On-Demand: Year-End Tax Strategies | Planning for Businesses

You had to spend 250 hours in running the business, not just your time, but other people counted in this. So documentation is important. If it falls into, it becomes a trade or business, and it's eligible unless it's a Specified Service Trade or Business, an SSTB, which means businesses in the fields of health, law, accounting, investing. I'm skipping through some when it's the reputation of the employee, and there is an exclusion for de minimus. Engineering and architectural services are not considered an SSTB, so they clearly had better lobbies, and we did. Then you need to look at the taxpayer's taxable income and does it exceed a threshold. So if you're under the threshold, you don't have to worry about the SSTB rules any, and you don't have to worry about the W-2 and the UBIA limitation. If you exceed that, then you need to walk through what you need to look at it.

And it's part of the calculation. So if your taxable income exceeds that amount, you need to figure out what's your 20% of QBI, or you need to do the greater of 50% of W-2 wages or 25% of W-2 wages plus the 2.5% of the UBIA. So let's say you're a single-member LOC, you don't pay any salaries to employees. How are you going to qualify for this? Well, maybe you want to think about becoming an S Corporation and giving yourself a salary and your salaries within qualify for part of this calculation. Let's just go on here. There's aggregation. Aggregation is when you look at your businesses and let's say you have a business that provides similar products, property, and services that are customarily offered by the same business. You could put your businesses together and be able to take the QBI deduction.

You'll have to look at family attribution and the tax year. Now once the decision is made kind of have to live with it as long as they are grouped consistently unless there's a change in the business and the business does not qualify. It can be done at the business or at the individual level. A negative QBI from one business must offset the positive from other businesses, and if you have an overall negative you can carry forward and offset in the future years. You have to have appropriate K-1 disclosures because if you don't put the disclosures on the K-1 then it doesn't qualify. And we've had situations where we have to go back and amend tax returns to put that information there in order for it to qualify.

It was really brief on the QBI discussion, but we have another session on November 22nd from noon to 1:00 PM, and it's going to be 199A lessons learned, maximizing deductions for Pass-throughs. I'm not sure if that invitation went out yet, but if you need to learn more about 199A you might want to sign up for that. It will be a whole hour. And then we get to our last polling question, which I said you have to pay attention for the other slide, as it could be more than one right answer.
Moderator:Net operating losses can be carried: (a) back two years and forward 20 years, (b) forward 20 years, (c) back two years and forward indefinitely, or (d) forward indefinitely. Please remember that in order to receive your CPE, you must remain logged on for at least 75 minutes and respond to at least five out of the six polling questions. It's going to give you 20 more seconds to respond, one more second. And we are going to now close the poll and share the results.
Carolyn Dolci: Okay. So, back two years and forward 20 years. This was the insurance companies, forward 20 years. Pretty much, that's all, nobody. Back two years and forward indefinitely, the farming businesses and forward indefinitely pretty much applies to all the other types of business. So that's kind of the general answer is the last one, but they all have some truths to them.
William Gentilesco: Okay. I'm Will Gentilesco; I'm a director with EisnerAmper state and local tax group. They offer covering various items starting with economic nexus developments for sales tax and income tax. I'll touch briefly on New Jersey market sourcing and the other States-market sourcing. Deal with miscellaneous Connecticut law changes and a Florida additional reporting requirement. And I'll finish up with a handful of states in the Northeast. Their treatment of state guilty and city income or C corporation.

Wayfair, of course, everybody knows by now was shotgun by the US Supreme court in June 2018, and the court held for in favor of South Dakota. South Dakota argued that even though Wayfair didn't have any employees or payroll in the state, they had "economic nexus." And they met South Dakota's statutory requirements, which were any company that has over $100,000 of sales or 200 transactions in the State, had an excess for sales tax, and had to register and collect tax.

And not surprisingly virtually all the stage that have a shelf tax except for Florida and Missouri have enacted their own Wayfair type or South Dakota type statutes, not all identical. They're very similar. A lot of them use the 100,000 or 200 transactions threshold. Some have gotten rid of the threshold and just go with the 100,000 of receipts. And some of them are looking at the 200 transactions will take into account taxable and exempt transactions. Some will just take into account taxable transactions. And by the way, these changes or these new statutes for economic nexus that the states have recently added, these are in addition to any existing nexus rules that the states had accumulated over the years, such as Amazon, Click-Through Nexus or traditional nexus, right?

If you've got an employee traveling into the state, you're going to have a sales tax collection responsibility, irrespective of whether you're below the $100,000 threshold or the 200 transactions. And lastly, public law 86-272, which is a federal provision protects companies from being subject to income tax and certain fact patterns. That doesn't apply for sales tax. But the interesting thing for sort of a story has been told as far as sales tax and economic nexus with the Supreme court decision. But the states have looked at this economic nexus and are now trying to roll it out for income tax purposes. Various states have had economic nexus rules for income tax for many years, including Washington, Ohio, for their gross receipts taxes, and the work in California have an economic nexus provision for income tax.

