Sikich Series on Tax Reform: Section 965 Penalty and Filing Relief

On June 4, 2018, the IRS announced a penalty and filing relief (IR-2018-131) for taxpayers who may be subject to the new transition tax on foreign earnings under Section 965. As will be discussed below, one part of the relief requires impacted taxpayers to make a payment by June 15, 2018. This new transition tax was a significant provision in the Tax Cuts and Jobs Act enacted in December 2017. The IRS outlines this Section’s amendment, which states that certain taxpayers are required to include in income an amount (section 965(a) inclusion amount) based on the accumulated post-1986 deferred foreign income of certain foreign corporations that they own either directly or indirectly through other entities. In this write-up, we will provide a high-level overview of what this tax is and how the tax relief affects you.

What is Section 965?

Essentially, Section 965 of the Code requires United States 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. The effective tax rates applicable to such income inclusions are adjusted by way of a participation deduction set out in section 965(c) of the Code resulting in an effective tax rate of 15.5% on cash and 8% on non-cash assets. Taxpayers, pursuant to section 965(h) of the Code, may elect to pay the transition tax in installments over an eight-year period.

Generally, a specified foreign corporation means either a controlled foreign corporation, as defined under section 957 of the Code (“CFC”), or a foreign corporation (other than a passive foreign investment company, as defined under section 1297 of the Code, that is not also a CFC) that has a United States shareholder that is a domestic corporation.

Do I Qualify for Relief?

The IRS’ Questions and Answers page reviews reporting related to Section 965 on 2017 tax returns. Questions 15, 16 and 17 were most recently added. They outline what to do under three scenarios:

  1. If a taxpayer credited a calculated income tax overpayment to the first installment of the transition tax (please note – if this item applies, a payment must be made by June 15, 2018 to obtain relief);
  2. If a taxpayer fails to pay their first installment of tax due under section 965(h) in a timely manner; and
  3. If a taxpayer has already filed their 2017 tax return, but has not made the section 965(h) election.

For more information about reporting related to Section 965 on 2017 tax returns and the penalty and filing relief, please visit the IRS website. For help to determine if you qualify for this relief or other tax related questions, please contact your local Sikich Advisor.

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