Trillions of dollars’ worth of company earnings held offshore will soon be repatriated for U.S. taxation, under the new Section 965 transition tax contained in the Tax Cuts and Jobs Act. Since tax reform was enacted, the U.S. Treasury and the IRS have been largely silent on the issue of Section 965, leaving individuals and companies with ownership stakes in foreign corporations wondering how to report eligible earnings.
On March 13, the IRS issued frequently asked questions to clarify some of the bigger concerns surrounding the Section 965 reporting. Read on for a breakdown of eligibility requirements, timing and next steps related to payment of these new repatriation obligations.
Which offshore earnings must be repatriated and reported under Section 965?
- Both taxpayers and pass-through entities (such as S-corporations and partnerships) will need to report the amount of net earnings held offshore, as well as the calculated deductions that reduce the tax rate on the repatriated earnings.
- Taxpayers (such as individuals and corporations) must also report the amount of the transition tax liability (including amounts elected to be deferred or paid in installments), “foreign cash position,” as well as any foreign tax credit allowed. A statement signed under penalty of perjury including these items and others is also required.
- Taxpayers with ownership in foreign corporations for which a Form 5471 has not been filed in the past should consult with their tax advisor to determine it will apply for the 2017 tax year.
- The IRS requests that taxpayers with a reporting requirement wait to electronically file a return until at least April 2, 2018.
- Any returns that have been submitted without this information should be amended to satisfy the reporting requirements.
Who must pay the transition tax on repatriated offshore earnings?
- The taxpayer with direct or indirect ownership in a specified foreign corporation, including shareholders in S-Corporations and partners in partnerships with ownership in at least one foreign corporation.
- Only taxpayers with ownership in foreign corporations that have accumulated earnings held abroad will be subject to the tax.
When is payment of the Section 965 transition tax due?
- Payment of the tax is due at the original tax return due date of the taxpayer (generally April 15).
- Taxpayers may make an election to pay the tax in installments over eight years. This election is due by the due date of the taxpayer’s return, including extensions, but the first installment payment is due by the original tax return due date.
- S-corporation shareholders are allowed a special election to defer the payment of tax until certain triggering events occur, such as the closing of the business, sale of stock, termination of the corporation’s S-status, among others. However, the above reporting requirements still apply.
- Payment for the transition tax must be made separately from regular tax payments. Taxpayers otherwise required to make payments via EFTPS must make the Section 965 tax payment via wire transfer.
I believe the transition tax will apply to me or my company. What should I do next?
- Contact your tax advisor: Calculation of the amounts of income, deduction, foreign cash position and tax will require careful analysis and could likely involve additional communication with the foreign corporation.
- Extend relevant filings: Given the complex nature of the provisions and coupled with the IRS request to delay filing until at least April 2, it would be prudent to extend all returns with a reporting requirement, including pass-through returns and their shareholders/partners. The IRS has also promised additional guidance on the transition tax that may impact the calculation or reporting.
Contact your RKL advisor for more information or assistance regarding Section 965 fillings. Stay tuned to our dedicated Resource Center for ongoing updates, insights and information related to tax reform as federal agencies continue to interpret, apply and advise on its various provisions.