GILTI as Charged
How to Cash Flow Global Intangible Low-Tax Income
We recently received a call on the Bukers Hotline from an analyst who was spreading a prospective borrower’s individual tax return and noticed some unusual sources of income. The analyst told us that they received Form 8992 and Form 5471 along with the tax return package submitted by the borrower. Their question to us was – what is this income and how does it affect my borrower’s cash flow? In this week’s cash flow article, we are going to investigate the cash flow implications of GILTI (Global Intangible Low-Taxed Income).
What is GILTI (Global Intangible Low-Taxed Income)?
GILTI is a relatively new tax concept that was added as a component of the 2017 Tax Cuts and Jobs Act (TCJA). The tax law addition requires individuals with a 10% or greater share in certain foreign companies (referred to as “CFCs” – Controlled Foreign Corporations) to pay US tax on income derived from certain types of intangible assets held by the CFCs. The term “GILTI” is used to describe the type of foreign intangible income upon which this new tax is imposed. Individuals will report their GILTI on Form 8992 and they would also file Form 5471 to register their ownership with the CFC to the IRS.
How does GILTI Cash Flow?
The analyst who brought this question to the Bukers Hotline asked us during our conversation, “Do I need to make any adjustments to include the income reported on Form 8992 to cash flow?”. Our direct answer to them was, “No,” but let’s explain why.
For all intents and purposes, we can treat income reported on Form 8992 as if it were being reported on Page 2 of Schedule E and therefore ignore it from cash flow. Like the reporting of flow-through income/(loss) reported on Page 2 of Schedule E, the income reported on Form 8992 is simply for tax purposes and does not reflect any true cash flow received from the CFC. It is merely reported on Form 8992 so that it can then flow to Schedule 1 of Form 1040 and be included in the borrower’s AGI, so they then must pay tax on the income. This is another good example of why we never begin our cash flow analysis using AGI as a starting point. Any cash flow implications to our borrower with respect to the CFC would likely be presented as distributions on a Schedule K-1 received or as dividends listed on our borrower’s Schedule B.
This was a great question from our analyst, and it helps illustrate the importance of keeping current with new tax acts as they arise. As tax legislation is passed by new administrations, tax return packages may be directly affected. At Bukers, our team of CPAs updates our products annually to ensure that we account for all cash flow implications of new tax laws and legislation, so that you don’t have to. Stay posted to our Bukers newsletters going forward as we will continue to cover tax law changes and their effects on cash flow analysis.