Presented by Paystrubmakr.com By John Wolf and Tom Collen CPA
Repatriation of Deferred Foreign Income
A U.S. corporate shareholder of a foreign subsidiary generally is not subject to
U.S. tax on the earnings of the foreign subsidiary until the earnings are distributed to the U.S. parent corporation (i.e., deferred foreign income taxation). The foreign subsidiary’s undistributed earnings that are reinvested in United States property are subject to current U.S. tax. For this purpose, United States property generally includes tangible property located in the United States, intangible property used in the United States, and equity and debt interests in U.S. affiliates. As a result, a U.S. corporate shareholder cannot avoid U.S. tax on the distribution of earnings from a foreign subsidiary by instead reinvesting those earnings in United States property.
For the last taxable year beginning before January 1, 2018, any U.S. shareholder
of a specified foreign corporation (i.e., any foreign corporation in which a U.S. person owns a 10% voting interest) must include in income its pro-rata share of
the accumulated post-1986 deferred foreign income of the corporation.
A portion of the pro-rata share of foreign earnings is deductible depending on
whether the deferred earnings are held in cash or other assets. The result is a reduced rate of tax with respect to income from the required inclusion of pre-
effective date earnings. The reduced rate of tax is 15.5% for cash and cash
equivalents and 8% for all other earnings.
Note: The corresponding portion of the credit for foreign taxes is disallowed,
thus limiting the credit to the taxable portion of the included income. How-
ever, the foreign tax credit limitation rules of §904 still apply rules.
The increased tax liability generally may be paid over an eight-year period. Special rules are provided for S corporations and real estate investment trusts.
Comments: The provision would remove disincentives for the investment of
foreign earnings in the United States. Under §4001 of the Act, a 100% exemption would be provided for the foreign-source portion of dividends from
the foreign subsidiary of a U.S. corporate shareholder. As a result, no U.S. tax would be avoided by a U.S. parent corporation reinvesting earnings of its
foreign subsidiary in United States property rather than distributing those
earnings. 5 Year Amortization of Research & Experimental Expenditures
Prior or Existing Law: Under §174, taxpayers may:
(1) elect to deduct the amount of particular reasonable research or currently
experimentation expenditures paid or incurred in connection with a trade or
(2) forgo a current deduction, capitalize their research expenditures, and re-
cover them ratably over the useful life of the research, but in no case over a
period of fewer than 60 months (§174(b), or
(3) elect to amortize their research expenditures over ten years
Amounts defined as research or experimental expenditures under §174 generally
include all costs incurred in the trial or laboratory sense related to the
development or improvement of a product.
After 2021, amounts defined as specified research or experimental expenditures
are required to be capitalized and amortized ratably over five years (15
years, if conducted outside the U.S.), beginning with the midpoint of the taxable
year in which the specified research or experimental expenditures were paid or
incurred. Thus, the provision that allows taxpayers to deduct research currently
and experimental spending will be eliminated after 2021.
Low-Income Housing Tax Credit – §42
The low-income housing credit may be claimed over a 10-year credit period after
each low-income building is placed-in-service. The amount of credit for any
taxable year in the credit period is the applicable percentage of the qualified basis of each qualified low-income building. Low-Income Housing Tax Credit Wikipedia
The credit provided each year is determined by a present-value formula
based on the general cost of borrowing. Over the past few years, as the general cost of loan has declined, so has the number of tax credits that can be used to build a LIHTC project.
Deal with that, and the applicable percentage is set at a minimum of 9% for
newly constructed non-Federally subsidized buildings. This minimum per-
centage was scheduled to expire for taxable years beginning after December
31, 2014. However, the PATH Act reinstated the provision and made it permanent.
For the calendar year 2018, the per low-income unit qualified basis amount under §42(e)(3)(A)(ii)(II) is $6,800 (up from $6,700 in 2017) and the amount
used under §42(h)(3)(C)(ii) to calculate the State housing credit ceiling for
the low-income housing credit is the greater of:
(1) $2.40 (up from $2.35 in 2017) multiplied by the State population, or
(2) $2,765,000 (up from $2,710,000 in 2017) (R.P. 2017-58).
