Proposed foreign tax credit regulations

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In light of the Tax Cuts and Jobs Act passed last December, the IRS has issued proposed regulations for both businesses and individuals in regards to foreign tax credits.  The TCJA includes several significant changes on how the government taxes foreign activities. The proposed regulation issued earlier this week includes information and rules to help taxpayers and tax preparers determine taxable income from offshore sources.

The changes in the taxation of foreign activities includes the repeal of rules for determining foreign tax credits on dividends on the basis of foreign subsidiaries’ aggregate earnings and foreign taxes.  Additionally, the changes include the addition foreign tax credit limitation categories for foreign branch income.

Within the proposed regulations, there is a rule that marks some assets as partially exempt for expense allocation. There are also set rules on how to apply the new foreign tax credit changes under certain categories, while providing an elective transition rule, favorable to taxpayers, on the carrying over of foreign tax credits.

The TCJA has also changed how taxable income is figured for the foreign tax credit limitation; it disregards some expenses related to income eligible for the dividends-received deduction, while repealing the fair market value method of allocating interest expense.

Furthermore, the IRS and the Treasury Department are asking for public comments on these proposed rules and others.  The agency has begun making an active effort to engage the public through social media platform, Instagram. On the IRS taking these steps, Mitch Elbarki, CEO of Sigma Tax Pro states that this “…should signify more regulations…and it’s great to see the IRS finally stepping into the 21st century by involving the public in a proactive and much more modern manner.”

The new foreign tax credit rules apply to this year and future years. More information about the proposed rules can be found on the IRS website.