Question

According to the course text, the United States has employed a worldwide system of taxation for the past 100 years. The Tax Cuts and Jobs Act (TCJA) upended this system. Imagine you are an international tax consultant advising a client on the impact of P.L. 115-97, the law known as the Tax Cuts and Jobs Act, on the taxation of a controlled foreign corporation (CFC).

• Analyze two changes to CFCs and advise your client on the actions necessary to reduce current and future tax liability as a result of these charges.
• Create a scenario reflecting the taxation under the prior tax and current law to support your recommendations.

Answer 1

Trump’s tax reform now means that all income is Subpart F income. In addition, all currently untaxed retained earnings will be subject to a one-time tax. Read further to find out what it means exactly and about the impact on U.S. expats with CFCs.

Trump’s tax reform benefits individuals who are struggling with their finances. What changed? Standard deductions doubled, i.e. from $6,000 to $12,000 for singles. Trump’s tax reform reduced the rates for five tax brackets of the existing seven. The New Tax Bill also increased the Child Tax Credit to $2,000. Taxpayers can deduct any medicals expenses that are over 7,5% of their adjusted gross income. Tax Cuts and Jobs Act of 2017 raise the alternative minimum tax rate (AMT) to $500,000 for individuals and $1 million for couples.

Tax Cuts and Jobs Act 2017 lowers the corporate tax rate from 35% to 21%. It also gives 20% reductions for the first $315,000 of joint income for a small business such as S corporations and limited liability companies (LLCs).

There weren’t many changes to the most important provisions. Breathe freely, the Foreign Earned Income Exclusion, Foreign Tax Credit or the Foreign Housing Deduction are still with us. Yet there are a few modifications that Americans abroad should be aware of.

What is a Controlled Foreign Corporation (CFC) and Subpart F?

This is especially relevant to provide an explanation of what a CFC. Trump’s tax reform expanded the CFC ownership rules, which now treats more foreign corporations as CFCs.

A Controlled Foreign Corporation (CFC) is a foreign corporation which operates abroad with U.S. shareholders who have more than 50% of the control. What does “foreign” mean in the context of business incorporation? The IRS considers only non-U.S. companies and companies which are taxed as corporations (including LLCs that elect to be taxed as a corporation) for the purpose of CFC status.

What is Subpart F? CFC status is regulated in a Subpart F and it was created to gather information on the income from foreign corporations owned/controlled by U.S. citizens and to collect tax on that income. As we know already, a foreign corporation is one type of entity which individuals use to conduct foreign operations through. A major tax advantage of conducting foreign operations by using a foreign corporation is income tax deferral. Generally, U.S. tax on the income of a foreign corporation is deferred until the income is distributed as a dividend or otherwise repatriated by the foreign corporation to its U.S. shareholders.

The Subpart F provisions eliminate deferral of U.S. tax on some categories of foreign income. Taxing certain U.S. persons currently on their pro-rata share of such income earned by their controlled foreign corporations (CFCs) do the work.

Trump’s tax reform now means that all income is Subpart F income. In addition, all currently untaxed retained earnings will be subject to a one-time tax. Read further to find out what it means exactly and about the impact on U.S. expats with CFCs.

Trump’s tax reform benefits individuals who are struggling with their finances. What changed? Standard deductions doubled, i.e. from $6,000 to $12,000 for singles. Trump’s tax reform reduced the rates for five tax brackets of the existing seven. The New Tax Bill also increased the Child Tax Credit to $2,000. Taxpayers can deduct any medicals expenses that are over 7,5% of their adjusted gross income. Tax Cuts and Jobs Act of 2017 raise the alternative minimum tax rate (AMT) to $500,000 for individuals and $1 million for couples.

Tax Cuts and Jobs Act 2017 lowers the corporate tax rate from 35% to 21%. It also gives 20% reductions for the first $315,000 of joint income for a small business such as S corporations and limited liability companies (LLCs).

There weren’t many changes to the most important provisions. Breathe freely, the Foreign Earned Income Exclusion, Foreign Tax Credit or the Foreign Housing Deduction are still with us. Yet there are a few modifications that Americans abroad should be aware of.

What is a Controlled Foreign Corporation (CFC) and Subpart F?

This is especially relevant to provide an explanation of what a CFC. Trump’s tax reform expanded the CFC ownership rules, which now treats more foreign corporations as CFCs.

A Controlled Foreign Corporation (CFC) is a foreign corporation which operates abroad with U.S. shareholders who have more than 50% of the control. What does “foreign” mean in the context of business incorporation? The IRS considers only non-U.S. companies and companies which are taxed as corporations (including LLCs that elect to be taxed as a corporation) for the purpose of CFC status.

What is Subpart F? CFC status is regulated in a Subpart F and it was created to gather information on the income from foreign corporations owned/controlled by U.S. citizens and to collect tax on that income. As we know already, a foreign corporation is one type of entity which individuals use to conduct foreign operations through. A major tax advantage of conducting foreign operations by using a foreign corporation is income tax deferral. Generally, U.S. tax on the income of a foreign corporation is deferred until the income is distributed as a dividend or otherwise repatriated by the foreign corporation to its U.S. shareholders.

The Subpart F provisions eliminate deferral of U.S. tax on some categories of foreign income. Taxing certain U.S. persons currently on their pro-rata share of such income earned by their controlled foreign corporations (CFCs) do the work.