Potential Impact to Your 2017 US Tax Returns: IRS has Issued Guidance on the Transition Tax on Foreign Earnings.

During the ordinary course of a day as you peruse random media outlets, you’ll inevitably come across an article or video blog taking aim at mega-multinational corporations like Apple or Uber.  Lately, these discussions have been focused on the controversial tax structures that allow them to stash money abroad and minimize the tax they pay in the United States.  I think it’s safe to say that the world is rapidly changing and the U.S. tax system is no exception.  In December 2017 the Tax Cuts and Jobs Act (TCJA), aka “tax reform”, was passed.  The TCJA represents the most significant tax reform for the U.S. since 1986.  While a lot of the international reform is directed towards U.S. corporations doing business outside of the U.S., these changes have the potential to significantly impact all types of U.S. persons who own foreign corporations.  Some of these new TCJA changes must be factored into your 2017 US tax return.

As a part of TCJA, the U.S. is changing the way corporations are taxed.  In order to accomplish this shift, the U.S. is implementing an additional one-time transition tax on any post-1986 untaxed, undistributed earnings in specified foreign corporations.  (Specified foreign corporations are those in which the majority of shareholders are U.S. persons.)  There is, of course, a prescribed method to calculate this and IRS working to formalize the details.  The net result of the calculation will be taxed at your ordinary U.S. income tax rate.  This tax can either be paid all at one time or in interest-free installments over eight years, but the first payment must be paid by April 15, 2018 (the IRS will not allow an extension of payment).

These international tax law changes are complex and continue to be clarified by the IRS daily.  What has been made clear are two points:  1) If you are a foreign corporation with a 10% U.S. domestic corporation shareholder or 2) if you are a foreign corporation whose ownership is made up of over 50% U.S. persons (collectively, by stock value or voting power), there could be additional reporting necessary on each U.S. shareholder’s 2017 US income tax return.  If you think you are in this situation please contact us as soon as possible.