Tax Cuts and Jobs Act: A comparison for large businesses and international taxpayers

The Tax Cuts and Jobs Act ("TCJA") made significant changes that affect international and domestic businesses, such as deductions, depreciation, expensing, tax credits and other tax items. This side-by-side comparison can help taxpayers understand the changes and plan accordingly.

Some provisions of the TCJA that affect individual taxpayers can also affect business taxes. Businesses and self-employed individuals should review tax reform changes for individuals and determine how these provisions work with their business situation.

Visit TCJA: International Taxpayers and Businesses regularly for tax reform updates. International and Domestic Businesses can find details and the latest resources on the provisions below at Tax Reform Provisions that Affect Businesses.

International Provisions

Taxes

Topic (Internal Revenue Code) 2017 law

What changed under TCJA

Treatment of deferred foreign income upon transition to participation exemption system of taxation (§ 965 Amended) U.S. citizens, resident individuals and domestic corporations generally are taxed on all income, whether earned in the United States or abroad. Foreign income earned by a foreign subsidiary of a U.S. corporation generally isn’t subject to U.S. tax until the income is distributed as a dividend to the U.S. corporation

Section 965 imposes a transition tax on untaxed foreign earnings of foreign subsidiaries of U.S. companies by deeming those earnings to be repatriated. A mandatory tax of 15.5 percent on post-1986 accumulated foreign earnings held in cash or cash equivalents and an 8 percent mandatory tax on post-1986 accumulated foreign earnings held in liquid assets is imposed. The transition tax generally may be paid in installments over an eight-year period.

For more information, see:

Global Intangible Low-Taxed Income (§ 951A New) A U.S. person generally isn’t subject to U.S. tax on foreign income earned by a foreign corporation in which it owns shares until that income is distributed to the U.S. person as a dividend. Certain income (referred to as Subpart F income) is taxed currently to the U.S. shareholder.

A U.S. shareholder of any controlled foreign corporation must include their global intangible low-taxed income (GILTI) in a tax year’s gross income in a manner similar to how they include Subpart F income.

For more information, see IR-2018-186, IRS issues proposed regulations on global intangible low-taxed income for U.S. shareholders.

Tax on base erosion payments of taxpayers with substantial gross receipts (§ 59A New) No previous law for comparison. This is a new provision.

§59A imposes a tax on each “applicable taxpayer” equal to the base erosion minimum tax amount (“BEMTA”) for the taxable year. This tax is in addition to any other tax under Subtitle A.

For more information, see IR-2018-250, IRS issues proposed regulations on key new international provision, the base erosion and anti-abuse tax .

Elimination of 30-day requirement for Subpart F (§ 951 Amended) The U.S. shareholder of a controlled foreign corporation is subject to U.S. tax on its pro rata share of the CFC’s Subpart F income, but only if the U.S. shareholder owns stock in the foreign subsidiary for an uninterrupted period of 30 days or more during the year. A U.S. shareholder is subject to U.S. tax on the CFC’s Subpart F income, even if the U.S. shareholder doesn’t own stock in the CFC for an uninterrupted period of 30 days or more during the year.
Change to definition of United States shareholder (§ 951(b) Amended) A U.S. shareholder for CFC purposes is a U.S. person who owns 10 percent or more of the total combined voting power of all classes of stock.

The definition of “U.S. shareholder” includes any U.S. person who owns 10 percent or more of the total value of shares of all classes of stock of a foreign corporation.

Stock attribution rules (§ 958(b) Amended) In general, stock owned by a foreign person was not attributed to the U.S. person when determining whether the company was a controlled foreign corporation. Section 958(b)(4) is repealed. The constructive ownership rules are amended so that certain stock of a foreign corporation owned by a foreign person is attributed to a related U.S. person for purposes of figuring CFC status.
Revised Sourcing Rule for Self-Made Inventory (§ 863(b) Amended)

Taxpayer divides gross income from sales between production activity and sales activity using one of the methods described in the regulations.

