Tax Reform Impact and the Revised Form 5471
Each year, between Thanksgiving and New Year, IRS uses the “offseason” to update tax forms. Hence, the e-filing services are shut down each mid-November. Usually, the changes refer to the form design and other aesthetic factors. The recent tax form was not the usual. An evidence of this one is the lengthy “What’s New” section of Form 5471 composed of the form instructions. It is as long as the form to be filled up. The instruction has 1548 words versus 2226 words which even expert accountants would not find appealing.
The new and many changes resulted to not just an updated form, but it seemed like a brand-new form. Offshore corporations, especially the CFCs or controlled foreign corporations, are the most affected taxpayers. The form is especially tailored to increase compliance costs among these foreign businesses.
New Changes in Form 5471
The recent changes not only result to a modified form but a completely made over and hardly distinguishable document. The old schedules were expanded while new schedules were added. Those schedules once related to form 5471 are now separated in other forms.
The changes among the schedules are as follows:
- New schedule B
- Separate schedule E
- New schedule E-1
- Schedule G expanded
- Separate schedule H
- Modified schedule I
- New separate schedule I-1
- Separate schedule J
- Separate schedule M
- New separate schedule P
- Schedules E, H, I-1, J, and P must be completed separately for each applicable category of income (i.e., section 965(a) inclusions and GILTI inclusions)
- Modified attribution rules for determining whether a U.S. person is a U.S. shareholder and whether a foreign corporation is a CFC.
Transition Tax
Owners of a CFC with a foreign accounting period ending after November 2, 2017 had 2018 as their tax forms due year. The Section 965 Transition Tax is the other Tax Reform added to the IRS code.
Those CFCs with a corporate tax ending earlier than November 2 would have to pay their transition tax in 2019 together with their 2018 tax return. For instance, a UK-based CFC has an accounting period that ends on March 31, 2017. Thus, this CFC would have to pay the transition tax on March 31, 2018, along with its 2018 U.S. tax return. This is in-line with its accounting period ending on the same date.
GILTI Tax
CFC owners should not be guilty when fulfilling their tax form duties, including the GILTI Tax. The IRS requires the controlled foreign corporation owners to pay this annual tax whether they have other income that is taxable or not.
The scope of entities related to GILTI and the Transition Tax are all expanded in the new Form 5471. Before, the Transition Tax requires a U.S. shareholder to pay if the corporation is a CFC for at least 30 days within its taxable year. Under the new rules, being a CFC even for just 1 day during the tax year would entitle the offshore business to be subject to the GILTI and the Transition Tax.
