Tax reform: What you can do now and how to plan ahead

Transcription

1 Tax reform: What you can do now and how to plan ahead

2 What s inside Plante Moran s tax reform playbook takes a detailed look at the tax reform opportunities and challenges most likely to impact businesses. THIS BOOK CONSISTS OF TWO PARTS: 1 What you can do now to optimize your tax position for the 2017 tax year before it s too late. 2 How to prepare your business for 2018 and beyond. KEEP IN MIND This legislation was enacted quickly, and a substantial amount of guidance will be necessary to interpret many provisions. Further, some portions of the legislation may not have been written correctly based on how Congress appears to have intended the law to operate. Therefore, there certainly will be changes in how portions of this legislation will operate going forward. Businesses will need to keep an eye on future changes to ensure any actions taken now will work as intended.

3 NAVIGATE THE S

4 Navigate tax year 2017 Defer income; accelerate deductions Since effective tax rates will decrease for most businesses, many planning items for the 2017 tax year revolve around deferring income into 2018 and accelerating deductions into For a C corporation whose tax rate is dropping from 35 to 21 percent, every dollar of accelerated deduction or deferred income generates a permanent savings of 14 percent. Similarly, for a pass-through entity whose tax rate may be dropping from 39.6 to as low as 29.6 percent (after considering the effect of the new qualified business income deduction), the same planning step results in a permanent savings of up to 10 percent.

5 All businesses

6 Tax accounting methods 1 APPLIES TO All businesses Changing accounting methods or adjusting practices to maximize the benefits of existing accounting methods are some of the most impactful planning strategies available. This could involve a number of areas such as: Paying bonus, commission, and other compensation accruals within 2½ months of year end, if using an accounting method that permits this deduction and the accrual was fixed and determinable as of year end. Accelerating the deduction for real or personal property taxes. Fully maximizing the deduction for research and experimentation expenditures under Section 174, particularly those otherwise included in inventory, capitalized into constructed fixed assets, or capitalized into software development costs. Considering lower-of-cost or market or subnormal goods write-downs for inventory. Accelerating payment of certain noncompensation liabilities. Changing from the accrual method to the cash method if gross receipts are under the applicable threshold for an automatic accounting method change. Changing from the cash method of recognizing advance payments to a one-year deferral method. Note: Only automatic accounting method changes can be filed in 2018 and still apply to the 2017 tax year. Taking advantage of existing accounting methods often requires certain actions to occur within a specified period of time after year end. Since you'll want to take time to analyze the viability of new methods and whether each is eligible as an automatic change, it's imperative to understand the ramifications of these items and act promptly if warranted.

7 Depreciation Significant changes were made to depreciation rules, including an increase in bonus depreciation to 100 percent and the expansion of the types of assets eligible for the new rules. 2APPLIES TO All businesses with depreciable assets Two important planning tools for depreciation include: 2A: Properly applying new depreciation rules The 100 percent bonus depreciation rules will apply to assets both new and used that were acquired and placed in service after Sept. 27, 2017, but only if a written, binding contract was not in place to acquire the property before Sept. 27, Determining the date property is placed in service is even more important now since property not eligible for the new rules will only be eligible for 50 percent expensing, and only then, if it meets the requirements of the previous bonus depreciation rules. 2B: Depreciation accounting method changes Another method of accelerating depreciation deductions is to identify assets placed in service in prior years that may be eligible for additional depreciation not previously claimed. For example, consider the following possible actions to accelerate depreciation expense into 2017: Conduct a cost segregation study for previously constructed or purchased real property. Review prior capitalized repairs to determine if they can be expensed. Determine whether prior assets, such as qualified improvement property, may be eligible for bonus depreciation that was not claimed or if property may be eligible for shorter lives than are currently being used. Accelerating depreciation deductions often is one of the most lucrative accounting method change opportunities. Since most depreciation issues can be corrected through automatic accounting method changes, there is still time to move these deductions into the 2017 tax year if warranted.

