The above-mentioned new IRS proposed regulations, issued March 6 th, also allow an individual who has made the 962 election to take a deduction of 50% of the GILTI when computing the tax on the GILTI! Reg. In assessing the state impact of a Sec. However, when an actual distribution is made from income previously taxed (PTEP), the distribution less any federal taxes actually paid under the 962 election will be taxed again. Accordingly, an individual U.S. Individual taxpayers who are U.S. shareholders in multiple foreign companies operating in different jurisdictions and subject to different foreign income tax rates may need to more carefully consider whether the section 962 election or the GILTI high-tax exclusion election provides a better outcome. (a) Who may elect. The only opaque part of the picture (to the IRS) is the raw financial data at the controlled foreign corporation level. How can the IRS verify that the taxpayer computed the tax liability correctly. This article was originally published in September 2018; it has been updated to reflect the release of final regulations related to sections 250, 951A, and 962. 965 inclusion amounts by a taxpayer that made a section 962 election for the section 965 inclusion year. (In Drake19 and prior, the entry is made on line 12a (3) of Screen 5) On the SCH screen: Assume an individual U.S. shareholder of a controlled foreign corporation prepared his/her Form 1040 and does not make the Section 962 election. 4. (d) Applicability dates. In this case Tom will owe an additional $59,994 (assuming federal tax from the first layer of 962 tax cannot be used to offset the second layer of 962 tax) in federal income tax (excluding Medicare tax). The proposed regulations provide that an election may be made for a CFC to exclude under 954 (b) (4)and thus exclude from gross CFC tested incomegross income subject to foreign income tax at an effective rate that is greater than 90 percent of the maximum U.S. corporate tax rate (18.9 percent based on the current rate of 21 percent). A Section 962 election permits individual CFC shareholders to pay a maximum of 21 percent on subpart F inclusions. It is your job to take the raw financial data and fill in the blanks on Form 5471, Schedule I, lines 1a 1f. Election: Pursuant to IRC Section 461(h)(3), the S Corporation hereby elects to adopt the recurring item exception as a method of accounting. Shareholder who makes a section 962 election will receive a 50% GILTI deduction and to be subject to tax on such GILTI inclusion at the corporate income tax rate. FC 1 and FC 2 are both CFCs. As this election is made at the level of the controlling domestic shareholder and not necessarily the ultimate individual owner, an individual may need to communicate with a domestic pass-through entity to clarify whether it is making the election and if it will impact the individuals personal section 962 election decision. Finally, the Joint Explan-atory Statement of the Committee of Conference to Public Law 115-97 states that: For the states that use AGI or FTI as the starting point to calculate state taxable income (STI), GILTI and Subpart F would be taxed when the income is recognized regardless of whether any federal tax is paid due to the Sec. 962 election should consider filing Forms 8993 and 1118 as a protective measure (see also Prop. Illustration 1.Tom is a U.S. person taxed at the highest marginal tax rates for federal income tax purposes. B. Attribution Rules in Sections 958(b) and 318(a) . On its face, a Sec. 179D energy-efficient commercial buildings deduction, IRS provides guidance on perfecting S elections and QSub elections. A cloud-based tax and accounting software suite that offers real-time collaboration. Comprehensive research, news, insight, productivity tools, and more. Additionally, most states do not recognize the Sec. I would appreciate if you could pass on any information you found out about this. Absent any adjustments on a state tax return, that distribution could be taxed by a state. Section 962 allows individuals or fiduciaries to be taxed at domestic corporate rates on any amounts included as gross income under IRC 951 (a), including presumable GILTI because of Section 951A (f) (1) (A), rather than at potentially higher individual or fiduciary income tax rates. Sign up to get the early-bird pricing here. A dividend from a qualified foreign corporation is taxed as a qualified dividend at long-term capital gain rates (Sec. Try our solution finder tool for a tailored set of products and services. General elections were held in Nigeria on 28 and 29 March 2015, the fifth quadrennial election to be held since the end of military rule in 1999. Individual Income Tax Return. The rate at which the dividend is taxed depends on whether the foreign corporation is considered a "qualified foreign corporation." To avoid double taxation, that distribution would need to be removed from STI, but there may not be clear authority for doing so. The short-term benefits of making a Section . No new contributions can be made. According to the 962 regulations, the attachment making the 962 election must contain the following information: 1. The IRS has a complete picture of how the controlled foreign corporations Subpart F income ends up creating that precise income tax liability reported by the individual United States shareholder on his/her Form 1040. It also allows individual CFC shareholders the ability to offset their subpart F liability with foreign tax credits for taxes paid by the CFC. 951(a) and 951A dictate how to include the income. Examples of 962 ComputationsWhen a CFC shareholder does not make a Section 962 election, he or she is taxed at ordinary income tax rates and the CFC shareholder cannot claim a foreign tax credit for foreign taxes paid by the CFC.Below please see Illustration 1 which demonstrates the typical federal tax consequence to a CFC shareholder who did not make a Section 962 election. The member firms of RSM International collaborate to provide services to global clients, but are separate and distinct legal entities that cannot obligate each other. Tom paid 19 percent corporate taxes to the South Korea government. 