But now, with the Wayfair decision, more and more states are getting on board. Recently Massachusetts adopted a provision like say if a corporation has over $500,000 of receipts. They have income tax nexus. Pennsylvania has a similar provision starting in 2020. Philadelphia has had a provision if you had over a hundred thousand, and she too was subject to the Philadelphia BIRT, Texas recently proposed a $500,000 sales threshold for the franchise tax. Now importantly, because of public law, 86-272, that's a federal law enacted in 1959. These economic nexus laws cannot be applied if the company is a manufacturer and, or a seller of tangible personal property. But 86-272, according to the states.

And I think presumably really according to the way the law is written 86-273 does not protect a company that's a service provider or that licenses. And tangibles or that sells things through digital, like downloads of music and that sort of thing. Those companies are what these economic nexus rules are designed to get at. And so if you're still... Good news is if you're a manufacturer and seller tangible personal property, you can continue to rely on public law 86-272 to assuming we stay within those requirements in the various States. Our market sourcing. Last year's tax update, I covered New Jersey tax reform, which included market sourcing.

But there's been some confusion. People come into my office with questions, and when I get to the next slide, you'll see why there's been some confusion. But starting with New Jersey, beginning in 2019, market sourcing applies to corporate tax fares, meaning S corp and C corp. And by market sourcing, what I mean is, it applies to revenue from services. So if you provide a service in New Jersey, if you're a company or corporation and let's say some type of a consulting service and your customer is in California or Massachusetts or anywhere else, and they actually benefit or utilized that consulting service in let's say, in California and Massachusetts in my example.

The New Jersey doesn't get that revenue in their receipts factor under the old rules; receipts were sourced to where the service was done and the new rules it's where your customer “benefited” from the service. Which can be tricky to determine if the benefit is in outside in Jersey. Then there's the statute calls for an allocation of the benefit for services rendered to individuals to benefit is deemed to be at the billing address for businesses. The service is, if you don't know where they're benefiting, then you can source it to where the client ordered the service. And if you don't know where that is, then you source it to where the customer's billing addresses.

So there's a lot of complexity here in New Jersey in the process of preparing regulations, which hopefully will be out soon to kind of explain or give some parameters to determine “where your client received the benefit.” Other states have issued regs even with the regulations; it's not always clear. But this is generally a good thing for New Jersey-based businesses. And here on this chart, I prepared, people I think assume that when a state makes a switch from the old cost of performance to the new market sourcing that applies to every type of taxpayer. And while that's the case in a lot of states, that's not the case in the Northeast. For some reason, and I'll go through these states.

New Jersey, New York, New York City and Pennsylvania have different rules depending upon whether it's a partnership or S corp or some other or an S corp. Connecticut follows the same rule for all types of companies. Market sourcing for all three at this point, New Jersey uses market sources just for S corp and C corp, not for partnerships. Partnerships still use a three-factor formula and source revenue from services to where the service was provided. If you're a corporate partner, they hasn't addressed this yet, but I would argue that the K-1 you get from the partnership, it really isn't relevant and that the partnership ought to be providing you with market source and data for you to put for the corporation to use on their New Jersey return. New York state uses market sourcing for S corps, but not for partnerships. But New York state does tell partnerships that if you have a corporate partner, there's a Shepard K1 where you have to provide that corporate partner with the data to compute those sales factor. New York City.

It's an oddball. C corps use market sourcing, S corps they source revenue to where the service was actually performed or cost of performance under the old rules for S corps. And same thing with the partnerships they're still using. They're still sourcing revenue from services for where the service was provided. Pennsylvania is similar to New York. They use market sourcing for C corps, S corp. I have a mistake on this slide. You shouldn't have a corporate shareholder of an S corp. Individual shareholders for S corps, Pennsylvania still uses cost of performance, and for partnerships, Pennsylvania's similar to any other state and you have, if you have a corporate partner, you use market sourcing, you have an individual partner, you use cost the performance. So that's why there's confusion because depending upon this jurisdiction, you have different rule and depending upon the type of company that it is, you have a different rule. Oh, that brings me to my first question.
Moderator: All States that adopt market forcing use it only for pass-through entities, (a) true, (b) false. Please remember that in order to receive your CPE certificate, you must remain logged on for at least 75 minutes and respond to at least five out of the six polling questions. All right, 20 seconds, everyone. All right, we're going to give everyone five more seconds. I'm going to close the poll and share the results.
William Gentilesco: Okay. 87% said that's false, and that's correct. As I just went through, depending upon the state, they might use market sourcing for one type of business and still use cost of performance for a pass-through entity or an escort. So that's correct in most cases. Okay. Moving on to Connecticut. Connecticut in for 2018, they adopted what's called a business entity, tax for pass-through entities, S corps, and partnerships where the personal tax of the partners or the shareholders was paid by the entity. And that was to get around the TCJ $10,000 income tax deduction limitation. Connecticut said, "Okay, well we'll have the tax paid by the entity, the entity will get a deduction, and we won't touch the partners or the shareholders because we've already gotten their tax from the entity." And it worked reasonably well. There were a couple of snags in 2018 for one reason or another; guaranteed payments were not allowed. We're not included in the pasture entity tax payments.

