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New International Tax Laws Now in Effect Under TCJA

Under the new tax changes for The Tax Cuts and Job Act (TJCA) there were several new provisions that impact US companies performing business internationally.  Below are few selected key provisions.

Under the Foreign Derived Intangible Income, or FDII, a deduction is created for certain foreign income earned by U.S. companies. This only applies to U.S. C-corporations with either a U.S. or foreign parent with an incentive to use U.S. workers.  In result, this creates a preferential rate of 13.125% on qualifying foreign income, or QFI.  QFI includes income derived from sale of property to foreign sources and, also, includes income from services performed for foreign sources by a U.S. company, not through a foreign branch. For example, if the FDII is $1,000, the tax on the FDII is $131.25 rather than $210.

Global intangible low-taxed income, or GILTI, creates a minimum annual tax on controlled foreign corporations operating in low taxing countries. This applies to all U.S. owners of foreign GILTI companies including C-corporations, S-corporation, LLC, and even individuals. If a foreign country’s tax is above 13.125% then in general there’s no GILTI.  However, if a foreign country’s tax rate is below 13.125% then this tax will apply.  Assume a country with 0% tax rate then the U.S. parent will pay 10.5% GILTI tax which will be reported and paid with the US tax return. This discourages U.S. companies from operating in low or no tax countries.

Finally under the new territorial tax system a US C-corporation only can exclude income earned by its foreign subsidiaries which is not subject to Subpart F income or GILTI tax.  For example, assume a U.S. C-Corporation has 100% ownership in a foreign entity and generates $1,000 profit with taxes of $150. The net cash of $850 can be repatriated back to the U.S. tax free as 100% dividend exclusion.  The U.S. C-corporation then distributes the $850 to its individual shareholders who only pay dividend rate tax of 23.8% federal plus state taxes.    This 100% foreign owned company dividend exclusion does not apply to U.S. parent companies who are S-corporation or LLC’s as well as individuals.

To discuss more about your international tax situation, please contact Hani Sharestan at (949) 910-2727.

 

Making Large Gifts Now Won’t Harm Estates After 2025

On November 20th, the IRS announced individuals taking advantage of the increased gift and estate tax exclusion amounts in effect from 2018 to 2025 will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to levels before 2018.

The Treasury Department and the IRS issued proposed regulations which implement changes made by the 2017 Tax Cuts and Jobs Act (TCJA).  As a result, individuals planning to make large gifts between 2018 and 2025 can do so without concern that they will lose the tax benefit of the higher exclusion level once it decreases after 2025.

In general, gift and estate taxes are calculated, using a unified rate schedule, on taxable transfers of money, property and other assets. Any tax due is determined after applying a credit – formerly known as the unified credit – based on an applicable exclusion amount.

The applicable exclusion amount is the sum of the basic exclusion amount (BEA) established in the statute, and other elements (if applicable) described in the proposed regulations. The credit is first used during life to offset gift tax and any remaining credit is available to reduce or eliminate estate tax.

The TCJA temporarily increased the BEA from $5 million to $10 million for tax years 2018 through 2025, with both dollar amounts adjusted for inflation. For 2018, the inflation-adjusted BEA is $11.18 million. In 2026, the BEA will revert to the 2017 level of $5 million as adjusted for inflation.

To address concerns that an estate tax could apply to gifts exempt from gift tax by the increased BEA, the proposed regulations provide a special rule that allows the estate to compute its estate tax credit using the higher of the BEA applicable to gifts made during life or the BEA applicable on the date of death.

To discuss more about your gift and estate tax situation, contact WFY’s Estates and Trusts Partners, Marisa Alvarado and Kevin Wiest, at info@cpa-wfy.com or (949) 910-2727.

© Copyright 2018. All rights reserved.

How to Co-ordinate Cost Segregation with Like-kind Exchange

The Tax Cuts and Jobs Act (TCJA) was signed by the President on December 22, 2017. The TCJA is the most significant overhaul of Internal Revenue Tax code since the 1986 Tax Act under President Reagan. The Committee Report has over a thousand pages of modifications to many areas of the tax code. One piece of the new legislation (that concern most real estate investors) involves changes to the like-kind exchange rules.

When certain conditions are met, no gain or loss is recognized when a taxpayer exchanges property of like-kind (used in a trade or business or for investment purposes). Before the TCJA, a taxpayer could exchange real property for real property; and personal property for personal property (with some restrictions) without recognizing gain on the exchange. For exchanges completed after December 31, 2017, the TCJA limits this tax-free treatment to an exchange of real property only. Personal property no longer qualifies for like-kind exchange after this date. Many taxpayers and tax preparers are asking the question: How does this impact an exchange of real property that went through a cost segregation study?

Cost segregation is a valuable tax strategy to accelerate depreciation deductions. When the timing is right, this strategic tool can save taxpayers thousands of tax dollars. The primary goal of a cost segregation study is to identify all costs that can be depreciated over shorter depreciable lives. By accelerating depreciation, a taxpayer can defer federal and state income taxes and increase cash flow. If timed correctly, a taxpayer can claim more deductions in a high marginal tax year and less deductions in low marginal tax year resulting in a permanent tax savings.

The building costs identified with shorter depreciable lives (by the cost segregation study) are depreciated as Section 1245 property. Most tax preparers believe that means that these assets are personal property. The distinction that needs to be made is between the personal property (machinery and equipment) from the real property fixtures that qualify as 1245 property for tax purposes but are deemed to be real property by state law. State law generally determines the classification of property as real or personal. For like-kind exchange purposes, the courts have held that state law, although not controlling, is generally followed to determine whether property is real or personal. As such, fixtures can be 1245 property with a shorter depreciable life for depreciation purpose but real property for like-kind exchange purpose. Taxpayers still need to be aware of the potential recapture rules under 1245(b)(4) and 1245(d)(4) but this personal property vs. real property distinction should help taxpayers navigate like-kind exchanges with more comfort.

Finally, according to the Committee Report, it is the intention of the Congress that real property eligible for like-kind exchange treatment under prior law continue to be eligible under TCJA. The expert opinion is that this language means that the treatment of real property that went through cost segregation study should continue to be eligible for like-kind exchange treatment as it has in the past.

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