8 Retirement plan payments 3APPLIES TO All businesses with retirement plans, particularly defined benefit pension plans Taxpayers have a lot of flexibility when it comes to deducting pension plan and other qualified retirement plan payments, because they often are able to choose the year in which those payments will be deductible. In order to deduct a retirement plan payment in 2017, you ll generally need to make a payment by Sept. 15, 2018, and report the payment on your 2017 pension plan return. Consider taking steps to allow 2018 payments to be deductible in 2017, or consider making extra payments. These payments do have implications for the plan itself; therefore, broader consideration should also be given to: The ceiling on deductible pension plan contributions for Long-term cash flow projections with and without the excess payment. Change in future Pension Benefit Guaranty Corporation (PBGC) premiums resulting from a decrease in an underfunded liability.

9 Net operating losses (NOLs) and other tax attribute utilization 4APPLIES TO Businesses anticipating NOLs or excess credits in 2017 Despite relatively good economic times for many companies, some have incurred taxable losses, and taking advantage of decreasing tax rates may not seem possible. However, there are still opportunities for these businesses. For example, the business may consider maximizing an NOL in 2017 in order to carry it back to obtain refunds of tax from earlier, higher-taxed years. Even if excess NOLs in 2017 cannot be fully carried back, it may still be advantageous to maximize the NOL because NOL carrybacks are no longer permitted after Any losses generated in later years will only be able to offset 80 percent of taxable income in any single year when carried forward. By accelerating losses into 2017, these limitations can be avoided. However, the 2017 NOL will be subject to the 20-year carryforward rules rather than the unlimited carryover rules for NOLs generated in later years. Corporations with existing NOLs may still be able to utilize those against income generated during For example, if the corporation may be eligible to file a consolidated tax return but hasn t historically, making that election in 2017 may be much more favorable than in the past. Taxpayers with NOLs or other attributes should closely analyze ways to maximize or utilize those attributes more efficiently in 2017 before tax rates change and other loss limitations go into effect.

10 C corporations

11 Fiscal-year C corporations 5APPLIES TO Fiscal-year C corporations Fiscal-year corporations have much more planning available to them than calendar-year corporations because they still have time to take certain actions before their year end. For example, if an amount is only deductible if paid by year end, a fiscal-year corporation may still be able to plan to make this payment while a calendar-year corporation can no longer take this action. Additionally, fiscal-year corporations can still take action to defer certain transactions that may create significant income, such as the sale of a business unit or certain related-party transactions. In addition, fiscal-year corporations get an immediate benefit from the reduction in the corporate tax rate because they receive a prorated tax rate in the fiscal year that straddles Dec. 31, For example, a corporation with a March 31, 2018, year end will have a tax rate of approximately 31.5 percent on all income generated during that year (9/12 months at 35 percent + 3/12 months at 21 percent). Closely scrutinize all traditional deduction acceleration and income deferral techniques to determine how to maximize savings in this decreasing tax rate environment. This is especially true for corporations that historically have not entertained many planning opportunities related to timing differences.

12 Pass-through entities

13 New suspended loss provision for business losses 6APPLIES TO Business owners structured as pass-through entities Beginning in 2018, aggregate business losses in excess of $250,000 ($500,000 for a married taxpayer) are not deductible by an individual, estate, or trust and must be carried forward as a net operating loss (NOL) in subsequent taxable years. This NOL will be subject to all NOL carryforward rules including the rule that only permits it to offset up to 80 percent of taxable income in future years. As NOL carrybacks are no longer allowed after 2017, many taxpayers will not have a need for these excess business deductions anyway. However, to the extent that a taxpayer has other nonbusiness income in excess of $250,000 ($500,000), this rule will cause tax liabilities where none had existed before. Taxpayers who may be subject to this rule beginning in 2018 should maximize any losses in 2017 in order to preserve the carryback of that loss, minimize the chance of being subject to this rule going forward, and even create NOL carryforwards that will be able to offset income from all sources in future years.

