United States

Taxpayers subject to 965 must use new forms

TAX ALERT  | 

The Internal Revenue Service (IRS) has released Form 965, Schedules A through H for the new form, as well as Form 965-A and Form 965-B. Taxpayers that reported income under section 965 on either their 2017 or 2018 tax returns (or both) must complete and attach Form 965 and either Form 965-A or 965-B to their 2018 income tax return. The new forms and schedules request various items for the 2017 and 2018 transitions tax years, such as the section 965(a) inclusion, the section 965(c) deduction, elections, etc.

Form 965 instructions, Form 965-A instructions, and Form 965-B instructions have also been released.

Form 965

New Form 965 is similar to the Transition Tax Statement described in Q&A 3 (IRS Q&As about reporting related to section 965 on 2017 tax returns). Part I of Form 965 is used to report the section 965(a) inclusion amount. Part II is used to calculate the section 965(c) deduction and determine the appropriate rate equivalent percentage. Part III is used to report which section 965 elections have been made.

Filing of Form 965 is required for 2018 if a taxpayer had a section 965 inclusion in 2017 or 2018 (or would have been required to include amounts in income under section 965 had there not been a section 965(b) deficit allocation). The filing of the form is required even if the section 965 tax liability was fully satisfied. There are some exceptions for organizations exempt from tax.

It is unclear whether Form 965 is intended to replace the Transition Tax Statement. Unless and until additional guidance is issued, it is recommended that a Transition Tax Statement be included in a 2018 return with a section 965 liability.

Form 965 Schedules

The IRS also released eight new schedules to accompany new Form 965:

  • Schedule A calculates a U.S. shareholder’s section 965(a) inclusion amount
  • Schedule B lists the accumulated post-1986 earnings and profits (E&P) of a deferred foreign income corporation
  • Schedule C reports a U.S. shareholder’s pro rata share of the aggregate foreign E&P deficits from E&P deficit foreign corporations
  • Schedule D determines the U.S. shareholder’s pro rata share of the cash position of each specified foreign corporation (SFC)
  • Schedule E sets out the cash position of each SFC
  • Schedule F (2018 tax year) and Schedule G (2017 tax year) compute the foreign taxes deemed paid
  • Schedule H determines the foreign tax credits disallowed with respect to the section 965(a) inclusion

For taxpayers that are owners and beneficiaries of U.S. shareholder pass-through entities and received summarized section 965(a) and 965(c) details from such pass-through entities, these amounts may be reported directly on Form 965 and do not need to be reported on Schedules A through E.

Only U.S. C corporations and individuals making a section 962 election use Schedules F, G and H.

Forms 965-A and 965-B

Individual taxpayers and entities taxed like individuals (for example, certain trusts and estates) must also file Form 965-A with their income tax return if they have a section 965 net tax liability in either tax year 2017 or 2018, or both.

Taxpayers electing to pay the tax in installments and S Corporation shareholders electing to defer tax under section 965(i) must continue to file Form 965-A as long as there is net tax liability remaining unpaid at any time during the tax year.

A corporate taxpayer must file Form 965-B with their 2018 tax return when there is a net section 965 tax liability in tax year 2017, or 2018, or both.

If an election to pay the tax in installments is made, including an election by a REIT under section 965(m), Form 965-B must continue to be filed as long as there is net tax liability remaining unpaid at any time during the tax year, or the REIT has 965 amounts taken into account at any time during the tax year.

The instructions for these forms should be reviewed carefully to ensure correct reporting.

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