The Tax Cuts and Jobs Act made sweeping changes to our tax laws. Perhaps more surprisingly, some of these changes took affect immediately and need to be reported with 2017 taxes. A change this sudden can cause some confusion, even more so when not even the IRS is exactly sure how it will work.
The main issue at hand is the “Transition Tax” where some owners of certain foreign corporations will have to pay a one-time tax on the accumulated earnings in the foreign entity. The problem is that we are now just weeks from the filing deadline and there is still no guidance of the precise calculation or even if an additional schedule and/or form will be generated to report the transition tax or payment structure election. The status per an IRS news release in January is that IRS Notice 2018-13 “…describes regulations that the Treasury Department and the IRS intend to issue, including rules addressing the calculation of earnings under the transition tax and other rules to clarify certain aspects of the law.” This sounds great, but we are still waiting for these regulations.
Another potential problem is that it seems the Transition Tax was geared towards corporations. Now that U.S. corporations can repatriate dividends from foreign subsidiaries tax free, the Transition Tax sought to bring past earnings up to speed. However, the Transition Tax is also entangling some individuals in its net even though they do not get the benefit of the tax-free repatriation. The tentative planning has led us to some very favorable scenarios, especially when wealth is tied up in income generating real estate, and some also less than favorable situations, such as when wealth is tied up in capital that was marked for foreign expansion.
The result is a stressful situation because tax returns are due, large numbers are at stake, and we are all left waiting for an IRS that is under-staffed and over worked to issue regulations at an indeterminant time in the future.