14 International businesses

15 Territorial tax system and the transition tax 7APPLIES TO All taxpayers owning a foreign corporation The new tax law reshapes the entire U.S. tax system as it relates to foreign activity through the adoption of a modified territorial tax system. To make the transition to this new system, earnings that have been deferred in foreign subsidiaries will be subject to a one-time repatriation or so-called transition tax 15.5 percent for earnings held in cash and 8 percent for all other earnings. This tax is due with the 2017 tax return but can be spread over eight years at the election of the taxpayer. S corporations can elect to defer the tax until certain triggering events occur. State tax implications will also need to be considered. Closely review accumulated earnings and profits and foreign tax pools in each foreign subsidiary to determine if planning opportunities, including accounting method changes, may exist to minimize tax. This process can be time-consuming and should not wait.

16 Foreign tax credit utilization 8APPLIES TO Any business that is paying tax in another country The shift to a territorial tax system and other changes in the foreign tax credit will result in a reduced ability to claim a foreign tax credit in future years. In addition, the rules have become significantly more complex, and there are several gray areas awaiting more specific guidance. It s critical for businesses to understand how the changes to the foreign tax credit will impact them in future years and to look at ways to maximize their utilization of any foreign tax credits in 2017.

17 Accounting method for payments to foreign-related parties 9APPLIES TO Businesses with foreign subsidiaries or foreign parents Some expenditures accrued to foreign-related parties cannot be deducted until paid, but many expenditures can still be deducted when accrued. Depending on the circumstances, this may include accrued interest, royalties, management fees, and other similar items. Re-evaluate accounting methods related to any items accrued to a foreign parent or subsidiary to determine if a correction to that method is necessary and may result in a favorable treatment overall (See 2017 Play 1: Tax accounting methods).

18 Navigate tax year 2018 Improve your future tax position For tax year 2018 and forward, tax planning revolves around understanding the impact of the changes in the tax law, maximizing the impact of beneficial changes, and taking steps to minimize the impact of changes that will adversely affect your business.

19 All businesses

20 Revenue recognition 1APPLIES TO All businesses Beginning in 2018, companies with audited financial statements will not be able to defer the recognition of revenue for tax purposes any later then when recognized on their books. In addition, the accounting for deferred revenue, advance payments, or customer deposits may get included in taxable income sooner than in the past. Many businesses will be implementing new generally accepted accounting principles/ International Financial Reporting Standards (GAAP/IFRS) revenue recognition accounting standards for book purposes during 2018, which may necessitate changes in tax revenue recognition positions. Businesses will see substantial changes in both book and tax revenue recognition rules during While some changes may be favorable, it will be critical for companies to understand how the changes will impact their tax position long before the end of the year to avoid surprises and ensure appropriate tax accounting method change processes are being addressed.

21 Business interest expense limitation 2APPLIES TO All businesses with interest expense Beginning in 2018, the deduction for business interest expense will be limited to the sum of business interest income plus 30 percent of the adjusted taxable income. Adjusted taxable income is defined as a tax-basis EBIDA (taxable income before interest, depreciation, and amortization). However, there s a cliff beginning in 2022 when depreciation and amortization will no longer be added back when computing the limitation. The limitation will apply both to C corporations and pass-through entities, but small businesses with less than $25 million in average annual gross receipts for the prior three years are exempt. Also exempted are certain industries, including real estate activities, motor vehicle dealers, and regulated utilities. A number of strategies exist for taxpayers who may be subject to the limitation. For example, interest could be minimized by restructuring debt into different types of preferred equity. For taxpayers with related-party debt, planning is especially important if interest expense will be limited while interest income remains fully taxable. Planning can take substantial time since it often involves parties not controlled by the taxpayer. The quicker taxpayers act, the more likely it is they will see savings.

22 Meals and entertainment and fringe benefit expenses 3APPLIES TO The new law bars the deduction of most business-related entertainment expenses, which were previously 50 percent deductible. While many meals have always been subject to a 50 percent limitation, more meals than before will be subject to it, although some exceptions will still exist. Further, certain expenses incurred for qualified transportation fringe benefits (e.g. parking or mass-transit benefits) and certain employee achievement awards will become nondeductible. All businesses Taxpayers should evaluate the magnitude of expenses in this category and determine whether providing the entertainment or other nondeductible benefits still makes sense. At a minimum, review current accounting for these expenses to determine if alternative methods will be needed to track these expense categories separately.

