With the passing of the Tax Cuts and Jobs Act (TCJA), tax professionals and businesses are beginning to absorb the massive changes and find some key twists in the new tax reform laws. The following information on these twists will help you navigate the new terrain.
Don’t Be GILTI
TCJA has some signficant international implications that companies should not overlook. One of the biggest is a completely new category of income called Global Intangible Low-Tax Income (GILTI). This new category reflects the TCJA’s overall mission to bring resources back to the US so that companies are keeping more onshore than offshore. GILTI
National Law Review notes the following about GILTI:
Following tax reform, domestic corporate taxpayers are required to include in gross income the amount of a CFC’s income in excess of its Subpart F income and 10 percent of depreciable tangible property (referred to as GILTI). The corporate taxpayer generally can deduct 50 percent of the amount of GILTI (10.5 percent US tax rate), and claim a foreign tax credit for 80 percent of foreign taxes paid or accrued on the GILTI (subject to limitation). The Conference Report states: “At foreign tax rates greater than or equal to 13.125 percent, there is no residual US tax owed on GILTI, so that the combined foreign and US tax rate on GILTI equals the foreign tax rate.”
In anticipation of all this, companies should take a look at their current foreign structures. They need to take into account the GILTI provisions in every aspect of their tax planning.
Conformity Rules
If states refuse or neglect to conform to new federal reforms, it could make things difficult for companies that have operations across state lines. The headaches come when you look at how different reactions from each state to TCJA could produce different scenarios.
Tax Policy Center lays it out this way:
The issues are bigger in some states than others. Nearly all states with an income tax start their calculations with federal adjusted gross income, which the TCJA did not change much. However, it did significantly increase the standard deduction, eliminate personal exemptions, and change some itemized deductions. States that use these federal provisions (see table 3 from the report) are facing big conformity questions.
For example, if these states adopt the new standard deduction amount and end personal exemptions, they’d be cutting taxes for childless households but increasing taxes on larger families. States could resolve the problem in one of three ways: They could also adopt the TCJA’s new larger child tax credit (CTC) and new non-CTC dependent credit, decouple from the federal standard deductions and personal exemptions and create their own rules, or completely overhaul their state income taxes. But each option creates new winners and losers and could affect state tax revenue.
The question boils down to this: what will my company’s relevant states decide to do? It will be imperative that your business researches each state’s actions in regards to TCJA.
Section 163(j)
Another big change is by how much can net business interest expense be deducted. TCJA rules, from a general standpoint, will limit this deduction to 30 percent of a company’s adjusted taxable income.
National Law Review makes these observations about the changes:
Section 163(j), as recently amended, may limit a taxpayer’s interest expense deduction. Notice 2018-28, in very general terms, provides interim guidance on the application of Section 163(j). Importantly, the Notice confirms that (1) a taxpayer with disallowed interest expense from taxable years prior to January 1, 2018 may carry forward such interest expense to the taxpayer’s first taxable year after December 31, 2017; (2) Section 163(j) applies at the consolidated group level; (3) Section 163(j) will not impact whether or when business interest expense reduces a corporation’s earnings and profits; and (4) taxpayers cannot “double count” business interest income earned through a partnership or S Corporation.
There will be no grandfathering for any loans issued before the TCJA’s tax reform, thus any interest on previous loans will fall into this new 30 percent limitation, which is something that businesses need to be ready for.
In conclusion, it’s important to remember the wide-sweeping implications of TCJA. This article only highlights some key points about this massive topic and pin-points some especially important twists in tax reform. It does not constitute comprehensive or actionable advice. It is imperitive that you consult with your own legal and tax professionals before forming your strategy for the TCJA.