IRS Issues Form for Base Erosion and Anti-Abuse Tax
The Tax Cuts and Jobs Act added a new provision to the Internal Revenue Code called the “Base Erosion and Anti-abuse Tax” (BEAT). The IRS recently issued Form 8991, Tax on Base Erosion Payments of Taxpayers with Substantial Gross Receipts, which taxpayers will use to report their tax liability under the BEAT provisions.
The BEAT applies to large corporations with at least $500 million in gross receipts. The new tax is effective for taxable years beginning after December 31, 2017.
The BEAT does not apply to individuals, S corporations, RICs or REITs. There is also a de minimis exception for companies whose foreign related party payments are low relative to overall deductions.
The BEAT is generally calculated by taking 10 percent of modified taxable income. The rate is 5 percent for years beginning in 2018 to help phase-in the new regime. It increases to 12.5 percent for years beginning after 2025.
Deductible payments to related foreign persons are added back to taxable income to arrive at modified taxable income.
There is also an “add back” for depreciation and amortization deductions associated with property acquired from related foreign persons. A foreign person is considered a “related person” if it owns at least 25 percent of the stock of the taxpayer (by vote or value) or satisfies other control tests.
Form 8991 consists of four parts and two schedules.
Part 1, Applicable Taxpayer, requires the taxpayer to report gross receipts and calculate its base erosion percentage to determine if the tax applies for the current year.
Schedule A is required if a corporation has average annual gross receipts of $500 million or more for the 3-tax-year period ending with the preceding tax year. This schedule requires a taxpayer to report all amounts that are base erosion payments as defined in section 59A(d) and base erosion tax benefits as defined in section 59A(c)(2). This schedule also requires a taxpayer to report any amounts that qualify for certain exceptions applicable to amounts that are not treated as base erosion payments.
Part 2 calculates Modified Taxable Income. Modified taxable income is the taxpayer’s taxable income determined without regard to any base erosion tax benefit with respect to any base erosion payment or the base erosion percentage of any net operating loss allowable for the tax year.
Part 3 is the Regular Tax Liability Adjusted for Purposes of Computing the Base Erosion Minimum Tax Amount. This section takes into account the regular tax liability, as adjusted for allowable tax credits, under the BEAT regime.
Any adjustments to allowable credits are computed on Schedule B.
Part 4 is the computation of the Base Erosion Minimum Tax Amount. This amount is reported as follows:
Form 1120 Schedule J, Line 3
Form 1120-F Section II, Schedule J, Line 3
Form 1120-L Schedule K, Line 3
Form 1120-PC Page 1, Line 6
Any large company that wants to “defeat the BEAT” will have to review their deductible payments tied to related foreign affiliates, determine if certain exceptions apply, and, if not, evaluate whether restructuring is appropriate to minimize amounts added back to taxable income for purposes of the BEAT provisions.