962, is includible in federal gross income of the individual taxpayer as either a qualified or nonqualified dividend and, therefore, would form part of AGI or FTI. The taxpayer hereby makes an election under Section 962(a)(1) to be taxed on amounts included in the taxpayers gross income under section 951(a) as if the individual were a Subchapter C corporation for the 2019 tax year. FC 1 FC 2 TotalGILTI inclusion $81,000 $81,000 $162,000Section 78 gross up $19,000 $19,000 $38,000Tentative income $100,000 $100,000 $200,000Section 250 deduction -$50,000 $50,000 $100,000Net Income $50,000 $50,000 $100,000Corporate tax 21% $21,000Foreign tax credit -$38,000962 tax liability 0When the $162,000 E&P is distributed in a future year to Tom, the distribution will be subject to federal income tax. The only requirement is that you attach a statement to your return claiming your election, it doesn't affect your tax calculation and is normally the last page of a paper filing. Note: This article was revised on December 13, 2016, to clarify that the subject is the Hospice . Thus, when a foreign corporation makes a distribution to a United States shareholder who has made a section 962 election, the individual may pay tax at normal ordinary income rates but only on the amount of the distribution that exceeds the amount of tax previously paid as a result of the section 962 election. This site uses cookies to store information on your computer. E&P distributed from a corporation to its shareholders generally qualifies for federal tax purposes as a dividend (Sec. In fact, most only partially conform or do not conform at all. Tom received pre-tax income of $100,000 FC 1 and $100,000 of pre-tax income from FC 2. 962 election, the individual will generally pay tax on their pro rata share of GILTI as if they were a U.S. C Corporation. You can see a possible discontinuity. Except as provided in subparagraph (2) of this paragraph, an election under this section by a United States shareholder for a taxable year shall be applicable to all controlled foreign corporations with respect to which such shareholder includes any amount in gross income for his taxable year under section 951(a) and shall be binding for the taxable year for which such election is made. Enter the pro rata share of gross earnings and profits from the CFC to be reported on the Section 962 Election Statement. Treas. The election to use the GILTI HTE is made by the controlling domestic shareholder (s) of the CFC and is binding on all U.S. shareholders. What to include on a 962 election statement. When a U.S. individual makes a Section 962 election, the taxpayer is treated as owning the CFC through a fictitious domestic corporation. A CFC will probably use a foreign currency as its functional currency. Now the government does not have a tax liability question to answer. In general, 962 allows an individual U.S. shareholder who owns at least 10 percent of a controlled foreign corporation (CFC) to elect to treat their foreign earnings in their 10 percent or more owned CFCs as "if" they were taxed as a corporation. Except as provided in 1.962-4, a United States shareholder shall make an election under this section by filing a statement to such effect with his return for the taxable year with respect to which the election is made. IRC Section 962 elections allow individuals and certain trusts that are US shareholders of CFCs to be taxed on GILTI and subpart F income as if they were a domestic corporation. 11, which accounts for "all income from whatever source derived." The statement bridges that critical data gap to make the governments job easier. ANY AND ALL OF THE INFORMATION ON THIS WEBSITE DOES NOT CONSTITUTE ADVICE IN GENERAL AND/OR TAX ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. ConclusionAnyone considering making a 962 election should have hypothetical computations of federal tax liabilities with and without the Section 962 election prepared before the election is actually made. However, as previously mentioned, that income may have already been taxed at the state level when it was taken into account as GILTI or Subpart F income on the taxpayer's federal return. 2IRC section 951A(a) By making a 962 election, Tom saved $27,594 ($59,994 $32,400 = $27,594) in federal income taxes.However, making a Section 962 election does not always result in tax savings. 