So if you were a partner that got a guaranteed payment, you had a file, a connect get returned to pay that tax on the guaranteed payment, or they had a sort of a last-minute way of sort of doing it at the entity level, but you had to get a signed agreement from the department of revenue. It was a bit cumbersome, but it worked. Well, starting in 2019, Connecticut reduced the credit that a partner or a shareholder gets for that entity tax from 93.1% to 87%. And what that does is it creates a gap. Now if you're a non-resident or resident partner or shareholder, the business entity tax isn't going to cover your liability in full.

And they did add guarantee payments to the calculation getting in 19, so that's good. But again, all non-resident and resident partners are going to have a shortfall where they're going to have to file a Connecticut tax return to make up that shortfall in the credit. And for that reason I'm positive return are back. They was no need for a composite return in Connecticut in 2018. Now there is so more tax to be paid and more compliance to be done beginning with the 2019 year. Also some other Connecticut changes in June 2019, the governor signed tax bill to phase out their corporate capital base tax over four years, and they reduced it certain credit that can be used to offset the corporate tax from 70% down to 50%. And that was, that applies to both the R and D and the urban reinvestment credits. And lastly, Connecticut extended there are 10% corporate surcharge for two more years, something they've been doing over and over now for several years.

Florida, in August of 2019, Florida, like corporate taxpayers, didn't have enough to do getting their returns out the door. They added an additional online filing requirement by C corps and S corps that have built-in gains. And this additional filing requirement applies for 2018 and 2019; it must be filed electronically. Most of the data, there's about 20 items that they ask for. It's readily available from the taxpayer, Florida return, and or their federal return. And in most cases that due date was October 27th 2019 so if you haven't filed, unfortunately you're probably late for them for the 18 tax return online submission there are penalties of $1,000 or 1% of the tax we haven't heard as yet whether they're going to be receptive to waivers. Hopefully that's the case, but be aware of it, and it's going to happen again next year. So you have to put something in your calendar to remind you to do this online filing if you're a C Corp or your escort filed the Florida corporate return. Next polling question.
Moderator: There are no penalties for a corporate taxpayers' failure to timely provide additional information to Florida. A, is that true or B is that false? Please remember that in order to receive your CPE certificate, you must remain logged on for at least 75 minutes and respond to at least five out of the six polling questions. And again, we'll give you another 20 seconds. We want to make sure everyone receives their credit. All right guys, 10 more seconds. All right, we are now going to be closing the poll and sharing the results.
William Gentilesco: Okay. 85% false. Right, there are penalties. So as I said before, it's a thousand dollars penalty or 1% of the tax, whichever is higher. All right, moving onto the last part. I'm going to cover state income tax treatment of guilty and FDII for C corps for a handful of Northeastern state. And as with the most state tax issues, when there's federal tax reform only for state treatment at least initially starts with how those items are presented on the federal tax return. Once the states know that they can decide are they going to conform, are they going to enact their own additions or deductions if the case may be.

So with this slide, I just give a high-level background of the federal presentation as a state and local tax expert on. I'm not really qualified to calculate guilty or FDII, but I can help if you have that income, how, whether it's whether or not it's taxable for state tax purposes. So GILTI is generally shown as a dividend on line four of the federal 1120. That's your gross guilty income, and your gross FDII is generally reported online one, it's a normal sale. The FDII isn't no income; it's a new deduction. And then as far as deductions for federal if applicable they're shown online 29B of the federal return as special deductions.

And because of that 29B presentation they are cut from a state tax perspective; they're known as below the line deductions. A lot of states start in line 28 of the federal, so we don't automatically have those deductions baked in. And then it's up to the states to decide, do we want to enact our own statute to allow a similar subtraction or maybe a better subtraction and many of them have. And we'll see that as we go through. And the three deductions that are on 29B include your 37 and a half percent FDII deduction, your 50% GILTI deduction, and your 50% section 78 gross-up on GILTI deductions. And so as I mentioned, because the income or the gross income shows up on either line one or line four, that income is going to be part of virtually every state corporate income tax return. And then the question is, well, what's deductible? And to answer that question, you first have to answer, well, is it does it start inline 28 does it start at line 30 and then go one step further and determine what state modifications might apply, whether it's a dividend received deduction or some other type of modification. Virtually all states allow a deduction for section 78 gross-up 100% deduction. Massachusetts, each section, they only allow a 95% deduction. Okay. Starting with Connecticut, Connecticut issued a special notice, I'm getting cut off on the side there, addressing the, their GILTI and FDII treatment.

The state starts with line 28, so that would be for your federal IRC 250 deductions. But the state has advised that they allow GILTI to be deducted as a foreign dividend. You'll get 100% DRD if you own 20% or more of the CFC stock. Otherwise, you get a 7% deduction. Now Connecticut does require a 5% add-back for “assumed expensive sort of,” I guess you could say it's a money grab. But they give you 100% deduction for the GILTI but make you add back 5% of the… that's “assumed expenses” that you incurred in generating that income. Gross-Ups fully deductible in Connecticut. I can also allow the FDII the federal city deduction as a subtraction modification. GILTI doesn't go and then Connecticut shells factor.

