Publication 5292 (2017), How to Calculate Section 965 Amounts and Elections Available to Taxpayers

For use in preparing 2017 Returns


Publication 5292 - Introductory Material

Reminders

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Introduction

On December 22, 2017, section 965 of the Code (section 965) was amended by "An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018," P.L. 115-97. As a result of the amendment, certain taxpayers are required to include in income an amount (section 965(a) inclusion amount) based on the accumulated post-1986 deferred foreign income of certain foreign corporations that they own either directly or indirectly through other entities. Other taxpayers may have inclusions in income under section 951(a) by reason of section 965 due to ownership of deferred foreign income corporations (DFICs) through U.S. shareholder pass-through entities. When referring to both amounts in the preceding two sentences, this document uses the term “section 965(a) inclusion.” Section 965 also allows for a deduction (section 965(c) deduction). Section 965(a) inclusions and corresponding section 965(c) deductions are taken into account based on the last tax year of the relevant foreign corporations that begin before January 1, 2018.

Certain taxpayers may make certain elections with respect to section 965. These elections include: (i) an election to pay the section 965 net tax liability over eight years, (ii) an election by S corporation shareholders to defer payment of the section 965 net tax liability with respect to such S corporation until a triggering event, (iii) an election by real estate investments trusts to take both section 965(a) inclusions and the corresponding section 965(c) deductions into account over eight years, (iv) an election not to apply a net operating loss, and (v) an election to use an alternative method to calculate post-1986 earnings and profits (post-1986 E&P). For guidance concerning section 965, see Notice 2018-07, 2018-4 I.R.B. 317; Notice 2018-13, 2018-6 I.R.B. 341; Rev. Proc. 2018-17, 2018-9 I.R.B. 384; and Notice 2018-26, 2018-16 I.R.B. 480.

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Publication 5292 - Main Content

Definitions

Accumulated post-1986 deferred foreign income.

This term includes all post-1986 E&P reduced by both (i) post-1986 E&P that, if distributed, would be excluded from the gross income of a U.S. shareholder under section 959 (previously taxed E&P); and (ii) post-1986 E&P attributable to income which is effectively connected with the conduct of a trade or business in the U.S. and subject to U.S. income tax (ECI E&P). For example, a foreign corporation could have 100u of post-1986 E&P of which 20u is previously taxed E&P and 10u is ECI E&P. The foreign corporation would have 70u of accumulated post-1986 deferred foreign income.

Controlled foreign corporation (CFC).

A CFC is any foreign corporation if more than 50% of the voting power of all classes of stock or 50% of the total value of the stock of the foreign corporation is owned (directly, indirectly, or constructively) by U.S. shareholders on any day during the tax year of the foreign corporation.

Deferred foreign income corporation (DFIC).

A DFIC is, with respect to any U.S. shareholder, any specified foreign corporation of a U.S. shareholder that has accumulated post-1986 deferred foreign income as of November 2, 2017, or December 31, 2017, that is greater than zero.

E&P deficit foreign corporation.

An E&P deficit foreign corporation is, with respect to any taxpayer, a specified foreign corporation with respect to which the taxpayer is a U.S. shareholder, if, as of November 2, 2017, the specified foreign corporation has a deficit in post-1986 E&P. For purposes of determining whether a specified foreign corporation is an E&P deficit foreign corporation, all post-1986 E&P must be taken into account. For example, if a specified foreign corporation had a 90u deficit in post-1986 E&P described in section 959(c)(3) and 100u of previously taxed E&P on November 2, 2017, the specified foreign corporation would have 10u of post-1986 E&P and would not qualify as an E&P deficit foreign corporation.

Post-1986 Earnings and Profits (Post-1986 E&P).

Post-1986 E&P is the E&P of the foreign corporation, including previously taxed E&P, accumulated in taxable years beginning after December 31, 1986, during periods when the foreign corporation was a specified foreign corporation. It is calculated without any reduction for dividends distributed by the foreign corporation during its last taxable year that begins before January 1, 2018, other than dividends distributed to another specified foreign corporation. See Notice 2018-26, section 3.03, for rules concerning the treatment of certain accrued foreign income taxes for purposes of determining post-1986 E&P

Specified foreign corporation (SFC).

An SFC is (i) any CFC and (ii) any foreign corporation with respect to which one or more domestic corporations is a United States shareholder. However, if a passive foreign investment company (as defined in section 1297) with respect to the shareholder is not a CFC, then such corporation is not an SFC. Solely for purposes of determining whether a foreign corporation is a specified foreign corporation within the meaning of section 965(e)(1)(B), stock owned, directly or indirectly, by or for a partner will not be considered as being owned by a partnership under sections 958(b) and 318(a)(3)(A) if such partner owns less than five percent of the interests in the partnership’s capital or profits. For purposes of the preceding sentence, an interest in the partnership owned by another partner will be considered as being owned by the partner under the principles of sections 958(b) and 318, as modified by the preceding sentence, as if the interest in the partnership were stock.

U.S. shareholder.

