The base erosion and anti-abuse tax (BEAT) (section 59A) enacted by the Tax Cuts and Jobs Act (TCJA) applies to a U.S. corporation that has average annual gross receipts of at least $500,000,000 for the prior three years and has a base erosion percentage of 3% (2% in certain instances). In addition to the federal income tax, a U.S. corporation subject to these rules must pay the additional base erosion and anti-abuse tax.
The final BEAT regulations issued this September largely finalize the proposed regulations issued on Dec. 6, 2019. However, the regulations contain refinements to the 2019 proposed regulations that may be applicable to certain taxpayers.
Some of the refinements include:
- BEAT attributes of aggregate group members – there are new clarifications with regards to including gross receipts and base erosion tax benefits for members of an aggregate group that end with or within the taxpayer’s tax year. The regulations include examples of what may be acceptable and unacceptable approaches for determining a taxpayer’s gross receipts and base erosion percentage test when there is a short tax year for the taxpayer. The regulations further state that excluding an aggregate group member’s gross receipts and base erosion tax benefits when the aggregate group member’s tax year doesn’t fall with or within the taxpayer’s tax is an unacceptable method. Also, the final regulations provided additional clarifications on when members of taxpayer’s aggregate group join or depart from the aggregate group. These rules can impact whether a taxpayer meets the $500,000,000 threshold and should be examined closely.
- Waived deductions - the final regulations also include changes to the waived-deduction provisions, including the elimination of the need to provide a detailed statement of the property related to the election.
- Application of BEAT to partnerships - the regulations contain new rules for partnerships and their partners. A corporate partner may waive a deduction with regards to its allocable share of the deduction from a partnership. The waived deduction is treated as a non-deductible expense pursuant to section 705(a)(2)(B). The regulations also contain rules with respect to a partner’s waived interest expense deductions.
- ECI exception - the ECI exception to a base erosion payment is expanded in cases where the foreign related party complies with a certification procedure.
Taxpayers may apply the final regulations to tax years beginning after Dec. 31, 2017 provided the taxpayer applies the final regulations in their entirety and in subsequent years. Taxpayers may also choose to apply the final regulations from tax years beginning after Dec. 31, 2017 only with respect to certain waived deduction provisions provided the taxpayer applies those provisions in future years.