GILTI rule change may mean more amended returns for partnerships

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Substantial changes in the regulations for the new provisions for "global intangible low-taxed income," or GILTI, from the Tax Cuts and Jobs Act could mean that many more amended K-1 schedules will be necessary for tax practitioners this year.

Last month the Treasury Department issued final regulations on the GILTI provisions of the 2017 tax overhaul, which provide guidance to determine the amount of global intangible low-taxed income included in the gross income of certain U.S. shareholders of foreign corporations, including U.S. shareholders who are members of a consolidated group (see Corporate America gets clarity on tax bills for offshore profits).

The final regulations retained, with some modifications, the anti-abuse provisions that were included in the original proposed regulations, but they also revised the domestic partnership provisions to take an aggregate approach to determining the amount of GILTI that should be included in the gross income of a partnership’s partners with respect to controlled foreign corporations owned by the partnership. The significant changes from the originally proposed regulations could mean some big headaches, particularly for smaller tax practitioners and their clients.

“The original proposed regulations took a combined approach with respect to calculating GILTI for partners in a domestic partnership, treating the domestic partnership as a taxpayer for purposes of determining who had a GILTI inclusion,” said Chaya Siegfried, an international tax services partner at Top 100 Firm Withum. “As such, if the domestic partnership owned more than 10 percent of a [controlled foreign corporation], then the partnership would have a GILTI inclusion and allocate a pro rata piece of this inclusion to its partners who would have a GILTI inclusion regardless if their indirect interest was less than 10 percent. Partners that indirectly owned 10 percent or more of the CFCs would calculate their own shareholder-level GILTI inclusion based on their pro rata allocation of tested income, tested loss, etc.”

But the final regulations took a different approach, treating domestic partnerships as foreign partnerships for purposes of determining which taxpayers have GILTI inclusions, she noted, so a partner in a domestic partnership that indirectly owns less than 10 percent of a CFC will not have a GILTI inclusion at all. Unfortunately, many partnerships have already filed their returns reporting the GILTI income to partners that indirectly own less than 10 percent of the CFC. But under the final regulations, that would turn out to be incorrect.

“Partnerships will have to rectify this, most likely by filing amended or superseded returns and issuing new K-1s to partners,” Siegfried warned. “These partners that were allocated incorrect GILTI income will likely also be amending their returns. We are hoping the IRS will share guidance on how to best address this issue.”

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Tax regulations International taxes Partnerships Tax forms WithumSmith+Brown