For tax years of foreign corporations beginning before January 1, 2018, a U.S. shareholder is a U.S. person who owns (directly, indirectly, or constructively) 10% or more of the total combined voting power of all classes of stock of a foreign corporation. A U.S. person for this purpose is defined in section 957(c) of the Code.

Who May be Required To Report Section 965 Amounts

A person who is a U.S. shareholder of a DFIC may be required to report the amounts needed to compute its U.S. tax liability resulting from section 965 (i.e., section 965 amounts). In addition, a direct or indirect partner in a domestic partnership, a shareholder in an S corporation, or an owner or beneficiary of another domestic passthrough entity that is a U.S. shareholder of a DFIC may also be required to report its section 965 amounts. For example, if a domestic partnership is a U.S. shareholder of a DFIC, its partners may be required to report their share of the partnership’s section 965(a) inclusion amount.

Reporting Amounts on 2017 Return/Mandatory Attached Statement

Section 965 amounts must be reported in a particular manner on 2017 tax returns. A person that includes an amount in income under section 965 for its 2017 tax year is required to include an IRC 965 Transition Tax Statement. See Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns.

2016 Tax Year Section 965(a) Inclusion Amount

In certain circumstances, a taxpayer may need to report section 965 amounts on its 2016 tax return, a return for a tax year beginning in 2016. If, for example, a DFIC and its sole owner and U.S. shareholder were both fiscal year taxpayers with a November 30 U.S. tax year end, and the DFIC dissolved on November 29, 2017, the last tax year of the DFIC beginning before January 1, 2018, would be its tax year beginning December 1, 2016, and ending November 29, 2017. A section 965(a) inclusion amount with respect to the DFIC would be properly included on the U.S. shareholder’s return for its tax year beginning on December 1, 2016, and ending on November 30, 2017.

For simplicity, the workbook below does not account for section 965 amounts to be taken into account in a 2016 tax year. Persons that have 2016 tax year section 965(a) inclusions should use the methodology of the workbook below to calculate their 2016 tax year section 965 amounts.

Workbook To Assist in Calculating Section 965 Amounts

Below are a workbook and instructions to assist in calculating section 965 amounts. The workbook calculates the 965(a) inclusions, the section 965(c) deductions, the deemed paid foreign taxes with respect to the section 965(a) inclusions, and the portion of such deemed paid foreign taxes disallowed under section 965(g).

Who Should Use This Workbook

All taxpayers required to include amounts in income under section 965 should use the Section 965 Workbook. Individuals, corporations, partnerships, S corporations, and other pass-through entities that are U.S. shareholders should use the Section 965 Workbook to calculate the section 965(a) inclusion amounts and section 965(c) deductions. Owners and beneficiaries of U.S. shareholder pass-through entities should receive information about their shares of the section 965(a) inclusion amounts and the section 965(c) deductions of the pass-through entities from the pass-through entities to be included in the workbook. Eligible individuals making a section 962 election and corporations should also use the Section 965 Workbook to determine the foreign taxes deemed paid with respect to the section 965(a) inclusions and the portion of such deemed paid foreign taxes disallowed under section 965(g). Under section 962 of the Code and Treas. Reg. §§1.962-1 and 1.962-2, an individual U.S. shareholder of a CFC may elect for a tax year to be taxed at corporate rates under section 11 on amounts included in his or her gross income under section 951(a) and to claim a foreign tax credit for foreign income taxes deemed paid with respect to such amounts under sections 902 and 960.

For frequently asked questions see See Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns.

Reporting exchange rates on Worksheets A and C

When translating amounts from functional currency to U.S. dollars, all exchange rates must be reported using a “divide-by convention” rounded to at least four places. That is, the exchange rate must be reported in terms of the amount by which the functional currency amount must be divided in order to reflect an equivalent amount of U.S. dollars. As such, the exchange rate must be reported as the units of foreign currency that equal one U.S. dollar, rounded to at least four places. Do not report the exchange rate as the number of U.S. dollars that equal one unit of foreign currency. Note. You must round the result to more than four places if failure to do so would materially distort the exchange rate or the equivalent amount of U.S. dollars.

Specific Instructions

Section 965(a) Inclusions

As discussed below, section 965(a) inclusions, other than with respect to ownership in U.S. shareholder pass-through entities ,are calculated in Worksheets A, B and C and then entered on line 1 of Part I of Worksheet 1.1. Amounts allocated to a taxpayer from U.S. shareholder pass-through entities are added on line 2.

 

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Worksheet 1.1--965 Workbook

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Worksheet A -- U.S. Shareholder’s Section 965(a) Inclusion Amount

Do not complete a separate Worksheet A for each applicable separate category of income. Section 965(b)(2) requires allocation of the aggregate foreign E&P deficit based on total accumulated post-1986 deferred foreign income without regard to the separate category of the deficit or the income. However, for purposes of determining the foreign tax credit that is a component of the tax liability on the 2017 tax return and the total net tax liability under section 965 reported on the IRC 965 Transition Tax Statement, section 904 requires that the section 965 amounts are accounted for by separate category. Accordingly, the information in Worksheets B and C is by separate category to aid in the foreign tax credit determination. The accumulated post-1986 deferred foreign income entered for a DFIC in column (c) on this worksheet is the greater of the DFIC’s aggregate accumulated post-1986 deferred foreign income as of November 2, 2017, reported in column (e) on all Worksheets B on a separate category of income basis, and the DFIC’s aggregate accumulated post-1986 deferred foreign income as of December 31, 2017, reported in column (i) on all Worksheets B on a separate category of income basis. Similarly, the U.S. shareholder's aggregate foreign E&P deficit entered on this worksheet is the aggregate of all amounts in column (e), line 16 on Worksheets C reported on a separate category of income basis.