New Jersey has gone round and round. Hopefully they're finished at this point with their most recent notice issued in October 31st, 2019 clarifying somethings. But New Jersey starts with line 28, but they allow, the state allows its own subtraction modification well to the amount of the federal GILTI deduction and the federal FDII deduction. So even though you don't get it in terms of the starting point, you do get a separate modification. 60-78 is fully deductible in New Jersey regardless of ownership. The state has advised that for sales factor purposes, originally the law required a complicated gross domestic product apportionment that nobody really understood. That has since been rescinded, and in division has clarified that GILTI and FDII the net amount after your eight-level deductions go in your sales factor denominator. And virtually, in most cases, not in the numerator at all. Let's put it this way; they couldn't come up with an example of when that income should go in the numerator, which makes sense because it's foreign income. It wasn't really earned in New Jersey in most cases.

If you file worldwide in New Jersey, which is possible in 2019 that's when our combined rules take effect. If you choose to file worldwide, then any CFCs that you include in your New Jersey return, you'd have an elimination for that GILTI; otherwise it would be double counting. Massachusetts starts with line 28; they allow a 95% dividend received deduction for GILTI. The 95%, I guess embedded with that, it's a 5% assume disallowance there's no FDII deduction in Massachusetts and GILTI doesn't go into the Massachusetts sales factor. New York state and New York city a lot on the slide for 2018 New York state and New York city allow the federal GILTI deduction, and they allow the 60-78 deduct up to all the 60-78 income attributable to GILTI. And those deductions are specific state-level subtraction modifications.

The net amount of GILTI that's taxed by New York, the net amount after the state-level deduction goes in the sales factor. Beginning of 2019 New York state now allows a 95% GILTI deduction. The city did not follow that thus far, and it doesn't seem like they're in any rush to do that. We'll have to see beginning in 190... You can claim a 95% GILTI deduction. It's reported as other exempt income on CT can't read that. Particular slide, it's getting chopped off, but because it's claimed as other exempt income. New York state requires that...
William Gentilesco:
CT 3.1 thank you. And because it's goes on this other exempt income schedule, New York state requires that any interest expense that the taxpayers incurred, you must attribute or add back a portion, “directly or indirectly attributable” to that deduction. And there's special rules on how to calculate that. Okay. In New York City has an, they're still stuck with 50%. Oh, and by the way, in 2019, your sale factor denominator in New York because you're deducting 95%, only 5%. That's actually takes those in the sales factor denominator. New York City hasn't adopted those changes, so you still have the same 50% deduction.

Pennsylvania starts at line 28 treats the gross GILTI as a foreign dividend, eligible for a dividend received deduction, 100% DRD if you only need 2% or more. And I showed you the other percentages. Dividends are excluded from the Pennsylvania sales factor, and Pennsylvania does not allow FDII deduction. Philadelphia is very similar to Pennsylvania. A method to starts with federal line 28 well, Philadelphia allows the GILTI to be deducted as a dividend eligible for a dividend received deduction, and you'll get a 100% DRD if the taxpayer owns 20% or more of the entity stock. Philadelphia does not allow the FDII deduction. And also, Philadelphia doesn't allow the GILTI to go in the field trash; they allowed tax deduction, which is a general rule. For states if they allow you to deduct an item, they don't want it. I'm putting into the sales factor. So that's the Northeast states.

I would say states in general, I don't have time to cover all 50 states, but generally most states are have allowed a GILTI dividend or some type of a deduction for guilty income, less have allowed the FDII deduction unless they start with line 30. Most of your other states don't allow a deduction for foreign-derived intangible income. So this is something that we was first shown on 2018 returns. We're going to have it going forward now. Each year the state struggled a bit; they were waiting for federal guidance to iron itself out. And now that's happened, most of the states like this are started through and hopefully there won't be changes other than New Jersey. It's been three or four in the last six months or so. But I think even New Jersey now has a handle on it. But we'll have to see.
Matthew Halpern: Okay. And for a final topic today, we'll talk about the latest international tax aspects, updates, maybe a couple of planning ideas. Again, I'm Matthew Halpern and I specialize in anything cross border these days with how the laws have been changing. So, first thing is just recapping a little bit about the tax cuts and jobs act of 2017. As Carolyn said earlier, put the corporate tax rate down to a flat 21% is no longer graduated rates. There's no longer AMC for corporations. But to transition, they had this one time transition tax on the trade foreign income, which they called 965 transition tax repatriation tax.

A lot of different terms and terminology came out from it. So in order to move to this quasi territorial tax system with a hundred percent dividend received deduction, they had to tax all those untaxed earnings in the foreign entities. So they incorporated this now 245 cafe DRD dividend received deduction, which really applies when you're in this nice needy and ownership of a 10% to a 49% ownership of a foreign corporation. So once you're in little median is where you're getting the benefit of the dividends received deductions. Why do I say between 10 49% well, once you start getting into over 50%, you fall into the GILTI rules. You fall into this Subpart F rule. Now a dividend received deduction is really not going to apply if you are already picking up the income under the Subpart F or GILTI rules. So that's why you really want to be in that median, which it's really up to 50%. That's once you're over 50%, you're not really going to get this benefit potentially.

