Tax Notes: Treasury final GILTI regulation delivers big regulatory win for smaller businesses
Updated: Aug 8
Individuals' GILTI Deduction Eligibility Win Just Got Sweeter
Posted on Jul. 13, 2020
By Andrew Velarde
Last year’s key victory for individuals seeking to reduce their global intangible low-taxed income tax through eligibility for a 50 percent deduction just got a little better under the final GILTI deduction regs.
The IRS and Treasury released final regs (T.D. 9901) on the section 250 deduction applicable to GILTI and foreign-derived intangible income on July 9. The final regs confirm the March 2019 proposed regs' (REG-104464-18) position that individuals can take the section 250 deduction for GILTI upon making a section 962 election.
But the final regs go beyond retaining the proposed regs' rule on section 962 eligibility. Monte Silver of Silver & Co. pointed to two other “major” wins for small business owners. First, taxpayers can make the section 962 election going back to 2018, the first year of GILTI’s applicability. Second, they can do so on an amended return.
“Unfortunately, the law caught about 200,000 small businesses in the same net [as large corporate taxpayers]. To make matters worse, until the final regulation was issued, small businesses paid higher GILTI tax rates than the corporate Goliaths,” Silver said. Under the final regs, "the playing field has been leveled," he said. Silver has brought pending court challenges to both another set of GILTI regs and the transition tax regs, alleging violations of administrative law protections put in place for small businesses.
Under section 951A, the GILTI rules act as a minimum tax on foreign profits. Each U.S. shareholder of a controlled foreign corporation is subject to tax on GILTI, defined as the excess of its pro rata share of tested CFC income over a 10 percent return (reduced by some interest expense incurred by CFCs) on its pro rata share of the depreciable tangible property of each CFC.
Section 250 allows a 50 percent deduction for domestic corporations on their GILTI, but before the release of the proposed regs, practitioners had expressed concerns about whether and how individual U.S. shareholders of CFCs can benefit from that deduction.
Section 962 allows individual U.S. shareholders of a CFC to elect to be taxed at corporate rates on their subpart F income and GILTI inclusions and to claim foreign tax credits on those inclusions under section 960 rules, which they wouldn’t otherwise get. The earnings and profits distributed to the shareholders are then included in gross income with a deduction allowed for taxes paid under section 962.
Pride and Prejudice
As acknowledged in the final regs’ preamble, it was unclear when individuals making the election could do so on an amended return. According to the preamble, the IRS and Treasury might issue further guidance under section 962, but until then, individuals making a section 962 election on an amended return can do so “regardless of circumstance, provided the interests of the government are not prejudiced by the delay.”
Such prejudice could include an amended return election that results in an overpayment in a year that could have a refund claim made while also increasing tax owed for a year in which the section 6501 assessment period has expired, the preamble states.
“This is a major win. Small businesses are invisible to the federal government. And the fact that we accomplished this . . . is a testament to our combined voice and focused persistence,” Silver said.
While recognizing the significance of the regs’ section 962 eligibility rules, Silver said the relief does not make his GILTI lawsuit moot, as that seeks to have small businesses 100 percent exempt from GILTI. That suit was filed in the U.S. District Court for the District of Columbia in June against proposed and final GILTI regs (REG-104390-18, T.D. 9866).