Column (e) represents the U.S. dollar amount of each DFIC’s accumulated post-1986 deferred foreign income, translated using the December 31, 2017, spot rate entered in column (d).

In column (g), determine the deficit allocation ratio by dividing the column (f) amount for each DFIC by the amount in column (f), line 16. For example, if the column (f) amount for a DFIC is $5 and the amount in column (f), line 16 is $200, enter .025 in column (g) for that DFIC. The sum of column (g) should equal 1. The deficit allocation ratio is used to allocate the aggregate foreign E&P deficit in column (h).

Column (i) indicates the section 965(a) inclusion amounts with respect to DFICs that a taxpayer owns directly or indirectly. This amount will generally be included in a taxpayer’s 2017 or 2018 tax return depending on the year end of the DFIC.

In determining when to include a section 965(a) inclusion amount with respect to a DFIC, it is necessary to look at the DFIC’s last tax year that began before January 1, 2018. If the end of that DFIC year is during the taxpayer’s 2017 tax year, the section 965(a) inclusion amount should be taken into account in the taxpayer’s 2017 tax return. If the end of that DFIC year is during a taxpayer’s 2018 tax year, the section 965(a) inclusion amount should be taken into account in the taxpayer’s 2018 tax return. Indicate in columns (j) and (k) whether the section 965(a) inclusion amount relating to a specific DFIC is taken into account in the taxpayer’s 2017 or 2018 tax year.

 

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Worksheet A: U.S. Shareholder's Section 965(a) Inclusion Amount

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Worksheet B -- Deferred Foreign Income Corporation’s Earnings & Profits

Complete a separate Worksheet B for each applicable separate category of income. See Categories of Income in the Instructions for Form 1118 or in the Instructions for Form 1116, as applicable. In this worksheet, list all DFICs and the indicated E&P information. Column (b)(2) serves to track whether the alternate method provided in Notice 2018-13, section 3.02, was used to determine the amount of post-1986 E&P on November 2, 2017. A SFC with a 52-53 week tax year that uses the alternate method for the November 2, 2017, measuring date must also use the alternative method for the December 31, 2017, measuring date. Only SFCs with a 52-53 week tax year can use the alternative method for the December 31, 2017, measuring date.

 

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Worksheet B Deferred Foreign Income Corporation's Earnings & Profits

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Worksheet C -- U.S. Shareholder’s Aggregate Foreign Earnings & Profits Deficit

Complete a separate Worksheet C for each applicable separate category of income. See Categories of Income in the Instructions for Form 1118 or in the Instructions for Form 1116, as applicable. In Worksheet C, list all E&P deficit foreign corporations. If an SFC meets the definition of a DFIC on either November 2, 2017, or December 31, 2017, it is classified solely as a DFIC and should not be included on this worksheet.

In column (b), enter the November 2, 2017, total post-1986 E&P deficit in functional currency. This amount is translated to U.S. dollars using the spot rate on December 31, 2017, entered in column (c). Enter the U.S. dollar amount in column (d). For information on the applicable spot rate convention, please refer to Notice 2018-13, section 3.05(a).

The column (e) total represents the U.S. shareholder’s aggregate foreign E&P deficit with respect to a particular separate category of income. The aggregate foreign E&P deficits with respect to all separate categories of income must be added together, and the total is allocated based on the U.S. shareholder’s DFICs’ accumulated post-1986 deferred foreign income on Worksheet A, column (h).

 

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Worksheet C U.S. Shareholder's Aggregate Foreign Earnings & Profits Deficit

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Section 965(c) Deduction

As discussed below, the aggregate foreign cash position is calculated in Worksheets D and E and then entered on line 5 of section 1 of Part II of Worksheet 1.1. Section 965(c) deduction amounts allocated from U.S. shareholder pass-through entities are added on line 13. The U.S. shareholder pass-through entities should provide the owner or beneficiary with the shares of the section 965(a) inclusion amounts and section 965(c) deductions of the U.S. shareholder pass-through entity to be included on line 2 of Part I and line 13 of section 1, Part II of Worksheet 1.1.

Section 2 includes the percentage rate equivalent percentages used to calculate the section 965(c) deductions. The amount in section 2.1 of Part II of Worksheet 1.1 have been calculated for calendar year taxpayers. Fiscal year taxpayers that use a blended tax rate should calculate their percentage rate equivalent percentage in Section 2.2.

Worksheet D -- U.S. Shareholder’s Aggregate Foreign Cash Position

All SFCs should be listed on this Worksheet D. Carry cash positions from Worksheet E to Worksheet D as indicated. Columns (c), (e), and (g) represent the U.S. shareholder’s pro rata of an SFC’s cash position on the three measuring dates. Line 19 represents the aggregate foreign cash position to be taken into account.

