Editor's note - Alan Osmolowski, CPA, is a partner at BlumShapiro, the largest regional business advisory firm based in New England, with offices in Connecticut, Massachusetts and Rhode Island.
The Tax Cuts and Jobs Act (the Act) was signed into law by the President on December 22, 2017. The Act represents some of the most historic changes to US tax law in more than 30 years.
Most of the tax law changes take effect in 2018.
There are some changes, though, that have more immediate implications. The new one-time repatriation tax on accumulated foreign earnings is one of them. Corporations that have accumulated foreign-sourced income may find themselves owing the federal government (and in some cases, state governments) an additional tax payment as soon as April 15 of this year.
Under the new law, a US person (including corporations, S corporations, partnerships and individuals) owning at least 10 percent, directly or indirectly, of the stock in a foreign subsidiary is required to include in income their pro-rata share of the undistributed, non-previously-taxed post-1986 foreign earnings of the foreign subsidiary. This provision of the Act is effective for the last taxable year that begins before January 1, 2018.
The operative wording of the Act relative to this provision in effect imposes the mandatory repatriation tax for a calendar year-end taxpayer as part of their 2017 tax compliance (and with respect to corporations, the recording of a tax provision on their 2017 financial statements).
The amount of deemed repatriation income is reduced by any aggregate foreign earnings and profits deficits. A partial deduction is also allowed against the deemed repatriation income such that a US corporation’s effective tax rate is 15.5 percent on their aggregate foreign cash positions and 8 percent on the balance.
The inclusion of foreign accumulated earnings is deemed to be additional “Subpart F income.” Foreign tax credits may be able to be used to offset the tax. An election can be made such that the payment of the net tax liability can be spread over a period of eight years.
The one-time repatriation tax is owed on accumulated foreign “earnings and profits” (E&P) of a 10 percent or more owned foreign subsidiary going back to 1986. That is a long period of time for most companies to analyze. For a calendar year-end US corporation, the first installment of the tax is due April 15. Many taxpayers are struggling with the daunting task of calculating their pro-rata share of accumulated foreign earnings and profits since 1986.
There are also many unanswered questions relative to how state and local tax (SALT) jurisdictions will tax the income the federal government is requiring to be included in income relative to the mandatory repatriation tax.
The starting point for state taxable income is typically federal taxable income; so the one-time deemed repatriation of Subpart F income raises some interesting and possibly problematic SALT questions, especially for those states that don’t follow all of the provisions of the Internal Revenue Code. In addition, should a state impose its tax on the deemed repatriated income, it would appear doubtful that many states would allow for the eight-year payment deferral provided by the federal law and thus require an immediate payment of the state income tax.
Some business people are calling the repatriation tax a “tax holiday” and others are calling it “confiscatory.”
The repatriation tax is just one topic that will be discussed by a panel of experts on February 5 as Associated Industries of Massachusetts and BlumShaprio offer a “Lunch and Learn” webinar on the new tax law.
Topics will include:
- General discussion about tax reform in the US and the rest of the world
- Changes to US corporate taxation
- US International tax law changes
- What does the new law mean for my business?
- S vs C Corporation
- SALT impact
- Financial reporting requirements
There will also be a question and answer period following the presentation.
The webinar is free for AIM members and guests. Registration is below.