AICPA lists 15 recommendations that would provide clarification and guidance. CFC shareholders can also claim foreign tax credits for the foreign taxes paid by the CFC. Assume that the foreign earnings of FC 1 and FC 2 are the same as in Illustration 1. Enter the name, EIN, address, and tax year of the Controlled foreign corporation. IRC 163(j) The TCJA limited the 163(j) business interest deduction. 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. Now you know why the Section 962 Statement exists. 1 How Section 962 Election for GILTI Works 2 GILTI 3 Corporations with GILTI Receive a 50% Deduction 4 26 U.S. Code 962 - Election by Individuals to be Subject to tax at Corporate Rates U.S. Code 5 962 Election Can Reduce and Eliminate GILTI Tax Liability 6 Golding & Golding: International Tax Lawyers Worldwide To make a Section 962 election for the Section 965 tax, follow these steps: Note that when the GILTI income amount from Form 8992 is included in "other income" (Form 1040, Schedule 1, line 8), and you are electing to tax the amount at the corporate rate with the Section 962 Election, you will need to make an offsetting entry on Screen4, line24z. In this example, by making the 962 election, Tom increased his tax liability by $17,010 ($77,004 $59,994 = $17,010). The gross income information has been reported, and the tax calculation formula is mechanical. In fact, most only partially conform or do not conform at all. This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19. 951A affect the vast majority of U.S. shareholders of CFCs. 962 and the underlying regulations repeatedly say that individuals who make a Sec. 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). That term is defined as either a corporation incorporated in a U.S. possession (e.g., Puerto Rico or Guam) or a corporation "eligible for benefits of a comprehensive income tax treaty with the United States" (Sec. the carryback period must also attach an election statement to each amended return. The elections were first scheduled to be held on 14 February 2015. 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. 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 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. 50% Section 250 GILTI Deduction with a Deadline! The variance can be considered income from a CFC's intangible . 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. Lets look at why a statement is needed at all. Comprehensive research, news, insight, productivity tools, and more. year, Settings and Suite 2104 Fort Lauderdale, FL 33304. 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. This is because South Korea is a country that has entered into a bilateral tax treaty with the United States. A section 962 election allows an individual to be taxed as if he or she was a US corporate shareholder and to use Canadian taxes paid by Canco on the E & P as a credit against his or her US tax liability. 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. Individual Income Tax Return. 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. Sign up to get the early-bird pricing here. Until now, shareholders had rarely invoked the Sec. FC 1 and FC 2 are CFCs. 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. If this individual makes a section 962 election, his or her current tax liability will be reduced. 962, individuals can make an election to pay tax on Subpart F income at corporate rates (and claim indirect foreign tax credits under Sec. It is your job to take the raw financial data and fill in the blanks on Form 5471, Schedule I, lines 1a 1f. (1) In general. A United States shareholder who does not make the Section 962 election will prepare and file a tax return that gives the IRS enough information to assure that the correct tax liability has been computed by the taxpayer. 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. Now lets assume the individual United States shareholder makes the Section 962 election. US final GILTI/FDII regulations under section 250 include guidance on section 962 elections, pass-through FDII reporting | EY - Global About us Back Close search Trending Why Chief Marketing Officers should be central to every transformation 31 Jan 2023 Consulting The CEO Imperative: How will CEOs respond to a new recession reality? This enables the taxpayer to benefit from the 21-percent corporate tax rate as well as the Section 250 deduction (for GILTI purposes only). The current highest federal tax rate applicable to individual CFC shareholders is 37 percent. 962 may determine the rate of tax that may apply, but Secs. 4 To prevent the cross-crediting of . Thus, an individual taxpayer who claims a Sec. 3IRC section 199A(c)(3)(A)(i). This process goes through a calculation of reducing a CFC's total tested income by the net deemed income from tangible assets. RSM US LLP is a limited liability partnership and the U.S. member firm of RSM International, a global network of independent audit, tax and consulting firms. Instructions state to use Form 1118, which doesn't appear to be an option. reg. 