Tax Rate Reduction Implication to Fiscal Year Companies

IRS Notice 2018-38

Internal Revenue Code (IRC) section 11(b) provides that the rate of corporate income tax is 21% effective for tax years beginning after December 31, 2017.  Additionally, the alternative minimum tax (AMT) tax imposed under IRC section 55 has been repealed effective for tax years beginning after December 31, 2017.  For a fiscal year end corporation’s taxable year beginning before January 1, 2018 and ending after December 31, 2017 (the “transition period”), under IRC section 15, the effective date of these tax law changes is as of January 1, 2018.  In other words, tax liability of a fiscal year end corporation must be computed using both old and new tax law for the transition period.

The IRS issued Notice 2018-38 (the “Notice”) providing guidance how tax liability should be computed during the transition period for a fiscal year end corporation.  Under the guidance, a corporation with a fiscal year that includes January 1, 2018, computes federal income tax using a blended tax rate approach and the following example illustrates how the rule applies.

Example I – IRC sections 11(b) & 15(a)

Corporation X reports $1,000,000 of taxable income for its fiscal year ending June 30, 2018.  Corporation X’s federal tax liability is $275,534, as computed below.

Example II – IRC sections 55 & 15(a)

Corporation X reports $1,000,000 of taxable income and $3,000,000 AMTI for its fiscal year ending June 30, 2018.  Corporation X’s AMT tax liability is $26,932, as computed below.

Please refer to the Notice 2018-38 https://www.irs.gov/pub/irs-drop/n-18-38.pdf for additional detail.

No More Government Subsidy for Conducting Business on the Golf Course!

(Meals and Entertainment Deduction Limitation)

많은 비지니스 거래들이 골프장이나 스포츠 경기의 VIP관람석에서 행해진다. 하지만, 2018년부터 이러한 비지니스 액티비티와 관련하여 발생되는 비용에 대한 세금 공제가 철회된다.

Tax Cuts and Jobs Act (the “Act”)가 발행되기 전까지는, 비지니스와 관련하여 발생되는 Meals and Entertainment비용의 50% 를 공제할 수 있었다. 또한, 고용주의 사업장에서 직원에게 고용주의 편의를 위해 제공되는 식사에는 100% 세금 공제가 적용되었다.  하지만, the “Act”에 의해 2018년 1월 1일 부터는 특정 Meals and Entertainment 비용에 적용 되는 공제액이 상당량 제한된다.  아래의 차트에 새 법안을 정리해 보았다.

Takeaway

The “Act” 은 납세자가 비지니스 Meals and Entertainment와 관련하여 발생하는 경비 및 특정 부가 급여를 공제하는 것을 제한한다.  납세자는 이러한 유형의 활동에 대한 세금 비용을 고려해야 한다. 또한, 세금 공제를 극대화하기 위해 업무용 식사, 오락, 레크리에이션 행사 및 부가 혜택을 기록하는 계정을 따로 생성하고 트랙하는 것을 권한다.

No More Government Subsidy for Conducting Business on the Golf Course!

(Meals and Entertainment Deduction Limitation)

 Many business deals are made on the golf course or in the sky box of sports games.  However, starting in 2018, no tax deduction is allowed for the expenses incurred in connection with these types of activities.

Prior to the Tax Cuts and Jobs Act (the “Act”), taxpayers generally could deduct 50% of meals and entertainment expenses incurred or paid for active conduct of trade or business.  Additionally, meals provided to an employee for the convenience of the employer on the employer’s business premises were 100% deductible. However, the Act has substantially limited the deductibility of certain meals and entertainment expenses effective January 1, 2018, and the following chart summarizes the new rule.

Takeaway

The Act significantly limits taxpayers’ ability to deduct expenses incurred in connection with business meals and entertainment, as well as certain fringe benefit.  Taxpayer should consider tax cost of these types of activities.  Additionally, to maximize tax deductions, set up and track separate general ledger accounts for business meals, entertainment, recreational events, and fringe benefits.

California Report on IRC Conformity

연방소득세법이 변경될경우, 캘리포니아의 Franchise Tax Board (FTB)는 제정된 변경사항에 대한 보고서를 작성해야한다. 2017 년 12 월에 제정된 Tax Cuts and Jobs Act (the "Act")는 연방 소득세 법에 많은 변경을가한다. 이에따라 FTB는 예비 보고서 발급과 함께 2018 년 4 월 20 일까지 최종 보고서를 발급 할 계획을 밝혔다. 예비 보고서는 캘리포니아가 IRC 245A, 951A 및 965 조항에 의거한 특정 외국인 소득의 송환세금과 관련된 연방규정에 준수하지 않음을 밝혔다.

