The Tax Cuts and Jobs Act (TCJA) that was enacted on December 22, 2017, includes a deemed repatriation provision applicable to all US Shareholders of Specified Foreign Corporations. This provision impacts the 2017 tax return of many US Shareholders (not 2018 as do most of the other provisions of the TCJA).
Click for a copy of the “IRC 965 Transition Tax Statement”.
The deemed repatriation is taxed at a favorable rate and can be paid over an 8-year period, but it came as a surprise to many taxpayers. It also requires an analysis of the Specified Foreign Corporations earnings as of the end of 2017 and requires taxpayers to prepare a calculation that is to be reported and paid shortly.
With the reporting and payment of the “Transition Tax” from the required deemed distribution of foreign earnings to US Shareholders under Sec. 965 coming due by April 17, 2018, the IRS just released information in a question and answer format as to how to proceed. Even with this guidance, the IRS has requested that taxpayers with this requirement not file before April 2, 2018. This allows the IRS to make certain system changes to allow the returns to be accepted and processed. Filing before that date could result in returns being rejected, delays in processing, or the issuance of erroneous notices.
Payment of the Sec. 965 Transition Tax
The IRS specifically requires that any amount of the transition tax must be paid in a separate payment from any regular tax liability, and that it must be paid either by wire transfer or by check or money order. It is not to be paid through otherwise mandated EFTPS payments. This will therefore highlight the amount of Sec. 965 transition tax, even if paid through an extension where it might otherwise be lumped in with the taxpayers’ income tax liability. An election is not made at the time of the extension even though a payment (reflecting the impact of an election) is required at that time.
Elections under the Sec. 965 Provisions
The release includes sample elections and reporting statements that will need to be included when filing a (final) tax return. These are filed with a return that may have been extended and not at the time of the payment of the Sec. 965 Transition Tax. The separate statements are to be filed as an attachment to the tax return, with the required information set forth in the release, and signed under penalties of perjury.
Additional Form 5471s May Be Required
US shareholders of Controlled Foreign Corporations (CFCs: >50% US Ownership) have always had to annually file a Form 5471 to report financial and tax information related to the CFC. However, Sec. 965 also pulls into its net certain 10% US Shareholders of foreign corporations that may not control the foreign entity and have not had to file the form annually. In fact, these shareholders may not have prepared the type of information annually that is needed to calculate and report the Sec. 965 Transition Tax. Yet these shareholders will need to prepare a modified version of the Form 5471 (including Schedule J) and calculate the tax based upon the earnings through the end of 2017. There will be some taxpayers that had the required 5471 filings in the past and in some instances did not have the 5471 filing requirement because of their ownership percentages. This will require some taxpayers to obtain financial information from foreign corporations where they did not need to before and analyze the foreign tax returns.
Additional Guidance to be Issued by April 2, 2018
The IRS has announced that they intend to provide further guidance concerning the availability of the elections under Sec. 965 for direct and indirect partners/shareholders in domestic partnerships/S corporations. This is to be released by April 2, 2018. See Q&A 5 of the release.
Moore Stephens Doeren Mayhew has been reviewing the new law as well as the current IRS guidance on Sec. 965. Although there are many unanswered questions, there are steps that can (and should) be taken at this point to prepare for the required reporting and payments. We would be pleased to discuss these steps further with youand assist you in meeting your tax obligations.