1(h)(11)(C)). If a Section 962 election is made, the reporting will be on Form 1118 instead of Form 1116. . Suite 2104 Fort Lauderdale, FL 33304. The election under section 962 may be made only by an individual (including a trust or estate) who is a United States shareholder (including an individual who is a United States shareholder because, by reason of section 958(b), he is considered to own stock of a foreign corporation owned (within the meaning of section 958(a)) by a domestic pass-through entity (as defined in 1.965-1(f)(19))). The tax then flows to Form 1040 Line 11 and a statement. Other basic information is provided. While a Sec. As a result, the pro rata share of Subpart F income is part of the individual shareholders gross income. While the impact of a Sec. shareholders of a controlled foreign corporation (CFC) must include any subpart F income or global low-taxed income (GILTI) as ordinary income on their taxable income. 962, the jurisdiction in which the non-U.S. corporation is domiciled, and its ability to qualify for treaty benefits. I have prepared a 962 election for an individual but its pretty manual with a somewhat rough implementation. 962 election with respect to a GILTI inclusion. The question seems to be what exactly do you need to put in the election and how is it reported on the return. 250 and to claim a foreign tax credit, respectively. The election under section 962 may be made only by a United States shareholder who is an individual (including a trust or estate). Instructions state to use Form 1118, which doesn't appear to be an option. After various adjustments and deductions, the taxpayers taxable income is calculated at Form 1040, line 11b. To make matters worse, individual CFC shareholders cannot offset their federal income tax liability with foreign tax credits paid by their CFCs. Read ourprivacy policyto learn more. The government just has an accounts receivable problem to solve. Again, start with the controlled foreign corporations financial data. The election is made with a U.S. individual's timely filed income tax return (including extensions) by attaching a statement to the tax return for the tax year the election is in effect. Under the tax treaty, the $162,000 distribution will be eligible for a preferential 20 percent qualified dividend rate. 11) Provide guidance to help prevent unintended consequences resulting from the . Backup for the Sec. Enter the amount of Section 951(a) income from the CFC that the individual is electing to have taxed at the corporate rates. The passage of the2017 Tax Cuts and Jobs Act (TCJA)was heralded as the beginning of a new age in international taxation. The election under section 962 may be made only by an individual (including a trust or estate) who is a United States shareholder (including an individual who is a United States shareholder because, by reason of section 958 (b), he is considered to own stock of a foreign corporation owned (within the meaning of section 958 (a)) by a domestic Enter an explanation of the tax calculation for 951(a) income, per the Form 1040 instructions. 962 election for the taxable year ending December 31, 2018 must be made with the individual USS's timely filed federal income return for 2018, on Form 1040, which is due on April 15, 2019. Such understanding is useful when assessing conduct and identifying potential claims and pitfalls. The current highest federal tax rate applicable to individual CFC shareholders is 37 percent. This Tax Alert addresses how the Final Regulations affect IRC Section 962 elections. The election is administratively simpler than forming an actual intermediary corporation,but subtle differences in distribution ordering and other rules could cause it to provide different tax outcomes which may need to be modeled in advance. The IRS would love to see the underlying data as well, but at the moment this is not feasible for all types of income. The tax professional you! (1) In general. Each election statement must have the applicable title and, in the case of an attachment in Portable Document Format (.pdf) included with an electronically filed return, the file name reflected in the following table: . Lets Have a Conversation +1 (626) 689-0060. Anytime a 962 election is made for a CFC which has a functional currency that is not the dollar, the rules stated in Section 986 and Section 986 of the Internal Revenue Code must be used to translate the foreign taxes and E&P of the CFC. How can the IRS easily verify that the correct amount of gross income was taken into account for the United States shareholder? 50% Section 250 GILTI Deduction with a Deadline! See IRC Section 986(b); 989(b)(3). 4See Treasury Regulation section 1.962-1(b)(1). A complex situation can get more complex when a distribution of earnings is made in a later year. It also allows individual CFC shareholders the ability to offset their subpart F liability with foreign tax credits for taxes paid by the CFC. The Section 962 Statement solves that problem. Anthony Diosdi may be reached at (415) 318-3990 or by email: adiosdi@sftaxcounsel.com. However, this method of reporting this income and related tax liability does not have a direct correlation with the amount that is technically included in the individual's gross income under Sec. AICPA lists 15 recommendations that would provide clarification and guidance. Treasury has also issued final regulations which would allow the individual to claim the 50 percent deduction against GILTI which is otherwise only available to corporations.4The application of the deduction and indirect foreign tax credit substantially reduces or eliminates the tax due from the individual in the current year. Ask questions, get answers, and join our large community of tax professionals. A United States shareholder