On lines 20 and 21 indicate whether the aggregate foreign cash position is taken into account on the taxpayer’s 2017 or 2018 tax return. On the 2017 tax return, the aggregate foreign cash position taken into account is the lesser of the taxpayer’s aggregate foreign cash position or the taxpayer’s tax year 2017 aggregate section 965(a) inclusion amount. The remainder of the aggregate foreign cash position, if any, is taken into account in the 2018 tax year. For example, a taxpayer may have $400 of aggregate foreign cash position and takes into account a $300 section 965(a) inclusion amount on its 2017 tax return. The taxpayer will take into account $300 of aggregate foreign cash position on the 2017 tax return. The remaining $100 of aggregate foreign cash position will be taken into account on the 2018 tax return.

 

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Worksheet D U.S. Shareholder's Aggregate Foreign Cash Position

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Worksheet E -- U.S. Shareholder’s Aggregate Cash Position - Detail

All SFCs should be listed on Worksheet E. Enter the cash position of each of the SFCs on each of the three cash measurement dates indicated. In this worksheet, cash position from derivative financial instruments and hedging transactions is listed in columns (b)(2), (c)(2), and (d)(2).

The cash position of an SFC is the sum of (i) cash held by the corporation, (ii) the net accounts receivable of the corporation, and (iii) the fair market value of the following assets held by the corporation: (I) personal property which is of a type that is actively traded and for which there is an established financial market, (II) commercial paper, certificates of deposit, the securities of the Federal government and of any state or foreign government, (III) any foreign currency, (IV) any obligation with a term of less than one year, and (V) any asset which the Secretary identifies as being economically equivalent to the above. The cash position of an SFC includes the fair market value of each derivative financial instrument held by the SFC that is not a bona fide hedging transaction. See Notice 2018-07, section 3.01(c) for more information regarding the treatment of derivative financial instruments. For additional guidance concerning the cash position of an SFC, see Notice 2018-7, section 3.01(b), and Notice 2018-13, section 3.04, as modified by Notice 2018-26, section 4.

 

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Worksheet E U.S. Shareholder's Aggregate Foreign Cash Position - Detail

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Foreign Taxes

Worksheet G -- Foreign Taxes Deemed Paid by Domestic Corporation for 2017 Tax Year

Use Worksheet G to compute foreign taxes deemed paid by an eligible domestic corporation or an individual with respect to the section 965(a) inclusion for the 2017 tax year. Taxpayers eligible for a deemed paid credit include certain individuals who make an election under section 962 and certain domestic corporations (see section 902 for eligibility requirements). U.S. shareholder pass-through entities with owners that are eligible to compute a deemed paid credit should provide the owner with the information necessary to make the deemed paid credit calculations. Complete a separate worksheet for each applicable separate category of income. See Categories of Income in the Instructions for Form 1118.

Enter the name of the DFIC with respect to which the domestic corporation or individual filing the worksheet has a section 965(a) inclusion.

Columns a and b.

See Reference ID numbers in the Instructions for Form 1118. In column (b), owners of U.S. shareholder pass-through entities eligible to compute a deemed paid credit should provide the EIN or Reference ID Number of the Form K-1 issuer. A U.S. shareholder that does not own a DFIC through a U.S. pass-through entity need not complete this column (b).

Example.

Assume Domestic Corporation directly owns 30% of the voting stock of DFIC and has a section 965(a) inclusion amount with respect to such DFIC. Domestic Corporation also owns 30% of the voting stock of DFIC through a domestic partnership and has an additional section 965(a) inclusion with respect to such DFIC. Domestic Corporation will complete a row on Worksheet G with respect to its section 965(a) inclusion resulting from its ownership of the domestic partnership and will include the Reference ID Number of the partnership in column (b).

Column c.

Enter the year and month in which the foreign corporation's U.S. tax year ended.

Column d.

Enter the applicable two-letter codes from the list at IRS.gov/countrycodes.

Column (e)(1).

Report (in the foreign corporation's functional currency) the section 965(a) inclusion with respect to the foreign corporation out of post-1986 undistributed earnings for the tax year indicated.

Column (e)(2).

Report the column (e)(1) amounts, translated into U.S. dollars at the appropriate exchange rates (as defined in section 989(b)). If the foreign corporation's functional currency is the U.S. dollar, do not complete column (e)(2).

Column f.

Enter the foreign corporation's post-1986 undistributed earnings pool for the separate category for which the schedule is being completed. Generally, this amount is the corporation's E&P (computed in the corporation's functional currency according to sections 964(a) and 986) accumulated in tax years beginning after 1986, determined as of the close of the corporation's tax year without reduction for any earnings distributed or otherwise included in income (that is, under section 304, 367(b), 951(a), 1248, or 1293) during the current tax year.

