On Dec. 17, 2019, the IRS issued final regulations focused on administering the foreign tax credit and related matters. On the same date, it issued related proposed regulations. The proposed and final regulations implement changes to the federal tax credit rules enacted under the international tax provisions in the Tax Cuts and Jobs Act of 2017 (TCJA), as well as proposed regulations that were published before enactment of the TCJA.
The final regulations adopt, in large part, the regulations proposed in November 2018 with some clarification and supplemental guidance. The final regulations also finalize certain overall foreign loss regulations proposed in 2012 and certain temporary regulations issued in 2007 related to the translation of foreign income taxes and foreign tax redeterminations. The most important changes from earlier guidance include:
- The reduction of previously taxed earnings and profits categories from 16 (per IRS Notice 2019-1) to 10
- The freedom to elect either the sales method or the optional gross income method for the allocation and apportionment of research and experimentation (R&E) expenses for each tax year beginning after Dec. 31, 2017, and before Jan. 1, 2020. This provision in the final regulations allows for adoption of the proposed regulation treatment of R&E allocation and apportionment.
The final regulations generally are effective for tax years beginning after Dec. 31, 2017, for provisions related to those enacted by the TCJA. However, for provisions included in the proposed regulations, the final regulations are effective for tax years ending on or after Dec. 4, 2018. Provisions not addressed in the proposed regulations generally are effective after Dec. 16, 2019.