Again, they introduced GILTI global, intangible, low tax income. They introduces the deduction for foreign derived intangible income in the FDII. There's a new tax on base erosion payments called the B. And there was a big issue with the repeal of this section 958B downward attribution rule, which really took effect in 2017 and created a lot more controlled foreign corporations which made a lot of more US shareholders have to fall under the transition tax and that would potentially fall under Subpart F or the GILTI rules. So again, repatriation tax 965, forced US shareholders of specified foreign corporations or SFCs to include the accumulated and untaxed earnings and profits as additional income, but they tax it at reduced US rate. Those rates were to come down to an 8% to a 15% tax rate based off the old 35% corporate tax rate.

Basically they allowed the tax liability to be paid over an eight year installment period or potentially indefinite if you were a shareholder in an S corporation. So long as that shareholder did not have a triggering event. And what this did is this created previously taxed earnings and profits or Ptab, what was previously called PTI now is called Ptab. Basically this comes down to ordering rules. Once you start taking the cash out of these CFCs, you have to first take cash out of the Ptab account before going into untaxed earnings and therefore potentially having that taxable dividends. So the repatriation tax was really computed as like an entity level approach as opposed to an aggregate approach. More or less, just about everybody had to pick up 965 domestic partnerships and S Corp's had to allocate it amongst all of their partners. There was a little rule when you did have a domestic partnership that controlled the CFC. In a situation like that, only the 10% US shareholders actually had an inclusion.

But if there was no one person controlling the CFC, then everybody had to pick up the transition tax. Do you see that a lot with a lot of ugly creative partnerships in these PTPs? No one person is really controlling the CFC. So everybody had to pick up a subpart F had to pickup the transition tax and 17 and even potentially in 2018, a lot of people think that, Oh, it's this one time event, but it really crossed over two years due to fiscal year foreign entities. When you had a fiscal year for an entity, that's when the transition tax was picked up in 2018 as opposed to being picked up in 2017. So then looking at the new GILTI taxation rules. So this is kind of like a catchall type of income recognition where GILTI would kind of enacted that if you don't fall under the subpart F rules. And again, we're talking about controlled foreign corporations here. So if you don't fall into subpart F you then fall under GILTI. So it's almost one way or the other.

You may have an inclusion. Now, if you don't have a controlled foreign corporation, you're not going to have either subpart F or GILTI. Just kind of want to make that differentiation, GILTI income recognize on an aggregate approach as opposed to the entity level approach like we just talked about under the transition tax. So in this particular case, they really put the calculation on the shareholders. So instead of the partnership doing the calculation and divvying up the income amongst its partners, which is something that they did say in the first half of this year, 2019 relating to 2018 they changed it in June of 2019 by issuing final regs and said, well now the partners have to see if they're considered a us shareholder of the CFC. So to be a US shareholder, that partner needs to own directly, indirectly or constructively 10% or more of these ESD.

And in a situation like that, the US shareholder is the one that has to do the calculations and pick up the GILTI income and do the 89 92 is the form themselves. So really put a lot more details in department. Right. And if you file the partnership return in March, you didn't have those details. You were doing the calculation yourself and you gave it amongst all your shareholders. But if you prepare to return after June, hopefully you just gave the shareholders the information and let them do the calculations themselves. The IRS understood that because of the final regs coming out during the middle of tax season not every partnership was going to amend their tax returns and change the way they presented information.

But they did require that you had to at least go back to your shareholders and say, look, we're not going to amend, but here's the information you need to do the calculations yourself. Here's the ownership percentages, here's your GILTI income, your qualified business asset investment and your taxes and so forth. So, even though they're saying that partners, the US shareholders have to determine their calculation, the partnership itself is still treated as a US shareholder solely for purposes of determining CFC status. So by having that US partnership owning the CFC 100%, your 100% will have CFC, but do you have 10% indirect partners? Is the next question, kind of open the gates a little bit because you might have some partners that are shareholders and have to do a calculation while other partners are not shareholders and don't have a GILTI inclusion.

So it really kind of maybe opened up planning purposes here and seeing how to manipulate it a little bit. One thing I do want to say is you still have to be worry about potential subpart F rules because for those shareholders that might not be a US shareholder of the CFC maybe they're a shareholder of a subpart F in the partnership, right? So just be worried. The subpart F rules that were slightly different, again, that kind of falls under the transition tax where the partnerships would pick up everything. And divvied out amongst their partners. They had the same rule with the controlled then that a domestic partnership that only 10 percenters picked up subpart F. Well they issued proposed regulations for subpart F that piggyback the same GILTI aggregate approach. So if once the, but they said allow you to follow those proposed regs for 2018 so the expectation is eventually those will be finalized as well. And then this way GILTI in subpart F are calculated in the same manner both on an aggregate approach.

They also came out and GILTI proposed tax regulations, a new high tax exclusion and this is an election to exclude certain high taxed income even if it would not fall under this subpart F rules. So currently only subpart F income has this high tax exclusion that would also be exempt from GILTI. So it's one little narrow caveat that if you have high tax, subpart F income, you also get out of the GILTI income. Now what they're going is, let's say you didn't meet high tax exception for subpart F where you didn't have support, I think to begin with potential. You can have high tax GILTI income and be excluded. The election itself is made by the controlling domestic shareholders on an original or amended return.

