Proposed Regulations on Global Intangible Low-Taxed Income (GILTI) Inclusions

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What is GILTI?

U.S. shareholders of Controlled Foreign Corporations (CFC’s) are required to include in income their Global Intangible Low-Taxed Income (GILTI), as a result of the addition of IRC §951A by the Tax Cuts and Jobs Act. The rules apply to tax years of foreign corporations beginning after December 31, 2017, and to tax years of the U.S. shareholders in which or with which such tax years of foreign corporations end.

How is it calculated?:

Intangible income is determined according to a formulaic approach that assigns a 10-percent return to tangible assets (Qualified Business Asset Investment (QBAI)) and each dollar above the return is treated as an intangible asset.

What are the Proposed GILTI Regulations?:

Proposed regulations have been issued that provide the best guidance on the computation of the GILTI inclusion. The proposed regulations provide some new rules, including rules for consolidated groups, domestic partnerships, and partners, and required basis adjustments. The proposed regulations also contain a number of anti-abuse rules to be aware of and impose new reporting requirements.

How do I handle GILTI compliance?:

The rules for GILTI are complex and the guidance issued to provide additional rules for computing the correct GILTI inclusion. To ensure that the inclusion is correctly computed, it is recommended to work with international tax experts like the team at Origins Group. Contact us to find out more information and if GILTI or FDII implications affect you and your business.

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New Regulations for Section 199A Pass-Through Deduction

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The IRS has finally released regulations for the IRC §199A deduction for qualified business income, also known as “pass-through deduction.”

What is Section 199A and Who Does it Apply To?

Section 199A allows business owners to deduct up to 20% of their Qualified Business Income (QBI) from sole proprietorships, partnerships, trusts and S corporations. Individuals, estates and trusts can also deduct 20% of their qualified REIT dividends and Qualified Income from a Publicly Traded Partnership (PTP). The deduction was one of the most high-profile pieces of the Tax Cuts and Jobs Act.

What’s included?

The Good:

  • Individuals can aggregate businesses and treat them as a single business, which can effectively increase the wage limits and capital limits on the deduction
  • A qualified business can get up to 10% of its gross receipts from services
  • A qualified business can include a related rental activity

The Bad:

  • Broadens the “service-business” category to include some non-service businesses that are incidental or related to a service business. This can limit the effectiveness of “crack and pack” strategies that try to create a qualified business by spinning off part of a service business

Mixed:

  • A rebuttable presumption that a former employee who continues to perform the same services for the employer is still an employee. I.e. the worker’s compensation is not qualified business income.

Neutral:

  • Defines terms such as:
    • “Trade or Business”
    • “Unadjusted basis immediately after acquisition”
  • Explains how to calculate the deduction
  • Detailed rules for determining the wage limits and capital limits
  • More clearly illustrates the three components of the deduction:
    • Qualified Business Income
    • REIT dividends
    • PTP income
  • Better explanations of:
    • Service business categories
    • Reporting requirements for pass-through entities (S corps and partnerships)
    • How an estate or trust can qualify for the deduction.

These changes and clarifications open up great opportunities for tax planning. Please contact us to discuss these new regulations will apply to your specific situation. Our team can review your current tax structure to ensure that you are receiving the maximum benefit of these new rules.

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Automatic Accounting Method Change Opportunities Created by the TCJA

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Summary:

Businesses can enhance their cash flow by optimizing their tax accounting methods.

The Tax Cuts and Jobs Act expanded the number of small business taxpayers eligible to use the cash method of accounting by raising the cap on gross receipts to $25 million averaged over the prior three years.

A change in accounting method can benefit any company, of any size, in any industry.

Before changing an accounting method, the IRS requires that a taxpayer obtain the IRS’s consent.

Businesses can enhance their cash flow by optimizing their tax accounting methods. This is especially important in times of tight money and inadequate revenues. More and more companies are putting their taxes under a microscope and taking a hard look at whether they can improve their cash flow by changing the accounting methods that they have elected either on past returns or during the current year. A taxpayer who is not on the optimal accounting method is effectively prepaying taxes, an undesirable and unnecessary result.

Every business must adopt a method of accounting to determine when it recognizes items of income and deduction. An accounting method determines timing (when an item is taken into account for taxes), not whether the item is taken into account. The choice of an appropriate method (or methods) is crucial because it determines the timing of overall income or loss.

The two most common overall accounting methods are the cash method, in which income and deductions are taken into account when payments are received or made, and the accrual method, in which income and deductions are taken into account when amounts are earned and expenses are incurred. Other accounting methods can apply to specific “material” items, such as the valuation of inventory or the treatment of an installment sale. For many businesses, there are scores of these “other accounting methods” to consider.

The Tax Cuts and Jobs Act expanded the number of small business taxpayers including startups eligible to use the cash method of accounting by raising the cap on gross receipts to $25 million averaged over the prior three years. Taxpayers who meet this revenue test are also eligible to use several simplified methods of accounting that exempt them from the requirements to capitalize costs in many situations, including the cash method of accounting and certain exceptions that may apply to accounting for capitalized costs, inventory, and long-term contracts. The IRS recently announced that it would automatically consent to these changes for taxpayers who meet specific eligibility requirements.

A change in accounting method can benefit any company—of any size, in any industry. Before changing an accounting method, the IRS requires that a taxpayer obtain the IRS’s consent. For some changes, the taxpayer must apply to the IRS for advance consent and pay a user fee. The application procedures are spelled out in IRS Revenue Procedure 2015-13. For these changes, the taxpayer cannot switch methods until the IRS agrees.

For other methods, the IRS has streamlined the process and will approve changes automatically. For these changes, the taxpayer can switch to another method by merely filing the proper information with the IRS, without having to wait for the IRS to grant its consent. “Automatic consent” significantly lowers the compliance costs needs to switch to a more advantageous method, enabling many more businesses to realize net savings by identifying yet unclaimed opportunities.

If you would like to know whether a change of accounting method can benefit your business and increase your cash flow, please contact us. If you have already filed a request to make one of these changes using non-automatic consent procedures, you may be able to have the user fee for that request returned if you act quickly.

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