The IRS has issued Publication 5292, How to Calculate Section 965 Amounts and Elections Available to Taxpayers, which provides guidance for determining the new transition tax on untaxed foreign earnings for the 2017 tax year.
Code Sec. 965, as amended by the Tax Cuts and Jobs Act of 2017 ( P.L. 115-97), requires U.S. shareholders to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States. Affected taxpayers can reduce the deferred foreign income amount based on deficits in earnings and profits with respect to other specified foreign corporations. The applicable effective tax rates on the inclusion amount are adjusted by a participation deduction. However, no foreign tax credit or deduction is allowed for a portion of any foreign income taxes paid or accrued (or deemed paid or accrued) for any mandatory inclusion amount for which a participation deduction is allowed.
Certain elections related to the Code Sec. 965 transition tax are available, including:
- an election to pay the Code Sec. 965 net tax liability over eight years;
- an election by S corporation shareholders to defer payment of the net tax liability with respect to the S corporation until a triggering event;
- an election by real estate investments trusts (REITs) to take both inclusions and the corresponding deductions into account over eight years;
- an election not to apply a net operating loss deduction; and
- an election to use an alternative method to calculate post-1986 earnings and profits.
The inclusions and corresponding deductions are taken into account based on the last tax year of the relevant foreign corporations that begins before January 1, 2018.
2017 Tax Year Calculations
The Section 965 Workbook is intended to help affected taxpayers calculate their required income inclusions and other relevant amounts under Code Sec. 965 for 2017. The IRS suggests that all individuals, corporations, partnerships, S corporations, and other pass-through entities that are U.S. shareholders should use the workbook to determine their required income inclusions and the participation deductions. Further, owners and beneficiaries of U.S. shareholder pass-through entities should receive information from the pass-through entity about their shares of the inclusion amounts and participation deductions to be included in the workbook.
In addition, the IRS recommends that eligible individuals making a deemed-paid credit election under Code Sec. 962 and corporations should use the workbook to determine the foreign taxes deemed paid with respect to the inclusions and the portion of the deemed-paid foreign taxes disallowed under Code Sec. 965(g).
The IRS publication includes:
The 965 Workbook —Worksheets to Calculate Inclusion of Deferred Foreign Income Upon Transition to Participation Exemption System;
Worksheet A — U.S. Shareholder’s Section 965(a) Inclusion Amount;
Worksheet B — Deferred Foreign Income Corporation’s Earnings & Profits;
Worksheet C — U.S. Shareholder’s Aggregate Foreign Earnings & Profits Deficit;
Worksheet D — U.S. Shareholder’s Aggregate Foreign Cash Position;
Worksheet E — U.S. Shareholder’s Aggregate Cash Position – Detail;
Worksheet G — Foreign Taxes Deemed Paid by Domestic Corporation for 2017 Tax Year;
Worksheet H — Disallowance of Foreign Tax Credit and Amounts Reported on Forms 1116 and 1118;
965 Deferral Worksheet for Individuals; and
965 Deferral Worksheet for Corporations.
Details on how to report Code Sec. 965 items on 2017 returns are set forth in the IRS’s FAQs on transition tax reporting.
The IRS has also updated its frequently asked questions (FAQs) on filing 2017 returns and making tax payments relating to the transition tax. The updated FAQs cover the elections available; reporting additional information to shareholders, partners, and beneficiaries; how to pay the tax resulting from a Code Sec. 965 inclusion; making estimated payments; refunds and other topics.
A taxpayer’s failure to submit a tax return according to the instructions may result in difficulties in processing tax returns, including rejection, processing delays, or erroneous notices being issued. Taxpayers may submit their questions or comments related to Code Sec. 965 to the IRS at LB&I.TCJA@irs.gov. Individual responses will not be provided. Instead, questions or comments may be addressed in the form of additional FAQs.