What Expats Need to Know About Section 965 Transition Tax
New tax filing and tax payment guidelines are to be set by the IRS. The revised Internal Revenue Code section 965 can potentially affect US expats. Get to know more about section 965 and how it affects you.
What is Section 965
United States shareholders defined under section 951 must pay a transition tax on any untaxed foreign earnings. This is what section 965 requires. The earnings should appear as if those were repatriated to the US. The affected foreign corporation would be a controlled foreign corporation (defined as CFC under section 957) or a non-CFC defined under section 1297 that has US domestic corporation shareholders.
Under Section 965, US shareholders may cut the amount of their income inclusion according to the deficits in their earnings and profits considering other foreign corporations. Section 965(c) also set out participation deduction that adjusts the effective tax rates ideal to the income inclusions. There is a provision for reduced foreign tax credit included in section 965(g). US taxpayers can pay the transition tax within eight years through installments.
US expats business owners may need to pay a section 965 transition tax when filing their tax returns. There is no extension for this tax. There are more updated information and guidelines from IRS about section 965 and other topics related to the Tax Cuts and Jobs Act and other tax reforms.
Who are Affected?
Domestic corporations and other US persons, including individuals, S corporations, partnerships, estate, trusts, cooperatives, REITS, RICs, and tax-exempt organizations are considered US shareholders. All US shareholders who are part of a CFC that files a form 5471 should assess if there is a need to file and pay the section 965 tax. Remember that a US shareholder who did not file 5471 can still be liable to pay the section 965 tax.
What Should Those Who are Affected Need to Know?
If you are US shareholder of a CFC or other affected foreign corporation as mentioned above, you have to do the following:
- Determine if you had an interest in any of the specified foreign corporations with a tax year ending with or within your taxable year.
- Determine the amount of untaxed earnings and profits that should be included in your tax return
- Pay the tax either in one lump sum or in eight-year installments.
- If you fail to comply with the reporting and payment obligations, interest and/or tax penalty may be imposed.
- Keep adequate records as evidence of the tax calculation related to section 965.
IRS website has more information and worksheets to help taxpayers comply with section 965. Reporting of net tax liability according to section 965 may differ for each taxable year. IRS will be monitoring the compliance of US expat taxpayers according to the provisions of section 965.