IRC Section 965 generally requires U.S. shareholders to pay a one-time deemed repatriation on the untaxed foreign earnings and profits of certain specified foreign corporations. The tax liability for this one-time deemed repatriation is determined by accumulating the untaxed foreign earnings and profits of certain specified foreign corporations of the U.S. shareholder under IRC Section 965(a). After the IRC Section 965(a) amount is determined, IRC Section 965(c) provides a “participation exemption” deduction that effectively reduces the tax rate on the untaxed foreign earnings and profits of the certain specified foreign corporations to 15.5 percent on earnings attributable to cash and cash equivalents, and 8 percent for the remainder of untaxed earnings and profits.
Look-Through Reporting for Partnerships and S Corporations With Section 965 Transition Tax Inclusions
While flow-through entities such as partnerships and S corporations are not liable for tax under IRC Section 965, they can qualify as shareholders in specified foreign corporations and, consequently, can create a tax liability for their owners. In fact, although the flow-through entity is not permitted to make any elections related to the liability under IRC Section 965, the net inclusion is calculated and reported at the flow-through level and then allocated and reported to each partner or shareholder.1 As a result, the IRS has provided guidance regarding reporting obligations for flow-through entities under IRC Section 965.
Partnerships
The IRC Section 965(a) amount (gross inclusion) should be reported on Form 1065, Schedule K, “Partner’s Share of Income, Deductions, Credits, Etc.,” Line 11 (other income) for the tax year that includes Dec. 31, 2017. The partners are required to report their respective shares of the IRC Section 965(a) amount on their own returns.
The IRC Section 965(c) amount (exemption amount) is included on Form 1065, Schedule K, Line 13d (other deductions). The partners also are required to report their respective share of the IRC Section 965(c) amount on their own returns.
If applicable, the partnership also needs to provide the information necessary for a domestic corporate partner, or an individual making an election under IRC Section 962, on the Schedule K-1 in order to allow the affected partner to compute its deemed paid foreign tax credits with respect to its share of the partnership’s IRC Section 965(a) inclusion amount.
S Corporation
While S-corporation reporting generally parallels partnership reporting, the specific line item reporting requirements related to Section 965 are as follows:
- The IRC Section 965(a) amount is included on Form 1120S, Schedule K, Line 10.
- The IRC Section 965(c) amount is included on Form 1120S, Schedule K, Line 12d.
Additional Tax Reporting
The IRS released guidance indicating any filer with income under IRC Section 965 for its 2017 taxable year, in addition to reporting the amounts discussed earlier, is required to include with its return an IRC 965 Transition Tax Statement. Flow-through entities and their partners and owners each need to include this statement with their respective returns.
The IRC 965 Transition Tax Statement must include the filer’s:
- Total amount required to be included in income under IRC Section 965(a)
- Aggregate foreign cash position, if applicable
- Total deduction under IRC Section 965(c)
- Deemed paid foreign taxes with respect to the total amount required to be included in income by reason of IRC Section 965(a)
- Disallowed deemed paid foreign taxes pursuant to IRC Section 965(g)
- Total net tax liability under IRC Section 965 (as determined under IRC Section 965(h)(6))
- Amount of the net tax liability under IRC Section 965 to be paid in installments (including the current year installment) under IRC Section 965(h), if applicable, which will be assessed
- Amount of the net tax liability under IRC Section 965, the payment of which has been deferred, under IRC Section 965(i), if applicable
- List of elections under IRC Section 965 or the election provided for in Notice 2018-13 that the taxpayer has made, if applicable
Flow-through entities are not required to report the items referenced in the last four bullet points.
Partners and owners will use the information furnished from flow-through entities to report their own respective amounts on their tax return and IRC Section 965 Transition Tax Statement and to make the attendant elections regarding payment deferral and foreign tax credits. Consequently, the partners and owners ultimately are relying on information provided from the flow-through, which will be required to provide the information with the appropriate K-1, presumably as additional white paper disclosures.
The IRC Section 965 Transition Tax Statement will need to be signed under penalties of perjury and, in the case of an electronically filed return, attached in portable document format (.pdf) with a file name of “965 Tax.”2
