IRS Form 8992 and GILTI Tax Calculations

For U.S. expats who own or have stakes in Controlled Foreign Corporations (CFCs), understanding IRS Form 8992 is crucial. This form helps calculate the Global Intangible Low-Taxed Income (GILTI) that U.S. shareholders must report and pay tax on, as part of the tax reforms introduced by the Tax Cuts and Jobs Act (TCJA). GILTI taxation aims to prevent U.S. shareholders from avoiding taxes by shifting profits to foreign corporations in low-tax jurisdictions. This article provides an in-depth look at GILTI, Form 8992, and how to manage your tax obligations as a U.S. expat.

What is GILTI Tax?

GILTI stands for Global Intangible Low-Taxed Income and is a type of tax on foreign earnings of CFCs. The GILTI tax rule calculates the earnings of a foreign corporation that exceed a normal return on tangible property, targeting income often associated with intangible assets, such as patents and trademarks. The GILTI tax was created to address tax planning strategies that allowed U.S. shareholders to avoid U.S. tax by shifting profits to low- or no-tax jurisdictions.

GILTI represents a major shift in U.S. international tax policy, aiming to prevent income shifting and double taxation by requiring U.S. shareholders to report and pay tax on these foreign earnings.

Who is Subject to GILTI Tax?

GILTI tax primarily impacts U.S. shareholders of CFCs. According to IRS guidelines, a U.S. shareholder is any U.S. person (including U.S. citizens, corporations, partnerships, and trusts) who owns at least 10% of the total combined voting power or value of a foreign corporation’s stock.

For U.S. expats, this means that if you own a foreign corporation or a significant share (10% or more) of a CFC, you may be required to calculate and pay GILTI on the profits generated by the business. This applies even if the foreign business is profitable and you are paying foreign taxes.

Controlled Foreign Corporation (CFC)

A Controlled Foreign Corporation (CFC) is a foreign corporation where U.S. shareholders collectively own more than 50% of the total combined voting power of all classes of stock entitled to vote or the total value of the stock. This definition is crucial for determining whether a U.S. shareholder is subject to the GILTI tax. Essentially, if you and other U.S. shareholders hold significant control over a foreign corporation, it qualifies as a CFC.

What is Form 8992?

Form 8992, titled “U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI)”, is used by U.S. shareholders of Controlled Foreign Corporations (CFCs) to calculate and report their GILTI inclusion amount. GILTI is a tax rule introduced by the Tax Cuts and Jobs Act (TCJA) to prevent U.S. corporations and individuals from shifting profits to low-tax jurisdictions.

GILTI applies to certain foreign income earned by CFCs, specifically targeting income from intangible assets such as intellectual property, patents, or other valuable assets. The IRS requires U.S. shareholders to report GILTI to ensure foreign income is included in their U.S. taxable income.

Who Must File Form 8992?

Form 8992 is required for U.S. shareholders of CFCs who own at least 10% of a foreign corporation, either directly or indirectly. U.S. citizens, green card holders, and resident aliens who own foreign corporations that meet the definition of a CFC must file this form if their foreign business generates net income. U.S. expats with interests in foreign businesses are often required to complete Form 8992 to calculate and report any GILTI inclusion.

Section 962 Election

The Section 962 election provides U.S. individual taxpayers with a way to reduce GILTI tax liability. By making a Section 962 election, U.S. expats with CFCs can elect to be taxed on GILTI at corporate tax rates, rather than individual tax rates. This election can reduce the GILTI inclusion by allowing the shareholder to take advantage of the Section 250 deduction, which cuts the taxable GILTI by 50%.

This election enables U.S. expats to reduce the effective tax rate on GILTI income and treat themselves as if they were a U.S. corporation rather than an individual taxpayer.

Components of GILTI Calculation on Form 8992

To complete Form 8992, U.S. shareholders must first calculate the GILTI inclusion amount using a specific formula:

GILTI = Net CFC Tested Income – (10% x QBAI – Tested Interest Expense)

This calculation involves the following components:

• Net CFC Tested Income: The CFC’s total income, minus deductions, and excluding certain types of income that are already taxed.
• Qualified Business Asset Investment (QBAI): The average adjusted tax basis of the CFC’s depreciable tangible property, such as equipment or buildings.
• Deemed Tangible Income Return (DTIR): Calculated as 10% of the QBAI, representing the return on tangible assets.
• Tested Interest Expense: Interest expenses related to the CFC’s operations that are allocated to reduce the GILTI amount.

