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

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:

• Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns
• Questions and Answers about Tax Year 2018 Reporting and Payments Arising under Section 965

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.

§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 .

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.

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.

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.

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.   

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–104352–18PDF. 

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

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.

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.

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.

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).

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:

• REG-113604-18PDF
• Notice 2018-08PDF
• Notice 2018-29PDF

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. 

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).

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, 2^nd 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, 3^rd column)

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 2018-23PDF.

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

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:

• Notice 2018-35PDF
• Notice 2018-80PDF
• Rev. Proc. 2018-29PDF
• Rev. Proc. 2018-49PDF
• Rev. Proc. 2018-60PDF

Technical terminations are eliminated.

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

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 2018-97PDF.

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

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.

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 2018-18PDF and IR-2018-37, IRS Plans to Issue Regulations Clarifying Limitations on Carried Interest.