New York State and City’s Treatment of Internal Revenue Code § 965 Repatriation Income
The federal Tax Cuts and Jobs Act of 2017 required certain U.S. taxpayers to recognize deemed repatriation income under Internal Revenue Code § 965(a), (IRC 965(a)). Below is a summary of the treatment of such income for individuals and various entities based on guidance issued by New York State and City (NY). Note that separate State and City tax filings are required.
For Individuals, the net IRC 965 amount (the income inclusion under IRC 965(a) less the IRC 965(c) deduction) is required to be included in federal adjusted gross income, and consequently, included in NY State and City taxable income. However, unlike the federal statute that allows taxpayers to elect to pay the resulting tax liability over eight years, or in the case of S corporation shareholders, defer the tax liability until specified triggering events occur in the future, individual taxpayers are required to pay the additional NY State and City tax generated by IRC 965 in the tax year the income is included in federal adjusted gross income.
Both NY State and City categorize IRC 965(a) income as exempt controlled foreign corporation (CFC) income for C corporations, but taxpayers must add back to federal taxable income interest deductions directly or indirectly attributable to the IRC 965(a) inclusion amount, or instead make a 40% safe harbor election.
When attributing interest expense, the following should be noted:
1. Taxpayers must include the stock of the foreign corporation that generates IRC 965(a) income in the investment capital indirect attribution formula if it is investment capital.
2. Taxpayers must include the stock of the foreign corporation that generates IRC 965(a) income in the exempt CFC stock indirect attribution formula if it is business capital.
In addition, taxpayers also must add back any IRC § 965(c) deduction.
NY S corporations must treat IRC 965(a) income as dividends from stock for the purposes of computing the business apportionment factor based on the following:
- When the 8% fixed percentage election is in effect and the stock that generated the net IRC 965(a) income is a qualified financial instrument, 100% of the net IRC 965(a) income should be entered in the everywhere column and 8% in the NY column where noted.
- If the criteria mentioned above are not met, the net IRC 965(a) income is not included in the business apportionment factor.
Real Estate Investment Trusts (REITS):
Captive and noncaptive REITS that have elected to defer the IRC 965(a)income inclusion, must include 100% of their IRC 965(a) income and take the IRC 965(c) deduction, but use 8% of these amounts when reporting these values on their NY returns.
Estates and Trusts:
Fiduciary filers must include the entire net IRC 965(a) amount, distributed and undistributed, in their returns, even though only the net IRC 965(a) distributed amounts are reported in the federal return. A pro-forma Form 1041 must be included with the NY returns to show the distributed and undistributed amounts.
Corporate partners and beneficiaries must include their distributive shares of IRC 965 income from partnerships and estates and trusts when computing their federal IRC 965 Transition Tax Statement and allocate that amount to NY if the income is derived from or connected to NY sources.
IRC 965 amounts are NY source income when the stock of the corporation generating the IRC 965(a) income was used in a trade or business in NY.
In addition, all taxpayers are required to include their federal or pro-forma IRC 965 Transition Tax Statement with the applicable return. It is also important to note that the Department of Taxation and Finance requires taxpayers to amend their 2017 tax returns if the IRC 965 amounts were reported differently than the guidance instructs as set forth above.
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