Post-1986 undistributed earnings are reduced to account for distributions or deemed distributions that reduced E&P and inclusions that resulted in previously taxed amounts described in section 959(c)(1) and (2) or section 1293(c) in prior tax years beginning after 1986. See Regulations section 1.902-1(a)(9). Also, see section 902(c)(3) and Regulations section 1.902-1(a)(13) for special rules treating earnings accumulated in post-1986 years as pre-1987 accumulated profits when no U.S. shareholder was eligible to claim a section 902 credit with respect to taxes paid by the foreign corporation.

Column h.

Enter the opening balance in the foreign corporation's post-1986 foreign income taxes pool for the tax year indicated. This amount is the foreign income taxes paid, accrued, or deemed paid (in U.S. dollars) by the foreign corporation for prior tax years beginning after 1986, reduced by foreign taxes attributable to distributions or inclusions of earnings in prior tax years. See Regulations section 1.902-1(a)(8)(i).

Column i.

Enter the foreign income taxes paid or accrued by the foreign corporation for the tax year indicated, translated into U.S. dollars using the exchange rate specified in section 986(a).

Column j.

Enter the foreign income taxes deemed paid (under section 902(b)) by the corporation for the tax year indicated. This is generally the amount(s) from Schedule D, Part I, Section A, column 10, and Section B, column 8(b) of the Form 1118.

 

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Works Sheet G Foreign Taxes Deemed Paid by Domestic Corporation For tax years of foreign corporations whose

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Worksheet H, Section 1 Disallowance of Foreign Tax Credit and Amounts Reported on Forms 1116 and 1118

Use Worksheet H, Section 1, to track by separate category the section 965(a) inclusion, the section 965(c) deduction, the foreign taxes deemed paid, and the disallowed portion of such taxes. While certain amounts are not required to be reported for purposes of the 2017 tax year reporting, the section 965(a) inclusion, the section 965(c) deduction, and the foreign taxes deemed paid with respect to such amounts should continue to be part of the determination of the foreign tax credit for the 2017 tax year. The foreign tax credit is reported as a component of the tax liability on the 2017 tax return and is reduced by the net tax liability under section 965 to be paid in a future year. Such foreign tax credit is also a component of the total net tax liability under section 965 reported on the IRC 965 Transition Tax Statement. See below for more information on the reporting of the “with calculation” under Election to Pay Tax Liability in Installments (section 965(h)).

 

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Worksheet H Disallowance of Foreign Tax Credit and Amounts Reported on Forms 1116 and 1118

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Worksheet H, Section 2 Applicable Percentage for Disallowance of Foreign Tax Credit

Use Worksheet H, section 2 to determine the applicable percentage for disallowance of a foreign tax credit for the U.S. shareholder’s 2017 tax year. Section 965(g)(1) provides that no credit is allowed under section 901 for the applicable percentage of any taxes paid or accrued (or treated as paid or accrued) with respect to any amount for which a deduction is allowed under section 965(c). The term “applicable percentage” means the amount (expressed as a percentage) equal to the sum of— (A) 0.771 multiplied by the ratio of— (i) the section 965(a) inclusion in excess of the U.S. shareholder’s aggregate foreign cash position divided by (ii) the section 965(a) inclusion, plus (B) 0.557 multiplied by the ratio of— (i) the section 965(a) inclusion with respect to the U.S.’ shareholder’s aggregate foreign cash position, divided by (ii) the section 965(a) inclusion.

What Elections Can Be Made

Election To Pay Tax Liability in Installments (section 965(h))

A U.S. shareholder of a DFIC may elect under section 965(h) to pay the section 965 net tax liability in eight installments. Furthermore, owners and beneficiaries of U.S. shareholder pass-through entities may also make elections under section 965(h). The section 965 net tax liability is generally determined as follows:

  • The taxpayer’s net income tax for the tax year with all section 965 amounts included (“with calculation” or “actual net tax liability”); less

  • The taxpayer’s net income tax for the tax year without regard to section 965, including without any section 965 amounts included, and without regard to any dividends received from DFICs (“without calculation”).

 

When determining the section 965 net tax liability, it should be noted that limitations on income, deductions, and credits will change depending on whether or not section 965 amounts are included.

If one or more elections under section 965(i) (see below under S Corporation Shareholder Deferral of Tax (section 965(i))) have been made, the taxpayer’s section 965 net tax liability as determined above is reduced by the aggregate amount of the taxpayer’s net tax liabilities under section 965 with respect to which section 965(i) elections are effective.

With Calculation

When calculating the “with calculation,” all section 965 amounts, including section 965(a) inclusions and section 965(c) deductions, should be included in the calculation of net income tax. This allows for corresponding calculations that are limited based on gross income or AGI.

A taxpayer’s actual net tax liability, including tax resulting from section 965, will include a reduction for the foreign tax credit properly computed under sections 901 through 909, and 960 of the Code on the basis of the taxpayer’s actual worldwide taxable income and total creditable foreign taxes, including the section 965 amounts. The taxpayer must compute its foreign tax credit limitation by adding the relevant section 965(a) inclusion to its other foreign source income for the year and by allocating to such section 965(a) inclusion its relevant section 965(c) deduction, and taking into account all of its creditable foreign taxes.

