The brand-new Section 951A of the Internal Revenue Code, regarding non-routine controlled foreign corporation income called “global intangible low-taxed income,” or GILTI for short, is set to have a significant impact on American taxpayers involved in foreign businesses. Under new regulations that expand Subpart F, individuals and trusts who own stock in controlled foreign corporations, directly or through LLCs or S corporations, will be subject to higher tax rates on GILTI than C corporation shareholders.
Though it is one of the major changes contained within the recently passed Tax Cut and Jobs Act, this wryly-named provision doesn’t receive a lot of media coverage. As actual taxable income that was formerly deferred is now pulled into the U.S., taxpayers who are earning foreign income might be caught off-guard.
This article outlines the major considerations to keep in mind when developing future strategies that are affected by these new provisions.
The GILTI computation is related to the excess of the owner’s “net tested income” over their “net deemed tangible income return”; essentially, it is a calculation on the income of the controlled foreign corporation, or CFC. Moving forward, income earned internationally may now be subject to U.S. taxation. Therefore, if you are generating income from your CFC, you may pay taxes on it as part of your Subpart F income, beginning in 2018.
Computing GILTI can be tricky. If you are self-reporting this income, in the event of an audit, you run the risk of the IRS computing an amount that is higher than yours. Of course, failure to report GILTI is never advisable. Like all unreported income, upon discovering your omission, the IRS will come knocking. Instead, it’s wise to work with an experienced CPA who understands your international business structure and will calculate your includible income correctly under the new law.
Navigating the modifications to GILTI
These sweeping changes are set to have an impact on your 2018 taxes, so it’s important to establish a foundation for success from the outset. Here are a few key principles to aid in achieving a favorable outcome:
• Verify that your CPA can manage GILTI reporting. Not all tax practitioners specialize in foreign compliance, and Section 951A is complicated. Discuss the implications with your tax specialist to confirm that they have the capacity to accurately oversee the tax impact on your business.
• Clean up your foreign financials. This is a good time to get all your foreign accounting-related records in order to ensure that you are properly reporting moving forward.
Since these changes will apply to your 2018 income and beyond, now is the time to consult your tax specialist to outline opportunities to reduce your tax liability. Certain elections (such as those for S Corps and individuals) can yield significant reductions in your tax burden. It is also a good time to evaluate your CFC structure. Close inspection might reveal beneficial opportunities, such as moving your company to the U.S., transferring income out of the CFC (to the extent that the transaction does not violate transfer pricing rules), or establishing a pass-through entity that provides for separate deductions.
The regulations that apply to Section 951A are not the flashiest part of the tax bill, which is why they are not often discussed. The average taxpayer has little interest in these intricacies, so it is critical that your tax specialist understands how this provision will impact your tax liability. By confirming that your tax specialist has the correct expertise and planning future strategies early, you can minimize the impact on your tax liabilities and get a head-start on emerging opportunities.