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Sec 965 Tax & Disregarded Entity Election

Transition Tax in simple terms



Can you explain the transition tax on the corporation? Is it based on the revenue or the amount of cash left at the end of the year? In other words will I have to pay comes next year, assuming I have very little revenue, but still money left in the corp account?

Transition tax is based on two factors, cash left at the end of the year and amount of untaxed earnings. By paying the transition tax you will start with a clean slate. It does not matter that you have money left in the corporate account. It has been already taxed.

For 2018 and the following years your corporation will pay tax on net corporate earnings (income remaining after expenses, losses and capital improvements). This is referred to as “GILTI” income.

It will be taxed as ordinary income like Subpart F income. If you pay yourself a salary from the corporate earnings, it is eligible for exclusion from your taxable income under the foreign earned income exclusion. This salary will be counted as an expense to your business, thus reducing the GILTI component.

If you do not take the exclusion for any reason but you pay yourself a salary or dividends then tax paid on that income in your resident country (ie France) will be applied as a foreign tax credit to reduce potential tax due.

Corporate taxes do not qualify for a credit on personal return.

The cash balance will not trigger tax in future years because you will not have previously unpaid earnings.

Quote — Had you elected to be treated as a disregarded entity, you would have paid US tax in the US in the past on those deferred earnings that are now subject to mandatory inclusion to your 2017 personal income.

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