If Democrats win both runoff elections, the Senate will be split 50-50 and the Vice President will control a tie breaking vote. Under this scenario, it is possible that Congress could pass tax legislation incorporating some or all of President-elect Biden’s campaign proposals. Those proposals include raising the corporate tax rate to 28 percent, raising the standard tax rate on foreign subsidiaries’ earnings (GILTI) to 21 percent and implementing a Corporate minimum tax based on book income. Should Republicans prevail in the Senate runoff elections, such proposals are highly unlikely to be enacted.
In any event, the Internal Revenue Code marches to its own drummer. Key provisions introduced by the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Tax Cuts and Jobs Act (TCJA) are due to soon begin phasing out or end entirely. Other provisions with upcoming sunset dates are traditionally renewed on an ad hoc basis in so-called “extenders” legislation, the future of which is uncertain for now.
Below, we identify the key year-end review items for taxpayers in the areas of corporate and international tax, and what taxpayers should consider when assessing their opportunities and exposure.
Temporary increase to section 163(j) interest limitation
As amended by the TCJA, Section 163(j) generally permits taxpayers to deduct net business interest only up to 30 percent of adjusted taxable income.
The CARES Act temporarily loosened this restriction in several ways. Under the Act, the deduction limit was increased from 30 percent to 50 percent of adjusted taxable income (ATI) for 2019 and 2020 tax years. Additionally, taxpayers may use their 2019 income as the base for their 2020 limitation calculation. The Act afforded partnerships specialized Section 163(j) relief as well.
However, the formula for determining ATI will become less favorable in tax years beginning after December 31, 2021, subjecting taxpayers to lower Section 163(j) limitations. Taxpayers should consider how the shifting limitations on interest deductibility may impact their financing decisions over the next year.
Temporary NOL carryback allowance under section 172
The TCJA generally eliminated carryback of net operating losses arising in tax years beginning after 2017. The CARES Act, however, allows carryback of losses arising in tax years beginning in 2018, 2019 and 2020 to the five preceding tax years.
Taxpayers who face a loss in their 2020 tax year are eligible to carry back the loss under the CARES Act provisions. Taxpayers with capacity to effectively absorb the loss in carryback years may wish to consider accelerating expenses to take greatest advantage of this temporary relief. This consideration should be weighed against any possibility of a corporate tax increase in the coming Congress.
Disaster loss carryback under section 165(i)
Although Section 165(i) is not new to the Code, it has achieved heightened prominence this year. The provision permits taxpayers to treat losses occurring in a disaster area and attributable to a federally declared disaster as arising in the immediately preceding taxable year.
Taxpayers with property losses attributable to wildfires, flooding or the coronavirus outbreak should consider whether this election would be beneficial. In conjunction with the five-year loss carryback provisions under the CARES Act, eligible losses can, in some circumstances, effectively be carried back six tax years.
“Retail Glitch” fixed by amending the definition of “15-Year Property” within section 168(e) to include qualified improvement property “QIP”
The CARES Act included what is commonly referred to as the ‘retail glitch fix,’ which corrected a previous error in the tax law by essentially providing a 15-year recovery period to QIP, rendering it eligible for bonus depreciation and a shorter depreciable life. Importantly, the fix can be applied retroactively to improvements generally placed in service after December 31, 2017. QIP generally refers to any improvement made by a taxpayer to an interior portion of an existing building that is nonresidential real property.
The retail glitch fix affords taxpayers with a 15-year depreciable life for QIP and enables them to take bonus depreciation on eligible QIP put into service in 2018, 2019 or 2020. Taxpayers can get this retroactive relief in one of two ways:
- By filing an amended return or Administrative Adjustment Request; or
- By requesting an accounting method change using Form 3115.
The retail glitch fix could provide significant relief and cash flow for many businesses. In order to fully maximize the changes to the QIP rules, one should consider undertaking a cost segregation study to identify QIP that may have previously been included in another asset class.
CFC look-thru rule under section 954(c)(6)
Section 954(c)(6)’s look-thru rule generally excludes from Subpart F income dividends, interest, rents and royalties received by one controlled foreign corporation (CFC) from a related CFC. The provision is currently due to expire for taxable years beginning after December 31, 2020.
Historically, the CFC look-thru rule has been extended by Congress on an ad hoc basis. Although allowing the provision to lapse would represent a break with past precedent, there is currently no clear legislative vehicle for an extension.
Mazars Insight
Taxpayers relying on Section 954(c)(6) should consider whether to plan for the contingency that the coming Congress fails to renew the provision.
Election regarding foreign tax redeterminations under section 905(c)
Late this year, the Treasury Department finalized regulations concerning the foreign tax credit. In part, the regulations addressed foreign tax redeterminations under Section 905(c).
The final regulations permit taxpayers to elect to account for foreign tax redeterminations affecting pre-TCJA tax years in the final tax year beginning before January 1, 2018. This election offers affected taxpayers an opportunity to simplify their U.S. filing obligations and reduce their administrative burden.
The due date for the election is not straightforward; the election must be filed with the timely filed original income tax returns for the taxable year of each controlling domestic shareholder of the foreign corporation in which or with which the foreign corporation’s “first redetermination year” ends. The foreign corporation’s first redetermination year is its first taxable year that ends with or within a taxable year of a United States shareholder of the foreign corporation ending on or after November 2, 2020, in which the foreign corporation has a foreign tax redetermination.
Mazars Insight
Taxpayers dealing with foreign tax redeterminations affecting pre-TCJA tax years should soon assess whether they would benefit from this election and when it must be made to avoid the potential headache and cost of filing many years of amended returns.
Reexamine intercompany pricing and financing arrangements
As the pace of legislation and related regulatory guidance slows, taxpayers may wish to take this opportunity to reassess internal business arrangements in light of the current economy.
Opportunities may be present in both transfer pricing and intercompany financing arrangements. Taxpayers may be able to lock in unusual and beneficial pricing structures for future tax years. Similarly, the current low interest rate environment offers an opportunity to rethink intercompany as well as external financing arrangements.
Please contact your Mazars LLP professional for additional information.
This alert was produced in conjunction with Ivins, Phillips & Barker, Chtd.
Published on December 11, 2020
The information provided here is for general guidance only, and does not constitute the provision of tax advice, accounting services, investment advice, legal advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers.