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IRS Provides Guidance on Section 965 Transition Tax

August 19, 2019

The IRS has released a Q&A document to help taxpayers navigate their new reporting and tax obligations under Section 965. We dive into some of these FAQs here.

Attention multinational companies…The IRS has released a question and answer document to help taxpayers meet their filing and payment requirements for the Section 965 transition tax on untaxed foreign earnings under the Tax Cuts and Jobs Act (TCJA).

What exactly did the TCJA change?

The TCJA revised Section 965 of the Internal Revenue Code to require U.S. shareholders of certain specified foreign corporations to pay a transition tax on the previously untaxed earnings and profits of the corporation. The tax applies to all controlled foreign corporations as well as any foreign corporation that has a domestic corporation as a U.S. shareholder. Anyone who meets the criteria must include their pro rata share of the untaxed earnings and profits of foreign corporations on their tax returns and pay the subsequent tax. Certain offsets and deductions are available as well as an election to pay the liability in annual installments. Section 965 inclusions are required to be reported for tax years 2017 and 2018, so it’s increasingly important that all potentially impacted taxpayers are aware of the requirements.

What do the Q&As address?

The Q&As address many things including….

  • General issues relating to section 965
  • How to make subsequent installment payments when the transition tax is paid over eight years
  • Filing of transfer agreements and consent agreements

Q&A Example

Q: I made a section 965(h) election on a prior tax return, electing to pay the section 965(h) net tax liability portion of a prior income tax liability in eight annual installments. How do I make the subsequent installment payment(s)?

A: Under Section 965, you are able to pay your net tax liability in eight annual installments (8% due for the first 5 installments, 15% for the 6th, 20% for the 7th, and the remaining 25% for the 8th). Your successive section 965 net tax liability installment payments should be made separately from your income tax payments for successive tax years.

Take a look at the other Q&As here:

Questions on your tax liability? We can help—contact us.

The TCJA…So Many Changes, So Many Questions…we can help you navigate this huge tax overhaul! Visit our Tax Reform Center for everything you and your business need to know, now.

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