When it comes to tax reform, most individuals aren’t worried because they have most of the year to plan (at least get an idea of what they may owe in 2019), but that is not true. The Tax Cuts and Jobs Act (“TCJA”) mostly affects tax years starting after 12-31-2017; HOWEVER, there is a small percentage of items that may affect your 2017 tax return due April 17, 2018! One of these items is the deemed repatriation tax.
This is for any U.S. Shareholder of a specified foreign corporation. A specified foreign corporation, for this provision, is any foreign corporation that has at least one U.S. shareholder (so NOT just CFCs). Sec. 951(b) defines a U.S. shareholder as any U.S. person that owns 10% or more of combined voting classes of stock of a foreign corporation. One big adjustment to help protect individuals from this burden was also added in the conference agreement:
In the case of a foreign corporation that is not a CFC, there must be at least one U.S. shareholder that is a domestic corporation in order for the foreign corporation to be a specified foreign corporation.
This last modification, I can bet you, saved quite a few individuals from this burdensome new, one time rule. If this still pertains to you keep reading.
If you are a shareholder in a foreign corporation, you most likely have what is called “Accumulated post-1986 deferred foreign income.” This is all post-1986 foreign earnings and profits (“E&P”) that was not previously taxed, attributable to income that is effectively connected with a trade or business in the United States and subject to U.S. income tax, NOR subpart F income that was included in the gross income of a U.S. shareholder. Generally, this amount would also be reduced by foreign E&P deficits that are property allocated to that person. See your tax advisor for calculation and allocation of any deficits.
Now that you have your income amount, we will move on to the deduction portion. The deduction is based on a rate equivalent percentage method. 15.5% rate of tax on your accumulated post-1986 foreign earnings held in the form of cash or cash equivalents and 8% rate of tax on all other earnings.
After applying the deduction to the inclusion amount, you will reach the net repatriation income amount that is to be included in gross income. If taxed at the highest individual rate for 2017 (39.6%), the deductions listed above would result in an effective tax rate of approximately 17.5% and 9.04%.
One last item is that the shareholder may elect to pay the net tax liability resulting from the section 951 inclusion in eight installments. These eight installments are not equal payments as they also give a specified breakdown per installment. (Because things are simpler that way! Right?)
Limitations and exceptions like every other tax law do apply, so please contact your tax advisor for more detail on your specific circumstances.
Chris Morrison, CPA, MAFM