Any help is appreciated! All rights reserved. 1Treasury Regulation section 1.962-2(a) Some are essential to make our site work; others help us improve the user experience. 115-97, brought new attention to a provision of the Internal Revenue Code that had long been forgotten: Sec. 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! 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. Diosdi Ching & Liu, LLP also has offices in Pleasanton, California and Fort Lauderdale, Florida. 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. Illustration 1.Tom is a U.S. person taxed at the highest marginal tax rates for federal income tax purposes. Reg. 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. Taxpayers who make a Sec. 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 IRC Section 962 tax election on their 1040 allowing gross income received under IRC Section 951 (a) to be taxed as if it were received by a domestic corporation. 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. (In Drake19 and prior, the entry is made on line 12a (3) of Screen 5) On the SCH screen: 962 election for corporate rates may also deduct 50% of the amount of the GILTI inclusion under Sec. Absent any adjustments on a state tax return, that distribution could be taxed by a state. Subpart F requires U.S. shareholders of a controlled foreign corporation (CFC) to take into current income their pro rata share of Subpart F income. By having access to information from transaction to tax return, the IRS reduces the opportunity for taxpayers to fib. An IRC Sec. 962(a)). 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. Taxpayers pro-rata share of E&P and taxes paid for each applicable CFC.5. 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. 2IRC section 951A(a) Regs. 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 . 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. Suite #100 Pleasanton, CA 94588, 2598 E. Sunrise Blvd. After various adjustments and deductions, the taxpayers taxable income is calculated at Form 1040, line 11b. Special rules apply as it relates to U.S. individual shareholders that make a Section 962 election. When Subpart F was enacted, the top federal tax rate for corporations was 52% while individuals were taxed at rates as high as 91% and could not take advantage of indirect foreign tax credits available to corporations. 4 To prevent the cross-crediting of . Few states fully conform to the Code. 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). It is your job to take the raw financial data and fill in the blanks on Form 5471, Schedule I, lines 1a 1f. In other words, depending on the CFCs E&P, a 962 election generates a second layer of tax as if the CFC shareholder received a dividend from a C corporation. Implication: Generally, spouses who file a joint income tax return must each sign the income tax return. There is a popup box under that for you to enter your election language. 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. FC 1 and FC 2 are CFCs. Only through a hypothetical computation can a CFC shareholder know if he or she will reduce his or her federal tax liability through a 962 election. A Section 962 election permits individual CFC shareholders to pay a maximum of 21 percent on subpart F inclusions. 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. 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. Moreover, there is often a lack of guidance on any particular issue. Do Not Sell or Share My Personal Information (California), Provides benefit of 21 percent corporate rate on GILTI and subpart F income, Provides benefit of indirect foreign tax credit on GILTI and subpart F income, Partial benefit of 50 percent GILTI deduction available to an actual C corporation, Additional administrative requirements in making election annually, Imposes second layer of tax; could increase effective rate after distribution, Distribution may not be eligiblefor qualified dividend treatment available to the shareholder of the C Corporation, unless paid by a qualified foreign corporation. 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. Without the election, Joe . 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. The right choice will vary depending on each taxpayers unique circumstances andneeds. Section 1.962-2(b) lists the information that must be included on the IRC Section 962 election statement and Ive listed that Regulation here for your easy reference to generate such statement. Enter the pro rata share of gross earnings and profits from the CFC to be reported on the Section 962 Election Statement. Enter Section 962 Election as thedescriptionand the GILTI income as a positive amount in that field. Section 951(a) income elected to be taxed at corporate rates. The section 962 election may be a valuable tool in softening or deferring the double-tax blow of being a U.S. shareholder in a foreign business but careful consideration should be used before making the election. 962 election, which could result in the double taxation of income subject to the election in Georgia and other states that take a similar approach. Assume an individual U.S. shareholder of a controlled foreign corporation prepared his/her Form 1040 and does not make the Section 962 election. You have to manually tell them what to credit. The Global Intangible Low-Taxed Income tax was put in place to counter-act profit shifting to low-tax jurisdictions. This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19. Such understanding is useful when assessing conduct and identifying potential claims and pitfalls. 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. Georgia, for its part, does not recognize the Sec. Provide guidance on which taxpayer(s) must sign the section 965 statement and elections attached to a married filing joint individual income tax return. 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. The second is taxable Section 962 E&P (the amount of Section 962 E&P that exceeds excludable Section 962 E&P). Again, start with the controlled foreign corporations financial data. The I.R.S. 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. Carefully research and adapt the following material to the facts and circumstances of your case or matter and verify the . Enter the amount of tax to be imposed on Section 951(a) income. 3 Individual shareholders that make a Section 962 election. A second wrinkle appears in the Section 962 election too. Now the government does not have a tax liability question to answer. Outside of Georgia, there is little to no mention of Sec. 78 gross-up of $180,000. Only income which is effectively connected to a United States trade or business is eligible for the deduction 962 election affects the rate of tax paid on the income, it does not affect the amount of income recognized. The net tax liability under Section 965 should be included . How can the IRS verify that the taxpayer computed the tax liability correctly. 