Military Allowances & Low-Income Housing – §42(h) & §142(d)
A member of the military’s basic housing allowance is not considered income
for purposes of calculating whether the individual qualifies as a low-income
tenant for the low-income housing tax credit program (§42(h) & §142(d)).
This provision was scheduled to expire for taxable years beginning after December 31, 2014. However, the PATH Act reinstated the requirement and made
it permanent. Low Income Housing Tax Credit Program
Cafeteria Plans – §125
For 2018, the dollar limitation under §125(i) on voluntary employee salary re-
ductions for contributions to health flexible spending arrangements is $2,650.
Employer-Provided Educational Assistance – §127
When certain requirements are satisfied, up to $5,250 annually of educational
assistance provided by an employer to an employee is excludable from gross income for income tax purposes and from wages for employment tax purposes
(§127 & §3121(a)(18)). This exclusion applies to both graduate and undergraduate courses.
Note: ATRA made §127 permanent for taxable years beginning after December 31, 2012.
Parking Exclusion & Passes – §132
Qualified transportation fringe benefits provided by an employer are excluded
from an employee’s gross income for income tax purposes and an employ-
ee’s wages for employment tax purposes (§132). Qualified transportation fringe
benefits include parking, transit passes, vanpool benefits, and qualified bicycle
As a result, employers can generally exclude a limited amount of the value of
qualified parking and commuter highway vehicle transportation and transit pass they provide to an employee from the employee’s wages (§132(f)).
For months beginning after February 17, 2009, and before January 1, 2015, the aggregate monthly fringe benefit exclusion amount for employer-provided
vanpool and transit pass benefits were increased to the same level (i.e., parity) as the exclusion for employer-provided parking. As a result, for 2014, the monthly aggregate fringe benefit exclusion amount for transportation in a commuter highway vehicle and any transit pass was $250. The monthly fringe benefit exclusion amount for qualified parking was also $250. However, this parity of employer-provided mass transit and parking benefits were scheduled to expire in 2015.
Nevertheless, in late 2015, the PATH Act reinstated parity in the exclusion for
combined employer-provided transit pass and vanpool benefits and for employ-
er-provided parking benefits and made parity permanent.
For 2018, the monthly limit on the exclusion for combined transit pass and
vanpool benefits were scheduled to be $260, the same as the monthly limit on the
exclusion for qualified parking benefits. However, for 2018 and after that, the
TCJA now provides that no deduction is allowed for the expense of any
employer-provided qualified transportation fringe as defined in §132(f).
Bicycle Commuters Fringe Benefit (Suspended)- §132(f)
Since 2009, a qualified bicycle commuting reimbursement fringe benefit was
added to the parking and mass transit qualified transportation fringe benefits.
An employer could reimburse, as a tax-free fringe benefit, up to a maximum of
$20 per month for qualified bicycle commuting for 15 months, beginning with the first day of such calendar year. The purpose was to reimburse the employee for reasonable expenses incurred during the calendar year for the purchase and repair of a bicycle, bicycle improvements, and bicycle storage provided that the bike was regularly used for travel between the employee’s residence and place of employment.
The employee could not receive any other qualified transportation fringe benefit
(no double-dipping with mass transit during the month). Also, the employee had to use regularly (i.e., the user could not be infrequent or constitute an insubstantial portion of the employee’s commute) a bicycle for a substantial part of travel between the employee’s residence and place of employment. The $20 per month amount was not subject to inflation adjustment and could not be provided according to an elective salary reduction agreement (§132(f)(4)).
However, for tax years after 2018 and before 2025, taxpayers are no longer permitted to exclude qualified bicycle commuting reimbursements from their income.
Disclaimer: John Wolf and paystubmakr.com are making a total effort to offer accurate, competent, ethical HR management, employer, and workplace advice. We do not use the words of an attorney, and the content on the site is not given as legal advice. The website has readers from all US states, which all have different laws on these topics. The reader should look for legal advice before taking any action. The information presented on this website is offered as a general guide only.