However, if the sale is by a nonresident and is attributable to an office or other fixed place of business in the United States, the sale is treated as income from U.S. sources without regard to the place of sale, unless it is sold for use, disposition, or consumption outside the United States and a foreign office materially participates in the sale.

Source of income from sales of inventory is entirely based on the place of production. Sales income from inventory property produced in the United States and sold outside the United States is 100 percent U.S. source. Income from inventory property produced partly within and partly outside the United States is partly U.S. source and partly foreign source. The rule with respect to sales attributable to an office or other fixed place of business in the United States was unchanged.

For more information, see IR-2018-235, IRS issues proposed regulations on foreign tax credits.

Deductions

Topic (Internal Revenue Code) 2017 law

What changed under TCJA

Deduction for foreign-source portion of dividends received by domestic corporations from specified 10-percent owned foreign corporations (§ 245A New) U.S. citizens, resident individuals and domestic corporations generally are taxed on all income, whether earned in the United States or abroad.

A 100 percent deduction is allowed for the foreign-source portion of dividends received from specified 10-percent owned foreign corporations by domestic corporations that are U.S. shareholders §of those foreign corporations.

For more information, see IR-2018-210, IRS issues proposed regulations reducing potential income inclusions for certain domestic corporations that own stock in foreign corporations.

Deduction with respect to foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI) (§ 250 New) No previous law for comparison. This is a new provision.

For a domestic corporation the law allows a deduction equal to the sum of 37.5 percent of the FDII for the tax year, plus 50 percent of the GILTI amount, if any, which is included in gross income. Also, per Proposed Regulation (REG 104464-18), a U.S. individual shareholder of a CFC who makes an election under Section 962 may be eligible for a deduction of 50 percent of their GILTI inclusion amount.

For more information, see IR-2019-27, IRS issues proposed regulations on deduction for foreign-derived intangible income and global intangible low-taxed income.   

Hybrid transactions/entities (§ 267A New) Due to differences under U.S. and foreign tax laws in characterizing entities, certain payments resulted in D/NI (deduction/no inclusion) outcomes. This is where the payment is deductible under the laws of one jurisdiction but not included in the income of the recipient. 

No deduction for any disqualified related party amount paid or accrued in a hybrid transaction or with a hybrid entity.

For more information, see REG–104352–18 (PDF)

Exclusion

Topic (Internal Revenue Code) 2017 law

What changed under TCJA

Repeal of inclusion based on withdrawal of previously excluded Subpart F income from qualified investment (§ 955 Repealed) Previously, a CFC could exclude subpart F income if it was invested in foreign base company shipping operations. As they decreased the amount of the investment, the excluded amount was included in income and the U.S. shareholder paid tax on the pro rata share. A reduction in investment in foreign base company shipping operations does not trigger recognition of previously excluded income.

Foreign Tax Credit

Topic (Internal Revenue Code) 2017 law

What changed under TCJA

Foreign tax credits/dividends received (§ 902 repealed; § 245A New)

Applies to domestic corporation owning 10 percent or more of the voting stock of a foreign corporation

Domestic corporation received a credit for income tax paid on dividends received from the foreign corporation.

The domestic corporation now receives a 100-percent deduction for the foreign-source portion of the dividends received from the foreign corporation subject to a one year holding period. The law allows no foreign tax credit or deduction for any foreign taxes paid or accrued on the qualifying dividend.

For more information, see IR-2018-235, IRS issues proposed regulations on foreign tax credits.

Income categories (baskets) for figuring foreign tax credit limitation (§ 904 Amended)

Foreign income is designated passive or general.

Separate income categories are allowed for non-passive GILTI and foreign branch income. The law defines “foreign branch income” as business profits of a U.S. person attributable to qualified business units (QBUs) in foreign countries. The law disallows any carryover or carryback of foreign tax credits to or from the GILTI income category.

For more information, see IR-2018-235, IRS issues proposed regulations on foreign tax credits.

