As year-end approaches, here are a few planning tips you may find useful.

TIP #1: Which M&A-Related Tax Forms to Expect, and When.

If you were a securityholder in a company that was sold in 2018, you will likely receive a tax form reporting the value of proceeds that were distributed to you. You may also receive tax forms reporting any amounts distributed from post-closing proceeds related to an escrow release or milestone payment paid in 2018. These types of proceeds are generally reported on IRS Form 1099-B, which, if required, must be sent to you by February 15, 2019. However, if you were an employee of the company that was sold and your proceeds are required to be treated as compensation, such as distributions resulting from incentive stock options, bonuses, or management incentive/carve-out plans, your proceeds would instead be reported on IRS Form W-2, which must be mailed to you by January 31, 2019. If you are a foreign securityholder, you might receive IRS Form 1042-S, which is used to report certain types of proceeds paid to foreign persons including non-resident aliens, foreign partnerships, foreign corporations, foreign estates, and foreign trusts that are subject to U.S. income tax withholding. Form 1042-S must be mailed to you by March 15, 2019.

TIP #2: Looking to Write Off a Portfolio Company Investment? Sell the Securities for $1 to Strengthen Your Tax Position or Wrap Up a Fund.

The position that a security is worthless for tax purposes may be strengthened if it is formally sold in an arm’s length transaction for a nominal amount. At the request of our clients, SRS Acquiom can formally purchase such securities for $1.00. This option may also allow for a quicker wrap-up of a fund if these worthless securities are among the remaining assets.

For more information, read our related article, “Selling Residual Interests to Write Off Investment Losses” or contact [email protected].

TIP #3: For Foreign Escrows or Accounts, is FBAR or Form 8938 Required? You May Need to File Both.

Securityholders in an M&A deal with escrows held in accounts domiciled outside the U.S. may need to comply with Report of Foreign Bank and Financial Accounts (FBAR) regulations. Unless an exception applies, you must file IRS Form 8938 if you are a U.S. citizen that has an interest in specified foreign financial assets and the value of those assets is more than the applicable reporting threshold. The IRS now requires unmarried (or married filing separately) taxpayers to file Form 8938 if they hold foreign financial assets in excess of $50,000 on last day of the tax year or more than $75,000 at any time during the tax year. For married taxpayers filing jointly, the amounts are $100,000 and $150,000, respectively. These rules could also apply if you are deemed to have control over applicable foreign accounts, such as any accounts on deals for which you may have served as the shareholder representative or in a similar capacity.

Given the complexity and significant penalties possible with the FinCEN 114, FBAR regulations and Form 8938, we advise that all securityholders and parties that may be deemed to have control over accounts to consult with their tax and legal advisors to determine whether any are held in foreign accounts, and if so, whether either reporting requirement applies for both individual 1040 filers and for business entities. The IRS has published a comparison of FBAR and Form 8938 reporting requirements, which is provided here.

For more information, read the related article, “Cross Border Transactions; Watch Out For FBAR,” or reference the IRS website for helpful resources: Form 8938, FBAR Regulations.

TIP #4: You May Need an Audit Confirmation for Escrow and Holdback Positions. We Can Help.

As part of year-end accounting, auditors may require independent confirmation of escrow and holdback positions related to those reported on your financial statements. In addition to the reporting provided through SRS Acquiom ComPort™, we can provide written audit confirmations upon request. Please email requests to [email protected].

TIP #5: Consider the General Principles of Inclusion – Actual versus Constructive Receipt of Funds.

In tax, the Principles of Inclusion set forth the general rule that items of gross income should be accounted for when received by the taxpayer, unless, under the taxpayer’s method of accounting, such amount is to be properly reported in a different period. The majority of individual taxpayers use the cash method and recognize income upon either the actual or constructive receipt of cash, property, or services.

In general terms, actual receipt of income occurs when you are in physical receipt of cash or a cash equivalent, and not when you actually earn it. Constructive receipt occurs when the cash or property is unqualifiedly available upon the taxpayer’s demand, without substantial limitations or restrictions.

Questions about the application of actual vs. constructive receipt often come up around year end where the closing happens in December but the stockholder does not submit required paperwork to get paid until January. Even though the stockholder does not actually receive funds until January, they might be deemed to have constructively received them upon closing in December. This is materially different than the analysis that applies to future payments that are likely at risk, such as escrows and earn outs. In most instances, those are not deemed to have been constructively received until the risk of forfeiture has lapsed.

TIP #6: You might receive a 1099 for Imputed Interest.

Taxes on M&A escrow accounts earnings are complicated because, while buyers typically receive a 1099-INT on actual interest paid to the escrow account, unless there is a claim, the actual interest is eventually paid to the selling shareholders as part of the escrow distributions reported to them on a 1099-B. Section 483 of the Internal Revenue Code, which applies to merger agreements that involve distribution of an escrow in a future tax year structured as an installment sale, requires the seller to allocate the escrow distribution between that part of the proceeds treated as a capital gain and that which should be treated as interest and taxable as ordinary income. If the merger agreement specifies a rate of interest to be paid during the escrow period, then the seller allocates the actual interest included in the escrow distribution as ordinary income. However, because most merger agreements do not specify a rate of interest to be paid during the escrow period, the recipients are required to ignore any actual interest included in the escrow distribution and instead impute interest on the total amount of the distribution based on interest rates published by the IRS, the so-called applicable federal rates (AFRs). Even if an escrow has earned no interest, the IRS periodically sets the short term AFR. As a result, a larger portion of escrow distributions could end up being taxed as ordinary income than would be the case if taxes were instead based on actual interest earned.

To read more about this issue, click on link to this Article: Taxation of Interest Earned on the Escrow: Actual vs. Imputed.

Please consult your tax and legal advisors for specifics on these highlights or other provisions of the Tax Cut and Jobs Act.

If you have questions related to specific year-end issues, our expert team is happy to help. Please contact our client support at 415-263-9018 or [email protected].

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