23 Transactions, mergers, and acquisitions (M&A) 4APPLIES TO Businesses entertaining sale or purchase transactions Several provisions of the new tax law will substantially impact business purchase and sale transactions and may cause changes to how even routine transactions have been conducted in the past. Buyers might consider how to finance an acquisition in light of the interest expense limitations, whether a different entity type is warranted, whether an acquisition of assets may allow for immediate expensing of some depreciable assets, and how changes in future tax rates impact the value of a target or an asset basis step-up. Sellers might consider whether their approach to an asset or equity sale still makes sense in light of rate changes, how the sale will impact their eligibility for the qualified business income deduction (See 2018 Play 13: Eligibility for qualified business income deduction (QBID) for pass-through businesses), and how to get the maximum value for transaction cost deductions in light of the changes to net operating losses (NOLs) and excess business losses. Going forward, closely review all aspects of transactions with all of the new laws in mind.

24 Section 1031: Like-kind Exchanges 5APPLIES TO All businesses making like-kind exchanges Section 1031 Like-kind Exchanges permit a taxpayer to defer gain on the exchange of property used in a trade or business or held for investment. In the past, personal property could qualify for like-kind exchange treatment, but the new law now limits this to only real property. This will directly impact many taxpayers that routinely sell or trade-in assets while purchasing similar equipment. This includes taxpayers with large fleets of automobiles or heavy equipment. These transactions will no longer be eligible for gain deferral. This will also impact taxpayers that exchange real estate, because most real estate contains at least some elements of personal property. This is especially true in multifamily residential property. Going forward, a like-kind exchange of a building that includes personal property elements will result in immediate gain recognition on the personal property. However, taxpayers are still eligible for 100 percent bonus depreciation on certain new and used personal property for the next several years (See 2017 Play 2: Depreciation). Even if a gain is recognized on disposed property, the potential for immediate expensing of the newly acquired property may largely mitigate the impact. Now that personal property, such as equipment, does not qualify for gain deferral under Section 1031, taxpayers should closely scrutinize these transactions and project out the anticipated tax results before entering into them to avoid unexpected surprises.

25 Small taxpayer accounting method considerations 6APPLIES TO The new law opens up the cash method of accounting to taxpayers with less than $25 million of average gross receipts over the prior three years. These taxpayers are also exempt from inventory accounting, permitting them to account for inventory consistent with their book method or to just capitalize materials costs. In addition, these taxpayers are exempt from the percentage-of-completion accounting requirements. All businesses with less than $25 million in average annual gross receipts over the prior three years Taxpayers that may benefit from this change should consider the impact on their businesses going forward and monitor any potential accounting method change filings that likely will be required to implement the change. Future guidance from the IRS will clarify this process.

26 Employee benefits 7APPLIES TO Under the new law, some existing employee benefits change in 2018, and some new ones have been created. For example, reimbursement of moving expenses and qualified bicycle commuting reimbursements that were previously excluded from income will become taxable in And employers are now permitted to claim an income tax credit in 2018 and 2019 for certain wage continuation payments made while an employee is on a family or medical leave. All businesses Employers must re-evaluate some existing employee benefits that will no longer be excluded from employee income or will no longer be deductible by the employer (See 2018 Play 3: Meals and entertainment and fringe benefit expenses). Employers also should consider implementing new employee benefit arrangements that now can be subsidized with income tax credits.

27 Research credit 8APPLIES TO All businesses The new law increases the research credit by approximately 22 percent for almost all companies. In addition, repeal of the corporate AMT (alternative minimum tax) will permit corporations to utilize more research credits, since they may have been limited by the AMT in the past. Similarly, even though the individual AMT is still in place, individuals may be able to claim more credits than they have in the past because of the increased AMT exemption and exemption phase-out range. Not currently taking advantage of the research credit? Consider revisiting that decision. If you are already taking advantage of it, consider taking a deeper dive into potential qualifying activities than you have in the past.

