Synopsis

Issue

Background

The Tax Cuts and Jobs Act of 2017 (“TCJA”) requires that all US shareholders of controlled foreign corporations and all domestic corporations that hold 10% or more of a foreign corporation include in income for 2017 (or the first fiscal year ending thereafter) their pro rata share of the accumulated earnings and profits (“E&P”) of such foreign corporation.  Such inclusion will be taxed at a reduced rate under Section 965 (the transition tax). 

New Guidance

After establishing the above legal framework for the transition tax, Congress left it to the IRS to administer the reporting and payment of this tax. On March 13, 2018, the IRS released IR-2018-53, (a questions and answers page) that addresses three broad areas of section 965 compliance—reporting inclusions, paying taxes, and making elections.

Reporting an Inclusion under Section 965

IR-2018-53 reiterates that taxpayers who have income inclusions under section 965 must report those inclusions on their 2017 tax returns.  Passthrough entities—such as partnerships and S-corporations—must provide information relevant to section 965 on their K-1s.

In addition, taxpayers who have income under section 965 must include with their return an “IRC 965 Transition Tax Statement” signed under penalties of perjury.  The IRS provides a model IRC 965 Transition Tax Statement.  It also warns that taxpayers must maintain records—including underlying calculations—that support their inclusion, deduction, and net tax liability arising from section 965.

Expanded 5471 Filing Requirement

For tax year 2017, US shareholders of Specified Foreign Corporations must also file forms 5471.  A US shareholder who is not otherwise required to file a form 5471 only needs to complete two sections:
1. Identifying information above Schedule A, and
2. Schedule J

Please note that taxpayers who have already filed their 2017 returns must file amended returns that conform to the standards set forth in IR-2018-53.

Paying the Tax Arising from Section 965

IR-2018-53 requires taxpayers who have inclusions under section 965 to make two separate payments.  Both payments are due by the due date of the taxpayer’s return, without extensions.

One payment should reflect the income tax owed without regard to section 965.  Normal payment procedures apply to this payment.

A second payment (the “965 Payment”) should reflect the tax owed as a result of section 965.  This will be either the first installment payment from taxpayers who elect to pay in installments or the full payment of the net tax liability under section 965.  The 965 Payment must be made by wire transfer, check, or money order.  Taxpayers who would normally be required to pay through EFTPS must submit the 965 Payment via wire transfer.

Making elections under Section 965

Taxpayers who wish to make an election under section 965 or in Notice 2018-13 must do so by attaching to their 2017 return a statement signed under penalties of perjury for each election.  The due date of an election is the due date, including extensions, for filing the return.  The IRS provides model statements for each election available under section 965 or in Notice 2018-13.

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