What You Should Know About the Tax Cuts and Jobs Act

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The 200-page Tax Cuts and Jobs Act (TCJA) was passed in 2017 and still has officials and tax experts questioning tax codes and compliances in 2021. The TCJA made many complex changes to the United States tax code, many of which had an effect on global businesses operating or having shareholders located in the U.S. While there are still questions left unanswered in regards to the TCJA, it is necessary to understand how this act has changed the processes in order to successfully plan and file your taxes. The team at Evolution Tax and Legal is breaking down some of the changes put into effect by the TCJA, and how to ensure you are complying with the new rules regarding your business taxes.

The Tax Cuts and Jobs Act (TCJA)

The Tax Cuts and Jobs Act was passed in 2017 by former President Donald Trump in an effort to reduce corporate, individual, and state tax rates. The massive bill affected so many parts of the tax code that determining how this bill affects people must be done on a case-by-case basis. Three years and a new presidential administration later, individuals and businesses continue to sift through the 200 pages of tax code, and deal with the changes it implemented. The IRS has been continually clarifying aspects of the TCJA and finalizing guidance for reporting and tax compliance. Questions are still being asked about the TCJA and implications for the future of tax guidelines are still being uncovered. 

The TCJA brought a few key changes to how U.S. shareholders are taxed on earnings from a foreign corporation. These new rules only apply to earnings from a specific type of corporation, a Controlled Foreign Corporation (CFC). A CFC is defined as a foreign corporation in which a U.S. citizen owns at least 50% of the total value of stock of 50% of the combined voting power within the corporation. This ownership can be determined by direct, indirect, or constructive ownership. 

The TCJA has created a number of complex rules and tax compliances for businesses and individuals to take note of. These rules will affect various business functions and have implications for the current and future tax periods. When planning for tax season and ensuring tax compliance, businesses must take these rules into account and ensure they are complying with the complexities of the TCJA.

Criminal Implications for Non-Compliance

Failure to comply with tax regulations set forth by the TCJA could result in large fines and penalties, and potentially, criminal charges. Failure to file will result in fines, causing you to pay interest on the money owed according to your tax filings. A discrepancy on your taxes that is determined to be a mistake will cause a 20% charge on your tax bill, while a discrepancy that is determined to be fraud will result in a 75% civil fine. 

The best option is to avoid discrepancies as much as possible by consulting with a professional and working with accountants, and potentially an auditor, to ensure your taxes are filed properly. Should you still have a discrepancy and have fines due, it is best to consult with a tax attorney to determine your options and pay the fines as soon as possible if that is the advice of your attorney.

Tax Compliance and Planning

Many businesses have recognized the need for sophisticated modeling techniques for tax planning since the implementation of the TCJA. It’s necessary to evaluate your compliance with the new rules, especially for international tax planning. Many of these complexities involve identifying various classes of gross income and allocating deductions accordingly. Some complexities that may affect your business’ international tax compliance include:

  • Expansion of the definition of a U.S. shareholder
  • Elimination of the “30-day rule,” which now permits United States shareholders to be subject to phantom income inclusions even if a business has been classified as a CFC for less than 30 days.
  • Providing U.S. corporations that receive dividends from a Controlled Foreign Corporation, or another 10% or more owned foreign corporation, with a 100-percent dividend received deduction. 
  • The Foreign Derived Intangible Income (FDII) Deduction: a new incentive for U.S. corporations to increase their exports. 
  • Increased foreign tax credit limitation categories for foreign branch income and global intangible low-taxed income. 
  • A new global intangible low-taxed income inclusion for U.S. citizens who are shareholders of Controlled Foreign Corporations, having earned intangible income that’s low-taxed. These citizens can be either corporate or non-corporate shareholders. 
  • Base Erosion and Anti-Abuse tax for U.S. corporations that make deductible payments to foreign-related parties and that have average annual gross receipts of at least $500 million and at least a 3-percent Base Erosion Percentage.
The changes the TCJA made related to Controlled Foreign Corporations were meant to expand the definition of a CFC. This will cause more foreign corporations to be classified as a CFC and be taxed accordingly. There will be greater compliance costs on global business, whether or not the tax rates have been increased.
 
There are some key indicators you can consider when evaluating your business’ preparedness for TCJA compliance. These indicators include:
  • Has your accounting team read and understood aspects of the TCJA which may affect your business’ tax procedures?
  • Has your business planned how you will shift your accounting methods to match the implications set forth by the TCJA?
  • Is your business prepared to file according to the increased obligations set forth by the TCJA?
  • Has your company evaluated your technology and processes will be prepared to file taxes in accordance with the TCJA within the time frame allotted?
Preparing to file in accordance with the TCJA can be a daunting task and despite countless hours of reviewing and reading the new rules set forth by the act, some compliances may be slipping through the cracks. It is beneficial to consider consulting with a professional who understands TCJA so they can work with you to ensure all the minutiae of the TCJA that may affect your individual business are taken care of, and you are aware of how to comply without difficulty this tax season.

Who Is Affected by the TCJA?

The complexities put in place by the TCJA are so broad that they will affect most people who are living or doing business in the United States. This includes:

  • International businesses: The TCJA has expanded the idea of a Controlled Foreign Corporation, which means new international businesses will be classified as a CFC and taxed accordingly. The tax compliance for CFCs is different from other global businesses and as such organizations which are newly classified as a CFC will see a higher cost on operating their business globally.
  • Domestic businesses: While many of the changes implemented in the TCJA focus on international tax, domestic businesses will see changes to their tax rules as well. Domestic businesses operating with international partners are required to complete new forms (Schedules K-2 and K-3) to inform the government of their partners and the international activity they are taking part in. The TCJA has made other forms a necessary part of tax compliance for domestic business, making the tax and accounting process more complicated for businesses. Many TCJA rules have been interpreted on a state-by-state basis, therefore, consulting with a professional to discuss tax compliance rules in states where your business operates is suggested to ensure you are complying with all necessary aspects of the TCJA.
  • Individuals: Individuals have also seen a change in their taxes attributed to the TCJA. While the seven tax brackets have remained the same, the top marginal tax rate has decreased. The income tax base was narrowed due to the threshold at which the top tax rate applies increasing from 8 to 9.5 times the average income.

How the Tax Attorneys at Evolution Tax and Legal Can Help

The Tax Cuts and Jobs Act is such a complex and lengthy act, that federal officials and tax experts still have unanswered questions about regulations and ensuring compliance with the rules. The minutiae of the TCJA will affect every company and individual differently, which is why seeking advice from a professional is the best option to ensure total compliance. At Evolution Tax and Legal, we have assembled a team of experts who are both certified accountants and attorneys. The legal expertise combined with our certification in public accounting gives our team an advanced knowledge of tax planning and compliance. We specialize in international tax law, so we understand how the small changes made in the TCJA can have a big impact on your global or domestic business. 

The team at TCJA can work with you to analyze the rules set forth by the TCJA, how these rules may affect your business or personal taxes, and help you ensure you are complying with the rules and submitting all the required information and documents to officials. Contact Evolution Tax and Legal today to speak with a tax expert and personalize your tax preparedness plan.