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IRS Issues Guidance on Changes in Accounting Periods Related to the Transition Tax

IRS Issues Guidance on Changes in Accounting Periods Related to the Transition Tax

The Treasury Department and the Internal Revenue Service (IRS) issued IR-2018-25 and announced modifications to the procedures for changing the accounting period of foreign corporations owned by U.S. shareholders that are subject to the transition tax under the Tax Cuts and Jobs Act.

On Dec. 29, 2017, the Treasury Department and the IRS provided initial guidance on computing the transition tax in Notice 2018-07.  On Jan. 19, 2018, the Treasury Department and the IRS provided additional guidance in Notice 2018-13.

Today’s revenue procedure (Rev. Proc. 2018-17) prevents changes to the annual accounting periods of certain foreign corporations in 2017 under either the existing automatic or general procedures if such change could result in the avoidance, reduction, or delay of the transition tax. 


The tax laws generally provide that a taxpayer seeking to change its annual accounting period and use a new taxable year needs to get the approval of the IRS.

In general, the newly enacted section 965 of the tax code that was included in the Tax Cuts and Jobs Act imposes a transition tax on untaxed foreign earnings of foreign subsidiaries of U.S. companies by deeming those earnings to be repatriated.

Foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5 percent rate, and the remaining earnings are taxed at an 8 percent rate. The transition tax generally may be paid in installments over an eight-year period.

The new revenue procedure was issued to prevent the avoidance of the purposes of section 965 through changes in the taxable years of certain foreign corporations, such as controlled foreign corporations that are effectively subsidiaries of U.S. corporations.  

Rev. Proc 2018-17 will be published in IRB 2018-09 on Feb. 26, 2018. 

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Read more at: Tax Times blog

 
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