United States

Passthroughs must notify owners to use proposed, not final, GILTI regs

TAX ALERT  | 

Under section 951A of the Internal Revenue Code of 1986 (As Amended), U.S. shareholders in a controlled foreign corporation (CFC) must take into income their pro rata share of the CFC’s “global intangible low taxed income” (commonly abbreviated “GILTI”).  Under proposed regulations issued under section 951A, a U.S. partnership (or an S corporation) that is a U.S. shareholder in a CFC would take into income its pro rata share of the GILTI income of the CFC. However, under the proposed regulations, partners (or shareholders in an S corporation) who are not themselves U.S. shareholders in the CFC take into account their pro rata share of the partnership’s (or S corporation’s) GILTI income while partners (or shareholders) who are themselves U.S. shareholders must receive their pro rata share of partnership (or S corporation) GILTI items (e.g., tested losses or income of the CFC) and calculate GILTI at the parter or shareholder level. This approach was called the “hybrid” approach.

In June of 2019, the Treasury issued final GILTI regulations which reject the hybrid approach and adopt an “aggregate” approach under which the partnership (or S corporation) must pass through all items needed for the partner to compute GILTI at the partner or S Corporation shareholder level.  However, only partners or S corporation shareholders who are U.S. shareholders must take into account GILTI under the final regulations. The final regulations are effective on a retroactive basis and could therefore apply to 2018 for calendar year taxpayers. 

Because the final regulations were issued in June of 2019, Treasury and the IRS recognized that some partnerships (or S corporations) that may have followed on the proposed regulations ,could be at a disadvantage. In particular, Treasury recognized that some partnerships (or S corporations) may wish to prepare their tax returns and schedule K-1s based on the proposed regulations. In addition, certain partnerships (or S corporations) may wish to file their tax returns based on the final regulations even though they have issued K-1s using the proposed regulations. However, this could result in penalty exposure. 

Notice 2019-46, published on Aug. 22, 2019, announces that no penalties will be asserted in these two situations provided the partnership (or S corporation) provides a notice to its partners or shareholders that states:

(1)   That the Schedule K-1 provided to the partner or shareholder is consistent with the “hybrid” approach contained in the proposed GILTI regulations;

(2)   Whether the domestic partnership or S corporation filed a Form 1065 or Form 1120S consistent with the proposed regulations or the final regulations;

(3)   That the notification is being provided in accordance with Notice 2019-46.

The notice must be provided to partners or shareholder by the extended due date of the partnership’s or S Corporation’s return.  Thus calendar year entities seeking to apply this relief must provide the notice by Sept. 16, 2019. The form of notice is flexible and any reasonable method may be used including via mail, e-mail, posting on a website through which the domestic partnership or S corporation would ordinarily disseminate tax information to its partners or shareholders. In the event a domestic partnership or S corporation has filed its tax return and not filed for an extension of time to file its return, the notice to partners or shareholder must be provided by the date on which the return would have been due had an extension been properly requested.

In addition, the domestic partnership or S corporation must ‘also’ attach the notification described above and a completed Form 8992 to its tax return if the return has not been filed by the publication date of Notice 2019-46.

Schedule K-1 Distribution Reporting

If a domestic partnership or S corporation furnished a Schedule K-1 based on the proposed regulations, the domestic partnership or S corporation must separately state on Schedules K-1 for subsequent taxable years the partner's or shareholder's distributive share or pro rata share of a foreign corporation's distributions to the domestic partnership or S corporation of earnings and profits that relate to the GILTI inclusion amount of the partnership or S corporation that was reflected on the first mentioned Schedules K-1.This information must be provided for each taxable year of the domestic partnership or S corporation following the taxable year to which the first Schedule K-1 relates. The information could be used by a partner of a domestic partnership or a shareholder of an S corporation that receives a Schedule K-1 separately stating such distributions to calculate its gross income if such partner or shareholder filed inconsistently with the first Schedule K-1 and did not include in gross income its distributive share or pro rata share of the GILTI inclusion amount reported on such Schedule K-1. 

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