Manufacturers Can Still Benefit From the One-Time Transition Tax Installment Election

Transition Tax

July 23, 2018

by Kevin Harris

If your manufacturing company has overseas earnings, you may be familiar with the Trump administration’s efforts to encourage businesses operating abroad to “repatriate” foreign earnings back to the U.S. by offering a more attractive tax rate.

The Tax Cuts and Jobs Act (TCJA) enacted into law last December has far-reaching implications for how the U.S. will tax multinational companies (MNCs) and how they will conduct business going forward. One of the major changes addresses deemed repatriation, also called the “transition tax.”

While this 2017 tax is required on previously untaxed foreign earnings, it is not too late for many manufacturers to take advantage of the installment election. The following Q&A provides helpful information about the tax and what manufacturers should know.

What is the Transition Tax?

Section 965 of the Internal Revenue Code imposes a one-time transition tax on untaxed foreign earnings of foreign corporations owned by U.S. shareholders by deeming those earnings to be repatriated. It is effective for the 2017 tax year.

Who is Subject to the Transition Tax?

Generally, an entity is subject to the one-time transition tax under the TCJA if it owns 10 percent or more of a controlled foreign corporation (CFC) with post-1986 accumulated foreign earnings.

What is the Transition Tax Rate?

Foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5 percent rate, and the remaining earnings are taxed at an 8 percent rate.

How is the Tax Paid?

The transition tax generally may be paid in installments over an eight-year period when a taxpayer files a timely election under section 965(h). The payments are due as scheduled:

  • 8 percent of the net liability is due in each of the first five installments
  • 15 percent in the sixth installment
  • 20 percent in the seventh installment
  • 25 percent in the final installment

 Are There Any Exceptions?

C corporations can potentially take foreign tax credits (FTCs) to offset the transition tax. S corporation shareholders may elect to defer transition payment indefinitely until it is sold, liquidated or otherwise disposed.

What if We Missed the April Deadline?

In June, the IRS decided to delay penalties that would have been imposed on companies. For taxpayers who missed the April 18, 2018 deadline for making the first of the eight annual installment payments, the IRS will waive the late-payment penalty if the installment is paid in full by April 15, 2019.

Absent this relief, a taxpayer’s remaining installments over the eight-year period would have become due immediately. This relief is only available if the individual’s total transition tax liability is less than $1 million. Interest will still be due. Later deadlines apply to certain individuals who live and work outside the U.S.

For many manufacturers, the transition tax provided an opportunity to repatriate foreign earnings at a reasonable tax rate. Although the April 17, 2018 deadline has passed, manufacturers who requested an extension and wish to pay the transition tax in installments can still do so.

The manufacturing team at GPP will monitor IRS guidance on transition tax elections that will flesh out how companies should calculate earnings when they bring them back to the U.S., including guidance on different accounting choices. For more information, please contact Kevin Harris, CPA, at 214-365-2473, or email Kevin. Learn more about the Manufacturing and Distribution Services Group at Goldin Peiser & Peiser.

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