Changes made under the Tax Cuts and Jobs Act (TCJA) have changed the way foreign companies may be taxed on foreign earnings. There are basically three different scenarios you need to understand when it comes to earnings of certain foreign companies:
- The law before the TCJA
- Laws under the TCJA
- The transition treatment
Pre-TCJA Treatment
The U.S. generally taxes the worldwide income of all taxpayers. Unlike some other countries, taxpayers can’t escape tax liability by setting up their business overseas or changing their primary residence to another country.
However, U.S. corporations with foreign subsidiaries could delay taxation by keeping foreign earnings overseas. These earnings would only be taxed when they were repatriated, such as when a dividend was issued to shareholders.
Because of this tax treatment, companies had an incentive to keep earnings overseas as long as possible to avoid taxation.
TCJA Treatment
Now, the United States is no longer taxing the income from foreign subsidiaries. The foreign source dividends will be fully deductible by the corporation, effectively resulting in territorial tax treatment of these foreign earnings.
One problem with this treatment is that it could have provided a windfall for companies who kept large amounts of foreign earnings overseas prior to the passage of the TCJA. To combat this issue. a transition treatment was developed for these untaxed foreign earnings.
Transition Treatment
Accumulated foreign earnings held overseas before 2018 were deemed repatriated and subject to transition tax treatment. The untaxed foreign earnings would be taxed at lower rates of 8 percent for non-cash holdings and 15 percent for cash or cash-equivalent holdings.
This transition treatment could result in a significant tax liability. However, taxpayers have some options to help them pay the Section 965 transition tax:
- Taxpayers may generally make a 965(h) election to pay the transition tax liability in eight annual installments
- S-Corp taxpayers may elect to defer payments of the transition tax liability until certain triggering events occur, such as a change in S-Corp status
If you have untaxed foreign earnings that are subject to the Section 965 transition tax, contact a tax attorney to discuss your case and resolve your tax debt problems.
The Gartzman Law Firm can help you with untaxed foreign earnings and other IRS tax problems. Use our contact form to request a consultation with an Atlanta tax resolution attorney.