The IRS has released Frequently Asked Questions (FAQs) to address a taxpayer’s filing obligations and payment requirements with respect to the Code Sec. 965 transition tax, enacted as part of the Tax Cuts and Jobs Creation Act ( P.L. 115-97). The instructions in the FAQs are for filing 2017 returns with an amount of Code Sec. 965 tax. Failure to follow the FAQs could result in difficulties in processing the returns. Taxpayers who are required to file electronically are asked to wait until April 2, 2018, to file returns so that the IRS can make system changes.
In general, Code Sec. 965 imposes a one-time tax on the untaxed post-1986 foreign earnings of foreign subsidiaries of U.S. shareholders by deeming the earnings to be repatriated. The foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5 percent rate, and remaining earnings are taxed at an 8 percent rate. The taxpayer may elect to pay the tax in installments over eight years.
Amounts must be reported by a U.S. shareholders of deferred foreign income corporation (DFIC) or by a direct or indirect partner in a domestic partnership, a shareholder in an S corporation, or a beneficiary of another passthrough entity that is a U.S. shareholder of a DFIC.
The Appendix to Q&A 2 contains a table that describes, separately for individuals and entities, how items should be reported on the 2017 tax return. For example, an individual reports the Code Sec. 965(a) amount on Form 1040, Line 21, with the notation SEC 965 on the dotted line to the left of the Line.
A person with income under Code Sec. 965 is required to include with its return an IRC 965 Transition Tax Statement, signed under penalties of perjury, and in the case of an electronically filed return, in pdf format with the filename 965 tax. A Model statement is provided. Adequate records must be kept supporting the Code Sec. 965 inclusion amount, the deduction under Code Sec. 965(c), the net tax liability under Code Sec. 965, and any other underlying calculations of these amounts.
The FAQs provide details on how to make the multiple Code Sec. 965 elections, including the election to pay the tax in installments over eight years. For each election, a statement must be attached to the return and signed under the penalties of perjury, and in the case of an electronically filed return, in pdf format.
Form 5471 must also be filed with the 2017 return of a U.S. shareholder of a specified foreign corporation, regardless of whether the specified foreign corporation is a controlled foreign corporation. A statement containing information about the Code Sec. 965(a) inclusion must be attached to the Schedule K-1s of domestic partnerships, S corporations, or other passthrough entities.
Tax must be paid in two separate payments. One payment will reflect the tax owed, without Code Sec. 965. The second payment is the Code Sec. 965 payment. Both payments must be made by the due date of the applicable return (without extensions). Additional details for paying the tax are provided in the FAQs.
Persons who have already filed a 2017 tax return should consider filing an amended return based on the information in these FAQs and Appendices.