Although the provision that allows for the deduction of expenses paid with PPP loan proceeds might be more popular and have received more press, an important part of the second coronavirus stimulus bill signed yesterday by President Trump was the passage of several tax extenders. These are favorable provisions that have bumped along in Congress, being extended periodically, often after they have expired.

Probably lost in the legislation that ran to over 5,500 pages is the extension of the favorable provision for controlled foreign corporations (CFC) that make payments between themselves of dividends, interest and royalties. The Sec. 954(c)(6) provision exempts these payments from being Subpart F deemed income distributions to the U.S. shareholders of these CFCs. This is particularly favorable to individuals who are U.S. shareholders who otherwise would have to pick up the income at ordinary income tax rates, without any cash, at a 37% rate rather than actual dividend distributions that presently receive the favorable qualified dividend rate of 20%.

While some extenders were made permanent, others continue to be extended for another one or two years after 2020. Fortunately, the CFC look-through rule was extended for five years through 2025. This allows related CFCs to move funds around for business operations without worrying about the Subpart F deemed distribution rules. 

But Look Out

Of course, there is still the GILTI rules lurking out there to trip up U.S. shareholders of CFCs. Our international tax advisors stand ready to help you understand the impacts to CFCs in 2021.