28 Domestic production activities deduction (DPAD) 9APPLIES TO Manufacturers, real estate developers, and other producers The domestic production activities deduction (DPAD) is repealed for tax years beginning after Dec. 31, For corporations, the loss of DPAD is more than offset by the reduction in corporate tax rates. For pass-through businesses, the loss of DPAD should be offset by the reduction in individual tax rates combined with the qualified business income deduction (See 2018 Play 13: Eligibility for qualified business income deduction (QBID) for pass-through businesses). Taxpayers should not count on DPAD being available in future years. Most pass-through businesses that previously qualified for DPAD will likely qualify for the QBID. However, this will not always be the case, so careful scrutiny should be placed on the QBID to ensure that the transition from DPAD to QBID is smooth.

29 State and local tax (SALT) 10 APPLIES TO All businesses Most provisions of the new law require consideration of the impact on SALT obligations. When trying to understand the effects of specific provisions on SALT, businesses generally need to start by asking this critical threshold question: What version of the Internal Revenue Code (IRC) has, or will, the state or locality adopt? The question refers to conformity, and most states fall into one of two key types: Rolling conformity states follow the current IRC, while fixed conformity states adopt the IRC in effect as of a particular date. A few states, such as California, pick and choose which parts of the IRC they follow and which they decouple from, known as selective conformity. Other outliers, such as Michigan, default to fixed conformity but permit the taxpayer to elect rolling conformity to the IRC currently in place. In states with rolling conformity, the provisions likely to have the greatest impact on SALT include bonus depreciation, the limitation on the interest expense deduction, and the transition tax on foreign earnings. The details and nuances, however, are many. Additionally, there is an expectation that states will enact amendments to state tax laws to counter or mitigate the impact of the changes in federal tax law, which will create an evolving SALT landscape for the next several years. Taxpayers filing in a fixed conformity state can expect additional tax compliance efforts to modify federally reported taxable income, and possibly create a pro forma federal return that aligns with the IRC version in effect for the respective state. Businesses should also begin considering now whether the states in which they file returns may decouple from provisions effective in the 2017 tax year. Businesses also should begin considering how these states will react to provisions effective in the 2018 tax year when determining their 2017 extension payments and 2018 estimated tax payments. Since some of these decisions may have to be made before there is additional clarity, begin by looking at high-priority states those where taxpayers conduct significant business activities and historically have had the greatest tax liability. And, in states such as Michigan, talk to a tax advisor about the conformity date that will be most advantageous to the taxpayer s company.

30 Estate tax changes 11 APPLIES TO All business owners With the new tax law come new estate, gift, and generation-skipping transfer (GST) tax exemption amounts. The amount individuals may transfer to heirs, free of transfer tax, increases to $11,200,000 per individual, up from $5,600,000. This greater amount may be transferred to heirs during one s lifetime or upon passing. Note that the changes only apply through Dec. 31, The current climate offers several planning opportunities, so review your estate planning documents. These are typically drafted with formulas tied to the estate or generation-skipping transfer (GST) exemptions in place at the time of one s death. But the formula provisions can produce significantly different results, depending on the amount of the exemption. It s also important to review how your formula clauses impact your spouse and other beneficiaries. Other opportunities may include lifetime gifting, transitioning closely held businesses, and reviewing the economics of life insurance policies intended to provide estate tax liquidity. With the higher exemption, families no longer subject to the estate tax may want to consider shifting focus to income tax planning to maximize the step-up in cost basis afforded to assets held in the estate at one s death.

31 Pass-through entities

32 Applies to Entity choice 12 APPLIES TO Businesses structured as a pass-through entity Since corporate tax rates will decrease substantially while pass-through business tax rates will decrease by a lesser amount, C corporations will look more attractive than before. That said, all of the many other considerations that go in to entity choice decisions won t change. In many cases, a pass-through structure may still be more advantageous. Making a proper determination of the ideal entity structure requires a holistic view not only of the tax on operating income and distributions but also of the long-term outlook for the business. This includes your exit or transition plan, since in many cases, it can be more advantageous to sell or transfer a pass-through entity than a C corporation. For businesses with foreign operations, the changes to international tax provisions also have a significant impact on this decision. Many of those provisions apply very differently to C corporations than they do to pass-through entities. If you ve made a decision, and you re ready to move forward, you generally must have acted by March 15, Otherwise, take the appropriate time to evaluate and consider the short- and long-term implications of changing entity types before acting.

