On September 3, the Department of the Treasury issued final regulations regarding the base erosion and anti-abuse tax (“BEAT”) imposed on certain large corporate taxpayers with respect to certain payments made to foreign related parties.^[1] The final regulations provide guidance on a number of areas, an important section of the regulations pertains to the election to waive deductions for purposes of the BEAT.

In this article, we will outline the reasons for, and the mechanics of, this election, as well as how this election, while a taxpayer-friendly inclusion in the regulations, can come at a significant cost for taxpayers. Additionally, the final regulations contained a relaxed anti-abuse provision that makes the effects of the anti-abuse provision less dramatic.

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In Notice 2020-75, the Treasury/IRS announced that proposed regulations will be issued to provide certainty that income tax payments made by partnerships and S corporations (as opposed to flowing through the tax to, and with payment then made by, each actual partner or S corp shareholder) are deductible without being subject to the SALT cap that was imposed by the 2017 Tax Cuts and Jobs Act.

The Notice explicitly states that this is true regardless of (i) whether the state gives a full or partial tax credit to a corresponding partner or S corp shareholder and (ii) whether the state law to tax the actual partnership or S corporation applies mandatorily or by election.

The applicability date is for (i) income tax payments  made on or after November 9, 2020 and (ii) also those made before then but for a taxable year ending after December 31, 2017, as long as the corresponding state law was enacted before November 9, 2020.

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In a recent Tax Notes Federal article, tax associate Bob Kane analyzes Notice 2020-69 and the S corporations and shareholders that would benefit from electing entity treatment for the global intangible low-taxed income (GILTI) regime.

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The IRS recently published a memorandum that provides guidance on the process of designating certain cases or issues for litigation (the “IRS Memo”). When a case or issue is designated for litigation, a taxpayer’s ability to try to resolve that issue through the IRS Independent Office of Appeals (“Appeals”) is foreclosed. While IRS guidance on the process of designating cases or issues for litigation existed previously, the IRS Memo provides more transparency on certain details of the process, and clarifies the procedure if a taxpayer wishes to challenge a designation for litigation.

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