Tax planning for Americans abroad — particularly small business owners — is about to get a little more complicated.
That’s because they are now facing a new tax that only took effect at the end of 2017, known as the transition tax.
This new levy — a 15.5 percent tax on foreign earnings held in cash and cash equivalents and 8 percent on other earnings — applies to U.S. shareholders of foreign corporations, including American owners of small businesses that are based overseas.
The tax “repatriates” money these businesses keep overseas. It applies to companies’ accumulated earnings and profits going back to 1986 and determined as of the end of 2017.
Large corporations are on the hook to pay taxes on cash held in foreign countries as well, but there's some good news for them: Going forward, they will be able to take advantage of the 100-percent dividends received deduction, said Richard Tannenbaum, a CPA and leader of the global mobility practice at Mazars USA.
This means they can repatriate their dividends without paying any taxes.