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, in this case, Tom made a 962 election. Also, the 962 Election Tax Worksheet does not calculate when the Foreign Earned Income Tax Worksheet is calculating. The IRS would love to see the underlying data as well, but at the moment this is not feasible for all types of income. Taxpayers making a Sec. 962 (Regs. Anthony Diosdi advises clients in tax matters domestically and internationally throughout the United States, Asia, Europe, Australia, Canada, and South America. 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. (b) Time and manner of making election. 962 election were made. 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. 4See Treasury Regulation section 1.962-1(b)(1). The election is made by filing a statement to such effect with this tax return. Once made, the election is irrevocable. Greg, Have you found out any information on this yet? 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). Accordingly, an individual U.S. 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). Join more than 3500 subscribers and get exlusive weekly information. 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). And, just as importantly, we will talk about how to prepare a good Section 962 Statement. In this case, does form 8992 not need to be used? Anthony Diosdi may be reached at (415) 318-3990 or by email: adiosdi@sftaxcounsel.com. to the tax that would be imposed under section 11 if the amounts were received by a Copyright (c) 2020-US Tax Services - All rights reserved. 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. 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. Your tax returns will be more coherent. This Strategy Note addresses how to understand the general statutory scheme of unfair competition law in California. 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 What to include on a 962 election statement. Section 1.962-2(b) lists the information that must be included on the IRC Section 962 election statement. The tax then flows to Form 1040 Line 11 and a statement. 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. 250 deduction will be allowed on 50% of the $1 million, or $500,000. I am in the same boat. 1(h)(11)(C)). This article is not legal or tax advice. A cloud-based tax and accounting software suite that offers real-time collaboration. This information chain from Form 5471, Schedule I, to Form 1040, Schedule 1, to Form 1040 gives the IRS a complete picture. Finally, the Joint Explan-atory Statement of the Committee of Conference to Public Law 115-97 states that: However, the deferral of tax should be weighed against a potential increase in tax liability as a result of a 962 election. guidance also provides that the Code 965(c) deduction allowed in de-termining the taxable income and the tax due as a result of the Code 962 election cannot be used to reduce the individual's tax under Code 1 (i.e., the individual's other taxable income). Summary. Thats the cloud-shaped mystery at the far left of the diagram, and this is what the IRS expects. The U.S. Treasury Department (Treasury) and the Internal Revenue Service (IRS) released final regulations (the Final Regulations) on July 20, 2020, regarding the global intangible low-taxed income (GILTI) high-tax exclusion.The Final Regulations are generally consistent with proposed regulations (REG-101828-19) (the 2019 Proposed Regulations) issued on June 14, 2019, but there are a number of . 962 to be taxed at corporate rates, the amount of income itself is not reported on Form 1040, U.S. I think you need to fill out form 1120 (proforma) for the individual, which includes forms 1118, 8992, and 8993 and keep this for your tax calculation and FTCbackup. It does allow me to input the 962 tax (21%) on GILTI income. Corporations are required to file Form 8993, Section 250 Deduction for Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI), and Form 1118, Foreign Tax Credit Corporations, in order to calculate the deduction under Sec. The distribution, if in excess of tax previously paid under Sec. E&P distributed from a corporation to its shareholders generally qualifies for federal tax purposes as a dividend (Sec. 11) Provide guidance to help prevent unintended consequences resulting from the . 951(a) and 951A dictate how to include the income. Choose from timely legislation and compliance alerts to monthly perspectives on the tax topics important to you. If a Section 962 election is made, the reporting will be on Form 1118 instead of Form 1116. . Individual Income Tax Return. Note: This article was revised on December 13, 2016, to clarify that the subject is the Hospice . 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. 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. 3IRC section 199A(c)(3)(A)(i). It also allows individual CFC shareholders the ability to offset their subpart F liability with foreign tax credits for taxes paid by the CFC. In the larger white box, enter a statement detailing the election being made that also shows how the taxpayer computed the tax. The tax professional you! First, the individual is taxed on amounts in his gross income under corporate tax rates. 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 . However, a distribution from a qualified foreign corporation would likely be eligible for the lower rates applicable to qualified dividends. You may start a new discussion The more you buy, the more you save with our quantity discount pricing. 962 election to be taxed at corporate rates, and, as a result, most states have provided no specific guidance on how to treat a Sec. 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). The 2020 United States presidential election in Montana was held on Tuesday, November 3, 2020, as part of the 2020 United States presidential election in which all 50 states plus the District of Columbia participated. 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. If a taxpayer is electing making the safe harbor election for a real estate enterprise under Notice 2019-07 and electronically filing his/her return, a signed copy of the election must be submitted as a PDF attachment to e-filed return reports Tax Notes Today.In an article in the March 11, 2019 edition of Tax Notes Today, Eric Yauch reports that IRS Office of Chief Counsel Attorney Robert . Tom wholly owns 100 percent of FC 1 and FC 2. 