Without Calculation

When calculating the “without calculation,” do not include the section 965(a) inclusions, the section 965(c) deductions, the deemed paid foreign taxes with respect to section 965(a) inclusions, and the deemed paid foreign taxes disallowed under section 965(g). Also do not include any income or deduction properly attributable to a dividend from a DFIC.

If an election is made, the taxpayer must make installment payments according to the following schedule:

Year Payment (Percent of Section 965 Net Tax Liability)
1st 8%
2nd 8%
3rd 8%
4th 8%
5th 8%
6th 15%
7th 20%
8th 25%

 

The 1st year installment must be paid on the due date (determined without regard to any extension of time for filing the return) of the tax return that would have included the relevant section 965 net tax liability had an election not been made. Each succeeding installment is due at the same time as each succeeding tax return is due (determined without regard to any extension of time for filling the return). But see Notice 2018-26, section 3.05(e) for special rules regarding the filing and payment due date of certain citizens and residents abroad.

S Corporation Shareholder Deferral of Tax (section 965(i))

A shareholder of an S corporation may elect under section 965(i) to defer payment of its section 965 net tax liability with respect to an S corporation until the shareholder’s tax year which includes a triggering event with respect to the section 965 net tax liability. Triggering events include: (i) the corporation ceases to be an S corporation, (ii) a liquidation or sale of substantially all the assets of the S corporation, a cessation of business by the S corporation, the S corporation ceases to exist, or any similar circumstance, and (iii) a transfer of any share of stock in the S corporation.

A shareholder’s section 965 net tax liability with respect to any S corporation generally is:

  • The shareholder’s net income tax for the tax year with the only section 965 amounts coming from the S corporation; less

  • The shareholder’s net income tax for the tax year without regard to section 965, including without any section 965 amounts included, and without regard to any dividends received from DFICs.

 

However, if the S corporation is not a U.S. shareholder of a DFIC, section 965 amounts related to the DFIC are not included in the first amount.

If a taxpayer owns shares in multiple S corporations, the above calculation of section 965 net tax liability must be made for each S corporation.

As in the case of a section 965(h) election discussed above, the limitations on income, deduction items, and credits will change depending on whether section 965 amounts are included or not when calculating the net income tax.

Real Estate Investment Trust Election To Include Income Over 8 Years (section 965(m))

A real estate investment trust may elect to take section 965(a) inclusions and corresponding section 965(c) deductions into account over 8 years. If the election is made, these amounts must be taken into account according to the following schedule:

Year Percent of Section 965(a) Inclusions and Section 965(c) Deductions Taken into Account Each Year
1st 8%
2nd 8%
3rd 8%
4th 8%
5th 8%
6th 15%
7th 20%
8th 25%

If a real estate investment trust makes this election, it cannot also elect to pay the section 965 net tax liability in installments.

Election Not To Apply Net Operating Loss Deduction (section 965(n))

A taxpayer may elect under section 965(n) to reduce the amount of the net operating loss under section 172 or the amount of the net operating loss carryovers or carrybacks also under section 172. The amount of the reduction is equal to the amount of the section 965(a) inclusion (net of the section 965(c) deduction) plus, in the case of a domestic corporation that takes a credit for deemed paid foreign taxes, the section 78 gross up with respect to the section 965(a) inclusion (which is computed taking into account the amount disallowed under section 965(g)). The section 78 gross up with respect to the section 965(a) inclusion is computed taking into account the amount disallowed under section 965(g). See section 965(n) for more information.

Election Under Section 3.02 of Notice 2018-13 To Use Alternative Method To Compute Post-1986 Earnings and Profits

An election can be made to determine an SFC’s post-1986 earnings and profits using an alternate method. If this election is made, the amount of the post-1986 earnings and profits of an SFC as of November 2, 2017 will equal the sum of: (1) the corporation’s post-1986 earnings and profits as of October 31, 2017, and (2) two days of daily earnings amount. Daily earnings amount looks to the average daily earnings of the SFC between the beginning of the relevant tax year and October 31, 2017. See Notice 2018-13, section 3.02 for more information.

In the case of an SFC with a 52-53 week tax year, an election may be made to use the alternative method to determine its post-1986 earnings and profits as of both November 2, 2017, and December 31, 2017. The alternative method with respect to a 52-53 week tax year SFC uses the closest end of a fiscal month to each measurement date which is then adjusted using average daily earnings. See Notice 2018-13, section 3.02 for more information.

Who Can Make an Election, When Must an Election be Made, and How Are Elections Made

See Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns, Answers 5-7.

965 Deferral Worksheet for Individuals

Individuals can keep track of the net 965 tax liability elected to be paid in installments as well as the deferred net 965 tax liability with respect to inclusions from S corporations on the 965 Deferral – Individual Worksheet. See Election to Pay Tax Liability in Installments (section 965(h)) and S Corporation Shareholder Deferral of Tax (section 965(i)) above for information related to calculating the net 965 tax liability.