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. Each member firm is responsible only for its own acts and omissions, and not those of any other party. By making a 962 election, Tom saved $27,594 ($59,994 $32,400 = $27,594) in federal income taxes.However, making a Section 962 election does not always result in tax savings. Individuals and pass-through entities receive no such benefits. Prudence suggests filling in gaps like these with a roll your own statement, even when not required. 1.250(a)-1(d)). 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. The law known as the Tax Cuts and Jobs Act (TCJA), P.L. Backup for the Sec. Additionally, if both the 30%-taxed and 0%-taxed foreign companies are being included in the GILTI income and foreign tax credit calculations, the excess FTCs generated by the 30%-taxed company may soak up U.S. GILTI tax imposed on the earnings of the 0%-taxed company. A complex situation can get more complex when a distribution of earnings is made in a later year. The average exchange rate of the year is also used for purposes of 951 inclusions on subpart F income and GILTI. Sign up to get the early-bird pricing here. 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. SO, I open that third form, then use the empty boxes to type in what is required: ELECTION TO CAPITALIZE CARRYING COSTS 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. The controlled foreign corporations financial data will be invisible to the IRS without a hands-on audit. Enter the foreign taxes paid to be reported on the Section 962 Election Statement. 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. The distribution, if in excess of tax previously paid under Sec. Enter Section 962 Election as thedescriptionand the GILTI income as a positive amount in that field. The tax then flows to Form 1040 Line 11 and a statement. Finally, the Joint Explan-atory Statement of the Committee of Conference to Public Law 115-97 states that: However, the individual making a 962 election file the federal tax return with an attachment. B. Attribution Rules in Sections 958(b) and 318(a) . The Global Intangible Low-Taxed Income tax was put in place to counter-act profit shifting to low-tax jurisdictions. 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). Individual shareholders need to evaluate whether a high-tax kick-out election is more beneficial compared to planning under Section 962, use of a domestic corporation (if available and can avoid domestic penalty tax rules) or check-the-box planning where the shareholders elects to treat the CFC as transparent and income and FTCs of the CFC pass . 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. For a corporate taxpayer, the combination of a reduced corporate rate, a special deduction, and access to indirect foreign tax credits (FTCs) largely mitigates the impact of GILTI except in scenarios where the foreign entity was paying an extremely low local tax rate. Section 10, hospice care is a benefit under the hospital insurance program. Regs. Finally, the injustice of the double tax on dividends received by United States shareholders from foreign corporations was put to rest for good at least for those United States shareholders who were also already using a corporate tax structure. The Section 962 Statement bridges that gap. Read ourprivacy policyto learn more. U.S. individual shareholders that have made a Section 962 election for Section 965, Subpart F, or GILTI inclusions in prior years however may be subject to tax on all or a portion of the distribution of PTEP under Section 962(d). E&P distributed from a corporation to its shareholders generally qualifies for federal tax purposes as a dividend (Sec. (a) Who may elect. 1.962-2 - Election of limitation of tax for individuals. 962 election with respect to a GILTI inclusion. Once made, the election is irrevocable. Suite #100 Pleasanton, CA 94588, 2598 E. Sunrise Blvd. Montana voters chose electors to represent them in the Electoral College via a popular vote, pitting the Republican Party's nominee, incumbent President Donald Trump and running . Toms total federal tax liability associated with the 962 election will be $77,004. Dont get lost in the fog of legislative changes, developing tax issues, and newly evolving tax planning strategies. 250. The election shows up on the top of page two of return. Lets also assume that FC 1 and FC 2 did not pay any foreign taxes. 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 . Pro rata share of gross earnings and profits. (1)In general. Enter the pro rata share of gross earnings and profits from the CFC to be reported on the Section 962 Election Statement. 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. . 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. Illustration 1.Tom is a U.S. person taxed at the highest marginal tax rates for federal income tax purposes. 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. Such amounts are only reported on the IRC 965 Transition Tax Statement discussed in Q3. However, a distribution from a qualified foreign corporation would likely be eligible for the lower rates applicable to qualified dividends. 