are also required to file Form 90-22.1 with the Treasury (not IRS) by July 1 of the following year.

Note: If you received a distribution (including a loan of cash or marketable securities) from a foreign trust, check box 12 and complete Form 3520 with detailed information about the trust. If you formed a foreign trust or transferred funds to a foreign trust that existed in 1998, check box 12 and complete either Form 3520 or 926.

Also, "responsible person(s)" of a foreign trust with a U.S. grantor must file Form 3520-A. A responsible person may be the grantor, if he is taxed on the trust's income under the grantor trust rules, or the trustee.




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