GILTI stands for Global Intangible Low-Tax Income. It is a tax that was introduced in 2018 by the IRS on a foreign company’s net profits, when the company is based outside of the US, but owned by a US citizen. It was put in place in order to dissuade companies from moving their company’s assets outside the US to a country abroad with a lower tax rate.
New regulations surrounding Global Intangible Low-Tax Income (GILTI) have been finally published and implemented by the IRS. How will these new regulations affect small business owners?
Prior to these new regulations being released, the IRS were ambiguous in their desired application of the tax laws surrounding GILTI. They were clear that they wanted to tax the net profits of foreign companies owned by US citizens, and they issued draft regulations to explain how they interpreted the law, including how they wished the tax payers to apply the law especially with regards to reporting on forms. However, there was uncertainty as to whether these laws applied equally to both small businesses and large corporations. The new regulations clarify that the same laws do apply to both; small businesses and large corporations are both eligible to claim the section 962 election, which allows them to get a lower tax rate.
Is the best option to see a tax professional or do your own research?
The vast amounts of information found on the web can be confusing, or in some cases incorrect. Often, websites have not addressed all the relevant facts, or have covered them in an ambiguous manner. As made clear above, each individual taxpayer finds themself in different situations with regards to their tax return, and the generic information found on the web may not give them the personalised advice needed in order to reduce the amount of tax paid. Therefore, it is better with a phone call to a tax professional, as when the tax rules are applied, the outcome and amount of tax paid for each individual does vary.
What if you have already filed tax returns for the 2018/2019 tax year? Can you refile them with the new regulations applied?
Yes, it is clear that it is possible to refile past tax returns for the 2018 or 2019 tax years, when GILTI tax was first applied. Businesses are allowed to prepare amended tax returns for those years, where they can apply the section 962 election, as well as the linked deduction, and have a reduced tax rate for those years. It would be useful to have a discussion with a tax professional in order to determine the appropriate options. They can help with claiming a foreign tax credit (if that is applicable), and potentially seeking a refund if tax overpayments have previously been made. This is particularly helpful for small businesses, especially in light of the current coronavirus situation.
It is clear how important it is to discuss the potential options with a professional. What is the best way in which to do that?
It is easy – go to our website, where you will find relevant links so you can either get in contact by phone or email and meet team members. From there you can set up a meeting with a professional, where they can review your individual circumstances, and they can explain how the tax law applies in your case. They will review the facts and aim to help you ensure you have the best tax position possible.
I want more information about Global Intangible Low-Tax Income (GILTI)
What would an example look like of how a tax professional would work with a client to make sure they are paying the lowest rate of Global Intangible Low-Tax Income (GILTI) tax possible in their situation?
The client should talk to a tax professional around November or December time. This means the client can provide the tax professional with 11 or 12 months of information regarding the income and expenses of the company and thus enable them to accurately estimate the net profit for the year. The tax professional could then help the client to find any other expenses that could be paid before the end of the year, such as any employees’ salaries or bonuses, which would reduce their net profit for the year, reducing the amount of GILTI tax they have to pay. Individuals could be entitled to a foreign earned income exclusion; there is a maximum number allowed per year, however they may have not used the maximum number yet. It is important to have this conversation before the end of the year in order to figure out the potential options and do the relevant tax calculations involving the potential net profit subject to GILTI tax.
There are many different options available to potentially reduce the tax rate for an individual, and the tax professional will help make their client aware of what these options are. It is different in each client’s situation; it depends on the individual taxpayer and their company. The individual’s income outside the company may fluctuate and put them within a different marginal tax bracket, or multiple family members could be involved in the business. It is worth talking to a tax professional about all these potential options to see what can be done by the end of the year in order to reduce the tax.
Another thing to consider is whether the ownership structure of the company is in the ideal position for tax. If an individual owns more than 50% of the shares of a foreign company, they control that company, and thus they are subject to GILTI tax on the net profit of that company. However, if they own less than 50%, it is a different situation for the individual.
Again, it is important to have a conversation with a professional in advance of the end of the tax year in order to determine what the individual’s ownership percentage is, and discuss the possibility of adjusting it so that they do not own more than 50%.
How much might this consultation, and ongoing assistance, cost?
The initial consultation with the professional is free. They will assess your individual case, and plot a potential course going forward. Depending on the work which needs to be done, we will then negotiate the best possible price for you.
Contact us at Expat Tax Online to learn more.