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Worksheet 2.1 965 Deferral Worksheet for Individual

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Worksheet 2.2 965 Deferral Worksheet for Individual

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Worksheet 2.3--965 Deferral Worksheet for Individual

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965 Deferral Worksheet for Corporations

Corporations can keep track of the section 965 net tax liability elected to be paid in installments as well as a real estate investment trust’s section 965(a) inclusions and section 965(c) deductions elected to be included in installments on the 965 Deferral – Corporate Worksheet. See Election to Pay Tax Liability in Installments (section 965(h)) above for information related to calculating the section 965 net tax liability.

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Worksheet 965 Deferral Worksheet for Corporation

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Additional Information a Pass-Through Entity Must Provide To Its Owners or Beneficiaries

See Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns, Answer 9.

How To Get Tax Help

If you have questions about a tax issue, need help preparing your tax return, or want to download free publications, forms, or instructions, go to IRS.gov and find resources that can help you right away.

Preparing and filing your tax return.

Find free options to prepare and file your return on IRS.gov or in your local community if you qualify.

The Volunteer Income Tax Assistance (VITA) program offers free tax help to people who generally make $54,000 or less, persons with disabilities, and limited-English-speaking taxpayers who need help preparing their own tax returns. The Tax Counseling for the Elderly (TCE) program offers free tax help for all taxpayers, particularly those who are 60 years of age and older. TCE volunteers specialize in answering questions about pensions and retirement-related issues unique to seniors.

You can go to IRS.gov to see your options for preparing and filing your return which include the following.

 

  • Free File. Go to IRS.gov/FreeFile. See if you qualify to use brand-name software to prepare and e-file your federal tax return for free.

  • VITA. Go to IRS.gov/VITA, download the free IRS2Go app, or call 1-800-906-9887 to find the nearest VITA location for free tax preparation.

  • TCE. Go to IRS.gov/TCE, download the free IRS2Go app, or call 1-888-227-7669 to find the nearest TCE location for free tax preparation.

 

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Getting answers to your tax questions. On IRS.gov get answers to your tax questions anytime, anywhere.

  • Go to IRS.gov/Help or IRS.gov/LetUsHelp pages for a variety of tools that will help you get answers to some of the most common tax questions.

  • Go to IRS.gov/ITA for the Interactive Tax Assistant, a tool that will ask you questions on a number of tax law topics and provide answers. You can print the entire interview and the final response for your records.

  • Go to IRS.gov/Pub17 to get Pub. 17, Your Federal Income Tax for Individuals, which features details on tax-saving opportunities, 2017 tax changes, and thousands of interactive links to help you find answers to your questions. View it online in HTML, as a PDF, or download it to your mobile device as an eBook.

  • You may also be able to access tax law information in your electronic filing software.

 

Getting tax forms and publications.

Go to IRS.gov/Forms to view, download, or print all of the forms and publications you may need. You can also download and view popular tax publications and instructions (including the 1040 instructions) on mobile devices as an eBook at no charge. Or, you can go to IRS.gov/OrderForms to place an order and have forms mailed to you within 10 business days.

Access your online account (Individual taxpayers only).

Go to IRS.gov/Account to securely access information about your federal tax account.

  • View the amount you owe, pay online or set up an online payment agreement.

  • Access your tax records online.

  • Review the past 18 months of your payment history.

  • Go to IRS.gov/SecureAccess to review the required identity authentication process.

 

Using direct deposit.

The fastest way to receive a tax refund is to combine direct deposit and IRS e-file. Direct deposit securely and electronically transfers your refund directly into your financial account. Eight in 10 taxpayers use direct deposit to receive their refund. IRS issues more than 90% of refunds in less than 21 days.

Delayed refund for returns claiming certain credits.

Due to changes in the law, the IRS can’t issue refunds before mid-February 2018, for returns that properly claimed the earned income credit (EIC) or the additional child tax credit (ACTC). This applies to the entire refund, not just the portion associated with these credits.

Getting a transcript or copy of a return.

The quickest way to get a copy of your tax transcript is to go to IRS.gov/Transcripts. Click on either "Get Transcript Online" or "Get Transcript by Mail" to order a copy of your transcript. If you prefer, you can:

  • Order your transcript by calling 1-800-908-9946.

  • Mail Form 4506-T or Form 4506T-EZ (both available on IRS.gov).

 

Using online tools to help prepare your return.

Go to IRS.gov/Tools for the following.

 

Resolving tax-related identity theft issues.

 

  • The IRS doesn’t initiate contact with taxpayers by email or telephone to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.

  • Go to IRS.gov/IDProtection for information and videos.

  • If your SSN has been lost or stolen or you suspect you’re a victim of tax-related identity theft, visit IRS.gov/ID to learn what steps you should take.

 

Checking on the status of your refund.

 

  • Go to IRS.gov/Refunds.

  • Due to changes in the law, the IRS can’t issue refunds before mid-February 2018, for returns that properly claimed the EIC or the ACTC. This applies to the entire refund, not just the portion associated with these credits.

  • Download the official IRS2Go app to your mobile device to check your refund status.

  • Call the automated refund hotline at 1-800-829-1954.

 

Making a tax payment.

The IRS uses the latest encryption technology to ensure your electronic payments are safe and secure. You can make electronic payments online, by phone, and from a mobile device using the IRS2Go app. Paying electronically is quick, easy, and faster than mailing in a check or money order. Go to IRS.gov/Payments to make a payment using any of the following options.

