Transition Tax: Additional Guidance on Return Filing and Tax PaymentMarch 21, 2018
Alan Osmolowski, CPA
The IRS released guidance in a Frequently Asked Questions (FAQ) format on March 13th that addresses important information for taxpayers affected by Code Sec. 965 (a.k.a. Transition Tax) added by the Tax Cuts and Jobs Act (P.L. 115-97 and hereinafter referred to as “statute”).The FAQ outlines procedures on how to report such income and how to pay the associated tax liability. This guidance seeks to alleviate the uncertainty surrounding compliance with the new law especially since the April 15 deadline is looming for many taxpayers.
Here is some salient guidance provided by the FAQ:
Electronic Filing – April 15 Due Date
Taxpayers who electronically file Form 1040 are requested to wait to file their return on or after April 2, 2018. This request allows the IRS time to make certain system changes and to allow for the returns filed to be accepted and processed.
How §965 Amount is Reported on the 2017 Tax Return
Amounts to be reported on a 2017 tax return should be reported on the return in the manner required by the IRS. Guidance is provided under Appendix Q&A2 of the FAQ.
§965 Transition Tax Statement
A person required to report a §965 tax liability is mandated to include in the return a §965 Transition Tax Statement, signed under the penalties of perjury. The FAQ provides the information that must be included in the statement (see Q3 of the FAQ). In addition, the IRS requires that adequate records must be kept supporting the §965(a) inclusion amount, deduction under §965(c), and the net tax liability as well as the underlying calculations of these amounts.
Who Can Make Elections Related to §965
§965 allows multiple elections related to amounts included in income by reason of §965 or the payment of a taxpayer’s net tax liability. Elections are provided in §965(h), (i), (m), and (n). Further, an election is also provided with respect to the determination of Post-86 earnings and profits of a Specified Foreign Corporation (a defined term in the statute). This election is described in Notice 2018-13, 2018-6 I.R.B. 341, §3.02.
The elections under §965 are limited to 1) taxpayers with net tax liability under §965; 2) taxpayers that are shareholders of S Corporations and have a net tax liability under §965; or 3) taxpayers with a net operating loss (NOL). Thus, a domestic partnership or an S Corporation that is a US shareholder of a deferred foreign income corporation (a defined term under the statute) may not make any elections under §965. Note that shareholders of S Corporations may elect to defer payment of the tax under §965 (§965(i)).
When Elections Can be Made
An election must be made by the due date (including extensions) for filing the return for the relevant year. Please note, that even if an election is made to pay a net tax liability under §965 in installments, the first installment must be paid by the due date (without extension, e.g., April 15) for filing the return for the relevant year.
How an Election is Made
A person makes an election under §965 or the election provided for in Notice 2018-13, §3.02, by attaching a statement signed under penalties of perjury to a 2017 tax return and, in the case of an electronically filed return, in PDF format, for each such election. Each such statement must include the information specified in the FAQ. Model statements are provided in the FAQ (see Appendix: Q&A7).
A taxpayer who has §965 tax liability for having interest in a foreign entity that is treated as Specified Foreign Corporation is required to file Form 5471 with respect to that foreign entity regardless of whether that entity is a CFC (controlled foreign corporation). Page 1 of Form 5471 must be completed (above Schedule A). Schedule J of Form 5471 must also be completed.
Payment of the Tax Under §965
A taxpayer is required to make two separate payments as follows: one payment reflecting tax owed without regard to §965 of the Code, and a second separate payment reflecting tax owed resulting from §965 (the §965 Payment). Both payments must be paid by the due date of the applicable return (without extensions). The §965 Payment must be made either by wire transfer or by check or money order.
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