962 election should keep detailed workpapers and records regarding: Where an individual makes a Sec. If this return has multiple units of the 962 screen, complete this section only on the first unit of the 962 screen. (5) Such further information as the Commissioner may prescribe by forms and accompanying instructions relating to such election. You can see a possible discontinuity. That dividend paid from a qualified foreign corporation would be taxed currently at 20% plus potentially an additional 3.8% net investment income tax. The IRS would love to see the underlying data as well, but at the moment this is not feasible for all types of income. (2) Revocation. For additional information about these items, contact Bill Tziouras (Bill.Tziouras@rsmus.com) and Ramon Camacho (Ramon.Camacho@rsmus.com). Tom wholly owns 100 percent of FC 1 and FC 2. 87-834, which introduced the Subpart F rules of the Code. 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. to make the election. This is because a federal Section 962 election does not alter the components of federal AGI for a taxpayer. To avoid double taxation, that distribution would need to be removed from STI, but there may not be clear authority for doing so. The passage of the2017 Tax Cuts and Jobs Act (TCJA)was heralded as the beginning of a new age in international taxation. 165(g)(3), Recent changes to the Sec. 962 (Regs. Proc. For purposes of this example, Tom did not receive any distributions from either FC 1 or FC 2 during the tax year. 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. However, that same dividend paid by a nonqualified foreign corporation would be taxable at full ordinary rates to that individual. 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. 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. Also, Part C contains an additional consideration to allow an entity-level S corporation section 962 election (and entity treatment) in conjunction with our recommendation to allow an S corporation . 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 In this case, does form 8992 not need to be used? The following diagram compares the treatment of a taxpayer who makes a section 962 election to one who does not: TheGILTI high-tax exclusionintroduced in final Treasury Regulation section 1.951A-2(c)(7) created a major new consideration for U.S. individual shareholders making section 962 elections. In the larger white box, enter a statement detailing the election being made that also shows how the taxpayer computed the tax. 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. 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. In some situations, taxing the subsequent distribution as ordinary income could actually create a higher effective tax rate than if no Sec. FC 1 and FC 2 do not own any assets. However, when an actual distribution is made from income previously taxed (PTEP), the distribution less any federal taxes actually paid under the 962 election will be taxed again. Other basic information is provided. There are obvious missing steps. Part 5 describes how you prepare the Section 962 Statement. 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. The FTC offsets $100 U.S. dollars of the $105 U.S. dollars of corporate-level tax and, assuming the Cyprus earnings are not distributed to the shareholder, there are just $5 U.S. dollars of residual U.S. tax in the current year. value in the foreign corporation may make a Code 962 election. 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. Translation of Foreign Currency IssuesAnyone considering making a 962 election must understand there will likely be foreign conversion issues. No new contributions can be made. Lori Anne Johnston, CPA, J.D., is a manager, Washington National Tax for RSM US LLP. 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). 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. This information chain from Form 5471, Schedule I, to Form 1040, Schedule 1, to Form 1040 gives the IRS a complete picture. The tax professional you! All taxpayers must include Form 8992, U.S. The availability of the section 962 election may also impact the value of a GILTI high-tax exclusion election. 1.962-3(a)). Connect with other professionals in a trusted, secure, environment open to Thomson Reuters customers only. Reg. I am in the same boat. Section 986 uses the average exchange rate of the year when translating foreign taxes. 962 election should consider filing Forms 8993 and 1118 as a protective measure (see also Prop. An IRC Sec. Sec. 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. Sec. 962 in state statutes. Marrying ESG initiatives to business tax planning, Early access to wages may require new employment tax analyses, Determining gross receipts under Sec. 