Small businesses may keep cash available to cover their ongoing needs, so a 15.5 percent tax on that pot of assets could put owners in a bind.
“For smaller companies, especially companies set up by expatriates, this could put people out of business and be a negative life-changing event,” said David McKeegan, co-founder of Greenback Expat Tax Services.
“If you knew you needed to keep $100,000 on hand for working capital, it wasn’t taxed by the U.S, but now, the U.S. government is taxing that $100,000 at 15.5 percent,” he said.
Additionally, the 8 percent tax on non-cash earnings would affect illiquid holdings.
The transition tax is different from the requirement that Americans report their foreign financial assets and accounts, known as the Foreign Account Tax Compliance Act (FATCA) and the Report of Foreign Bank and Financial Accounts (FBAR).
“Whereas FBAR can apply to any individual who owns a foreign account, the transition tax is for controlled foreign corporations,” said Tannenbaum.
There is the potential for overlap between the two tax requirements when it comes to small business owners: An American who owns at least 50 percent of a foreign corporation already has to report the company’s overseas bank accounts on FBAR, he said.
That same company could be subject to the transition tax, too.