Everything has its season, and for tax reform, this is the season of sending comments to Treasury. This week, the S Corporation Association submitted comments on Treasury’s proposed rules implementing the so-called “toll charge” repatriation tax under Section 965.
To recap, one of the selling points of tax reform was the move from a system that taxed all the income of U.S. taxpayers, regardless of where it was earned, with a system that focused primarily on taxing income earned with our borders. This new territorial approach was supposed to make U.S. businesses more competitive overseas. Only time will tell whether that proves to be the case.
What is most certainly the case is that individuals and S corporations were blocked from the territorial treatment yet subjected to the new taxes that accompanied it. These taxes include the toll charge under Section 965, the GILTI tax to help shore up the territorial treatment, and the BEAT tax to protect against base erosion. So, S corporations don’t get the good international stuff in tax reform, but they must pay the extra taxes anyway. Not the best outcome.
These general concerns are outside the scope of Treasury’s regulatory process, however. In the proposed rules, S-Corp focused its recommendations to two specific items:
- Treasury needs to clean up the mess about overpayments and deferred taxes under Section 965; and
- Treasury needs to discard new language that would needlessly accelerate payment of the Section 965 toll charge on S corporations.
Those S corporations with overseas operations should pay attention, as these items will affect you in the coming months and years. You can read the full comments here.
S-Corp and U.S. Chamber Join Forces on Overpayments
S-Corp co-authored a separate letter with the U.S. Chamber of Commerce on the toll-charge tax and the question of what should happen to overpayment by taxpayers. Signed by 30 trade groups, the letter highlights business community concerns on the overpayment issue and why the IRS needs to revisit its position. As the letter states:
Taxpayers often overpay their tax liabilities, either through excessive estimated tax payments or through amendments to earlier returns. The policy articulated in FAQ 13 and 14 would require that these overpayments be applied to any outstanding §965 liabilities, even if the taxpayer had elected to defer those liabilities under §965(h) and (i). That result is simply not consistent with the clear reading of §965(h) and (i) nor with the policy goals Congress articulated when it adopted the deferral election.
An accompanying press release included the following quotes:
- “The current IRS guidance creates a sweeping, negative impact on business operations of all sizes and across all sectors,” said U.S. Chamber Vice President for Tax Policy and Economic Development and Chief Tax Counsel Caroline Harris. “This new tax code is designed not to pick winners and losers, but the IRS’s current guidance for overpayments does just that. We urge the IRS to change course and to implement this provision the way Congress intended – to grow and strengthen American businesses.”
- “S corporations were excluded from the new territorial system, so Congress reasonably exempted them from the toll charge tax as well,” S Corporation Association President Brian Reardon said. “A policy of applying tax overpayments to these deferred 965 liabilities effectively undermines congressional intent and should be reversed. S corporation owners should not have to pay a ticket for a ride they don’t get.”
The overpayment issue is obviously a big deal to C corporations with overseas operations. It’s a bigger deal to S corporations. For them, it’s the difference between paying no tax and paying the full tax.
You can read the full letter here. Expect to hear lots more on this issue as Treasury finalizes its Section 965 rules and tax overpayments.