Names, address, and taxable year of each CFC to which the taxpayer is a U.S. shareholder. Part 5 describes how you prepare 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. Translation of Foreign Currency IssuesAnyone considering making a 962 election must understand there will likely be foreign conversion issues. Distributions actually received by the taxpayer during the year on a CFC by CFC basis with details on the amounts that relate to 1) excludable Section 962 E&P 2) taxable Section 962 E&P and 3) E&P other than 962. IRC section 266 and Regulations section 1.266-1 (b) (1), election to capitalize interest, taxes and other carrying charges incurred during the tax year. The election is made by filing a statement to such effect with this tax return. The IRS wants to see tax data connecting gross income to tax liability computations. value in the foreign corporation may make a Code 962 election. FOR ASSISTANCE WITH YOUR PARTICULAR FACT PATTERN AND HOW TAX LAW PERTAINS TO THAT PATTERN, PLEASECONTACTOUR OFFICE TO ARRANGE AN ENGAGEMENT WHEREUPON OUR OFFICE CAN OFFER ADVICE IN THE COURSE OF THE ENGAGEMENT. There is no tax form created just for the individual taxpayer making a Section 962 election, so the Section 962 Statement requirement is the governments way of telling you to do the governments job at your expense. Paragraph (a) of this section applies beginning the last taxable year of a foreign corporation that begins before January 1, 2018, and with respect to a United States person, for the taxable year in which or with which such taxable year of the foreign corporation ends. The 2020 Proposed Regulations would replace the reference to "books and records" with an "applicable financial statements" standard, providing for an order of priority when there are various forms of financial statements available. The variance can be considered income from a CFC's intangible . (b) Time and manner of making election. The election shows up on the top of page two of return. Note that you may need to make adjustments to the 962 Election Tax Worksheet when using Schedule J or Form 8615 to calculate tax. 4. The Internal Revenue Service Criminal Investigation Process, Pre-Indictment Department of Justice Representation, Criminal Aspects of Failing to Disclose Foreign Financial Accounts, Residency Planning for U.S. Income Tax Purposes, U.S. Tax Planning for Foreigners Intending to own U.S Real Estate, Minimizing U.S. Tax Consequences of U.S. Citizens and Residents Working Overseas, Captive Insurance Compliance & Audit Representation, Report of Foreign Bank & Financial Accounts, FinCen Form 114 / Treasury Form TD F 90-22.1, Voluntary Disclosures of Foreign Financial Accounts, Report of Foreign Bank and Financial Accounts FBAR Litigation. 2IRC section 951A(a) According to the 962 regulations, the attachment making the 962 election must contain the following information: 1. This raises the following question: Should an individual who makes a Sec. Noncorporate US shareholders have generally reduced the effect of GILTI by either making a section 962 election to be subject to corporate tax rates (thereby permitting a 50% deduction and a foreign tax credit), by contributing the shares of CFCs to a domestic C corporation, by engaging in check-the-box planning to treat each CFC as a transparent Any other foreign dividend would be treated as ordinary income. We'll do a step-by-step walkthrough of a sample statement. FC 1 and FC 2 do not own any assets. 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. 962 election affects the rate of tax paid on the income, it does not affect the amount of income recognized. Carefully research and adapt the following material to the facts and circumstances of your case or matter and verify the . Daniel Gray CPA US Tax Services Toronto Canada, transition tax - 962 tax election statement language template, Many US citizen taxpayers abroad (including Canada) with transition tax issues seek tax benefit by making an I. This election, in brief, allows for certain foreign company income to be excluded from GILTI where the effective foreign income tax rate applicable to such income exceeds 90% of the current U.S. corporate tax rate. The availability of the section 962 election may also impact the value of a GILTI high-tax exclusion election. Marrying ESG initiatives to business tax planning, Early access to wages may require new employment tax analyses, Determining gross receipts under Sec. Other basic information is provided. This discussion has been locked. GILTI Tax Example- US Corporation. . (2) Revocation. Use the following data to answer Questions a, b, and c. a) Determine the correlation coefficient between the percentage of people who get greater than 7 hours of sleep and the percentage who score in the 95th percentile on cognitive tests. Section 965 affects U.S. owners of certain foreign corporations. 3IRC section 199A(c)(3)(A)(i). Tax is reported at Form 1040, line 12a. I have prepared a 962 election for an individual but its pretty manual with a somewhat rough implementation. Enter the foreign taxes paid to be reported on the Section 962 Election Statement. To implement this rule, the regulations describe two categories of Section 962 E&P. From here, the train goes off the tracks: How can the IRS follow the data trail from Form 5471, Schedule I (the controlled foreign corporations total Subpart F income) to the individual United States shareholders tax liability? The IRS has a complete picture of how the controlled foreign corporation's Subpart F income ends up creating that precise income tax liability reported by the individual United States shareholder on his/her Form 1040. 1.962-2 Election of limitation of tax for individuals. Upon application by the United States shareholder, an election made under this section may, subject to the approval of the Commissioner, be revoked. The only opaque part of the picture (to the IRS) is the raw financial data at the controlled foreign corporation level. Next, the United States shareholders pro rata share of the controlled foreign corporations Subpart F income items calculated from the total values on Form 5471, Schedule I, then reported on Form 1040, Schedule 1, line 8. 