What Expats Need to Know About the Tax Reform and the IRS’ Proposed Regulations

Last week, the IRS issued proposed regulations on Section 965, “Treatment of Deferred Foreign Income Upon Transition to Participation Exemption System of Taxation” to the Office of the Federal Registry. Since the passage of the tax reform, tax practitioners and taxpayer advocates have been requesting additional guidance on the Section 965 rules. Below, our expert accountants have summarized what expats need to know!

What is the Repatriation Tax?

You’ve heard it called many things: the transition tax, the repatriation tax, and some have even called it the toll tax. Whatever name you prefer, this tax was part of the tax reform and is a one-time tax for the tax year 2017 that affects US persons who have interests in a specified foreign corporation. These companies include controlled foreign corporations (CFCs; organizations at least 50% controlled US shareholders), or foreign corporations at least 10% controlled by US domestic corporations. Any US person with direct or indirect ownership of the specified foreign corporation will be required to “pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States.” The calculation is based on the post-1986 retained earnings of a specified foreign corporation and depends on the accumulated value of untaxed profits on November 2, 2017, and December 31, 2017, whichever is higher. In the proposed regulations, they estimate that there will be 100,000 taxpayers affected and that it will take an estimated additional five hours of tax preparation to run the transition tax calculation.

What Has Changed?

Remember: prior to the tax reform, foreign retained earnings were for the most part untaxed, without considering the taxable Subpart F income. One silver lining from a tax perspective is the transition tax on retained earnings is at a lower rate than if the earnings were repatriated and taxed at the individual or corporate rates. Cash is taxed at 15.5% and other assets like buildings and equipment at 8%. But beware: the definition of cash for the Section 965 calculation is intricate. Adding another layer to the complexity of the one-time tax calculation is the potential of Foreign Tax Credits to offset the Sec 964 tax.

Are These Regulations Final?

The proposed regulations are in the document stage, which is used to notify the public of the issuance of rules and regulations. The 249-page document is considered to be a close resemblance of the final rules, though it does not have full force or legal effect at this time. For 60 days it is open to public comments. The document does provide clarity and answers to some of the questions that taxpayers and practitioners have posed and cements some of the previous guidance provided by the IRS.

Questions About If This Tax Will Affect You?

Soon, the final regulations will be published in the Federal Registry, but with October 15th around the corner, it may not be in your best interest to wait for the rules to be ironed out. If you believe the Transition Tax applies to you, then get in touch with your Greenback Tax Accountant today!

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