Election to Increase section 904(g) Pre-2018 Overall Domestic Loss (ODL) Recapture (§ 904 Amended)

If you had an overall domestic loss for any tax year beginning after 2006, you had to create or increase the balance in an overall domestic loss account and recharacterize a portion of your U.S. source taxable income as foreign source taxable income in succeeding years for purposes of the foreign tax credit. The part that’s treated as foreign source taxable income for the tax year was the smaller of:

  • The total balance in your overall domestic loss account in each separate category (less amounts recaptured in earlier years), or
  • 50 percent of your U.S. source taxable income for the tax year.

The law allows for an election to recapture up to 100 percent of any pre-2018 unused overall domestic loss from a prior year. This election applies for any taxable year beginning after December 31, 2017, and before January 1, 2028.

For more information, see IR-2018-235, IRS issues proposed regulations on foreign tax credits.

Change to deemed-paid credit for Subpart F and GILTI inclusions (§ 960 Amended)

Foreign-source income earned by a foreign subsidiary of a U.S. corporation generally isn’t subject to tax until the subsidiary distributes the income as a dividend to the U.S. parent corporation. However, under the Subpart F provisions certain income is taxed currently to the U.S. shareholder. Deemed paid credits for Subpart F inclusions and previously taxed income were computed according to the § 902 formula that used pooling concepts.

In place of the pooling regime, a “properly attributable to” standard is used to compute deemed paid taxes with Subpart F inclusions, foreign taxes on the distribution of previously taxed income, and GILTI inclusions.

For more information, see IR-2018-235, IRS issues proposed regulations on foreign tax credits.

Revised Sourcing Rule for Self-Made Inventory (§ 863(b) Amended) Taxpayer divides gross income from sales between production activity and sales activity using one of the methods described in the regulations. Source of income from sales of inventory is entirely based on the place of production. Sales income from inventory property produced in the United States and sold outside the United States is 100 percent U.S. source. Income from inventory property produced partly within and partly outside the United States is partly U.S. source and partly foreign source.

Business Structure

Topic (Internal Revenue Code) 2017 law

What changed under TCJA

Special rules relating to sales or transfers involving specified 10-percent owned foreign corporations (§ 1248 Amended)

When a U.S. corporation sells or exchanges stock in a foreign subsidiary, the gain may be considered a dividend to the extent the foreign corporation has earnings and profits that have not already been subject to U.S. tax.

Income subject to tax as a dividend may be eligible for a deduction under section 245A. See section 1248(j).

Treatment of gain or loss on the sale of a partnership interest (§ 864 Amended)

Gain or loss on the sale or exchange of a partnership interest by a foreign person was based on the residence of the selling partner and generally would not be treated as effectively connected with the conduct of a trade or business.

On or after November 27, 2017, gain or loss from the sale or exchange of a partnership interest is effectively connected with a U.S. trade or business to the extent that the transferor would have had effectively connected gain or loss had the partnership sold all its assets at fair market value as of the date of the sale or exchange.

Allocate any gain or loss from the hypothetical asset sale by the partnership to interests in the partnership in the same manner as non-separately stated income and loss.

A transferee of a partnership interest must withhold 10 percent of the amount realized on the sale or exchange of a partnership interest unless the transferor certifies that the transferor is not a nonresident alien individual or foreign corporation.

For more information, see:

Shareholders of surrogate foreign corporations not eligible for reduced rate on dividends (§ 1(h) Amended) Qualified dividend income is taxed at capital gain rather than ordinary income rates. Generally, qualified dividend income includes dividends received during the tax year from domestic corporations and qualified foreign corporations. For dividends paid in tax years that begin after December 31, 2017, dividends received by an individual shareholder from a surrogate foreign corporation that’s treated as a domestic corporation aren’t eligible for lower rates on qualified dividends.

