Marcum 2021 Year-End Tax Guide

OTHER NOTABLE UPDATES Though first established under the TCJA in 2017, the final Base Erosion and Anti-Abuse Tax (“BEAT”) regulations were released on September 1, 2020. These regulations provided clarity to taxpayers regarding the application of the tax, which is imposed on large (i.e., $500 million or more average gross revenue over the last 3 years) multinational corporations that shift profits abroad through related party transactions that create U.S. deductible payments to low-tax foreign countries. Among other changes, the September 2021 Ways and Means proposal raises the rate imposed under the BEAT regime to 10% in 2022, 12.5% in 2024, and 15% in 2026, thereby furthering the Biden Administration’s goal of discouraging the use of foreign tax havens. The Ways and Means draft modifications of the BEAT, however, stops short of the repeal previously outlined by the Biden Administration under its Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD) regime, and it remains to be seen whether further attempts will be made to bring the current BEAT even further in line with the SHIELD framework promulgated under the Biden Administration’s “Green Book.” In an attempt to further dissuade multinational taxpayers from acquiring foreign companies and shifting their headquarters out of the U.S. (to avoid paying U.S. taxes), the Biden Administration released proposals in the Green Book to reduce the ownership threshold percentage at which foreign corporations are treated as domestic corporations for U.S. income tax purposes. In addition to effectively reducing the previous 80% ownership threshold to 50%, the anti-inversion proposals also expand the tests used to determine whether an inversion transaction has occurred. The Green Book proposal indicates that an inversion transaction would be deemed to occur if (1) immediately prior to the acquisition, the fair market value of the domestic entity is greater than the fair market value of the foreign acquiring corporation; (2) after the acquisition, the expanded affiliated group is primarily managed and controlled in the United States; and (3) the expanded affiliated group does not conduct substantial business activities in the country where the foreign acquiring corporation is organized. However, taxpayers should note that it is currently uncertain whether the anti-inversion 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 in the Green Book.

U.S. taxpayer’s income tax return. In terms of GILTI, only deductions directly allocable to GILTI income are included in the calculation. Other significant changes include (1) the repeal of the foreign branch income basket, (2) the inability for dual capacity taxpayers to take a credit, (3) the disallowance of the foreign tax paid carryback, and (4) the change of the foreign tax carryforward maximum from 10 years to 5 years. BUSINESS INTEREST LIMITATION The TCJA introduced the business interest limitation under IRC §163(j), which was later amended under the CARES act. Under current law, IRC §163(j) limits the interest deduction to the sum of (1) interest income, (2) 50% of the entity’s adjusted taxable income (30% for partnerships), and (3) the floor plan financing interest expense (interest paid for the financing of motor vehicles in inventory for sale). The interest limitation is determined at the entity level. The Ways and Means proposal provides changes to IRC §163(j) and creates IRC §163(n). If the proposal is approved, IRC §163(j) would be determined at the partner/shareholder level rather than the entity level. IRC §163(n) would limit the interest deduction of domestic corporations that are members in an international financial reporting group. A domestic corporation will calculate its allocable share of the group’s net interest expense by dividing the domestic corporation’s earnings before interest, taxes, depreciation, and amortization (“EBITDA”) by the group’s EBITDA and multiplying that fraction by the group’s net interest expense. The domestic corporation’s net income expense must not exceed 110% of the domestic corporation’s allocable share of the group’s net interest expense. Therefore, the maximum amount of interest that may be deducted by a domestic corporation, which is a member in an international financial reporting group, is 110% multiplied by the domestic corporation’s allocable share of the group’s net interest expense. The newly proposed IRC §163(n) applies only to domestic corporations whose average excess interest expense over interest income exceeds $12 million over a three-year period. In addition, the limitation does not apply to any S-corporations, real estate investment trusts, regulated investment companies, or corporations that meet the small businesses exemption under IRC §163(j)(3). The proposal would allow for a carryforward of up to 5 years for business interest that is limited by IRC §163(j) or 163(n). The interest carryforward would be used in a first-in, first-out basis.

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