Changes to know as you file your return

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Debra Callicutt, CPA, MBA

While some of you had the joy of experiencing the new tax law last year, 2018 will likely be the first tax year for which most of you will be impacted by the new tax law – a lot has changed! Since we last updated you in the summer, the IRS has provided more guidance and clarification on several areas of the new international tax rules. We have summarized the frequently asked questions our clients have raised and hope the information assists in your gaining a better appreciation for this new regime.

Q: We dealt with the Transition Tax (IRC 965) in 2017 – any updates?

A: Yes, the IRS has provided guidance regarding reporting and payments arising under Section 965 with respect to the tax year 2018. Starting in 2018, there now exists new forms which were specifically created to address this new Transition Tax – Form 965 and Form 965-A or 965-B. These forms will be attached to, and become a part of, your 2018 income tax return. If you reported income under section 965 in your 2017 tax year (that is, a tax year beginning in 2017) you must complete and attach Form 965 to your 2018 income tax return. In addition, even if you did not owe any Section 965 tax due to a foreign earnings and profit deficit allocated in accordance with Section 965(b), you must also complete Form 965 and attach it to your 2018 income tax return.

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Q: Are there any updates to the foreign derived intangible income (FDII)?

A: Just a reminder – if you’re lucky enough to be a C Corporation taxpayer, and you’re also lucky enough to have a business that exports products or services to foreign persons, you will be entitled to a reduced rate of tax on that eligible foreign derived intangible income. The IRS has provided a new form and instructions which provide a bit more insight into the mechanics of the tax rate reduction.

Q: What about the limitation on interest expense paid to a foreign related party?

A: Under the new IRC 163(j), the interest expense limitation starting in 2018 applies to all interest expenses – not just interest expense paid to foreign persons. This may be good news for those of you who, in prior years, had a suspended interest expense deduction due to interest expense being paid to a foreign related person. Such taxpayers – it appears – may now be allowed to use their suspended deductions from prior years if the average total revenues are under $25 million. We are waiting for further guidance from the IRS regarding this interpretation. Taxpayers with average annual gross receipts less than $25 million, for the three taxable years immediately preceding the current year, should no longer have any limitations applied to interest expense paid to a foreign related person. But, do remember, while there may no longer be a limitation on the deduction, there remains withholding tax requirements and reporting tax requirements (Form 1042/1042S) with respect to interest payments to non-U.S. persons.

Q: What about GILTI – anything new with this?

A: One of the options, if you are an individual taxpayer and have GILTI income, is to make a 962 election and treat yourself as if you were a corporation. Guidance on the specifics of how this election will be applied is still forthcoming. Based on the information and interpretations provided to date, making a 962 election may not be the ‘best’ option but may certainly provide a better option for those taxpayers who have not restructured their international holdings.

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Q: Have there been any changes to the definition of a controlled foreign corporation (CFC)?

A: The IRS has expanded its definition of foreign entities which may be deemed a CFC and has done away with the rules that kept a foreign corporation from being a CFC if it was owned for less than 30 days in a year. Generally, a foreign corporation is a “controlled foreign corporation” if U.S. shareholders (i.e., U.S. taxpayers who directly or indirectly own 10% or more of the foreign corporation’s stock) collectively own more than 50% of the foreign corporation’s stock. The old law allowed for the avoidance of CFC status if the U.S. person owned the stock less than 30 continuous days during the year. As there is no longer a 30-day exception rule, a CFC status is tested from day one, and tested every day of the year. As a result of these changes, more taxpayers will be required to comply with CFC rules even if their holding in the foreign entity was limited to, for example, 10 days in the year.

Q: Has there been any more guidance with respect to taxation (withholding) by a transferee purchasing an interest in a partnership from a foreign partner?

A: Yes. Starting in 2018, the IRS says foreign partners with U.S. source effectively connected income (ECI) are now subject to withholding and U.S. tax, notwithstanding certain exceptions, when they sell an interest in a U.S. partnership.

What’s next?

As you know, with any major tax overhaul, changes and more guidance can be expected. We will keep you posted as we get updates on GILTI and other international tax provisions that may impact your situation.

Debra Callicutt, CPA, MBA, Partner, specializes in international tax consulting + compliance services for high net worth individuals and closely-held businesses. You can reach her at (480) 483-1170 or