Other Business Changes

Taxes

Topic (Internal Revenue Code) 2017 law

What changed under TCJA

Alternative Minimum Tax (§ 53)

Taxpayers must compute their income for purposes of the regular income tax, then recompute their income for purposes of the alternative minimum tax (AMT). Corporations with average gross receipts equal to or in excess of $7.5 million over the preceding three tax years are subject to the AMT. A taxpayer's tax liability is the greater of their regular tax liability or their AMT liability.

Corporations receive a credit for AMT paid (the prior-year minimum tax credit), which they can carry forward and claim against regular tax liability in future tax years, to the extent such liability exceeds AMT in a particular year.

Repeals the corporate AMT for tax years beginning after Dec. 31, 2017.

Continues to allow the prior year minimum tax credit to offset the taxpayer’s regular tax liability for any tax year.

For tax years beginning after 2017 and before 2022, the prior year minimum tax credit is refundable in an amount equal to 50% (100% for tax years beginning in 2021) of the excess of the credit for the tax year over the amount of the credit allowable for the year against regular tax liability. 

Deductions and Losses

Topic (Internal Revenue Code) 2017 law

What changed under TCJA

Repeal of deduction for income attributable to domestic production activities (§ 199 Repealed)

Taxpayers could claim a deduction equal to 9 percent of the lesser of their income from qualified production activities, such as manufacturing, producing, growing or extracting, or their taxable income for the tax year.

Although this provision is repealed, a new section 199A(g) provides a similar deduction beginning in taxable year 2018 for a certain group of taxpayers (agricultural and horticultural cooperatives and their patrons).

New limits on deduction for business interest expenses (§ 163(j)) The deduction for net interest expense is limited to 50% of adjusted taxable income for firms with a debt-equity ratio above 1.5. Interest above the limit can be carried forward indefinitely. The change limits deductions for business interest expense of all taxpayers, except for certain exempt small businesses with average annual gross receipts for the three preceding tax years of $25 million or less (adjusted annually for inflation) and certain other excepted trades or businesses. If a taxpayer’s deduction for business interest expense is limited, it is limited to the sum of business interest income plus 30% of the business’s adjusted taxable income plus the amount of floor-plan financing interest expense for the year. Disallowed interest above the limit is carried forward to the following year. Special rules apply for partnerships and S corporations.
Net Operating Loss (§ 172)

Generally, if you have an NOL for a tax year ending in 2017, you must carry back the entire amount of the NOL to the 2 tax years before the NOL year (the carryback period), and then carry forward any remaining NOL. (2017 Pub 536 page 3, 2nd column)

If your NOL is more than the taxable income of the year you carry it to (figured before deducting the NOL), you generally will have an NOL carryover to the next year. (2017 Pub 536 page 4, 3rd column)

Most taxpayers no longer have the option to carryback a net operating loss (NOL). For most taxpayers, NOLs arising in tax years ending after December 31, 2017, can only be carried forward. The 2-year carryback rule in effect before 2018, generally, does not apply to NOLs arising in tax years ending after December 31, 2017. Exceptions apply to certain farming losses and NOLs of insurance companies other than life insurance companies. For losses arising in taxable years beginning after Dec. 31, 2017, the new law limits the net operating loss deduction to 80% of taxable income (determined without regard to the NOL deduction).
Denial of deduction for certain fines, penalties, and other amounts (§ 162 Amended) No deduction allowed for fines or penalties paid to a government for any law violation.

TCJA amended this section to disallow a deduction for amounts paid to a government or governmental entity for a violation or potential violation of a law, unless the amount paid is identified in a court order or agreement as restitution (including remediation) or to come into compliance with a law.

For more information, see Notice 2018-23 (PDF).

Repeal of deduction for local lobbying expenses (§ 162 Amended) Generally, no deduction for lobbying expenses, but an exception applied to lobbying local governments, including Indian tribal governments.

TCJA repeals the local lobbying exception. Taxpayers can’t deduct local lobbying expenses.

