GILTI (2019) – Summarizing How GILTI Impacts Your Tax Return Filing
- 1 GILTI
- 2 How do I Report GILTI?
- 3 Corporate Shareholders
- 4 U.S. Shareholder – Net Zero Multiple Companies
- 5 U.S. Shareholder – One Company (High Assets)
- 6 Do You Have a High-Profit, Low Asset CFC?
- 7 How can a Person Avoid GILTI Income?
- 8 Should You Make a 926 Election?
- 9 Should You Disregard the Entity?
- 10 Should You Shift Profits?
- 11 Invest in a losing CFC company?
- 12 Are You Out of Compliance for CFC & Other Reporting?
- 13 4 Types of IRS Voluntary Disclosure Programs
GILTI (2019) – Summarizing How GILTI Impacts Your Tax Return Filing
GILTI: GILTI refers to Global Intangible Low-Taxed Income. It is designed to equalize taxes, reduce offshore evasion, and increase transparency.
But, GILTI is not limited to Intangible or Low-Taxed Income.
And, as with FATCA, while the goal is to reduce offshore tax evasion and increase transparency, many unsuspecting taxpayers, who have otherwise been in tax compliance will get the brunt of it.
GILTI is Global Intangible Low-Taxed Income – but it applies to more types of income than just the name would presume. Unless the foreign income is specifically excluded from GILTI – it is GILTI.
For Corporate Shareholders, it may not be so bad. For Non-Corporate Shareholders with an aggregate CFC tested net income loss, it is may also largely be a non-issue.
But for a single member U.S. Shareholder of a CFC (or a single member with a large ownership stake) who earns significant income, with relatively low value CFC assets…such as U.S. Person Doctors and Lawyers operating foreign professional corporations with significant deferred compensation – it can be a serious problem.
This summary will focus on non-corporate U.S. Shareholders.
*As you can imagine, GILTI is very complex — this is just an very general and introductory article to introduce to some of the GILTI basics.
How do I Report GILTI?
GILTI is reported on Form 8992.
If you are a U.S. Corporate Shareholder owner of a CFC, you may able to receive significant reductions in GILTI. This summary will not focus on Corporate Shareholders, other than to say that with deductions and credits, you may be able to significantly reduce any GILTI taxes due.
GILTI is based on the net value of all CFC related income. At a most basic level (exceptions, exclusions and limitations apply), if you own (5) companies and (4) of them each generate a profit, but the fifth company generates a loss equal to, or greater than the total income of the other companies – your net GILTI would be zero.
In other words, it is an aggregate of all CFCs, not per company.
The basic formula for GILTI Net CFC Tested Income reduced by net Deemed Tangible Income Return (DTIR).
On the net CFC tested income is determined, the net CFC tested income is reduced by the shareholder’s “net deemed tangible income return” to arrive at the shareholder’s GILTI.
For example, David has a single CFC overseas that generated net income of $300,000 that may be subject to GILTI. But, David’s business has high assets, to the tune of $5M.
10% of the assets value is $500,000. Since $500,000 is less than $300,000, the total GILTI income would be zero, since when you subtract.
It appears the loss is not carried forward to offset future years GILTI.
Do You Have a High-Profit, Low Asset CFC?
Using the example above, let’s say the CFC is a single member Professional Corporation (PC) which is not eligible to be disregarded under U.S. Tax Law (26 CFR 301.7701-2). The PC is a law firm, in which the member earns $600,000.
The expenses are small and the owner only takes a small amount of income, and defers the rest into government approved investments (similar to a 401K) to receive tax deferred status. This deferred income will not be taxed until it is distributed.
Problem: The total net income after deductions, is still substantial, and may result in a significant tax liability (due to the mismatch in tax payment due in the U.S. vs. abroad).
How can a Person Avoid GILTI Income?
If possible, the best option is to try to find an exclusion to GILTI.
Generally, the following types of income are excluded from GILTI:
– Section 952 Effectively connected income (ECI)
– Gross income of the CFC excluded from foreign base company income (determined under §954) and insurance income (determined under §953) by reason of the high tax exception under §954(b)(4)
– Subpart F income of the CFC
– Related Person Dividends (as defined in §954(d)(3)), and
– Foreign oil and gas extraction income (determined under §907(c)(1)), over
Should You Make a 926 Election?
With Form 926, you can elect to be taxed a corporation. With the new reduced corporate tax rate, it may be a benefit for some individual shareholders.
As to the 50% corporate deduction, the general consensus amongst practitioners is that it does not apply, even if a person makes an election to be taxed as a corporation.
*You must consider both short and long-term strategies before making such an election.
Should You Disregard the Entity?
One strategy may be to change the foreign structure of the business to avoid CFC status. A CFC is a legal term, and technically under CFC rules, if the corporation is not considered a corporation/CFC – it may avoid any GILTI issue (but it may have other unintended tax consequences).
Should You Shift Profits?
Depending on the type of CFC you have, you may consider shifting the income/ownership percentage of the CFC to avoid CFC status – but you have to be cognizant of Attribution.
For example, if you shift ownership to your spouse, his or her ownership may be attributed to your ownership percentage ownership.
Invest in a losing CFC company?
If you have a hunkering for purchasing a company that is generating losses, you may be able to plan the purchase of a losing corporation to offset GILTI.
But, there are already regulations pending to deter this type of behavior, and if assets are purchased solely for trying to reduce GILTI, the IRS can disregard those assets in determining GILTI.
Are You Out of Compliance for CFC & Other Reporting?
If you are out of compliance for failing to properly report your foreign/offshore accounts, you may consider entering one of the approved IRS offshore voluntary disclosure programs/tax amnesty program to safely get yourself into compliance before it is too late.
4 Types of IRS Voluntary Disclosure Programs
There are typically four types of IRS Voluntary Disclosure programs, and they include:
- Traditional (IRM) IRS Voluntary Disclosure Program
- Streamlined Domestic Offshore Procedures (SDOP)
- Streamlined Foreign Offshore Procedures (SFOP)
- Reasonable Cause (RC)
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)
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