It will apply to all of the CFCs they are a shareholder of and it is binding on all other US shareholders, even the minority shareholders. And you have to have 10% to be a US shareholder could be subject to this high tax election. And you don't know if those other minority shareholders own interests in other CFCs that this might be detrimental to. Once you make the election, it is effective until it's revoked and right now, once you revoke it, you cannot reelect for five years without IRS commissioner approval. The effective date for the high tax exclusion is for tax years beginning after the proposed regs are published in the federal register basically finalized and they're not finalized yet. So you can't rely on this for 2019 calendar year entities. It's potential that you can rely on this for 2020 calendar your entities, but nothing's been finalized yet.

We are also not aware of whether or not they're going to make it retroactive. We hope that they would make it retroactive. Are they going to do that for 2019? Are they going to do that for 2018? It's unclear. We hope 2018 but then we might have a lot more amended returns to prepare. So there are some pros and cons with regards to the high tax exclusion. Some of the pros is, okay, your income is excluded from tested income, so you don't have to have a GILTI inclusion. If you have domestic NOLs while you're not using those NOLs against the GILTI income. A little caveat to the NOL rule is before you even get your 50% deduction of GILTI for C corporations, you have to use your NOL.

So to the extent you have NOL, you're not going to use the 50%. Now you're going to use it 100% against your GILTI. Maybe I should do a high tax exclusion and preserve my NOL. With foreign tax credit purposes you have less expense allocation because you don't have that for an income which helps utilize interest expense allocation more because you have an increase in exempt assets. So when you have a US controlling parent with let's say a large loan and a lot of interest expense to fund all of their worldwide operations, you might have been allocating some of that US interest expense against your foreign filthy income or your foreign F income or your foreign branch income. Therefore, when you calculate your foreign tax credits, your foreign tax credit limit is actually reduced and therefore you're not getting a full credit as maybe originally anticipated. You really have to look at the 861 allocation of expense rules, which also the IRS is going to update and issue some more finalized regs on so that you can have a better idea of how to do the expense allocation.

Some of the cons, there's no cross crediting of foreign tax credits. So if you have low tax jurisdictions, they're not going to benefit from those CFCs that are in a high tax jurisdiction that have excess credits. So it's kind of really comparing your subsidiaries, your CFCs and saying, well, if I have an IRS with only a 12% tax rate and an Indian with a 37% tax rate, to the extent I still owe tax on my IRS GILTI, if I don't do high tax, I get to use my credits from India because it's all part of the same GILTI basket. But if I... it was high tax one, I'm not going to have my Indian income and two, I'm not going to have my Indian foreign taxes. I'm also not going to have my Indian Cuba. So that's Cuba is a deduction. So if I had a big manufacturing operation that pick the high tax, I'm not going to get any of those deductions and I'm not going to get any of that cross crediting of the taxes, which could have helped eliminated my double taxation.

You also have less one 63 J utilization. So interest expense utilization when making the CFC group election. No. Again, if you don't have that income, you don't get to benefit from a higher allowed amount and you don't have any previously taxed earnings and profits, which makes the roll ions on the two 45 a dividend received deduction more relevant. So originally I talked about owning 10 to 49%. Well now if you own let's say 100% of the CFC and you're electing high tax exclusion, that income is never getting picked up. It's never getting taxed. And now you're making the dividend distribution and as long as you fall under the two 45 a rules and the holding periods of the 365 day out of the last two years, you can get a full exclusion of that foreign sourced income.

So as long as the CFC completely operating abroad and now you have this high tax exclusion, I see a potential planning here that you're not going to have any inclusion. That's territorial tax system now, right. Foreign income will be taxed abroad and it won't be taxed when it's brought back to the US so you really have to run modeling and looking at the situations, especially when you have more than one CFC and your structure to see if it's beneficial and make the high tax exclusion. If two 45 is really relevant. If you can benefit how your Cuba plays out, how are your foreign tax credits play out? This is something that we see going on a lot more. So with a lot of our clients we start modeling this out and seeing, well, it's really not beneficial to you because you have these low tax jurisdictions, CFCs, they're not going to get a big a benefit or your foreign tax credit allocation is in great because you have a huge loan in the US it might not be worth it. So different things that you have to be thought about now and you can't just go and make it. So they also came out with this foreign derived intangible income deduction.

Again, FDII or fitty, this is really an incentive solely for domestic C corporations and the benefit is that it provides a 37 and a half percent deduction of its foreign derived income. The way that it works, it's all on the same form. The 50 deduction and the GILTI deduction are kind of calculate together. The reason being is that it's subject to a taxable income limitation. It's also subject to a net operating loss limitation. If you are in a loss position or if you have NOL, you will not benefit from either the 50 deduction or the 50% GILTI deduction something to think about. The domestic corporations city, it's deemed intangible income multiplied by a percentage of its deduction, eligible income, which is foreign drive. So in general, let's say all your gross sales and income is DEI deduction eligible income. It's all sales, but you're really only going to get that 37 and a half percent on the foreign piece. And that foreign piece is going to be that net taxable income piece after expense allocation. And what does foreign use means? Well, it's any use consumption disposition.