Basis limitations for charitable contributions and foreign taxes paid or accrued (§ 704(d)) Generally, a partner with a zero basis could deduct the value of a charitable property contribution (subject to IRC 170(b) limitations). The loss limitation rule of § 704(d) was amended to take into account deductions for charitable contributions and foreign taxes. A special rule is provided for charitable contributions where the fair market value of the property contributed exceeds its tax basis.
Reduction in dividend received deductions to reflect lower corporate income tax rates (§ 243 Amended) Corporations could generally deduct 70 percent of dividends received from other taxable domestic corporations and 80 percent of dividends received from a corporation for which it owns 20 percent of the stock. The 70 percent deduction is reduced to 50 percent and the 80 percent deduction to 65 percent.

Business Structure and Accounting Changes

Topic (Internal Revenue Code) 2017 law

What changed under TCJA

Taxable year of inclusion (§ 451)

Accrual method taxpayers generally need to include income in the year in which:

  • All events that fix their right to receive income have occurred, and
  • They can figure the amount with reasonable accuracy (the all-events test).

Exceptions for deferring recognition apply.

In general, for accrual method taxpayers that have AFS, income recognition for advance payments received from the sale of certain specified items may be deferred to the taxable year following the taxable year of receipt if such income also is deferred for AFS purposes. 

For more information, see:

Technical termination (§ 708(b)(1)(B)) A partnership terminates if there was a sale or exchange of 50% or more of the interests in the partner’s capital and profits within a 12-month period. This was called a technical termination. 

Technical terminations are eliminated.

For more information, see Questions and Answers about Technical Terminations, Internal Revenue Code (IRC) Sec. 708.

Certain contributions by governmental entities not treated as contributions to capital (§ 118 Amended) A partnership terminates if there was a sale or exchange of 50% or more of the interests in the partner’s capital and profits within a 12-month period. This was called a technical termination.  Contributions to capital don’t include any contribution in aid of construction or any other contribution as a customer or potential customer, and any contribution by a governmental entity or civic group.

Employee Stock Compensation

Topic (Internal Revenue Code) 2017 law

What changed under TCJA

Stock compensation (§ 83(i) New) An employee generally recognizes income upon the transfer of substantially vested stock pursuant to the exercise of a stock option or the settlement of a restricted stock unit (RSU).

Certain employees of private corporations can now defer (for up to five years) income inclusion with respect to the exercise of a stock option or the settlement of a RSU. For initial guidance, see Notice 2018-97 (PDF).

Tax on stock compensation from expatriated corporations (§ 4985 Amended) Tax was 15 percent times the value of the stock. Tax is 20 percent times the value of the stock.

Income (including gains and losses)

Topic (Internal Revenue Code) 2017 law

What changed under TCJA

Certain self-created property not treated as a capital asset (§ 1221 Amended)

Treated a self-created patent, invention, model or design, or secret formula or process as a capital asset.

Treat the gain or loss from the disposition of a self-created patent, invention, model or design, or secret formula or process as ordinary income.
Substantial built in loss (SBIL) rules (§ 743(d)) The partnership used an aggregate approach to determine whether it had a SBIL. The partnership compared the FMV of its assets to the total adjusted tax basis of its assets. If the adjusted tax basis of assets exceeded the FMV of assets by more than $250,000, a SBIL existed. 

A SBIL also exists if a transferee would be allocated a net loss of more than $250,000 based upon a hypothetical sale of partnership assets.

For more information, see Questions and Answers about the Substantial Built-in Loss Changes under Internal Revenue Code (IRC) Section 743.

 

Recharacterization of gains in partnership interest from the performance of investment services (carried interest) (§ 1061 New)

Gain was long-term capital gain if held for more than one year. 

Gain to the service partners that hold a direct or indirect interest in the partnership for certain transactions is long-term capital gain if held for more than three years.

For more information, see Notice 2018-18 (PDF) and IR-2018-37, IRS Plans to Issue Regulations Clarifying Limitations on Carried Interest.