Tax Benefits, Business-Friendly Climate Boost Growth Prospects for Companies Relocating to Miami-Dade
Living and working in Miami-Dade County comes with an array of perks – from beautiful year-round weather to reasonably priced waterfront real estate. In addition to these advantages, the business-friendly environment and the highly advantageous tax platform make investing and operating a business in Miami-Dade highly profitable as well.
A qualified accounting firm can evaluate existing policies and procedures at your firm or family office, identify vulnerabilities, and offer recommendations to help you mitigate your fraud and data security risks.
Tax considerations
The most significant tax benefit in Miami-Dade is the absence of any individual state income tax – guaranteed by state constitution – as well as the lack of any county-level income tax. For a high-income investor coming from a high-tax state, the savings can be sizeable and add up over the long term. The annual savings for a fund manager relocating to Miami-Dade from New York City and earning $1 million a year, for instance, could be as high as $89,000.
Florida also does not impose business income tax on limited partnerships and subchapter S-corporations, unlike some high-business-revenue states like New York and California. The state also supports businesses through numerous tax credits and incentives to promote growth and job creation. For instance, Florida offers tax credits for capital investments, the entertainment industry and enterprise zone activity, among others.
The trade and logistics sectors provide significant impact to Miami-Dade’s economy and to that end, a number of incentives exist to promote activity in this space. Manufacturers receive tax benefits throughout the manufacturing process. For instance, there are no sales and use taxes for purchases of raw materials incorporated into a final product for resale, nor for goods manufactured in the state for the purpose of export. There are no sales or use taxes for the purchase and lease of manufacturing equipment by new or expanding businesses, nor for the purchase of parts and labor to repair manufacturing equipment. If equipment in general and building material are located in an enterprise zone, the purchase of these items would qualify for a refund of sales or use tax as well, while jobs created in said zone could earn corporate income tax credit.
Miami-Dade’s budding tech hub and other industries also stand to benefit from a mix of federal and state tax credits intended for research and development. At the federal level there exists the Credit for Increasing Research Activities, commonly known as the research and development (R&D) credit. This tax incentive allows qualifying taxpayers to reduce their tax liability based on investments in qualified research activities. Businesses that qualify for this credit may also qualify for the Florida R&D tax credit.
The federal credit is available for businesses performing research in a broad range of industries. Taxpayers frequently overlook the opportunity to claim the R&D tax credit assuming it is only available to larger corporations or specific industries, while in reality, qualified research, as defined by the tax code, can occur almost everywhere there is a tangible product, software or transformation process. Florida offers an additional R&D tax credit for research activity that is eligible for the federal R&D credit and also falls within a Florida-designated target industry – namely, clean technology, life sciences, information technology, aviation and aerospace, defense, manufacturing, marine sciences, financial/professional services, and a host of emerging industries, including materials sciences and nanotechnology.
Furthermore, Florida does not have an estate tax and prohibits the imposition of a death tax. For those who have a large estate and want to establish family legacy, the comparative advantage over states that charge estate taxes estate, like New York and Massachusetts, cannot be disregarded.
Fraud prevention and cyber-security
With high volumes of electronic transactions sent daily at the speed of light, a plan to mitigate fraud and data security risk becomes an indispensable element of any successful business in today’s highly digitized world. This is an especially important consideration in Miami-Dade, an economy dominated by small and medium enterprises (SMEs) and family offices. SMEs are more prone to employee fraud and theft as they often lack policies and procedures for preventing fraud, and they also tend to lack adequate anti-fraud controls. The fewer employees, the more difficult internal controls become.
Smaller organizations are more often victims of occupational fraud and tend to suffer disproportionately large losses. For example, a loss of $150,000 can have a much more significant impact for smaller companies than for larger companies.
There are three components to occupational fraud: opportunity, rationalization and motivation (financial pressure). Of these, opportunity is the one area that employers can proactively minimize, and it is one of the most effective ways to reduce fraud risk. Statistics show that certain anti-fraud controls directly correlate with decreases in both the cost and duration of fraud. According to the Association of Certified Fraud Examiners (ACFE), the cost of fraud is reduced by approximately 36 percent to 45 percent when certain controls – such as management review, employee support programs, hotlines, and fraud training for managers/executives – are in place.
In addition, nearly half of all small businesses have been a victim of cyber-attacks, according to the 2013 Small Business Technology Survey conducted by the National Small Business Association. This can be a vicious cycle for small businesses, which are particularly vulnerable to fraud and IT risk because their limited size, resources and reserves often mean fewer and less-effective internal controls. Companies that maintain sensitive customer, financial and vendor data should be aware of data threats and what they can do to reduce IT security risk. There are four common risks to businesses’ data security: malicious attack (external hacking), natural disaster (such as hurricanes in Florida), equipment breakdown/human error, and internal attack.
It may be strategic to contract an independent accounting firm with expertise in internal controls and IT security. A qualified firm can evaluate existing policies and procedures at your firm or family office, identify vulnerabilities, and offer recommendations to help you mitigate your fraud and data security risks.