IRC 섹션 245A에 따르면, 외국 법인의 10 % 이상을 소유한 미국법인은 외국법인이 지불한 배당금에 대해 100 % 공제를 받게된다. 그러나 캘리포니아는 Worldwide Unitary Combined Report 및 Water-Edge Tax Regime을 지속적으로 유지하는바 연방 정부의 100 % 배당금 공제조항을 준수하지 않음을 밝혔다.

섹션 951A는 Global Intangible Low Taxed Income ( "GILTI")을 보유한 CFC의 미국 주주를 대상으로한다. 주된 내용은 해외자회사가 벌어들이는 소득중에 일반적인 소득을 초과하는 부분은 미국의 과세소득으로 포함시키라는 조항이다. 캘리포니아주는 이 Subpart F 조항과 관련된 연방규정을 준수하지 않으며 실제 배포에 세금을 부과한다고 밝혔다.

Act는 IRC 조항 965에 의해 2018 년 이전에 축적된 외국기업의 소득에 송환세금을 부과한다. 캘리포니아주는 이 연방규정을 준수하지 않으며 실제 분배가 이루어질 때 세금이 부과된다고 밝혔다.

Federal Tax Cuts and Jobs Act의 특정 조항에 관한 California 예비 보고서를 보려면 아래 링크를 클릭하세요.

https://www.ftb.ca.gov/law/legis/Federal-Tax-Changes/CAPreliminaryReport3Provisions-Revise.pdf

IRS Notice 2018-28: Section 163(j)

IRS는 Notice 2018-28 (이하 “Notice”)를 통하여, 수정된 Section 163(j)에 관한 추가 지침을 담은 규정을 발행 할 계획이라고 밝혔다. 이 규정이 발행되기 전까지 납세자는 Notice에 설명된 조항들을 참고 하도록 한다.

수정된 163(j)는 비지니스의 조정된 과세 소득의 30%가 넘는 부분에 대해 순 사업 이자 비용의  공제를 금한다. 이 조항은 이전 과세 연도를 포함한 과거 3년 간의 연 평균 총 수령 소득이 $25M 을 넘지 않는 납세자들에게는 적용되지 않는다. 이 조항을 적용할 때 추가적으로 설명이 필요한 요소들 중 몇 가지를 아래에 정리해 보았다.

Section 5: Section 163(j)의 제한은 통합 그룹 (consolidated group) 에 적용하기 위함이다. 다시 말해, 통합 그룹의 조정된 과세 소득을 계산 할 때 사용되는 과세 소득이 통합 과세 소득으로 간주되며, 회사간의 의무는 Section 163(j)(1)의 제한을 결정 할 시에는 고려되지 않는다.

Section 6: Section 163(j) 의 제한 금액은 C-corporation의 E&P (배당 가능 이익) 를 산정하는데에 있어 아무런 영향을 주지 않는다.

Section 3: 기존의 Section 163(j) (1) (A) 에 의해 1월1일 2018년 이전 과세 연도에 불허된 실격 이자를 보유한 납세자들의 경우, 이 이자를 사업 이자로 여기어 2017년 12월 31일 이후의 첫 과세 연도로 이월 시킬 수 있다.

아래의 링크를 참조하여 Notice 2018-28를 확인하기 바란다.

https://www.irs.gov/pub/irs-drop/n-18-28.pdf

California Report on IRC Conformity

The Franchise Tax Board (FTB) of California is required by law to produce an annual report on all changes to federal income tax law enacted in the previous year.  The Tax Cuts and Jobs Act (the “Act”) enacted in December 2017 contains many significant changes to federal income tax law and FTB issued preliminary report and plans to issue a final report by April 20, 2018.  The preliminary report issued on March 20, 2018 clarifies, along with other matters, that California does not conform to the federal rules related to the repatriation of certain foreign-earned income under IRC sections 245A, 951A and 965.

Under IRC section 245A, a U.S. corporation that owns 10% or more of a foreign corporation will receive a 100% dividends-received deduction on dividends paid by the foreign corporation out of its foreign-source earnings.  However, California continually maintains its own Worldwide Unitary Combined Report and Water’s-Edge tax regime, and does not conform to the federal 100% dividends-received deduction provision.

Section 951A subjects U.S. shareholders of CFCs with Global Intangible Low-Taxed Income (“GILTI”) to current tax.  The full amount of the U.S. shareholder’s share of the GILTI is treated as an income inclusion with applicable deductions.  California does not conform to the federal rule in connection with the Subpart F provision and it imposes tax on actual distribution.

The Act imposes a one-time deemed repatriation tax on untaxed earnings of foreign corporations accumulated prior to 2018 under IRC section 965. California does not conform to the federal provision and tax will be imposed when the actual distribution is made.

Please click on link below to view the California’s Preliminary Report on Specific Provisions of the Federal Tax Cuts and Jobs Act.

https://www.ftb.ca.gov/law/legis/Federal-Tax-Changes/CAPreliminaryReport3Provisions-Revise.pdf

IRS Notice 2018-28: Section 163(j)

The IRS issued Notice 2018-28 (the “Notice”) stating that the IRS will issue regulations providing additional guidance related to the amended section 163(j).  Before the issuance of the regulations, taxpayer may rely on the rules described in the Notice.

The amended 163(j) disallows a deduction for net business interest expense of any taxpayer in excess of 30% of a business’s adjusted taxable income. There is an exception to this limitation that applies to taxpayers with average annual gross receipts for the three taxable year period ending with the prior tax year that do not exceed $25 million.  In applying the rule in practice, there were many areas requiring additional clarifications and guidance, and the following are some of the issues addressed in the Notice:

Section 5 of the Notice clarifies that the limitation under section 163(j) is intended to be applied at the level of the consolidated group.  In other words, a consolidated group’s taxable income for purposes of calculation adjusted taxable income will be its consolidated taxable income, and intercompany obligations will be disregarded for purposes of determining the limitation in section 163(j)(1).

Section 6 of the Notice clarifies that the limitation under section 163(j) will not affect whether or when such business interest expense reduces earnings and profits of the payor C corporation.

Section 3 of the Notice clarifies that taxpayers with disqualified interest disallowed under prior section 163(j)(1)(A) for the last taxable year beginning before January 1, 2018, may carry such interest forward as business interest to the taxpayer’s first taxable year beginning after December 31, 2017.

Please click on the link below to view the Notice 2018-28.

https://www.irs.gov/pub/irs-drop/n-18-28.pdf

연방세율 인하에 따른 캘리포니아 세율 인상?

연방세율이 21%로 인하되는 것에 대해서, Kevin McCarty와 Phil Ting 캘리포니아 민주당 하원의원들은 캘리포니아 한계세율을 기존 8.84%에서 18.84%로 인상하는ACA-22안을 내 놓았다. 이 법안에 따르면, 2018년 1월 1일 이후에 시작되는 과세연도에 1백만불 이상의 법인소득에 10%의 추가 세금이 부여되게 된다.

두 하원의원은 지난 연방세법개혁안은 중산층이 아닌, 백만장자들에게만 혜택을 주는 법안이며, 일반 캘리포니아 납세자들에게 이러한 기업들의 경제적 이득을 나누어 주기 위해서 ACA-22를 준비했다고 밝혔다.

이 법안이 통과된다면, 캘리포니아 주 내에 있는 법인들이 다른 주로 사업을 옮긴다거나, 법인들이 캘리포니아 내에 추가로 투자하기를 꺼려하게 만들것으로 예상된다. 이러한 이유로, 캘리포니아는 민주당이 강세를 띄지만 ACA-22는 통과되기는 어려울 것으로 전망된다. 법안이 실질적으로 효력을 얻기 위해서는, 이 법안은 상하원에서 동의를 받아야 하며, 그 후에 추가로 투표에 따라 통과가 되어야 한다.

자세한 내용은 아래의 링크를 참조하기 바란다:
http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201720180ACA22

California Democrats’ Reaction to Federal Corporate Rate Reduction

In response to the federal corporate tax rate reduction to 21%, two Democratic assemblymen, Kevin McCarty and Phil Ting, introduced Assembly Constitutional Amendment 22 (“ACA-22”) that would impose a 10% surcharge on qualified corporate net income over $1,000,000 effective for taxable years beginning on or after January 1, 2018.  This bill, if enacted, will effectively increase marginal California corporate tax rate from 8.84% to 18.84%.