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. To implement this rule, the regulations describe two categories of Section 962 E&P. The Section 962 Election. This raises the following question: Should an individual who makes a Sec. Implication: Generally, spouses who file a joint income tax return must each sign the income tax return. If a Section 962 election is made, the reporting will be on Form 1118 instead of Form 1116. . Election: Pursuant to IRC Section 461(h)(3), the S Corporation hereby elects to adopt the recurring item exception as a method of accounting. Any other foreign dividend would be treated as ordinary income. Individual taxpayers who are U.S. shareholders in multiple foreign companies operating in different jurisdictions and subject to different foreign income tax rates may need to more carefully consider whether the section 962 election or the GILTI high-tax exclusion election provides a better outcome. The second is taxable Section 962 E&P (the amount of Section 962 E&P that exceeds excludable Section 962 E&P). These figures are then entered into 1040. 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. 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. 18 - Adopt Recurring Item Exception (sec 461(h)(3)) Title: Election to Adopt Recurring Item Exception . Section 951(a) income elected to be taxed at corporate rates. Below, please see Illustration 2 which discusses the potential federal tax consequences associated with a Section 962 election if an individual was the sole shareholder of two CFCs.Illustration 2.Assume the same facts in Illustration 1. Absent any adjustments on a state tax return, that distribution could be taxed by a state. The statement shall include the following information: (1) The name, address, and taxable year of each controlled foreign corporation with respect to which the electing shareholder is a United States shareholder and of all other corporations, partnerships, trusts, or estates in any applicable chain of ownership described in section 958(a); (2) The amounts, on a corporation-by-corporation basis, which are included in such shareholder's gross income for his taxable year under section 951(a); (3) Such shareholder's pro rata share of the earnings and profits (determined under 1.964-1) of each such controlled foreign corporation with respect to which such shareholder includes any amount in gross income for his taxable year under section 951(a) and the foreign income, war profits, excess profits, and similar taxes paid on or with respect to such earnings and profits; (4) The amount of distributions received by such shareholder during his taxable year from each controlled foreign corporation referred to in subparagraph (1) of this paragraph from excludable section 962 earnings and profits (as defined in paragraph (b)(1)(i) of 1.962-3), from taxable section 962 earnings and profits (as defined in paragraph (b)(1)(ii) of 1.962-3), and from earnings and profits other than section 962 earnings and profits, showing the source of such amounts by taxable year; and. 962, the jurisdiction in which the non-U.S. corporation is domiciled, and its ability to qualify for treaty benefits. The analysis may have to consider the interplay of the tax regimes and profiles of several different foreign countries. Approval will not be granted unless a material and substantial change in circumstances occurs which could not have been anticipated when the election was made. Moreover, there is often a lack of guidance on any particular issue. 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). Has anyone done a 962 election in regards to GILTI (Form 8992) for an individual? 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. 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 . This provision was enacted as part of the Revenue Act of 1962, P.L. See IRC Section 986(b); 989(b)(3). Tax Section membership will help you stay up to date and make your practice more efficient. Therefore, the total deemed inclusion is $1 million. (b) Time and manner of making election. Any help is appreciated! A cloud-based tax and accounting software suite that offers real-time collaboration. 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. Second, the individual is entitled to a deemed-paid foreign tax credit under Section 960 as if the individual were a domestic corporation. Taxpayers pro-rata share of E&P and taxes paid for each applicable CFC.5. In the next chapters we will talk about what information is required for the Section 962 Statement. 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. Therefore, the lower corporate rate of 21% will apply and the individual may claim an indirect credit for foreign taxes the foreign corporation has paid. Summary. I have prepared a 962 election for an individual but its pretty manual with a somewhat rough implementation. Special rules apply as it relates to U.S. individual shareholders that make a Section 962 election. By having access to information from transaction to tax return, the IRS reduces the opportunity for taxpayers to fib. With these facts in mind, Congress adopted Sec. Some are essential to make our site work; others help us improve the user experience.