Regulatory compliance for finance
Money laundering is a universal concern, and because Miami-Dade is an international banking and finance hub, international transactions into and out of the county are subject to scrutiny by federal regulators. Investors should be aware of the heightened focus on anti-money laundering (AML) compliance, and be prepared to provide required information to comply with regulations and bank policies. Financial institutions operating in this market need to keep abreast of the latest developments and regulatory requirements surrounding AML and Bank Secrecy Act compliance.
Financial institutions should have their own compliance programs in place to identify and address the risk of money laundering. Key steps that financial institutions can take include: reviewing “Know Your Customer” and due diligence documentation for existing customers; requiring international and domestic customers to identify the source of their funds and beneficial owners of accounts; improving transaction monitoring; increasing staff training related to AML compliance; and if necessary, terminating the business relationship with customers or foreign financial institutions (FFIs) who do not meet the bank’s AML requirements or fit the bank’s AML risk profile.
Due to frequent cross-border transactions – particularly with Latin America – financial institutions in Miami-Dade are especially affected by tax regulations like the Foreign Account Tax Compliance Act (FATCA). Enacted in March 2010, FATCA targets tax non-compliance by U.S. taxpayers with foreign accounts.
While FATCA certainly affects U.S. withholding agents and U.S. multinational companies, foreign financial institutions (FFIs) are perhaps most impacted by this law, which requires them to provide information on financial accounts held by U.S. taxpayers. If FFIs do not register with the Internal Revenue Service (IRS) and agree to report certain information, certain income payments from said accounts may be subject to a 30-percent withholding tax. So far, more than 80 countries are in talks with the U.S. government to negotiate intergovernmental agreements (IGAs), which make it easier for those countries to comply with FATCA reporting requirements. More than 100 countries have either already signed IGAs or have agreed to them in substance.
Although FATCA is primarily aimed at FFIs, U.S. financial institutions also have requirements under the law and need to understand their responsibilities for compliance, including withholding, reporting, due diligence and staff training. U.S. institutions must also prepare their internal systems to comply with the relevant reporting requirements, including the requirement to identify entity account owners and to house multiple Tax IDs for residents in participating countries. Moreover, U.S. institutions should incorporate FATCA – including the reporting requirements – into their systems. They must integrate IRS forms W-8BEN or the W-8BEN-E into their procedures. Meanwhile, clients of U.S. financial institutions who will be affected by FATCA should be aware of new reporting requirements.
Foreign investments in U.S. real estate
For foreign investors, purchasing real estate in Miami- Dade County can be considered a bargain when compared to purchasing property in comparable top global markets. Specific tax advantages include no personal state income tax, no state-level property tax assessed, no corporate franchise tax on capital stock, and no sales tax on business inventories, among others. However, there are important factors to consider when it comes to real estate taxation.
To maximize tax savings, much of the tax planning required for foreign investments should take place before the investor purchases the property in Florida. Some elect to make the acquisition through simple structures using just one entity (single-tiered structure), while others choose more complex structures involving several entities (multi-tiered structure). The optimal structure will depend on the foreigner’s unique facts and circumstances as every foreign investor is different in terms of needs, goals, and timelines. For instance, a younger individual may be more concerned with limiting his or her income tax liability rather than estate taxes as it relates to the purchase. An older individual may be focusing on estate tax issues and on efficient ways to transfer the property to his or her loved ones.
The most common structures used to acquire U.S. real estate are direct ownership by foreign individual; ownership by U.S. corporation; ownership by foreign corporation; ownership by limited liability company (LLC); foreign corporation owning a U.S. corporation; foreign corporation owning a U.S. corporation that owns several LLCs; and ownership by domestic or foreign trust. There is no one-size-fits-all approach, so it is important for a potential real estate investor to consult with a U.S. tax professional and real estate attorney who can assist with structuring the purchase and help the investor avoid penalties and needless tax filings while minimizing potential tax liabilities and administrative and legal costs.
In addition to state and local taxes, there are three significant federal tax considerations that foreigners investing in U.S. real estate should consider when deciding on a structure for the purchase: the Foreign Investment in Real Property Tax Act, U.S. Branch Profits Tax, and U.S. estate tax. A foreign investor should also consider his or her potential U.S. income tax liability, the importance of anonymity, liability exposure, and the administrative costs associated with each structure.
The way taxes are filed and calculated depends on the structure of the entity. Non-resident aliens and foreign corporations are generally taxed in the same manner as a U.S. citizen or domestic corporation on all income that is “effectively connected” with the conduct or trade of a business in the United States. If any U.S.-source income received by a non-resident alien or foreign corporation is not effectively connected with a U.S. trade or business, then it will be taxed at a flat 30-percent rate, or lower treaty rate.
Nonresident and resident aliens who do not have or are ineligible for U.S. Social Security numbers will need to obtain an individual taxpayer identification number (ITIN) and provide it to the Internal Revenue Service (IRS) with all tax documentation. An accounting firm designated by the IRS as a Certified Acceptance Agent can assist foreigners with obtaining an ITIN.