87-834, which introduced the Subpart F rules of the Code. Moreover, there is often a lack of guidance on any particular issue. Third, when the CFC makes an actual distribution of earnings that has already been included in gross income by the shareholder under Section 951(a) or Section 951A requires that the earnings be included in the gross income of the shareholder again to the extent they exceed the amount of U.S. income tax paid at the time of the Section 962 election. The Section 951(a) income included in the Section 962 election on a CFC by CFC basis. Enter the pro rata share of gross earnings and profits from the CFC to be reported on the Section 962 Election Statement. Instructions state to use Form 1118, which doesn't appear to be an option. Electronic Code of Federal Regulations (e-CFR), CHAPTER I - INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY. This number will be included on line 5 of the Section 962 Election Tax Worksheet. 962 election at the federal level is relatively clear, state tax treatment of the election is murky at best. How can the IRS verify that the taxpayer computed the tax liability correctly. 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). To avoid double taxation, that distribution would need to be removed from STI, but there may not be clear authority for doing so. Consider an individual who owns, directly or through a pass-through entity, 100 percent of a Cyprus-based services company which pays a 12.5 percent rate of local income tax. However, that same dividend paid by a nonqualified foreign corporation would be taxable at full ordinary rates to that individual. 11, which accounts for "all income from whatever source derived." You can see a possible discontinuity. Sample Hospice Election Statement . Enter the section 962 election: a relatively obscure provision of the Code designed to ensure an individual taxpayer was not subject to a higher rate of tax on the earnings of a directly-owned foreign corporation than if he or she had owned it through a United States corporation. An election under section 962 does not affect tax imposed under other chapters, including under chapter 2A. SO, I open that third form, then use the empty boxes to type in what is required: ELECTION TO CAPITALIZE CARRYING COSTS First, the individual is taxed on amounts in his gross income under corporate tax rates. The controlled foreign corporations financial data will be invisible to the IRS without a hands-on audit. Toms total federal tax liability associated with the 962 election will be $77,004. This process goes through a calculation of reducing a CFC's total tested income by the net deemed income from tangible assets. A dividend from a qualified foreign corporation is taxed as a qualified dividend at long-term capital gain rates (Sec. The Section 962 Statement includes gross income inclusions and tax liability computations. It is your job to take the raw financial data and fill in the blanks on Form 5471, Schedule I, lines 1a 1f. With that said, Section 962 requires that subpart F and GILTI inclusions be included in the individual CFC shareholder income again to the extent that it exceeds the amount of the U.S. income tax paid at the time of the Section 962 election. The short-term benefits of making a Section . The election may be made on an annual basis with respect to all controlled foreign corporations in which an individual is a United States shareholder, including those owned through a pass-through entity.1Individuals who make a section 962 election are taxed as if there was an imaginary domestic corporation interposed between them and a foreign corporation that creates GILTI or other Subpart F income (income of the foreign corporation which is taxable to the U.S. shareholder in the current year even if no dividend was paid). Note: Use Screen Elect in the Elections folder to enter the description, date paid or incurred, and amount of the expenses for this election. To make matters worse, individual CFC shareholders cannot offset their federal income tax liability with foreign tax credits paid by their CFCs. Upon application by the United States shareholder, an election made under this section may, subject to the approval of the Commissioner, be revoked. 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 . Connect with other professionals in a trusted, secure, environment open to Thomson Reuters customers only. 11) Provide guidance to help prevent unintended consequences resulting from the . Additionally, most states do not recognize the Sec. ($162,000 x 20% = $32,400). 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. 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. Therefore, the U.S. taxable income on the inclusion is $500,000. 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. The controlling domestic shareholder (s) makes the election by attaching a statement to the shareholder's federal tax return and must provide notice of the election to the other affected shareholders. Taxpayers making a Sec. There are obvious missing steps. The section 962 election allows an individual to take indirect foreign tax credit to help offset the tax on the subpart F or GILTI income. It will be taxed at the corporate rate of 21%, and the individual U.S. shareholder will be allowed to take an indirect credit for foreign taxes the CFC paid on that income in the past. Atax court decisionheld that such distributions are generally subject to tax at ordinary rates rather than the reduced qualified dividend rate if dividends from the foreign corporation would normally be considered ordinary rather than qualified dividends. The statement bridges that critical data gap to make the governments job easier. 