Federal Tax Overview
The Tax Cuts and Jobs Act (P.L. 115-97) amended Internal Revenue Code (IRC) Section 965 and required taxpayers to include in income an amount (§965(a) inclusion amount) based on the accumulated post-1986 deferred foreign income of certain foreign corporations they own either directly or indirectly through other entities. This inclusion essentially operates in two steps. First, it piggybacks on Subpart F to deem a dividend under IRC §951(a)(1)(A) for U.S. shareholders of deferred foreign income corporations (DFIC). This inclusion is structured as an increase in the Subpart F income of a DFIC for its last taxable year beginning before January 1, 2018 (inclusion year), equal to the greater of the DFIC’s “accumulated post-1986 deferred foreign income” determined on November 2, 2017, and December 31, 2017 (measurement dates). Second, it allows a U.S. shareholder with an IRC §965(a) inclusion a deduction under IRC §965(c) based on two measurements: the U.S. shareholder’s aggregate foreign cash position amount (resulting in the inclusion being taxed at a 15.5 percent rate) and the aggregate earnings and profits held in forms other than cash or equivalents (resulting in the inclusion being taxed at an 8 percent rate).
Another provision, effective for tax years beginning on or after January 1, 2018, is global intangible low-taxed income (GILTI). The objective of GILTI is to prevent domestic corporations from transferring intangible property and related income to low-tax foreign jurisdictions by subjecting the income to current U.S. federal taxation. Even though it targets income related to intangible assets, it applies to any type of income that exceeds a routine return on net tangible assets. Similar to the Subpart F federal taxable income inclusion, GILTI is a tax on a U.S. shareholder’s share of its controlled foreign corporations’ GILTI at a reduced effective tax rate of 10.5 percent (13.125 percent beginning in 2026). A corporate taxpayer may take a special deduction under new IRC §250 equal to, at most, 50 percent of its GILTI plus any corresponding IRC §78 gross-up and up to 37.5 percent of the taxpayer’s foreign-derived intangible income. For tax years beginning after December 31, 2025, the deduction for corporate taxpayers allowed under this provision is reduced to 21.785 percent and 37.5 percent, respectively. It should be noted that non-C corporation U.S. shareholders aren’t entitled to the 50 percent GILTI deduction.
Tennessee Senate Bill 558
On May 8, 2019, Tennessee enacted Senate Bill (SB) 558, which provides deductions for IRC §965(a) amounts related to the “transition tax” and IRC §951A amounts related to GILTI. SB 558 also creates related addbacks for associated federal income tax deductions to the Tennessee tax base.
For the 2017 tax year, the Tennessee Department of Revenue (DOR) previously issued guidance under TN DOR Notice #18-05, indicating all IRC §965 amounts should be excluded from the Tennessee excise tax base. This is still the Tennessee DOR’s position for tax year 2017. For tax years beginning on January 1, 2018, however, the amendments made by SB 558 provide a deduction for amounts included in federal taxable income under IRC §965(a) to the extent such amounts would otherwise be included in the Tennessee excise tax base. SB 558 also requires an addback to the excise tax base of 5 percent of the gross IRC §965(a) amount, before the IRC §965(c) deduction.
SB 558 provides a deduction for amounts included in federal taxable income under IRC §951A to the extent such amounts would otherwise be included in the Tennessee excise tax base. In addition, SB 558 requires an addback to the excise tax base of 5 percent of the gross IRC §951A amount, before the IRC §250 deduction. Both the deduction and addback are effective for tax years beginning on or after January 1, 2018.
SB 558 unfortunately doesn’t provide guidance on sales factor sourcing or inclusion related to the 5 percent addback. It also leaves open the question of whether the addback can pass a challenge under the U.S. Constitution’s commerce clause.
Both deductions authorized by SB 558 will be codified at Tenn. Code Ann. §67-4-2006(b)(2), and both addbacks will be codified at Tenn. Code Ann. §67-4-2006(b)(1). From a reporting perspective, taxpayers will be able to subtract the GILTI from the federal starting point and add 5 percent of all GILTI to the federal starting point. Per Tennessee Important Notice No. 19-13, 07/01/2019, taxpayers filing FAE170 will subtract GILTI on Schedule J, Line 18, and add back 5 percent of that amount on Line 4. Taxpayers filing FAE174 will subtract GILTI on Schedule J, Line 22, and add back 5 percent of that amount on Line 7.
To learn more about the state tax effects of SB 558, contact your BKD trusted advisor or use the Contact Us form below.