The IRS has released guidance that answers questions about return filing and tax payment obligations arising from the “deemed repatriation” provisions (IRC 965) of the Tax Cuts and Jobs Act (TCJA) enacted at the end of 2017. The law requires that U.S. shareholders pay a transition tax on the previously untaxed foreign earnings of certain foreign corporations as if those earnings had been repatriated to the United States.
It applies to the last taxable year of the foreign corporation beginning before 2018, meaning calendar-year taxpayers will begin calculating and paying the tax on their 2017 tax returns.At this time, taxpayers who request an extension of time to file will still be expected to calculate and deposit the proper amount of repatriation tax due on the original due date of the income tax return — April 17, 2018, for corporate and individual taxpayers.
Taxpayers should separately calculate and pay the repatriation tax owed by the return’s original due date — April 17, 2018, for calendar-year corporations and individuals.
The IRS provides detail on several important parts of the filing and payment process, including:
- IRC 965 Transition Tax Statement: The guidance lists nine details that a taxpayer must include in an IRC 965 Transition Tax Statement. The statement should be signed and included with the 2017 return.
- Separate payment due: There’s a somewhat unique payment process for taxes due under IRC 965. Taxpayers should make one payment reflecting any tax owed without regard to section 965 and a second separate payment reflecting tax owed as a result of section 965. The 965 payment must be made either by wire transfer, check, or money order. Taxpayers who are normally required to pay through the Electronic Federal Tax Payment System should submit by wire transfer, or they may be subject to penalties.
While the guidance doesn’t state this specifically, it appears that if the taxpayer’s non-965 tax position is a refund, a separate payment should be made for the full amount of 965 tax due on April 17, 2018.
- Elections made at the individual shareholder level: The law allows for several elections related to IRC 965, most notably the election to pay the tax in specified installments over eight years. The guidance clarifies that the decision to elect is made at the individual shareholder level, not the entity level. Taxpayers that do elect the installment treatment should apply the appropriate percentage to the total 965 tax owed when calculating the payment to be made in 2018.
Subchapter S corporation shareholders who elect deferral treatment create a joint liability with the company. As a result, affected S corporations and their shareholders should come to some sort of understanding on this issue prior to filing their returns and/or extensions.
- When to file: Individuals reporting IRC 965 income on a 1040 form are asked to hold off filing electronically until after April 2, 2018, in order to allow the IRS time to make certain system changes. Individuals who file a paper 1040 form can do so at anytime. The Q&A does not address any recommended delays in electronic filing of a corporate return. Taxpayers who have already filed should consider filing an amended return based on the information in the Q&A document.
The IRS continues to release guidance on the TCJA as quickly as it can. Taxpayers should watch for additional information about repatriation taxes and other provisions of the new law as it becomes available. Those whose returns are affected by provisions of the new law should consider the possible benefit of filing an extension in the hope that additional guidance might be available before the extended due date. If you have any questions, please contact your tax advisor.