That's not within United States. It has to be to a foreign person. There are special rules with related party transactions and it's not completely eliminating that. If you do business with Roy at a party that you're wiped out, there's just additional documentation requirements to ensure that a third party ultimately benefits or that you don't have a turnaround type of system where the related party eventually sells back in the US so just things to look about. But there is some benefit if you're in this nice tax position. If you are making income and making money, again, it's only available see corpse, you can't be RICs and you can't be REITs. The IRS also came out with this base erosion anti-abuse tax or the beat, and this is a new section 59 had a which really talks about taxpayers with substantial gross receipts. And as we say a little bit later, substantial gross receipts is $500 million. Okay. And when certain companies make these excess excessive base erosion payments, they might be subject to a minimum tax based on modified taxable income based on that payment. Right? And these payments are generally amounts paid or accrued to a foreign related party, which gives the US party a deduction. So paying management fees to a foreign party, paying licenses and royalties to a foreign related party.

They can be in connection with the purchase of depreciable property because of depreciation and amortization gives you a benefit. And who is the applicable taxpayer? Well, this is any USC corporation. It could be a foreign corporation if they have effectively connected income. And you have to have 500 million of gross receipts for the last three taxable years based that average and your base erosion percentage is at least 3%. But if you're a banking or a securities dealer, it's 2%. What's interesting is that the 500 million tests doesn't apply to the single taxpayer. It applies to that taxpayer's consolidated group. So if you had a large US multinational company, you have use a foreign entities, maybe it takes 10 US subsidiaries to reach the 500 million average and you would only have to look at each entity their three year average.

And add it up and see if you meet this 500 tests. I've seen this a lot come into play where we've had clients that by themselves didn't meet the test, but all of a sudden they've been acquired by a larger organization, a larger company. And now at an aggregate basis they meet the 500 million. So now we have this, our client that we're still doing work for. We didn't have to do these calculations, we didn't have to look at the beads. Now we do. Now we have additional work for this, which is part of everything that we're trying to just fully understand is because they've always had these related party transactions. It's just that they've never been subject to this base erosion payment before. Now they're part of a larger structure and all of a sudden the same payments they've been doing they might have pay an extra minimum tax. So what are the payments that we're looking at? Or the payments to a foreign person? So any person that's not a US person as defined under 7701 was any citizen of a US possession who's also not a US resident. You have to be related. So essentially is any type of relationship involving at least a 25% ownership or cross ownership.

You will get the 318 attribution rules with a reduced threshold because a lot of them talk about 50% in Iowa and 25% you're walking at 482 transfer pricing rules. That's looking at related parties. Again, I mentioned gross receipts. Is that an aggregate basis? And a lot of this is the same and similar information that's used when you do the 54 72. So if anyone's familiar with the 54 72, when you have a us company on 25% or more by foreign parent and you have a way to party transaction. So any transactions between the U S and the foreign party or another related foreign person or even US, you have this 54 72 fond requirement. So the big thing, the big other thing I really wanted to mention was the repeal of the downward attribution rule. And this was nine 58 before they modified the rule, which previously said you did not have to work up to your parents and then down again to see if you have a CFC controlled foreign corporation. But with the repeal of this rule, in a situation like the structure, I'm showing a foreign parent that owns both a US sub any foreign sub. It's now creating that foreign sub to be a CFC.
Now in this particular instance, you don't have a us shareholder, right? A US shareholder has to own 10% or more of that foreign subsidiary. So there's no GILTI inclusion, there's no subpart F inclusion, no transition tax. But did you have a filing requirement? So the IRS kind of amended the instructions and they say, well, in a situation like this, there's no filing requirement. You don't really have to indicate that you have this CFC again as a form 54 71 to report CFCs major forum that went through a major overhaul. And obviously the IRS is trying to track down more controlled foreign corporations. You're trying to tax more offshore income, wants your profits and really bring that back home to the US so just to kind of show maybe a situation here, now you have a US shareholder, you have a 10% and the percent US foreign shareholder of a foreign holding company. And that foreign holding company owns both the US and a foreign sub. So the parents, there's not a CFC but the foreign subsidiary is a CFC due to a downward attribution. Now you have a US shareholder that owns 10% of the foreign subsidiary.

Now you have a filing requirement. Now you have to do GILTI calculations and subpart F calculation. So what the IRS did come out with is they came up with proposed regulations on nine 58 before this just happened in October, which kind of simplify and streamline the ways and the methods for doing these calculations. Because he said that 10% shareholder might not have enough information, might not be provided within the information to number one know if they're a shareholder of a CFC or to even know what the operations of that foreign subsidiary are to do their calculation. So they came out with a list of like safe harbors where you can use audited or unaudited a local or US gap financials, tax reporting, book reporting. And it came up with like six or eight different methods to really identify the type of income and to do your calculations. So it's kind of a little more broad, a little more open. I think this was good that the IRS came out with these rules and these safe Harbor is, it really helps to... No, because the shareholders really can't calculate it and face it if they don't file and calculate, they may be subject to penalties. So this is help relieving some of that burden. So Again, this is why looking at your structure charts again is really more prevalent than ever.

