If you own a business taxed as a sole proprietorship, partnership, or S corporation, the new Section 199A Qualified Business Income Deduction offers one of the biggest potential tax benefits under the recently-enacted Tax Cuts and Jobs Act. It allows you to deduct up to twenty percent of your business income. If your income exceeds $157,500 ($315,000 for a married joint filer), the deduction is limited by filters tied to your company’s employee payroll and depreciable property ownership. There are other restrictions, but for most business owners our calculator offers a useful, simplified estimate of tax savings from the new deduction.
Shareholders in foreign businesses could find themselves hit with an immediate tax on offshore earnings under the recently passed “Tax Act,” officially known as “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.” Before the Tax Act, most foreign income earned by US shareholders through foreign corporations would only be subject to US taxes when the foreign income was paid to those US shareholders as dividends. The Subpart F rules were a way for the United States to capture some of this offshore income in the US tax base, but careful planning meant many US shareholders with foreign companies could keep money offshore and out of the US tax system for years. Some estimates put the amount of this offshore money at nearly $3 trillion, so any change to how the United States treats foreign taxes would look into how best to address these offshore earnings.
The Tax Act will look to capture some of this offshore income through a one-time immediate increase in the Subpart F income of certain US persons investing in foreign corporations. The amount of income immediately taxed by the United States will increase by the greater of (i) accumulated post-1986 deferred foreign income determined as of November 2, 2017, or (ii) the accumulated post-1986 deferred foreign income determined as of December 31, 2017. The tax rate on this deferred foreign income will be 8 percent for non-cash E&P and 15.5 percent for cash E&P. This one-time tax has been referred to as a “Toll Charge” for how it may allow offshore income to flow back into the United States.
The Toll Charge is not a routine E&P calculation for US shareholders of foreign corporations. Year-by-year ownership percentages, whether E&P is cash or non-cash, and the availability of certain foreign tax credits will all affect the final tax due. The Tax Act has allowed for the payment of the Toll Charge in installments if sufficient cash to make payments is unavailable.
For more information regarding the Tax Act, please see our recent related blog posts linked below:
On December 22, 2017, President Trump signed into law the most important rewrite of the US tax code in decades. The federal law, which is entitled “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution of the budget for the fiscal year 2018” (the Act), has no other name, as its short title, the Tax Cuts and Jobs Act, was stricken from the bill shortly before being signed.
We have prepared a summary of the Act as a non-exhaustive discussion of key changes to the tax code. We will continue to analyze the Act and will post updates and recommend planning strategies on this blog.
For more information regarding the Act, please see our previous related blog posts linked below: