Significant final regulations under section 163(j), which includes the interest expense limitation that was issued in July 2020 to reflect amendments made by the Tax Cuts and Jobs Act (TJCA) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act, were recently signed at the beginning of January 2021. There are some changes for U.S. persons who own 10% or more of multiple foreign corporations.
Highly related Controlled Foreign Corporations (CFCs), which are foreign corporations who are owned by at least 50% of U.S. persons, form a specified group and can make an election to compute their section 163(j) limitation on a group basis. Highly related means the CFCs are owned by 80% or more directly or indirectly by the same U.S. person or another CFC from the specified group.
There are two avenues that you can go through when doing the group election.
- Safe Harbor Election
- An election to not compute the CFCs interest expense limitation. To make this election, the group’s total business interest expense cannot exceed the lesser of 30% of 1) tentative taxable income or 2) the sum of subpart F and GILTI (including section 250 deduction).
- Group Election
- You calculate the interest expense limitation as a CFC group rather than each individual CFC having their own calculation.
- Once this election is made or revoked to a specified period, the 60-month period begins before you can make a different interest expense limitation election.
A key difference between the two elections is the allowance to use GILTI income in the U.S. domestic parent tax return’s interest expense limitation. The reason that this is important is because you are increasing the tentative taxable income base for the U.S. domestic parent that is limited to 30%. So, in theory, you will be allowed to deduct more U.S. interest expense if you were limited before the group election. The safe harbor election does not allow you to use this GILTI income, whereas, the group election does.
It is important to model the best tax scenario for your company. As tax rates are expected to rise with the Biden administration’s agenda, taxpayers may want to defer deductions. Also, note that taxpayers may choose to retroactively apply the final regulations if desired. This provides another opportunity for tax planning.
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If you have any questions relating to international tax strategies, please reach out to our team of dedicated international tax experts.
Connect with a member of the Barnes Dennig international tax team or call (513) 241-8313 for answers to questions you have regarding your specific tax situation. We’re here to help.