Things to Consider Before Filing Return for Corporate Taxpayers!
As we are approaching the extended due date of 2018 income tax returns, here are some reminders of key considerations that could potentially reduce tax liabilities:
Monetization of AMT Credit
Corporations are no longer subject to the Alternative Minimum Tax (“AMT”) under the new tax law. However, many corporations have paid in AMT in the past and may have AMT credit carryforwards that is refundable starting in 2018 through 2022. 50% of the corporation’s AMT credit carryforwards are refundable in 2018. If your company was subject to AMT in the past, you should explore this opportunity to monetize AMT credits carryforwards.
Bonus depreciation percentage has increased from 50% to 100% for qualifying property acquired and placed in service during 2018 through 2022. Generally, the 100% write-off applies to depreciable business assets with recovery period of 20 years or less that are placed in service in the U.S.A.
One of the centerpieces of the President Trump’s tax reform was to create a more tax-efficient environment and to make the U.S tax system competitive with other tax regimes around the word. As part of this reform, Congress added Internal Revenue Code (IRC) Section 250 “Foreign-Derived Intangible Income” (FDII) deduction which provides an incentive to domestic corporations in the form of a lower tax rate on income derived from foreign market.
Under Section 250, U.S. corporations are entitled to a preferential rate reduction from 21% to 13.15% on income derived from foreign market. This preferential rate applies to the qualifying income from 2018 through 2025, and then slightly increased to 16.4% thereafter.
Minimization of GILTI Tax
Global Intangible Low-Taxed Income (“GILTI”) is a new category of foreign income that must be added to the US taxpayers’ taxable income each year effective January 1, 2018. In a nutshell, it is a tax on foreign subsidiaries’ earnings that exceeds 10 percent return on their investment in hard assets (such as fixed assets used for operation). Under the GILTI tax regime, foreign subsidiaries’ income in excess of their 10% return on hard asset investment is considered as income attributable to the US intangibles, and US tax is imposed on such excess income each year.
There are various strategies and planning ideas to avoid or reduce GILTI tax: check-the-box election, section 78 gross up with deemed paid foreign tax credit, section 962 election for individual taxpayers, transfer pricing planning, sourcing foreign income to subsidiaries with substantial hard asset, and ownership restructure to disqualify as controlled foreign corporation.
Foreign Dividend Exemption
A full participation exemption is available under the new tax law which exempts certain foreign sourced dividends paid to 10 percent US corporate shareholders for federal income tax purposes. If your company received a dividend from one of its foreign subsidiaries during the year, the company may be eligible for this exemption.
R&D Tax Credits
The Research and Development (R&D) tax credit, first introduced in 1981, is a government-sponsored tax incentive that rewards companies for conducting R&D activities in the United States. This credit was implemented to incentivize innovation throughout the economy and to keep technical jobs here in the United States.
The benefit of the R&D tax credit could range from 14% to 20% of qualifying expenditures that could be used to offset the company’s tax liabilities. In addition, many states have their own means of incentivizing in-state R&D activities.
The Work Opportunity Tax Credit (WOTC) is a Federal tax credit available to employers for hiring individuals from certain target groups who have consistently faced significant barriers to employment. Employers claim about $1 billion in tax credits each year under the WOTC program and there is no limit on the number of individuals an employer can hire to qualify to claim the tax credit.
The maximum tax credit ranges from $1,200 to $9,600, depending on the employee hired. The expiration of the WOTC credit has been extended until the end of 2020.