Form 8992 GILTI Calculation Pitfall – Latest To Know For 2024
The new law of December 2017 brought major tax law changes for foreign corporation shareholders. This led to the creation of IRS Forms 8992 and 8993, as well as updates to Form 5471.
This has significantly changed how controlled foreign corporations (CFCs) and U.S. taxpayers operate abroad and calculate their U.S. income tax liability.
Challenges and Implications of Global Intangible Low-Taxed Income
The law calls for including Global Intangible Low-Taxed Income from controlled foreign corporations under Section 951 A of the Internal Revenue Service Code. That means the IRS will tax U.S. shareholders on their allowable share of earnings from a controlled foreign corporation.
This is to the extent that the earnings exceed a ten percent return on tangible assets allocated to the U.S. shareholder.
With this significant change in tax law, a U.S. person who owns at least ten percent of the value or voting rights in one or more CFCs must include their intangible income as taxable, regardless of whether they receive any distributions.
In January 2018, the tax reform law removed section (958(b)(4)) from the tax code. This change means that one can now indirectly own stock through foreign entities. For example, if you own more than half of another company’s stocks, it’s treated as if that other company owns them.
Before the new law, the definition in Section 951(b) only considered voting stock.
A U.S. person includes U.S. individuals, domestic corporations, partnerships, trusts and estates.
The Advantages of a Hybrid Territorial System
The transition from a worldwide income system to a hybrid territorial system through a participation exemption (i.e., deduction for received dividends) led to a one-time tax when bringing overseas profits back to the U.S., as per section 965.
The Treasury Department, IRS, and tax practitioners have found implementing these new rules to be quite challenging.
In July 2020, new regulations introduced a high-tax exception for low-taxed global income. Taxpayers can now choose to exclude high-taxed income from controlled foreign corporations for the Global Intangible Low-Taxed Income calculation, regardless of whether it’s considered foreign-based company income. This involves comparing the foreign tax rate with 90 percent of the maximum U.S. tax rate, currently at 18.9 percent.
What Is The Purpose Of The Global Intangible Low-Taxed Income Calculation And Form 8992
U.S. individuals with shares in foreign corporations must use Form 8992 and Schedule A to report their portion of the global intangible low-taxed income from each corporation. This helps them determine their overall global low-taxed income, and distribute it among these foreign companies.
The reform law requires U.S. shareholders to add their portion of a foreign corps’ global income to their annual earnings. Form 8992 explains how to calculate global intangible low-tax income separately from Subpart F calculations. Even if there is no Subpart F income, income inclusion might still be necessary. It’s calculated by subtracting net deemed tangible income return from net controlled foreign corporation-tested income.
Net CFC-Tested Income means gross income minus deductions and certain items of excludable income that you properly allocate to the gross income.
Excludable income items include income that’s already part of the U.S. shareholder’s income as subpart F income, income related to the high-tax exception for subpart F income, and income connected to a U.S. trade or business.
Optimizing Your Business Asset Investments
Qualified business asset investment (QBAI) refers to the average of a corporation’s total adjusted bases in specified tangible property at the end of each quarter during the taxable year.
This applies to all assets used in a trade or business of the corporation and assets for which a deduction is permissible under Section 167.
As a result, QBAI is generally property, plant, and equipment used in a trade or business that qualifies for a depreciation deduction under the tax code. One must calculate depreciation under Section 168(g).
To calculate the business asset value correctly, consider which assets generate net tested income. If some assets generate gross income that’s not included in the tested income (like subpart F income), an allocation is necessary. In such cases, the use dual-use ratio ensures proper allocation of qualified business asset investment.
The IRS has established rules in Prop Treas. Reg §951A-3(h) to prevent people from using certain property transfers or purchases to lower their global income and such actions will not be considered valid.
This includes transfers of property to a related party even if the principal purpose of the transaction was not to reduce the global income inclusion.
Simplifying Global Intangible Low-Taxed Income Inclusion Reporting
After calculating the global intangible income formula components for the controlled foreign corporation and determining the pro rata share for each U.S. shareholder, one must report their income inclusion for the year using Form 8992.
An individual taxpayer should report it on the “other income” line of Form 1040 and the ordinary income tax rate will apply.
Further calculations are necessary if the U.S. person is a corporation.
If the U.S. shareholder is a corporation, they might benefit from foreign tax credits related to global income inclusion. Individuals can choose to be treated like a corporation for certain types of income by making a Section 962 election on their tax return, but it’s best to talk to a tax expert about this. Corporations should use Form 8993 with their tax return and can get a 50 percent deduction.
Since GILTI is part of adjusted gross income, it will be taxable on many U.S. state income tax returns as well.
Be sure to check with the specific laws applicable to your state if unsure.
Maximizing Tax Savings With Form 8993
Individuals can get a deduction for their global intangible income under Section 250 by reporting eligible deductions on Form 8993. This covers deductions for foreign-derived intangible income and the global intangible income inclusion amount.
This Section allows for a 37.5 percent deduction on foreign-derived intangible income, a 50 percent deduction on the global intangible inclusion amount, and treats an amount as a dividend received by the domestic corporation under Section 78.
Who Needs To File Form 8992
Any U.S. shareholder with controlled foreign corporations and “tested income” or “tested loss” must file Form 8992. This law applies to tax years of foreign corporations beginning after December 31, 2017, and subsequent years.
Understanding Controlled and Specified Foreign Corporations
A Controlled Foreign Corporation is a foreign company where U.S. shareholders own over half of its voting power or stock value at any point in the tax year. Even if a foreign corporation loses its CFC status during the year, it still needs to follow the Form 8992 filing rules for that year.
A Specified Foreign Corporation (SFC) is any foreign company that has one or more domestic corporations as U.S. shareholders (meeting a ten percent ownership threshold) and is also a CFC.
Streamlined Filing for Specified Foreign Corporations
If someone owns specified foreign corporations and had to pay Section 965 transition tax for tax years mainly in 2017 and 2018, they should include this tax in their streamlined filing submission, even if those years are outside the usual three-year lookback period. So, if there were specified corporations with Section 965(a) inclusion in 2017 or later, those years should be part of the lookback period.
Note: The Section 965(h)(1) option to pay the Section 965 transition tax is not available when filing delinquent returns through the Streamlined Filing Compliance Procedures.
When preparing delinquent or amended tax returns and information returns, remember to include “Section 965” in red at the top margin. This should come after the annotation of “Streamlined Foreign Offshore” or “Streamlined Domestic Offshore,” also written in red.
Conclusion
In conclusion, it’s important for U.S. shareholders of foreign companies to understand global income tax requirements, especially due to the significant changes brought by the new law. Compliance involves using forms like Form 8992 and Form 8993, so consulting a tax professional is advisable to navigate these complex rules effectively.
At Tax Samaritan, we’re a team of experienced Enrolled Agents with over 25 years of expertise in U.S. tax preparation and representation. We’re here to help you with your tax concerns and ensure you meet your tax obligations efficiently. Contact us for personalized assistance.
To learn more about how controlled foreign corporation tax works, explore our related article here.