The Tax Cuts and Jobs Act (TCJA), enacted on December 22, 2017, made sweeping changes to federal tax law. Three of the most significant changes relate to foreign-sourced income earned by U.S. corporations and their foreign subsidiaries. The Michigan Department of Treasury provides corporate income tax guidance for the following items:
– repatriated income;
– global intangible low-taxed income (GILTI); and
– base erosion and anti-abuse tax (BEAT).
IRC Sec. 965 requires taxpayers with untaxed foreign earnings of certain foreign corporations to recognize those earnings via deemed repatriation. Michigan taxpayers must include IRC Sec. 965 income in the federal taxable income they use as a starting point for computing Michigan corporate income tax. However, Michigan allows taxpayers to deduct these dividends, to the extent included in federal taxable income. Taxpayers must report IRC Sec. 965 income on their Michigan return even though it may have no tax effect. Taxpayers that have filed their 2017 state return and have not included the IRC Sec. 965 income must file an amended return to properly report that income and any associated deduction.
Global Intangible Low-Taxed Income
IRC Sec. 951a requires U.S. shareholders to include GILTI from controlled foreign corporation in their gross income. The department preliminarily concludes that taxpayers must include GILTI in their federal taxable income. However, they may deduct GILTI as a dividend from a foreign entity, similar to other Subpart F income, on their state return. The IRS may provide further clarification on the topic. The department will provide further guidance once the IRS provides clarification.
Base Erosion and Anti-Abuse Tax
IRC Sec. 59A requires some taxpayers to pay a BEAT. The department views BEAT as a tax measured by net income. Generally, taxpayers may not deduct federal income taxes when computing federal taxable income. However, if taxpayers deduct any BEAT in computing federal taxable income, they must add that amount back when calculating their Michigan corporate income tax.
Notice: Corporate Income Tax Guidance on Federal “Tax Cuts and Jobs Act”, Michigan Department of Treasury, July 2, 2018, ¶402-303