Lisa Goldman, CPA, TEP, M. Tax and Rebeccah Fontaine, J.D., LL.M.
8.12.19 | Client Alert
Part 3 – Mechanics of GILTI – Coordination with Existing Rules
In our concluding alert on the recent final and proposed IRS regulations addressing Global Intangible Low-Taxed Income (“GILTI”), we expand on the implications for Subpart F and Qualified Business Asset Investment (“QBAI”).
Subpart F and GILTI Coordination
Under GILTI, gross tested income excludes any gross income “taken into account” in determining Subpart F income (referred to as “Subpart F exclusion” in the regulations). The final GILTI regulations clarify that income excluded under the existing Subpart F de minimis rule is included in gross tested income, while income included in Subpart F under the full inclusion rule is excluded from gross tested income.
Under existing Subpart F rules, “de minimis” income is excluded from Subpart F inclusion. De minimis is defined as annual Subpart F income that is the lesser of 5% of gross income of the CFC or $1 million. Alternatively, there is a full inclusion rule for Subpart F income that requires 100% inclusion if the sum of the annual CFC’s Subpart F income exceeds 70% of total gross income of the CFC. In that case, the entire gross income for the taxable year is treated as Subpart F income and thus is taxable.
The effect of this rule is that full inclusion Subpart F income is taxed solely under the Subpart F rules while de minimis Subpart F is taxed solely under the GILTI rules.
Specified Interest Expense
The Regulations clarify the definition of interest income and expense to be that found under IRC Sec. 163(j). Currently, proposed rules under Sec. 163(j) provide a very broad definition of interest, including as interest items debt issuance costs, original issue discount, accrued market discount, and repurchase premium; and guaranteed payments by partnerships for the use of capital.
Further, the regulations confirm that the QBAI of a tested loss CFC is not included when there is computed net deemed tangible income return (DTIR). However, there is relief to taxpayers by reducing a tested loss CFC’s tested interest expense by an amount equal to 10% of the QBAI that the tested loss CFC would have had if it were instead a tested income CFC.
Determining Qualified Business Asset Investment (“QBAI”)
For purposes of computing QBAI, the regulations defined specified tangible property as property used in the production of tested income for which the depreciation deduction provided by the code is allowed. This definition specifically excludes intangible property that may be eligible for depreciation (e.g., computer software). Further, the IRS clarified that for partially depreciable assets, only the portion of the basis that is depreciable is taken into account in computing QBAI.
Overall, the final regulations and proposed regulations provide both opportunities and challenges for taxpayers. The changes in the final regulations will need to be addressed in short order for companies that have not yet filed their 2018 tax returns.
Companies affected by the final regulations should also consider filing an amended 2018 tax return to reflect the final regulations and potentially early adopt the aggregate partnership treatment for Subpart F purposes. When considering current restructuring and preparing for the eventual finalization of the GILTI high-tax exception (discussed in Part 2), both modeling and scenario planning will be more important than ever given these complex and highly computational provisions.
If you have questions or need advice on any aspect of GILTI, contact Lisa Goldman at 212.699.8808 | firstname.lastname@example.org or reach out to your Berdon advisor.
Berdon LLP New York accountants
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