New York, NY (Februrary 2, 2018) – Integra International today released an Advisory Bulletin prepared by Gerard Esposito, CPA, our member at Leaf|Saltzman in New York. It is for Integra International members and their clients.
Summary of the United States TAX CUTS AND JOBS ACT (the “TAX ACT”), enacted into law on December 22, 2017, regarding the effects of foreign companies doing business in the US and US companies doing business abroad:
The Tax Act brought about permanent changes to the corporate tax code, most significantly by lowering the corporate tax rate from approximately 35% to 21% in 2018 and by eliminating the world wide US taxation system to a territorial based system with base erosion rules, effecting multi-national enterprises with global subsidiaries.
- US Subsidiaries owned by Foreign Companies
US Subsidiaries will find the following important changes in the TAX ACT:
- Corporate AMT (alternative minimum tax)
- Increased levels of expensing
- Business Interest limitations
- Net operating loss (NOL) deductions
- Entertainment expenses
The Corporate AMT tax has been eliminated for 2018. However, the prior year AMT credits may be available in future years.
The law extends additional first year depreciation of assets and increases the immediate expensing up to $1 million of Sec 179 property. This includes certain property and equipment, such as furniture, fixtures, machinery, computers and qualified real property items
Business interest is limited to 30% of adjusted taxable income as defined. Business interest means interest paid or accrued on debt related to a trade or business. Disallowed interest may be carryforward indefinitely, subject to certain restrictions.
Net Operating Loss (NOL) deduction after 2017 are limited to 80% of the taxable income.
Entertainment (events, ie. concerts, theatre, ballgames, and the like, and charitable events) expenses after 2017 are not deductible. Certain meals and related expenses provided for convenience of employer to employees may be only 50% deductible.
There are other issues in the law relating to Inventories, completed contract method of accounting, UNICAP rules, Fines and Penalties and Family Leave which will affect corporate taxable income are not addressed, since some of them have a $25,000,000 gross receipts threshold or will require additional information and guidance which is presently unavailable.
- US Shareholders of Foreign Subsidiaries
In enacting a territorial tax for US owned foreign corporations, there is a transition tax (Sec 965) imposed on accumulated post-1986 foreign earnings as of a measurement date for 2017. This is considered deferred foreign income. In the instance of multiple foreign subsidiary ownership, accumulated deficits are allowed to be netted against earnings with certain rules.
The rates on this transition tax is of course pro-rated to the US shareholder’s percentage in the foreign owned corporations and then calculated as follows:
- 5% on all cash positions of the foreign corporation including:
- Cash Held
- Accounts receivable net of accounts payable,
- The fair market value (FMV) of the following assets:
- Actively traded personal property
- Commercial paper, certificates of deposit, and securities of any government
- Foreign currency
- Obligations less than a year
- Any other asset equivalent to assets in i. through iv. above.
- 8% rate that exceeds the cash position above from the overall calculation of accumulated foreign earnings
Payment of the transition tax is allowed to be made over eight (8) years in equal installments.
US shareholders will receive a 100% deduction for the “foreign source portion” of dividends for investment holding periods greater than 366 days; “hybrid” dividends will be subject to Subpart F income.
Other issues include deductions for Foreign-Derived Intangible income deduction 37.5% on certain entities, Excise taxes on base erosion and anti-abuse of 5% and dispositions of partnership tax after November 27, 2017.
In all of this, the IRS has not released final regulations and complete guidance to the TAX ACT so that some of this information may change in further directives during the course of the year and in future interpretations and court cases.