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Tax practitioners have several questions about the newly minted tax law and are awaiting guidance on how to interpret many of its provisions.
The Internal Revenue Service and Treasury Department have a short runway to release regulations and other guidance implementing the law (Pub. L. No. 115-97), which President Donald Trump signed Dec. 22. Here’s the short list of the initial questions tax practitioners have as they seek to advise clients on the changes.
U.S. multinationals are anxiously awaiting guidance on three big international provisions in the law.
One provision requires taxpayers to bring back their overseas money in a “deemed repatriation,” subject to a one-time tax—with rates of 15.5 percent on cash and 8 percent on illiquid assets.
The IRS issued Notice 2018-07 on Dec. 29 to address issues of double counting and the definition of cash, among others, but much more guidance is needed, according to Dentons partner John Harrington, who chairs the Bloomberg Tax International Advisory Board.
One issue is that the law requires companies to count their earnings and profits as of Nov. 2 or Dec. 31, on whichever date the amount is greatest. Harrington said taxpayers need guidance on how to determine:
Companies need guidance on a provision that requires U.S. shareholders of controlled foreign corporations to pay tax on their global intangible low-taxed income (GILTI), Steptoe & Johnson LLP partner Robert J. Kovacev said. Taxpayers need help figuring out how to calculate their qualified business asset investments when determining GILTI, he said.
Kovacev said the statute specifically calls for regulations on the treatment of specified tangible property that is transferred or held temporarily.
Multinationals also need the IRS’s help on a 10 percent base erosion anti-abuse tax (BEAT). This requires that U.S. multinationals making “excessive” deductible payments to their foreign affiliates pay a 10 percent tax on their income without those deductions, after a one-year, 5 percent transition rate. In 2026, the rate would increase to 12.5 percent.
Kimberly S. Blanchard, a partner with Weil, Gotshal & Manges LLP, said the BEAT raises “thousands of conduit-type questions going to when a deductible payment is really going to a related party vs. an unrelated party. The statute is very simple-minded and does not resemble real life cash flows.”
The law allows businesses to write off the cost of capital expenditures in one year, instead of depreciating the property over several years. The change is applied for property acquired after Sept. 27, 2017, but the law doesn’t specify exactly how an acquisition is defined in the statute, said Jane Rohrs, a director in the Federal Tax Accounting Periods, Methods & Credits Group at Deloitte Tax LLP.
Rohrs said it would also be helpful to understand if the government is going to follow the committee report or the statute where the two are inconsistent.
“For example, the statute does not provide a class life or recovery period for Qualified Improvement Property (QIP), and it is not clear whether the property would be eligible for bonus depreciation,” she told Bloomberg Tax in an email. “However, the Committee Report clearly indicates the intent that QIP is depreciated over 15 years for regular Modified Accelerated Cost Recovery System (MACRS), and is eligible for bonus depreciation.”
The new tax law limits the business interest deduction to 30 percent of a company’s earnings before interest, taxes, depreciation, and amortization (EBITDA) for four years starting in 2018. Beginning in 2022, the deduction is limited to 30 percent of earnings before interest and taxes (EBIT).
It “seems to me the limitation itself is reasonably straightforward, but it’s in the exceptions that you’ll find some unforeseen wrinkles,” said Liam Donovan, a tax lobbyist at Bracewell LLP in Washington. The law exempts taxpayers with average gross receipts of $25 million or less from the interest limitation. It also provides exemptions for certain regulated public utilities, real property trades, farming businesses, and car dealers using floor plan financing loans to fund their inventory.
“When you carve out specified industries from certain restrictions (and except them from certain benefits on the other end), you’ll inevitably have people who want to find their way in or out of that definition,” Donovan told Bloomberg Tax in an email. “So any activity singled out as not being included in ‘trade or business’ for purposes of the interest limitation (e.g. ‘real property,’ farming, utilities) is likely to yield questions when it comes to implementation.”
For example, Donovan said it is somewhat unclear how the exception for regulated utilities applies to holding companies that incur debt related to those utilities. “It could apply only at the entity level; it could be allocated based on existing guidance—we just don’t know at this point,” he said. “So things like that may take a bit more clarity from IRS.”
Tax lawyers are waiting for the IRS to weigh in on what types of businesses will qualify for a 20 percent deduction on certain pass-through income. The law doesn’t allow service business owners earning more than $157,500 as individuals or $315,000 as joint filers to claim the full deduction.
The tax law defines a service business as an entity in the fields of health, law, consulting, athletics, financial services, or brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.
Tax practitioners say a definition relying on the reputation or skill of an employee is too broad and could apply to many businesses outside of those typically thought of as service businesses.
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