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Although the tax law changes resulting from the Tax Cuts and Jobs Act are effective January 1, 2018, there is a significant change in the tax law that result in an income pick up in 2017.
Newly enacted section 965 imposes a repatriation tax on previously untaxed earnings of specified foreign corporations (SFCs) of U.S. shareholders by deeming those earnings to be repatriated. A specified corporation is any foreign corporation that is either a controlled foreign corporation (CFC) or any foreign corporation which has at least one shareholder that is a U.S. corporation. Under the Tax Act, any U.S. shareholder of a SFC must include in its income for 2017, the pro-rata share of the accumulated post-1986 accumulated earnings and profits of the foreign corporation.
The repatriation tax is assessed on deferred foreign income of such SFCs as of November 2, 2017 or December 31, 2017, whichever date reflects the greatest amount of deferred foreign earnings. The foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5 percent rate, and the remaining earnings are taxed at an 8 percent rate. The repatriation income is included on the 2017 income tax returns.
A special rule permits deferral of the repatriation tax liability for shareholders of an S corporation; however, S corporations are required to report the includible repatriation income as well as the amount of deduction that would be allowable, and provide a copy of such information to its shareholders. Any shareholder of the S corporation may elect to defer his (her) portion of the net tax liability at transition to the participation exemption system until the shareholder’s taxable year in which a triggering event occurs.
Payment of the repatriation tax can be made in one payment or with election by making 8 annual payments. If the installment election is chosen, 8 percent of the net tax liability is made in each of the first five of such installments, 15 percent of the net tax liability in the sixth such installment, 10 percent of the net tax liability in the seventh such installment and 25 percent of the net tax liability in the final or eighth such installment.
If you or your business owns a foreign corporation, you should consult your advisor as there may be tax consequences on your 2017 income tax return.