Regulations coming on S corporations with accumulated E&P and GILTI

By Alistair M. Nevius, J.D.

The IRS announced in a notice Tuesday (Notice 2020-69) that it intends to issue regulations addressing the application of Secs. 951 and 951A to certain S corporations with accumulated earnings and profits (AE&P). The regulations will allow S corporations to elect to have global intangible low-taxed income (GILTI) inclusions increase the S corporation’s accumulated adjustments account (AAA).

Under the forthcoming regulations, S corporations with AE&P on Sept. 1, 2020, will be able to transition from the historic entity treatment and the hybrid treatment in Prop. Regs. Sec. 1.951A-5, to the aggregate treatment under the final regulations in T.D. 9866, issued in 2019.

The goal is to ensure that distributions of income already taxed to S corporation shareholders will be tax-free and AE&P generated by a former C corporation will be taxed as dividends when distributed. Under the forthcoming regulations, S corporations with AE&P will be allowed to recognize a GILTI inclusion amount at the entity level, so it is treated as an item of income and increases AAA before it is distributed to shareholders.

The notice also announces that the IRS intends to issue regulations addressing the treatment of qualified improvement property under the alternative depreciation system of Sec. 168(g) for purposes of calculating qualified business asset investment for purposes of the foreign-derived intangible income and GILTI provisions. The IRS says these rules would implement changes enacted as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136.

Alistair M. Nevius, J.D., (Alistair.Nevius@aicpa-cima.com) is The Tax Adviser’s editor in chief.

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