  • IRS Direct Pay: Pay your individual tax bill or estimated tax payment directly from your checking or savings account at no cost to you.

  • Debit or credit card: Choose an approved payment processor to pay online, by phone, and by mobile device.

  • Electronic Funds Withdrawal: Offered only when filing your federal taxes using tax preparation software or through a tax professional.

  • Electronic Federal Tax Payment System: Best option for businesses. Enrollment is required.

  • Check or money order: Mail your payment to the address listed on the notice or instructions.

  • Cash: You may be able to pay your taxes with cash at a participating retail store.

 

What if I can’t pay now?

Go to IRS.gov/Payments for more information about your options.

  • Apply for an online payment agreement (IRS.gov/OPA) to meet your tax obligation in monthly installments if you can’t pay your taxes in full today. Once you complete the online process, you will receive immediate notification of whether your agreement has been approved.

  • Use the Offer in Compromise Pre-Qualifier (IRS.gov/OIC) to see if you can settle your tax debt for less than the full amount you owe.

 

Checking the status of an amended return.

Go to IRS.gov/WMAR to track the status of Form 1040X amended returns. Please note that it can take up to 3 weeks from the date you mailed your amended return for it to show up in our system and processing it can take up to 16 weeks.

Understanding an IRS notice or letter.

Go to IRS.gov/Notices to find additional information about responding to an IRS notice or letter.

Contacting your local IRS office.

Keep in mind, many questions can be answered on IRS.gov without visiting an IRS Tax Assistance Center (TAC). Go to IRS.gov/LetUsHelp for the topics people ask about most. If you still need help, IRS TACs provide tax help when a tax issue can’t be handled online or by phone. All TACs now provide service by appointment so you’ll know in advance that you can get the service you need without long wait times. Before you visit, go to IRS.gov/TACLocator to find the nearest TAC, check hours, available services, and appointment options. Or, on the IRS2Go app, under the Stay Connected tab, choose the Contact Us option and click on “Local Offices.”

Watching IRS videos.

The IRS Video portal (IRSvideos.gov) contains video and audio presentations for individuals, small businesses, and tax professionals.

Getting tax information in other languages.

For taxpayers whose native language isn’t English, we have the following resources available. Taxpayers can find information on IRS.gov in the following languages.

 

The IRS TACs provide over-the-phone interpreter service in over 170 languages, and the service is available free to taxpayers.

The Taxpayer Advocate Service Is Here To Help You

What is the Taxpayer Advocate Service?

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Our job is to ensure that every taxpayer is treated fairly and that you know and understand your rights under the Taxpayer Bill of Rights.

What Can the Taxpayer Advocate Service Do For You?

We can help you resolve problems that you can’t resolve with the IRS. And our service is free. If you qualify for our assistance, you will be assigned to one advocate who will work with you throughout the process and will do everything possible to resolve your issue. TAS can help you if:

  • Your problem is causing financial difficulty for you, your family, or your business,

  • You face (or your business is facing) an immediate threat of adverse action, or

  • You’ve tried repeatedly to contact the IRS but no one has responded, or the IRS hasn’t responded by the date promised.

 

How Can You Reach Us?

We have offices in every state, the District of Columbia, and Puerto Rico. Your local advocate’s number is in your local directory and at TaxpayerAdvocate.IRS.gov/Contact-Us. You can also call us at 1-877-777-4778.

How Can You Learn About Your Taxpayer Rights?

The Taxpayer Bill of Rights describes 10 basic rights that all taxpayers have when dealing with the IRS. Our Tax Toolkit at TaxpayerAdvocate.IRS.gov can help you understand what these rights mean to you and how they apply. These are your rights. Know them. Use them.

How Else Does the Taxpayer Advocate Service Help Taxpayers?

TAS works to resolve large-scale problems that affect many taxpayers. If you know of one of these broad issues, please report it to us at IRS.gov/SAMS.

Low Income Taxpayer Clinics

Low Income Taxpayer Clinics (LITCs) are independent from the IRS. LITCs represent individuals whose income is below a certain level and need to resolve tax problems with the IRS, such as audits, appeals, and tax collection disputes. In addition, clinics can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. Services are offered for free or a small fee. To find a clinic near you, visit TaxpayerAdvocate.IRS.gov/LITCmap or see IRS Publication 4134, Low Income Taxpayer Clinic List.

Publication 5292 - Additional Material

Index

Symbols

2016 Tax Year Section 965(a) Inclusion Amount
2016 Inclusion amount, 2016 Tax Year Section 965(a) Inclusion Amount
965 Deferral – Corporate Worksheet, 965 Deferral Worksheet for Corporations
965 Deferral – Individual Worksheet, 965 Deferral Worksheet for Individuals

A

Additional information pass-through entity must provide, Additional Information a Pass-Through Entity Must Provide To Its Owners or Beneficiaries
Assistance (see Tax help)

F

Foreign Taxes, Foreign Taxes

P

Publications (see Tax help)

T

Tax help, How To Get Tax Help