Proposed Regulations On GILTI Are Released


Proposed Regulations On GILTI Are Released

As the new GILTI laws become part of our business lives, the IRS issued some guidance in September. In light of this new guidance and with the end of the year approaching, I thought it would be a good time to share some additional thoughts on GILTI. (See our previous thoughts here.)

If you own the majority of shares of a controlled foreign corporation (CFC) the latest U.S. tax reform will bring a surprising change when you file your 2018 tax return in 2019. When you file your 2018 tax return you will confront a new type if income called GILTI which stands for Global Intangible Low-Taxed Income. GILTI basically taxes the active net income of the corporation whether the earnings are retained or distributed. The GILTI income flows up to the shareholder’s personal tax return and is taxed at the shareholder’s marginal tax rate. Here are some ways to reduce the GILTI:

  1. “Zero out” your profit – If you reduce your profit through salary, bonuses, and expenses to break even, then there will be no tax on GILTI income.
  2. Establish a business that has a large investment in capital assets – GILTI allows a 10% deduction for qualified business asset investment (QBAI). This deduction may have a major impact in reducing GILTI.
  3. Establish a U.S. corporation to hold your CFC – Your GILTI income would be reduced by 50% and if your foreign corporate income tax is at least 13.125%, you will have no additional U.S. income tax to pay.
  4. Primary Service Provider – If you are a service provider, our firm may have a custom solution for you to avoid GILTI. Please contact your associate to see if you meet the criteria.

In short, GILTI is a new challenge to business owners of CFCs and dramatically changes the long-standing assumption that active businesses that are established abroad are only taxed when income is distributed. Using offshore and low tax jurisdictions may have been attractive places to set up your businesses in the past, but GILTI changes all of that. We strongly recommend reviewing your current CFCs to see how you will be impacted.

For more about GILTI, click here.

The writer is the CEO and President of Philip Stein and Associates

This publication has been prepared for general guidance on matters of interest only and does not constitute professional advice.
You should not act upon the information contained in this publication without obtaining independent professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law. Philip Stein & Associates does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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