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Tax alert: 2016 domestic entity tax regulations are going into effect

January 23, 2017 Article 2 min read
Authors:
Kellie Becker Andy Barnes
Some domestic businesses must now report foreign financial assets to the IRS. If your business produces significant income from passive assets and is at least 80% owned by one individual, it could be time for some tax planning.

On Feb. 23, 2016, the IRS released final regulations under Treas. Reg. Section 1.6038D-6 providingguidance to certain domestic entities on the reporting of specified foreign financial assets on Form8938. The regulations affect certain domestic corporations, partnerships and trusts. The effective datefor the final regulations is for tax years beginning after Dec. 31, 2015.

Since 2011, only individuals were required to report (on Form 8938) certain foreign financial assetsunder IRC Sec. 6038D(a) until Treasury issued Regulations as permitted under Sec. 6038D(f) to extendthe filing requirement to entities. Starting with the 2016 tax year, certain domestic entities will also berequired to file Form 8938 with their U.S. income tax returns.

The original proposed regulations were simplified so that an objective test could be applied todetermine whether or not a domestic entity is subject to the filing requirement. Form 8938 will berequired if at least 50 percent of the entity’s gross income or at least 50 percent of the entity’s assetsare passive (the assets produce passive income) and the entity is at least 80 percent owned by aspecified individual. Passive assets are measured using a weighted average measured quarterly, andcorporations and partnerships are permitted to use either fair market value or book value (measuredunder U.S. or international accounting standards). Specified individuals are U.S. citizens, residentaliens, and certain nonresident aliens electing to file a U.S. joint income tax return with a qualifyingspouse, and nonresident aliens resident in Puerto Rico or certain possessions. Attribution rules underIRC Sec. 267 apply for the purpose of the ownership test.

In addition, assets and income owned by related entities of the same specified individual will becombined to determine whether the reporting threshold is met. The filing requirement is determined onan annual basis. The specified foreign financial asset reporting threshold for domestic entities is anaggregate value of assets exceeding $50,000 on the last day of the taxable year, or $75,000 at anytime during the taxable year.

Additional changes in the final regulations consisted of:

  • Modifying the definition of “passive income” to better resemble the definition undersections 1471-1472 (FATCA)
  • Certain rents and royalties derived in the conduct of an active trade or businessconducted “at least in part” by employees of the entity will not be considered passiveincome
  • Adding an exception for certain active business gains or losses from the sale ofcommodities
  • Defining notional principal contracts by adding a reference to the section 446 regulations
  • Adding an exception for dealers, similar to what was added to the section 1472regulations
  • Expanding the definition of “current beneficiary” of domestic trusts to include any holderof a general power of appointment, whether or not exercised, that was exercisable atany time during the taxable year

If you have any questions, please contact your Plante Moran tax advisor.

The information provided in this alert is only a general summary and is being distributed with the understanding that Plante & Moran, PLLC, is not renderinglegal, tax, accounting, or other professional advice, position, or opinions on specific facts or matters and, accordingly, assumes no liability whatsoever inconnection with its use.

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