Year-end planning

With the end of the tax year fast approaching, here are a few tips that may be relevant:

• If you haven't already done so, make a claim for the Working Tax Grant (negative income tax) in respect of 2013 income. The deadline is Friday 26th December.

• If you are a business with inventory, take a count as close as possible near the year-end. The cost of each item should be listed alongside the quantities.

• Business owners should make top-up payments towards pension, Keren hishtalmut etc to take advantage of the tax breaks available. The same goes for salaried individuals who have private pension plans.

• If you pay Bituach Leumi without usng a standing order, pay by the end of the year in order to receive the deduction for tax purposes. (Those paying on standing order will have the January payment included in the 2014 certificate)

• Make donations to recognized charities (section 46), and ensure the receipt is dated 2014.

• Start collating information for "short" tax returns, if relevant:
• Israeli property income taxed on the 10% route must be reported and the tax paid by 30 January 2015.
• Foreign property income taxes on the 15% route and foreign interest, dividends and/or capital gains must be reported and the tax paid by 30 April 2015.

• For business owners, consider whether you need to increase the amount you need to pay on account for both income tax and bituach Leumi. If you don't, expect to pay interest on the extra payments once the tax return is eventually filed. For Bituach Leumi, this will mean letting them know that you wish to increase by the end of the year. For income tax, voluntary payments can be made anytime. Interest is fully waived on payments made in January. 50% is waived on February payments and 25% is waived on March payments.

Overseas companies, part 4 - the LLC

In the USA, one of the most common ways of running a business or investment is via an LLC (Limited Liability Corportation).

Such a vehicle has a number of advantages, but these are not our concern here. The tax treatment in the USA is that, although the LLC is a separate legal entity to the owner(s), the income generated is taxed directly in the hands of the shareholders. This is therefore similar in nature to the House Company and Family Company, but without the various restrictions imposed on Israel.

The issue to be dealt with is that legally the LLC is a separate body. As such, Israel should tax shareholders only on the dividends (i.e. distributions). But since such distributions are not taxed in the US, there is no foreign tax credit to be given, even though the shareholder has already paid US taxes on the underlying profits.

The Israeli tax authority (based on a circular from 2004) therefore permit a person to elect to treat the income of the LLC as earned by the shareholder, and US taxes paid on that income can be credited against the Israeli tax due. However, this applies solely for the purpose of preventing double tax. As such, any losses incurred stay at the LLC level until subsequent profits wipe out the loss. This, despite the fact that in the US the LLC loss can be offset against other income in the year in which the loss in incurred.

Two further conditions apply for this election to be effective:

1. The election must be made in the first year that the LLC income needs to be reported.

2. The election cannot be revoked.

As always, personal circumstances will determine the best course of action, and individual advice must be sought.