So now just thinking about maybe some planning ideas. So I've gone through some of the changes, some of the new items that are out there. What do people really trying to do about this? Well, a lot of companies are making entity classification election. We call them check the box election because you literally tick a box on a form and that changes the foreign entities classification for you as tax purposes. And now you have this hybrid entity. You want to ensure that the entity you're looking at is eligible to make the election. You can treat it as a foreign disregarded entity, maybe a foreign partnership. The two types now you have pass through treatment. Right, allows the income to pass through. You might have better utilization of foreign tax credits. You're not subject to the subpart F or GILTI rules. And now you can have better utilization of the carry over as a foreign tax credit. Possibly restructuring. So you might want to look at restructuring the ownership and operations revisiting transfer pricing policy, intercompany interest management fees, licenses, royalties.

I want to push the debt down to the finance debt financing overseas as opposed to the US that comes where I talked about interest expense allocation. If you push it overseas, maybe they're a small business taxpayer and has better utilization. You might want to grow your overseas manufacturing benefit from your a GILTI Cuba deduction. Cuba is an average of your tangible assets. You get a 10% of the adjusted base deduction. Again, I wasn't going into too much detail there. Maybe reduce some of your borrowings. Again, that can help with your foreign tax credit allocation. Just before continuing on, we have to go to our first polling question.
Moderator: All right. If you guys can just bear with me. After listening to the new rules and made your changes, so you need to amend your 2018 tax return? Yes or no.
Matthew Halpern: Hopefully, a lot of people are answering this question, "No," but I know there's been a lot of changes in rules during the filing season.
Moderator: And please remember that in order to receive your CPE certificate, you must remain logged on for at least 75 minutes and respond to five out of the six questions. We'll give everyone 10 more seconds to answer. Okay. And are we will close and share the results.
Matthew Halpern: Yup. 11% that said yes. Okay. Well just letting you guys know we're here and available. If you ever have some questions and want to talk to us about it, glad to see that the majority do not have to amend though.
Moderator: And we will just go straight into the next polling question as well. Question number six. Okay. And I will launch, are you a US shareholder that needs to calculate and include GILTI? (a) Yes. (b) No. And (c) I still don't know. And again, please remember that in order to receive your CPE certificate, you must remain logged on for at least 75 minutes and respond to at least five out of the six polling questions. Again, I will give you 10 more seconds to respond, and we are now going to close the poll and share the results.
Matthew Halpern: So a couple of people don't know 8% most of them are not subject to GILTI. That's good. You don't have any CFCs or ownership. A couple of people do. Hopefully it was done properly. So just getting back to some of the planning ideas here. So something else that I wanted to bring up was whether or not people wanted to plan into subpart F income. Reason being is you get 100% foreign tax credit as opposed to GILTI, which only allows an 80% foreign tax credit. With subpart F you get carrybacks and carryovers. Plus, this is in the general basket GILTI. There's no carry bags. There's no carryover is have access points, tax credits, and it's in a new GILTI foreign tax credit basket.

There's more subpart ethics exclusions than there are GILTI exclusions. However, you want to be wary that even if you're planning in the subpart F that you're not going to fall under GILTI. Reason being is that subpart F has an ENP limitation. We're GILTI. There is no ENP limitation. You're more or less making tax adjustments books; the tax adjustments where you could maybe have negative ENP would have a positive GILTI inclusion that you were unaware of. Other things they're just trying to focus on export in goods and services. IRS are still relevant. Again, bitty planning the FDA, I deduction. So you might want to change how your IP is if it's in the US may be send it abroad vice versa.

And you when you're dealing with individuals and trusts that a US shareholders may be making a 962 election just talking quickly about a 962 election. When you have a US individual shareholder, a US individual trust that meets the shareholder status at 10% ownership, you're allowed to be taxed by making an election on the GILTI and subpart F income as if you're a C corporation. Some of the benefits are you get the 21% tax rate; you get the foreign tax credits, you get the 50% deduction under GILTI. This election is made on an annual basis. It's not an every year binding. So you can do it one year, not the next. It does apply to all CFCs that the shareholders making the election. So you can't just pick and choose. It applies across the board.

The other little caveat is you just have to be worried because, with the 962 election, the amount of previously taxed income you have comes down to the amount of tax that you pay in the US after taking all of these benefits into account. And if you don't pay any residual US tax because you benefit from the deductions and the foreign tax credits, well then once you start paying the cash out, you actually have a taxable dividend where a normal C corporation or someone that doesn't make the election has previously taxed income, which one upon distribution is not subject to taxation to get. So something to think about. Again, calculations, modeling it out to see if it's a potential benefit. That applies definitely more for partners and partnerships and escorts just to make that applicable. And that was the end.
Moderator: Okay. We hope you enjoyed today's webinar. Please lookout for a follow-up email with a link to the survey and presentation. If you have additional questions about these topics that you would like addressed, please feel free to email our speakers directly. For those who meet the criteria, you will receive a CPE certificate from EisnerAmperU@eisneramper.com within 14 business days of confirmed course attendance. Thank you again for joining our webinar today.

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