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. Thus, choosingnotto make the high-tax exclusion election could simultaneouslyincreasethe U.S. shareholders GILTI inclusion anddecreasethe U.S. shareholders overall tax liability. The answer, in brief, is to fill an information gap. On the other hand, for federal tax purposes, domestic C corporations that are shareholders of CFCs are taxed on subpart F and GILTI inclusions at a rate of only 21 percent.Because of the differences in these tax rates and because CFC shareholders are not permitted to offset their federal tax liability with foreign tax credits paid by the foreign corporation, many CFC shareholders are making so-called 962 elections. Such amounts are only reported on the IRC 965 Transition Tax Statement discussed in Q3. Thus, the reduced corporate rate of 21 percent will apply and the individual may claim an indirect credit with respect to any foreign taxes that the foreign corporation has paid. . Lets see how Subpart F income flows from one tax form to another, providing the government with a clear view of the taxpayers taxable income and therefore, the correct tax liability. Individual Income Tax Return. 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. Suite 2104 Fort Lauderdale, FL 33304. 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 962 Election Statement: Purpose and Requirements An individual who makes the Section 962 election must send a statement to the IRS with their return. The elections were first scheduled to be held on 14 February 2015. Discover what makes RSM the first choice advisor to middle market leaders, globally. Regs. For purposes of this example, Tom did not receive any distributions from either FC 1 or FC 2 during the tax year. 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. Special and detailed rules A CFC will probably use a foreign currency as its functional currency. Sec. For those who were not, some temporary relief may be available in the form of a section 962 election. (d) Applicability dates. 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. The downside is on actual distribution: that distribution is again subject to US tax because it is not treated as previously taxed income. CFC shareholders can also claim foreign tax credits for the foreign taxes paid by the CFC. Comprehensive research, news, insight, productivity tools, and more. But, Tom has had the benefit of deferring his tax liability. Computers can easily check for omitted gross income, simply by cross-checking the issuance of a Form 1099 by the payor against the existence of a gross income item on the payees tax return. Enter the amount of Section 951(a) income from the CFC that the individual is electing to have taxed at the corporate rates. 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. This raises the following question: Should an individual who makes a Sec. If this individual makes a section 962 election, his or her current tax liability will be reduced. 2. This provision was enacted as part of the Revenue Act of 1962, P.L. (a) Who may elect. All taxpayers must include Form 8992, U.S. 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. I probably wont publish the notes as part of the webcast, but I will be sharing drafts on the blog. Federal Elections can be generated by using worksheets under General > Federal Elections. However, the individual making a 962 election file the federal tax return with an attachment. (a)Who may elect. 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. Joe Trader has a $100,000 Q1 2021 trading loss in securities, and he elects Section 475 by April 15, 2021, to offset the ordinary loss against wage income of $150,000. While the impact of a Sec. Sec. In fact, most only partially conform or do not conform at all. Enter the name, EIN, address, and tax year of the Controlled foreign corporation. 962 and the underlying regulations repeatedly say that individuals who make a Sec. However, there is no tax form created just for the individual taxpayer making a Section 962 election. 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. Gross income from Form 1040, Schedule 1 including Subpart F income listed on line 8 is inserted on Form 1040 on line 7a. When an actual distribution is made, the earnings and profits (E&P) are "included in gross income" to the extent they exceed the amount of income tax paid by such shareholder under Sec. Making a 962 Election on a Tax ReturnThe IRS must be notified of the Section 962 election on the tax return. When a U.S. individual makes a Section 962 election, the taxpayer is treated as owning the CFC through a fictitious domestic corporation. 962 elections When an individual U.S. shareholder of a CFC has an income inclusion under either Subpart F or GILTI and makes an election pursuant to Sec. are included in the individuals gross income under section 951(a) be an amount equal 962 in state statutes. What you do is to go to screen 45.3 under other taxes. IntroductionU.S. 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. To show why a Section 962 Statement is needed and required, lets look a taxpayer who does not make a Section 962 election. The box called Section 962 tax should be the credit you compute and should be negative. A Section 962 election is an election made by a domestic shareholder of a controlled foreign corporation to be taxed at corporate rates. If a CFC is more interested in deferring his or her tax liability than obtaining tax savings, a 962 election may provide a deferral of tax. 2. 962 election must calculate their income, deductions, and foreign tax credits "as if [the income inclusions] were received by a domestic corporation." The threat of audit (and its consequences) is used to keep the taxpayer honest with the underlying accounting data at the controlled foreign corporation level. Welcome back! 962 election. the carryback period must also attach an election statement to each amended return. 962 election for state income tax purposes. Sounds like a great deal. earlier, the legislative history to Code 962 indicates that an individual making a Code 962 election should be in the same position as a corporation with regard to amounts included in gross income under Code 951(a). 250 and to claim a foreign tax credit, respectively. IRC 163(j) The TCJA limited the 163(j) business interest deduction. The short-term benefits of making a Section . The variance can be considered income from a CFC's intangible . This is because a federal Section 962 election does not alter the components of federal AGI for a taxpayer. It also allows individual CFC shareholders the ability to offset their subpart F liability with foreign tax credits for taxes paid by the CFC.