shall make an election under this section by filing a statement to such effect with his return for the taxable year with respect to which the election is made. In the next chapters we will talk about what information is required for the Section 962 Statement. Individuals with investments in profitable foreign corporations, including throughpass-through entities such as partnerships and S corporations, must contend with immediate double-taxation of foreign earnings on an annual basis under the section 951A Global Intangible Low-Taxed Income (GILTI) regime: the local jurisdiction taxes the income and then the U.S. takes another cut. This brings the total worldwide tax liability to $304 U.S. dollars, a much better answer than the $449 U.S. dollars of worldwide tax in the absence of the election. All rights reserved. Input is also available on worksheet General > Federal Elections. FC1 FC2 TotalGILTI Inclusion $81,000 $81,000 $162,000 Section 78 gross up 0 0 0Tentative taxable income $81,000 $81,000 $162,000Section 250 deduction -$40,500 -$40,500 -$81,000Net income after deduction $40,500 $40,500 $81,00021% corporate tax rate $17,010Foreign tax credit 0First layer 962 tax $17,010At the time of the 962 election, Tom will pay $17,010 in taxes (excluding Medicare tax). The analysis may have to consider the interplay of the tax regimes and profiles of several different foreign countries. Proc. Your online resource to get answers to your product and industry questions. Thus, both spouses should sign any Section 965 election statements. In this example, by making the 962 election, Tom increased his tax liability by $17,010 ($77,004 $59,994 = $17,010). Instead, the taxpayer computes tax liability using corporate tax principles, and include *only the tax liability* on his/her income tax return, at Form 1040, line 12a. 962 election for corporate rates may also deduct 50% of the amount of the GILTI inclusion under Sec. Because of nuances such as differing foreign tax rates and qualified dividend rates only being available with respect to investments in certain countries, the exact differential in tax with and without the election will vary depending upon each fact pattern considered. The Section 962 election is made annually for all CFCs in which an individual is a U.S. shareholder, including indirectly through pass-through entities. The I.R.S. The answer, in brief, is to fill an information gap. In some situations, taxing the subsequent distribution as ordinary income could actually create a higher effective tax rate than if no Sec. Section 962 tells the electing individual United States shareholder to NOT include the Subpart F income in gross income the normal way of computing tax liability. FC 1 and FC 2 do not own any assets. Therefore, from a federal tax planning perspective, it is important to consider all the facts and circumstances and to carefully model out the tax impacts on future cash distributions as well as the administrative costs associated with the additional compliance related to a Sec. Names, address, and taxable year of each CFC to which the taxpayer is a U.S. shareholder. The application for consent to revocation shall be made by the United States shareholder's mailing a letter for such purpose to Commissioner of Internal Revenue, Attention: T:R, Washington, DC 20224, containing a statement of the facts upon which such shareholder relies in requesting such consent. Section 1.962-2(b) lists the information that must be included on the IRC Section 962 election statement. Form 1099 income is an example of a raw data to tax liability data trail available to the IRS. Instead, taxpayers must track that information separately, attach a statement to the tax return, and report any tax directly on Form 1040, line 12a. Section 986 uses the average exchange rate of the year when translating foreign taxes. Also, the Section 965 mandatory inclusion and the Section 965 deduction are both reported on Form 1116. Pass-through structures such as S corporations are popular in the United States in large part because they eliminate the domestic double-taxation of corporate income. Approval will not be granted unless a material and substantial change in circumstances occurs which could not have been anticipated when the election was made. Section 962 gives individual taxpayers an election to be taxed on Subpart F income and GILTI at corporate tax rates (21%) rather than individual tax rates (as high as 37%). If the Cyprus company generates $1,000 U.S. dollars of income, that income is first subject to $125 U.S. dollars of Cyprus taxes, then potentially the entire $875 U.S. dollars remainder could be currently taxed as GILTI and subject to an additional 37 percent U.S. individual tax rate in the year incurred2(note that GILTI inclusions are not eligible for the new section 199A business income deduction3). Thats the simple explanation. This raises the following question: Should an individual who makes a Sec. This article is not legal or tax advice. Integrated software and services for tax and accounting professionals. If the U.S. shareholder makes a section 962 election, the GILTI inclusion would be subject to a lower immediate rate of tax (10.5% effective rate at corporate level). The elections were first scheduled to be held on 14 February 2015. Connect with other professionals in a trusted, secure, environment open to Thomson Reuters customers only. Income reported under Section 951(a) for 