Residents of the U.S.A.
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The Graycliff Way in the U.S.A.
Although the tax laws in the United States differ from those in Canada, our program works the same way in both countries. In fact, it works well in most countries around the world. The idea of a tax on income is the same in any country, and those countries that choose to impose a tax on income do not impose a tax on loan proceeds. So it is easy to see why our system is not just a national phenomenon.
In the United States, the IRS provides publications to set out everything you need to know to ensure that our system works in the USA. It is not necessary to look at the much more difficult-to-read Internal Revenue Code.
In the United States, "incorporated employees" are called "leased employees" and you can find out how they are taxed in IRS Publication 15-A at page 4. You can download a PDF version of Publication 15-A from this web site by clicking here, or from the IRS web site by clicking here. Or you can see it in HTML on the IRS web site, where you can use the links to navigate through it, by clicking here. You will see that "leased employees" in the United States are taxed the same way as "incorporated employees" are taxed in Canada.
The IRS requirements for interest on loans to employees to avoid deemed interest are set out in IRS Publication 535 at chapter 4-Interest under "Below-Market Loans." You can download a PDF version of Publication 535 from this web site by clicking here, or from the IRS web site by clicking here. Or you can see it in HTML on the IRS web site, where you can use the links to navigate through it, by clicking here and going to Chapter 4-Interest and then to the last item in Chapter 4 - Below-Market Loans - which you can also reach by clicking here. You will see that deemed interest is dealt with the same way in the United States as it is in Canada.
The required interest rate in the USA is specified by Publication 535 at page 14 and is published monthly in Internal Revenue Bulletins available on the IRS web site by clicking here. Or, to find this "applicable federal rate" more easily, you can go to a private web page by pressing here, or here. (The required interest rate in Canada is specified by the Canadian government and is published on the Canada Revenue Agency web site and can be viewed by clicking here.) When we prepare promissory notes for US residents, we use the rate specified by the IRS.
The only thing that is really different in the United States, compared to Canada, is the requirement for adequate compensation, something that is not required in Canada. You can read about this requirement on the IRS web site by clicking here. This is relevant in the creation of retained earnings, because Canadians can have all of their earnings retained by a corporation, and receive nothing as salary. That is not possible in the United States. But this difference is not relevant in the way we deal with retained earnings.
When you are looking at tax-reduction methods, it is a good idea to check the IRS web site for their listing of "Listed Abusive Tax Shelters and Transactions" especially Notice 2003-22 (Offshore Deferred Compensation Arrangements) which is shown in that list. You can download Notice 2003-22 in PDF format from this web site by clicking here, or from the IRS web site by clicking here.
These abusive methods are based on hiding earnings from the IRS. On the other hand, our method is not based on secrecy. Those who use our method can disclose fully to government tax auditors, without fear, what they are doing. The loans are fully disclosed whenever the tax authorities ask for information. And the consequences are not in question, because we use actual government legislation and government tax publications to justify the tax consequences of using our method.
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