The Tax Cuts and Jobs Act, enacted on December 22, 2017, made substantial changes to the taxation of international transactions. A significant component of the Act is a one-time, cumulative “deemed repatriation” of earnings held in certain foreign corporations. This issue has been described by the media in the context of large U.S. multinationals such as Apple and Google, but it actually applies to many taxpayers, including individuals and trusts. In fact, affected individuals, trusts, and corporations will need to address the deemed repatriation on their 2017 tax return.
Specifically, the new law requires “U.S. Shareholders” of “specified foreign corporations”1 to include in income their pro rata share of the undistributed, non-previously-taxed foreign earnings of the corporation. Once included, future distributions of such earnings are free of U.S. tax. These deferred, un-repatriated earnings are taxed as follows:
These rates are applied to both individuals and corporations, and they are independent of the taxpayer’s marginal tax brackets.2
Accumulated deficits in other specified foreign corporations owned by the same taxpayer can be used to offset the inclusion, which may soften the tax impact. In addition, a reduced foreign tax credit is available for corporate U.S. shareholders.
Election to Pay Net Tax Liability in Eight Installments
Taxpayers can elect to pay the tax over an eight-year period. A special rule permits shareholders that are S corporations to defer the tax much longer, and a time-sensitive planning opportunity exists for taxpayers with Net Operating Losses (NOLs). The eight annual installments spread is as follows:
If this election is made, the first installment must be paid by the original due date of the relevant tax return (determined without regard to any extension of time, which for individuals is April 15, 2018), and each succeeding installment must be paid by the corresponding due dates for the following years’ tax returns.
Election to Permit S Corporation Shareholders to Defer Net Tax Liability Payments
Each shareholder of an S corporation that is, in turn, a U.S. shareholder of a foreign corporation with a tax liability as described above may elect to defer payment of the shareholder's tax liability with respect to the S corporation until the shareholder's tax year, which includes a triggering event. The triggering event is whichever of the following that occurs first:
Election to Disregard/Exclude Deferred Foreign Income for NOL Purposes
A U.S. shareholder with deferred income from a foreign corporation and an NOL carryforward can elect to not use the NOL against low taxed income, and therefore, pay the tax at the reduced rates on that income.
For individuals and calendar year corporations, this section of the Bill is effective for tax years ending December 31, 2017. For fiscal year taxpayers, it is effective in the last year of a deferred foreign income corporation beginning before January 1, 2018.
1 A "specified foreign corporation" is a foreign corporation which either (i) is a controlled foreign corporation or (ii) with respect to which a U.S. corporation owns at least 10%, but in this case only with regard to that U.S. corporation.
2 Calculations of the tax liability as prescribed in the Act will be impacted by the taxpayer's marginal rate.
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Berdon LLP New York Accountants