In February 2016 the IRS released final regulations under Treas. Reg. Section 1.6038D-6. The regulation applies to domestic entities, and beginning with the January 2016 tax year, requires certain corporations, partnerships, and trusts to file Form 8938 with their U.S. income tax returns.
Under the new regulation, Form 8938 (which is used to report specified foreign financial assets), will be required if at least 50 percent of the entity’s gross income or assets are passive* (assets produce passive income) and the entity is at least 80 percent owned by a specified individual**.
The filing requirement is determined on an annual basis –– assets and income owned by related entities of the same specified individual will be combined to determine whether the reporting threshold is met. The specified foreign financial asset reporting threshold for domestic entities is an aggregate value of assets exceeding $50,000 on the last day of the taxable year, or $75,000 at any time during the taxable year.
Additional changes in the final regulations consisted of:
- Modifying the definition of “passive income” to more resemble the definition under sections 1471-1472 (FATCA)
- Certain rents and royalties derived in the conduct of an active trade or business conducted “at least in part” by employees of the entity will not be considered passive income
- Adding an exception for certain active business gains or losses from the sale of commodities
- 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 1472 regulations
- Expanding the definition of “current beneficiary” of domestic trusts to include any holder of a general power of appointment, whether or not exercised, that was exercisable at any time during the taxable year
For further guidance on the regulation, please contact a member of the Plante Moran international tax services team.
*Passive assets are measured using a weighted average measured quarterly, and corporations and partnerships are permitted to use either fair market value or book value (measured under U.S. or international accounting standards).
**Specified individuals are U.S. citizens, resident aliens, and certain nonresident aliens electing to file a U.S. Joint income tax return with a qualifying spouse, and nonresident aliens resident in Puerto Rico or certain possessions. Attribution rules under IRC Sec. 267 apply for the purpose of the ownership test.