McCarty and Ting believe that the recently enacted federal tax laws, including corporate tax rate reduction, favors billionaires over middle-class workers, and they are introducing ACA-22 to share with ordinary California taxpayers the economic gains provided by federal income tax cuts for corporations.

The 10% surcharge is believed to cause some businesses to migrate out of the state and companies might be less inclined to make investment in the state.  For these reasons, despite the fact that California is a liberal state, ACA-22 faces an uphill battle.  To be signed into law, the bill must be approved in both houses of Legislature and, if passed, would also need voter approval.

For the reference, here is a link to ACA-22.
http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201720180ACA22

GILTI & BEAT in Plain Language

There are two provisions contained in the Tax Cuts and Jobs Act which may have unwary impact to multinational businesses effective for a tax year starting after December 31, 2017.  These two provisions were given fancy names and the rules are extremely complex.  One is Global Intangible Low Taxed Income (“GILTI”), enacted to keep the earnings deemed associated with U.S. intangibles within the United States.  The other one is Base Erosion and Anti-Abuse Tax (“BEAT”), designed to minimize tax revenue loss resulting from payments to foreign related parties by their affiliated U.S. companies.

We will try to explain these two overly complex tax rules in a plain language so that even those with little or no tax background may understand how the rules work and may impact their associated business.

Global Intangible Low Taxed Income

GILTI applies to U.S. shareholders of a controlled foreign corporations (“CFC”).  Its intention is to include CFC’s income in excess of its ‘routine income’ in the U.S. shareholders’ taxable income.  In a nutshell, every year, U.S. shareholders of CFCs are required to test if the CFC generated income in excess of its routine income and the excess income are included in the U.S. shareholders’ taxable income.  The routine income is artificially set at 10% of CFC’s investment in depreciable assets – tangible assets.  Income in excess of the routine income is considered as earnings attributable to U.S. intangibles.  In computing taxable income, U.S. shareholders are allowed deduction equal to 50% of GILTI for the tax years from 2018 through 2025 and 35% of GILTI from taxable years after 2025.

Illustration:

X is a U.S. taxpayer who owns 80% of a foreign company, Y.  During the calendar year 2018, Y generated $1,000,000 of income.  Y has an average balance of depreciable assets in the amount of $2,000,000 for the year.  X is required to include $300,000 of income in his/her tax return for the year.

Takeaway is U.S. shareholders of a CFC with high income relative to its investment in hard assets should consult with their tax consultants to assess the potential impact of GILTI tax provision contained in the Tax Cuts and Jobs Act.

Base Erosion & Anti-Abuse Tax

BEAT applies to U.S. companies with relatively large outbound payments (paid or incurred) to its foreign related parties.  Generally, any outbound payments resulting in U.S. tax deductions, depreciation and amortization (with exceptions for inventory purchase and service cost reimbursements) are considered as base erosion payments and they are disregarded in computing an alternative taxable income (referred as “modified taxable income”).

U.S. companies are required to compute the modified taxable income and compute alternative tax at 10% (5% for the tax year 2018).  U.S. companies’ tax liability for a tax year is higher of the regular tax or the alternative tax computed without base erosion payments.

BEAT provision applies to affiliated group with U.S. source gross income in excess of $500 million and base erosion payments account for 3% or more of the total U.S. deductions.

Illustration:

X, a U.S. corporation, has $10,000,000 taxable income for 2019 tax year, which includes $25,000,000 royalty payment to its foreign parent company and $5,000,000 depreciation deduction on machineries acquired from its foreign related party.  (For purpose of the illustrations, we will assume that there is no withholding tax).  X is subject to BEAT minimum tax of $1,900,000, in addition to the regular tax of $2,100,000.

Takeaway is U.S. companies with considerably large base erosion payments to foreign related parties should consult with their tax consultants to assess the potential impact of BEAT provision contained in the Tax Cuts and Jobs Act.

THE INFORMATION CONTAINED HEREIN IS OF A GENERAL NATURE AND BASED ON AUTHORITIES THAT ARE SUBJECT TO CHANGE AND DIFFERING INTERPRETATION.  APPLICABILITY OF THE INFORMATION TO SPECIFIC SITUATIONS SHOULD BE DETERMINED THROUGH CONSULTATION WITH YOUR TAX ADVISER.  ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED TO BE USED AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.