2019: Section 956 Inclusion _________ Inc. XXXXXXX, Section 956 Inclusion __________ XXXXXXX, Global Intangible Low-Taxed Income XSXXXXX, Total Income Reported Under 951(a) for 2019 XXXXXXXX, Tax at 37% Marginal Rate XXXXXXX, Tax at 21% Corporate Rate XXXXXXXXX, Tax Savings from Election XXXXX. For example, if a taxpayer has a GILTI inclusion but no residual tax liability due to full coverage of foreign tax credits, a subsequent distribution may create a taxable dividend to the extent the distribution exceeds the amount of tax paid (including deemed paid credits). But, Tom has had the benefit of deferring his tax liability. There is a popup box under that for you to enter your election language. Regs. The IRS wants to see tax data connecting gross income to tax liability computations. Except as provided in subparagraph (2) of this paragraph and 1.962-4, an election under this section by a United States shareholder for a taxable year shall be applicable to all controlled foreign corporations with respect to which such shareholder includes any amount in gross income for his taxable year under section 951(a) and shall be binding for the taxable year for which such election is made. Discover what makes RSM the first choice advisor to middle market leaders, globally. Under section 962, the individual will generally pay tax on his or her pro rata share of GILTI as if he or she were a U.S. corporation. Individual taxpayers will also be allowed to make an election under section 962 to have the section 965 income taxed using the corporate rates and take a foreign tax credit for a portion of the foreign taxes that are deemed paid by the foreign corporation; they will then be required to prepare and attach a sworn statement and elections to their . Individuals and pass-through entities receive no such benefits. The attractiveness of a Section 962 election is clear for individual US shareholders to pay a federal tax rate of only 10.5 percent (after taking into account the current federal corporate tax rate of 21 percent and the 50 percent Section 250 deductions domestic corporations are permitted to take). Because of the significant reduction in the federal corporate tax rate to 21%, taxpayers began to seek relief from GILTI inclusions by making Sec. Individuals making a 962 election will be permitted to claim a Section 250 deduction. Washington, D.C. (October 31, 2018) - The American Institute of CPAs (AICPA) today submitted an extensive set of recommendations and comments to the Internal Revenue Service (IRS) about proposed regulations (REG-104226-18) regarding the transition tax . (2) Revocation. Association of International Certified Professional Accountants. Copyright (c) 2020-US Tax Services - All rights reserved. The Section 951(a) income included in the Section 962 election on a CFC by CFC basis. The Sec. Section 965 affects U.S. owners of certain foreign corporations. 78 gross-up of $180,000. This enables the taxpayer to benefit from the 21-percent corporate tax rate as well as the Section 250 deduction (for GILTI purposes only). Enter the foreign taxes paid to be reported on the Section 962 Election Statement. 962 election is made. Returning to the facts of the prior example, if the individual makes a section 962 election for the year, the Cyprus earnings are now subject to GILTI tax at the deemed-corporate level instead of the individual level. Prop. 962 election were made. However, in this case, Tom made a 962 election. The average exchange rate of the year is also used for purposes of 951 inclusions on subpart F income and GILTI. 962 election can be made on a year-on-year basis and is made on a timely filed U.S. tax return, including amended returns, but it will apply to all appropriate CFCs of the shareholder making the election for the year. 962 election is made, the amount of that income is included in the taxpayer's gross income. Implication: Generally, spouses who file a joint income tax return must each sign the income tax return. On July 10, 2020 I will present a live Section 962 webcast that goes into excruciatingly painful detail about preparing a Section 962 tax return. A 21% corporate tax rate, a 50% deduction, and a foreign tax credit can greatly reduce an individual's tax liability and in some cases eliminate it entirely in the year in which the income is recognized. Upon application by the United States shareholder, an election made under this section may, subject to the approval of the Commissioner, be revoked. 3 Individual shareholders that make a Section 962 election. A United States shareholder who does not make the Section 962 election will prepare and file a tax return that gives the IRS enough information to assure that the correct tax liability has been computed by the taxpayer. How do I make a Section 962 election in Drake Tax? FC 1 and FC 2 are CFCs. Therefore, GILTI and Subpart F would still be included in adjusted gross income (AGI) and subsequently in federal taxable income (FTI) for an individual. The first category is excludable Section 962 E&P (Section 962 E&P equal to the amount of U.S. tax previously paid on amounts that the individual included in gross income under Section 951(a). More recently, the TCJA required U.S. shareholders to take into account their pro rata share of a CFC's global intangible low-taxed income (GILTI) in a way that is similar to Subpart F. The GILTI rules in new Sec.
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