Marcum 2021 Year-End Tax Guide

of the FDII deduction due to the strict documentation rules required under the proposed regulations should consider filing amended returns under the final regulations, so that they can benefit from the comparatively less-stringent evidential standards. The Ways and Means proposal issued on September 13, 2021, provided the following changes to the FDII provisions: 1. Reduce the IRC §250 FDII deduction from 37.5% to 21.875%, resulting in a reduction of the proposed effective tax rate from 13.125% [(1-37.5%) X 21%] at 21% corporate tax rates to 20.7% [(1-21.875%) X 26.5%] at proposed 26.5% corporate tax rates; and 2. Net operating loss will include IRC §250 FDII deduction that exceeds taxable income. Taxpayers should note that it is currently uncertain whether the Ways and Means proposals will ultimately be enacted into law, and if so, whether the enacted legislation will remain in a form substantially similar to that currently outlined above. FOREIGN TAX CREDITS (“FTC”) Current law states a taxpayer may claim a credit (or deduction) for foreign income taxes imposed by foreign countries or U.S. possessions. The FTC must not exceed the foreign taxes paid multiplied by the fraction of the taxpayer’s income sourced outside the U.S. over the taxpayer’s total taxable income from sources outside and inside the U.S. If any portion of the foreign taxes paid is not used as a credit due to the limitation, the foreign taxes paid may be carried back to the previous tax year and forward to a maximum of 10 years. The Ways and Means proposal released on September 13, 2021, would make major changes to the FTC calculation if enacted into law. Under this proposal, the FTC must be determined on a country-by-country basis, and each item of income and loss must be specifically categorized on the

Taxpayers should note that it is currently uncertain whether the Ways and Means proposals will ultimately be enacted into law, and if so, whether the enacted legislation will remain in a form substantially similar to that currently outlined above. FOREIGN-DERIVED INTANGIBLE INCOME (“FDII”) Under the TCJA, the IRS established IRC §250, which allows a U.S. C-corporation that provides services and makes sales to foreign customers located outside of the U.S. the ability to take an annual 37.5% deduction of its foreign- derived intangible income (“FDII”). The FDII deduction, which was intended to encourage C-corporations to export goods and services outside of the U.S., reduces the U.S. effective tax rate imposed on qualifying income from the 21% statutory corporate income tax rate to 13.125% for tax years 2018 through 2025 and 16.406% for years thereafter. The FDII deduction applies to income in excess of a 10% return on tangible assets, earned by a domestic corporation from the performance of services or sales, leases or licenses of property to non-U.S. persons for foreign use. In order to take advantage of the FDII provisions, taxpayers were previously required to comply with stringent documentation rules to establish that their foreign-sourced income was eligible for the FDII deduction. Heeding taxpayer complaints that its previous documentation requirements were unduly burdensome, the IRS released final regulations in 2020 that significantly relaxed the documentation rules such that specific documentation was no longer required for most forms of transaction. Instead, the final regulations grant taxpayers more flexibility in the means by which they substantiate that their services or sales transactions are: (1) to foreign persons and (2) will be consumed abroad. Because the applicability provisions of the 2020 final regulations clarify that taxpayers may choose to adopt them for tax years beginning on or after January 1, 2018, companies that previously could not take advantage

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