Step-by-Step Guide to Completing Form 8992

Here’s a step-by-step guide on how to complete Form 8992:

Part I: U.S. Shareholder Calculation of GILTI Inclusion Amount

1. Line 1 – Net CFC Tested Income: Enter the CFC’s net tested income. This includes all gross income of the CFC, minus deductions, foreign tax credits, and other allowable deductions. You must exclude any income already subject to tax, such as Subpart F income, which is handled separately.
2. Line 2 – Net CFC Tested Loss: If the CFC has a loss for the year, enter the net tested loss here. This loss offsets the tested income from other CFCs in the GILTI calculation.
3. Line 3 – Net CFC Tested Income After Loss: Subtract net tested losses from the net tested income to determine the total net tested income across all CFCs. This value represents the CFC’s income after losses.
4. Line 4 – Aggregate Qualified Business Asset Investment (QBAI): Enter the QBAI, which is the average adjusted tax basis of the CFC’s tangible property. Calculate QBAI as the average of the CFC’s depreciable assets used in business operations at the beginning and end of the tax year.
5. Line 5 – Deemed Tangible Income Return (DTIR): Calculate the DTIR by multiplying the QBAI from Line 4 by 10% (0.10). This represents the deemed return on tangible assets and reduces the GILTI amount.
6. Line 6 – Tested Interest Expense: Enter the CFC’s tested interest expense. This is the amount of interest paid or accrued by the CFC that reduces GILTI.
7. Line 7 – Net DTIR (10% of QBAI – Interest Expense): Subtract the tested interest expense on Line 6 from the DTIR on Line 5. This result is the net DTIR, which is subtracted from net tested income to determine the GILTI inclusion amount.
8. Line 8 – GILTI Inclusion: Subtract the net DTIR on Line 7 from the net tested income on Line 3 to calculate the GILTI inclusion amount. If the result is zero or negative, there is no GILTI inclusion for this tax year.

Part II: U.S. Shareholder GILTI Inclusion for Each CFC

For each CFC, you must complete a Schedule A to report the pro rata share of tested income and losses:

1. Column 1 – Name of CFC: Enter the name of each CFC for which you are calculating GILTI.
2. Column 2 – EIN of CFC: Enter the Employer Identification Number (EIN) for each CFC.
3. Column 3 – Pro Rata Share of Tested Income: For each CFC, enter the shareholder’s pro rata share of tested income, calculated based on their ownership percentage.
4. Column 4 – Pro Rata Share of Tested Loss: For each CFC with a tested loss, enter the shareholder’s pro rata share of that loss. Additionally, account for the ‘tested loss QBAI’ by including the Qualified Business Asset Investment related to the tested loss for each CFC listed.
5. Column 5 – Pro Rata Share of QBAI: Enter the U.S. shareholder’s share of each CFC’s QBAI.
6. Column 6 – Pro Rata Share of Tested Interest Expense: Enter the shareholder’s pro rata share of each CFC’s tested interest expense.

After completing Schedule A for each CFC, calculate the totals across all CFCs to determine the GILTI amount.

Part III: Filing and Reporting the GILTI Inclusion

1. Transfer GILTI Amount: Transfer the GILTI inclusion amount calculated on Form 8992 to your U.S. tax return, as this amount will be included in your taxable income.
2. Attach Form 8992: Attach Form 8992 and each Schedule A to your U.S. tax return to ensure complete reporting.

Compliance Tips for Form 8992

1. Accuracy in GILTI Calculation: Ensure all calculations, especially for QBAI and tested income, are accurate, as errors can lead to penalties.
2. Keep Records: Maintain detailed records of all financial data used in GILTI calculations for each CFC to streamline the filing process and support your claims if audited.
3. Consult a Tax Professional: Given the complexity of Form 8992 and GILTI calculations, consulting a tax professional experienced in U.S. expat taxes is highly recommended to avoid mistakes and optimize tax outcomes.

Form 8992 helps U.S. shareholders of CFCs calculate and report their GILTI inclusion amount, ensuring that foreign income is accurately reported to the IRS. By following the steps above and accurately completing each part of the form, U.S. expats with interests in foreign businesses can comply with GILTI requirements while minimizing errors.

How Can I Reduce GILTI Tax Liability?

For many U.S. expats with foreign businesses, GILTI can result in a substantial tax burden. Here are a few strategies to manage or reduce GILTI tax liability:

1. Section 962 Election: Make the election by filing form 8993 to reduce GILTI by applying corporate tax rates.
2. Pay Yourself a Salary: Compensate yourself as an employee of the CFC. Paying a reasonable salary can reduce GILTI by reducing the CFC’s tested income.

These methods may help minimize the taxable GILTI income and reduce the amount you’ll owe in GILTI tax.

Need Help With Form 8992? Contact Us for Free Tax Advice

Form 8992 and GILTI calculations can be complex, especially for U.S. expats managing foreign business interests. At 1040 Abroad, we offer free tax advice to all U.S. expats to help you understand and meet your tax obligations. Whether you need assistance with GILTI, filing Form 8992, or reducing your tax liability, our team of tax professionals is here to guide you through each step. Reach out to us today to ensure your compliance and maximize your tax benefits.