33 Eligibility for qualified business income deduction (QBID) for pass-through businesses 13 APPLIES TO Businesses structured as a pass-through entity Under the new law, individuals, trusts, and estates may deduct up to 20 percent of qualified business income. This deduction has many exceptions and limitations, including some based on the type of business, W-2 wages paid by the business, and the cost of depreciable assets held. Further, professional services income of an individual is only eligible for the QBID when the recipient s taxable income is below $207,500 for a single taxpayer and $415,000 for a married taxpayer. The benefit also begins to phase out when taxable income approaches those amounts. The professional services that the above limitation applies to are health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners. The limitation also applies to the performance of services that consist of investing and investment management, trading, or dealing in securities, partnership interests, or commodities. The definition of each of these terms is largely unclear. Business owners need to understand how the QBID limitations may impact them and then look at planning opportunities to maximize the deduction. Some businesses will have to take active steps, many of which may require immediate action. This especially includes businesses that do not employ their own workforce, that lease most assets, that structure certain business units as separate entities, or that expect significant income to be generated through a one-time event. Professional services businesses should begin to consider whether they may fall into one of these restricted categories, and if adjusting certain elements of the business or spinning out certain qualifying elements of the business may be warranted.

34 Excess business losses 14 APPLIES TO Businesses structured as pass-through entities New suspended loss provision for business losses discusses how aggregate business losses will only be deductible by the individual owner of a business to the extent it doesn t exceed $250,000 for a single taxpayer or $500,000 for a married taxpayer. Pass-through entities must consider these rules in determining whether and how to take advantage of new significant tax deductions, such as 100 percent bonus depreciation, and whether tax may be due on nonbusiness income despite being offset by other losses in prior years.

35 Holding periods on profits interests and carried interests 15 APPLIES TO All private equity, venture capital, real estate, and similar investment funds Under prior law, a taxpayer holding a profits interest in a partnership could be allocated long-term capital gain from that interest regardless of how long they held the profits interest or how long the partnership held the investment. They could sell the profits interest and generate a long-term capital gain as long as they held it for at least one year. Under the new law, the partnership must hold its underlying investment for at least three years in order for the profits interest holder to obtain long-term capital gain treatment. Also, the profits interest holder must hold their interest for at least three years in order to generate long-term capital gain treatment on the sale of the profits interest. This applies to profits interest in a partnership received in exchange for services rendered in the business of: Raising or returning capital. Investing in specified assets or identifying specified assets to invest in. Developing specified assets. Specified assets include corporate stock, partnership interests, debt, rental or investment real estate, commodities, notional principal contracts, and derivatives, in addition to other investments. Further, interests issued and outstanding prior to the enactment of the new law are still subject to the three-year holding period for long-term capital gains recognized after Dec. 31, Profits interest and carried interest holders should look closely at this rule to understand their tax obligations on any recognized gains and consider whether planning may be available to avoid this rule.

36 International businesses

37 International issues 16 APPLIES TO All businesses with foreign operations The new tax law made significant changes to how foreign activity is taxed. These include a shift to a territorial tax system, a minimum tax on certain corporations with payments to foreign-related parties, a minimum tax on income earned in foreign subsidiaries, and a deduction for foreign intangible income and exported property. These provisions are complex and often apply very differently to C corporations versus pass-through entities, with pass-through entities generally treated less favorably. The changes could dramatically affect the manner in which a business should be structured or the way in which its domestic and foreign operations should interact. All companies with foreign operations must understand how the various changes will impact them, including taking a hard look at existing structures and operations to determine if changes are needed to avoid adverse consequences. This is particularly true for businesses structured as pass-through entities.

38 Domestic holding companies 16a APPLIES TO Pass-through businesses with foreign corporation subsidiaries C corporation holding companies can allow for repatriation of cash from foreign subsidiaries without any U.S. tax, since C corporations are eligible for the deduction on foreign dividends while a pass-through entity is not eligible for the deduction. C corporation holding companies may also allow for capital gains rates on dividends from subsidiaries in jurisdictions without a U.S. tax treaty. For widely held partnerships, a C corporation domestic holding company may provide a simple method of substantiating tax residency to take advantage of tax treaties with the United States to lower withholding taxes on dividends. S corporations and partnerships with foreign operations may benefit from forming a C corporation holding company to hold their foreign subsidiaries.

