Breaking Expat Tax Reform News: IRS Proposes New Regulations for Global Intangible Low-Taxed Income

Expat Tax Reform: New Proposed GILTI Regulations

The old adage, “no news is good news,” does not apply today! Yesterday, the IRS released new proposed regulations to provide more guidance on Internal Revenue Code Section 250, which is an addition to the tax code that was originated by the tax reform (Tax Cuts and Jobs Act of 2017). The proposed changes would provide a domestic corporation with a Section 250 deduction for foreign derived intangible income (FDII), global intangible low-taxed income (GILTI), as well as the amount treated as a dividend – under Section 78 – which is attributable to GILTI. How would this new information on the tax reform affect expats? Find out below.

Small Business Owners May Be Subject to Less Tax.

If you’re an expat who owns a small business, now might be the time to get out the champagne. Under the proposed rules, American expats who own businesses abroad would be able to be treated as corporations for tax purposes; the end result is a maximum of 50% savings on their annual US tax. These savings would come courtesy of a deduction on their intangible income.

GILTI was created to tax profits earned in countries outside the US that were not taxed initially – a sort of “Welcome to America,” fee, designed to make shipping businesses abroad less tempting. Basically, before the tax reform, American business owners could defer the US taxation of their foreign business income for an indefinite amount of time. However, the speed at which the bill was initially introduced left some taxpayers wondering if the harsh consequences were an oversight; the amendment to the bill seems to corroborate this notion.

The new regulations would abate some of the effects the tax reform had on American taxpayers, specifically for expats. However, the new regulations would not affect the Repatriation or Transition tax.

The provisions also have information regarding the process by which the amount of the FDII deduction is determined (plus the correct application of the taxable income limitation!), broad guidelines for calculating a domestic corporation’s foreign derived intangible income, and how to determine a domestic corporation’s qualified business asset investment (QBAI) which is tangentially connected to FDII computations.

Lastly, the weighty, 177-page document covers the instructions for gross income determinations as related to gross foreign-derived deduction eligible income (gross FDDEI), clarifies how to figure gross FDDEI from sales of property or from the provision of a service, and it stipulates how to treat the sale of property or the provision of a service to a related party. So, in addition to a reduced tax burden, these proposed regulations shine a lot of light on previously confusing issues for American small business owners.

Is There a Downside?

Unfortunately, there’s always a downside; but in this case, it’s relatively minimal. If you elect to use this deduction, you will very likely be facing more paperwork. However, there are ways around all that paperwork, like having an expert do the paperwork for you.

All Things Considered, the Regulations Would Be a Step in the Right Direction.

In the end, this is a move toward reducing the tax burden on expats who own small businesses worldwide. So, if you’d like to comment on the regulations, you have sixty days to do so, once they are published in the Federal Register. The comments are accepted electronically, for your convenience.

Greenback Can Help File Your Expat Taxes for Your Small Business

If you’d rather skip IRS book club this week, don’t read the proposed tax reform regulations and instead leave the paperwork to us. We’ll make sure your taxes are correct and more effortless than you imagined possible! Get started today.

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