We knew it was going to happen and it is well underway. Accountants, attorneys and the IRShave been busy discerning the sweeping new tax law and its implications. Looking for any opportunities and loopholes for their respective constituencies. Not an easy endeavor. Why? Because instead of replacing old tax laws with a completely new system, the new tax law was added onto decades of old rules and regulations which can lead to unintended consequences. One big loophole/opportunity concerning the corporate tax rate may have recently come to light.
Passed by Congress in 1962 and signed into law by then President Kennedy, Subpart F of the tax code contains provisions that, at the time, were intended to prevent Americans from indefinitely shielding themselves from taxes by keeping investments offshore. The provision forced them to pay taxes annually on these investments but gave them the option to have that income taxed at the corporate tax rate instead of at individual tax rates. In the past, wealthy investors had little reason to pick the corporate tax rate since it was nearly the same as the top personal rate. But no longer. New tax law dramatically dropped the top corporate tax rate to 21%. That’s 16 percentage points lower than the new top federal individual income tax rate. But remember, the income will ultimately be doubled tax when the money is distributed out of the C Corporation.
Another option to consider is something known as the 962 election. It creates a “phantom” domestic corporation that stands between the individual taxpayer and foreign investments. One cannot make the final decision to use this as a planning tool as it is currently unclear which tax rate taxpayers will face when the investments pay dividends or distributions.
In summary, wealthy taxpayers with passive foreign investments should explore the use of corporate type structures with their Henry+Horne tax advisor.
Dale F. Jensen, CPA