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TAX CLINIC

customers; and salaries and fees for be considered personal costs that are
executives and consultants, or for simi- not deductible (see Rev. Rul. 77-254). Foreign Income & Taxpayers
lar professional services (See S. Rep’t. However, the costs associated with the
No. 96-1036, 96th Cong., 2d Sess. 10 purchase of a specific business or that Controlled foreign
(1980)). This is not an exhaustive list; were incurred in the attempt to start corporations: US
however, all these types of costs would the business could be claimed as a shareholders’ income
qualify for the first-year deduction and capital loss, subject to rules that apply inclusions
180-month amortization. to nonbusiness capital losses. Any With the ever-changing tax landscape,
Some costs do not qualify for the business assets that were purchased many taxpayers and tax professionals
first-year deduction and 180-month could only be claimed as a loss if and find themselves seeking guidance on the
amortization, as they do not qualify when the assets are sold. complex international tax compliance
as startup costs. These costs include Businesses that are incorporated and reporting requirements imposed on
incorporation expenses, interest, real follow the same rules as Sec. 195; U.S. shareholders of controlled foreign
estate taxes, research-and-experimental however, the guidance for expensing corporations (CFCs).
(R&E) costs, and costs attributable to the organizational expenditures is For purposes here, a “U.S. share-
the acquisition of a specific property. provided in Sec. 248. From a planning holder” is a U.S. person who owns, or
The incorporation costs may be de- perspective, a noncorporate taxpayer is considered as owning, 10% or more
ductible if the business incorporates. who is not currently in business but of the total voting power or stock value
The interest, taxes, and R&E costs anticipates substantial expenditures of the CFC (Sec. 951(b)). The U.S.
do not qualify for this amortization. to investigate or search for a new international reporting requirements
Interest and taxes may be deductible business venture should consider for these shareholders have dramatically
when they are incurred. R&E costs are incorporating before beginning the expanded in recent years, largely at-
now subject to amortization under Sec. investigation process. If the busi- tributable to the enactment of the 2017
174(a). Costs attributable to the acqui- ness venture proves to be successful, law known as the Tax Cuts and Jobs
sition of a specific property are subject the corporation would conduct the Act (TCJA), P.L. 115-97, which added
to depreciation and, therefore, do not new business. If the venture does not several new categories of foreign income
qualify for amortization and must be ultimately get started or fails, the inclusions — including the transition tax
depreciated instead. shareholders in the corporation could under Sec. 965 and the global intangible
Then what happens to the startup take an ordinary loss on the disposi- low-tax income (GILTI) regime pursu-
costs if the business does not ultimately tion of their small business stock, ant to Sec. 951A.
get started or fails? For individual thereby recouping the costs incurred The primary purpose of this item is
taxpayers, the portion of costs related in endeavoring to get the business up to provide additional clarity and insight
to investigating possibilities or to pur- and running. into the various categories of income
chasing an existing business that had From Jackie Fountain, CPA, MST, inclusions a U.S. shareholder of a CFC
not been specifically identified would Irvine, Calif. may need to consider to the extent of its
current-year earnings and profits (E&P)
or deficits and how to properly report
and track any foreign inclusions related
to E&P on Form 5471, Information
Return of U.S. Persons With Respect to
Certain Foreign Corporations.

Background on the TCJA’s
changes
Before exploring the current tax rules,
it may be helpful to remind readers PHOTO BY PAKIN SONGMOR/GETTY IMAGES
about the changes brought about by
the TCJA.
Pre-TCJA: Prior to the passing of
the 2017 legislation, a U.S. shareholder,
in general, could defer its offshore E&P

12 November 2022 The Tax Adviser