2018 Tax Year Section 965 Reporting
With tax reform making major changes to the international scene, a lot of tax preparers have had to delve into the international world of taxation, whether we like it or not. I have dabbled there, but am in no way an expert, so I’m going to keep it pretty high level in this overview of the transition tax and its 2018 reporting requirements.
The Tax Cuts and Jobs Act, P.L. 115-97, gave us §965 - a new provision of the IRC that requires U.S. shareholders to pay a transition tax on the untaxed foreign earnings held by certain offshore corporations. Previously, foreign corporations could keep their earnings U.S. income tax free so long as they didn’t repatriate the funds (bring the money into the U.S.) usually in the form of a dividend.
One of the TCJA’s goals was to make doing business in the U.S. more attractive, and with that, reduce corporate inversions (moving U.S. companies offshore to low-tax countries), and level the playing field for U.S. companies competing with foreign competitors. Section 965 is just one new area of international tax law that aided this goal, but was more of one-time hit to foreign activity, rather than a new continuous consideration such as the BEAT and GILTI provisions.
The transition tax applies to the last taxable year of certain specified foreign corporations, defined under §965(e), beginning before January 1, 2018. As such, most taxpayers dealt with the transition tax on their 2017 tax return, and likely said good riddance if all related tax liability was paid on the 2017 return…but sorry, you’re not done yet! The IRS must have said, “Oops, we need more information than the Transition Tax Statement!” Intro Form 965 and 965-A/965-B.
Newly created Form 965, and its Schedules A through H, is required to be filed with the 2018 tax return by those having 2017 and/or 2018 §965 related activity. The purpose of the form, as listed in the instructions, is to compute:
o Section 965(a) inclusion amounts
o Section 965(c) deductions
o Foreign taxes deemed paid in connection with a section 965(a) inclusion, and
o Foreign taxes disallowed under section 965(g)
So then, why do we need this form is we’ve already computed, reported, and paid the transition tax with the 2017 return? First, there can be 2018 related §965 activity, for example if you have a fiscal year-end foreign investment, or aggregate foreign cash position leftover for 2018 after the 2017 calculations. Second, given the late guidance, I don't know that the IRS had enough time to get the forms ready. The Transition Tax Statement that was required to be an attachment to the 2017 return only reports the totals required to be computed, but did not ‘show your work’ as much as these new forms require. Publication 5292 How to Calculate Section 965 Amounts and Elections Available to Taxpayers was ready to use in completing the 2017 return, and the new Form 965 and related schedules largely follow the worksheets available within the publication.
A Form 965-A or 965-B gets attached to the 2018 tax return as well, depending if the filer is an individual (and those taxed like individuals) or a corporate taxpayer, respectively. These forms track and report the §965 tax liability for each tax year the taxpayer must report or pay §965 amounts. That means Form 965-A or 965-B will need to be filed beyond the 2018 return as long as any §965 tax liability remains unpaid at any time during a tax year, such as installments under the 965(h) election made on either the 2017 or 2018 tax return. This continued filing is also required for the §965(i) S Corporation deferral election, or §965(m) election for REITs with amounts not taken into account at any time during the tax year.
If you made the §965(h) election to pay the transition tax in eight annual installments on your 2017 tax return, then you already knew you weren’t completely done with this provision, regardless of these new forms! The IRS has released a Q&A related to making the installment payments here that helps explain various scenarios a taxpayer may encounter.
At the end of the day, most taxpayers who reported 2017 §965 activity had an Excel version in their workpapers that followed Publication 5292 to calculate and track what these new forms are requiring to now be formally reported. So, if you had your ducks in a row last year, the current year reporting may not too bad. It seems like timing of guidance and inability to get forms drafted timely last year is maybe driving this one-year reporting delay.