962 election should consider filing Forms 8993 and 1118 as a protective measure (see also Prop. (5) Such further information as the Commissioner may prescribe by forms and accompanying instructions relating to such election. Your online resource to get answers to your product and industry questions. 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 If in a future year those $875 U.S. dollars of earnings are distributed, the first $5 U.S. dollars will be non-taxable in the U.S., and the remaining $870 U.S. dollars will be treated as a qualified dividend to the shareholder taxable at 20 percent, for an extra $174 U.S. dollars of U.S. tax at the shareholder level. That dividend paid from a qualified foreign corporation would be taxed currently at 20% plus potentially an additional 3.8% net investment income tax. In assessing the state impact of a Sec. Controlling domestic shareholders (as defined in Treas. 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. Thus, choosingnotto make the high-tax exclusion election could simultaneouslyincreasethe U.S. shareholders GILTI inclusion anddecreasethe U.S. shareholders overall tax liability. Calculating income tax liability is a trivial exercise. This Tax Alert addresses how the Final Regulations affect IRC Section 962 elections. 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. 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). 3 Therefore, most individuals who make the 962 election will use a 10.5% U.S. tax rate on the . Screen 962 - Section 962 Election (1040) General Information Summary of Income Tax Summary If this return has multiple units of the 962 screen, complete this section only Tax on Section 951 (a) income at corporate rates Explanation of computation of tax Federal Elections can be generated by using worksheets under General > Federal Elections. If both foreign companies are profitable, the U.S. shareholder may recognize a GILTI inclusion on the combined income of both companies. Any foreign entity through which the taxpayer is an indirect owner of a CFC under Section 958(a).3. The I.R.S. An IRC Sec. 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. (a) Who may elect. Integrated software and services for tax and accounting professionals. You may start a new discussion 962 election, the above information will be extremely helpful in determining how to tax a subsequent distribution once the states release guidance on how the federal Sec. 250 and to claim a foreign tax credit, respectively. By using the site, you consent to the placement of these cookies. 415.318.3990 Local 833.829.4376 Toll Free 415.335.7922 Fax, 505 Montgomery St. 11th Floor San Francisco, CA 94111, 4900 Hopyard Rd. Ask questions, get answers, and join our large community of tax professionals. Lori Anne Johnston, CPA, J.D., is a manager, Washington National Tax for RSM US LLP. In fact, most only partially conform or do not conform at all. It does allow me to input the 962 tax (21%) on GILTI income. This election is made annually by attaching a statement to the Form 1040, and this election applies to all controlled foreign corporations and not just for those controlled foreign corporations for which an . 962(a)). The Sec. Taxpayers should expect significant scrutiny of their positions by state tax authorities given the lack of guidance, and complete documentation will be critical in mounting a successful defense. In this example, by making the 962 election, Tom increased his tax liability by $17,010 ($77,004 $59,994 = $17,010). Now you know why the Section 962 Statement exists. Note: This article was revised on December 13, 2016, to clarify that the subject is the Hospice . 2. Under these circumstances, it is not too difficult to imagine scenarios where a CFC shareholder pays more in federal, state, and foreign taxes than the actual distributions they receive from the CFC. All taxpayers must include Form 8992, U.S. 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%). (a)Who may elect. 962 election is made, the amount of that income is included in the taxpayer's gross income. I have a client that is subject to the Gilti tax as well and per my understanding, by filing a 962 election, it can be taxed at 1/2 the corporate rate of 10.5% and further be reduced by any foreign tax attributed to this income. The election statement must state that the taxpayer is electing to apply 172(b)(1)(D)(v)(I) under Rev. With these facts in mind, Congress adopted Sec. Association of International Certified Professional Accountants. 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. Depending on the facts and circumstances of the case, sometimes making a 962 election can result in a CFC shareholder paying more federal income taxes in the long term.Below, please see Illustration 3 which provides an example when a 962 election resulted in an increased tax liability in the long run.For Illustration 3, lets assume that Tom is the sole shareholder of FC 1 and FC 2.Only this time, FC 1 and FC 2 are incorporated in the British Virgin Islands. Under the tax treaty, the $162,000 distribution will be eligible for a preferential 20 percent qualified dividend rate. Per the instructions it states to use Form 1118 specifically. Form 1040, line 12a, has box 3 marked with the amount and Statement #1 entered as the description. The election under section 962 may be made only by a United States shareholder who is an individual (including a trust or estate). . 250 deduction or a foreign tax credit with regard to a Sec. The passage of the2017 Tax Cuts and Jobs Act (TCJA)was heralded as the beginning of a new age in international taxation. 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. 962 may determine the rate of tax that may apply, but Secs. Just as a section 962 election provides for the benefit of a corporate foreign tax credit, it also creates the detriment of an extra layer of U.S. tax on the dividend. The outcome: a current effective tax rate of approximately 45 percent, regardless of whether the individual owner draws a dividend or reinvests the business earnings.
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