39 Base erosion anti-abuse tax (BEAT) 16b APPLIES TO C corporations with gross receipts over $500 million and a base erosion percentage of at least 3 percent The new law imposes a minimum tax on a corporation s modified taxable income 5 percent in 2018, 10 percent from 2019 to 2025, and 12.5 percent thereafter. Modified taxable income adds back certain deductible payments to foreign-related parties, potentially including addbacks of a portion of net operating losses (NOLs). These corporations will pay the higher of regular tax or the BEAT, similar to how the alternative minimum tax (AMT) has historically operated. The new law provides for the use of transfer pricing analyses to reduce the impact of BEAT on charges for certain lowvalue intercompany services. An effectively documented application of the Services Cost Method (SCM) is an essential tax-planning tool. If you are a large corporation and make significant payments to foreign-related parties, you may be subject to the BEAT. You should immediately review whether this is the case and determine if there are planning opportunities to reduce this tax.

40 Global intangible low-taxed income (GILTI)Applies to 16c APPLIES TO Any U.S. person owning 10 percent or more of a foreign corporation The GILTI effectively repeals the deferral or exclusion of U.S. tax on foreign earnings by immediately subjecting certain foreign subsidiary earnings to tax. A corporate parent is subject to a 10.5 percent rate, while an individual owner pays tax at ordinary rates (up to 37 percent). GILTI also has a reduced deemed foreign tax credit. If you have more than 10 percent ownership in a profitable foreign subsidiary, you ll want to forecast the GILTI impact. Individuals may be able to elect to postpone the tax under certain circumstances. For corporations, although GILTI is subject to a lower tax rate, certain situations might cause the effective rate to actually be higher, making it even more necessary to begin modeling the impacts immediately. Consider a review of transfer pricing policies to optimize foreign subsidiary profitability, consistent with that entity s functions and risks and applicable local transfer pricing rules.

41 Foreign-derived intangible income (FDII) 16d APPLIES TO C corporations with customers outside the United States This new provision offers a 37.5 percent deduction on qualifying income, bringing the effective tax rate to percent. These effective tax rates will increase after FDII is particularly beneficial to C corporations that are not capital-intensive. The deduction is allowed for foreign-owned C corporations too. If you are a C corporation with significant taxable income attributable to foreign customers, this provision is definitely worth a closer look. For foreign customers that are related parties, revised transfer pricing could increase FDII, consistent with each entity s functions and risks and applicable local transfer pricing rules. S corporations and partnerships may consider establishing a domestic corporation to house export activity and take advantage of this provision.

42 Change is here. Don t wait to define your plays. Many of the tax-planning strategies in this playbook may require quick action either to implement a change or to start a process of further evaluation. That's why it's so important to understand and assess all the factors relevant to your business immediately. Have questions? Give us a call. Our deep technical knowledge helps companies like yours uncover potential new savings opportunities. And, with over 90 years of business experience and expertise, we also provide the meaningful insights that help you focus: Position your business for success. Reach your goals. Make the mark. Mike Monaghan Partner, National Tax Office mike.monaghan@plantemoran.com Kurt Piwko Partner, National Tax Office kurt.piwko@plantemoran.com

43 Want more? Check out our full tax reform toolkit including short videos, in-depth webinars, and a variety of other resources at plantemoran.com/taxreform. Plante Moran is among the nation s largest certified public accounting and business advisory firms. For more than 90 years, we ve helped our clients achieve their business and personal goals to make the mark. Our more than 2,200 audit, tax, consulting and wealth management professionals and staff deliver seamless, fully integrated services to clients across the United States and around the world. Respected for our personal touch and deep expertise, Plante Moran has been recognized by a number of organizations, including Fortune magazine, as one of the country s best places to work. Plante Moran is a founding member of Praxity, AISBL, the world s largest alliance of independent audit, tax, and consulting firms with more than 41,000 professionals in over 100 countries.