However, there is a reason this election went largely unused until now. Section 965 affects U.S. owners of certain foreign corporations. This election is made annually by attaching a statement to the Form 1040, and this election applies to all controlled foreign corporations and not just for those controlled foreign corporations for which an . earlier, the legislative history to Code 962 indicates that an individual making a Code 962 election should be in the same position as a corporation with regard to amounts included in gross income under Code 951(a). In this example, by making the 962 election, Tom increased his tax liability by $17,010 ($77,004 $59,994 = $17,010). Additionally, if both the 30%-taxed and 0%-taxed foreign companies are being included in the GILTI income and foreign tax credit calculations, the excess FTCs generated by the 30%-taxed company may soak up U.S. GILTI tax imposed on the earnings of the 0%-taxed company. Reg. ConclusionAnyone considering making a 962 election should have hypothetical computations of federal tax liabilities with and without the Section 962 election prepared before the election is actually made. This article is not legal or tax advice. Treasury has also issued final regulations which would allow the individual to claim the 50 percent deduction against GILTI which is otherwise only available to corporations.4The application of the deduction and indirect foreign tax credit substantially reduces or eliminates the tax due from the individual in the current year. Have a question about TCJA changes? 1(h)(11)(B)). 3 Individual shareholders that make a Section 962 election. Finally, the Joint Explan-atory Statement of the Committee of Conference to Public Law 115-97 states that: The Section 962 Statement includes gross income inclusions and tax liability computations. This is the first draft of my notes for the part of the presentation that talks about where the rubber meets the road: the Section 962 Statement. A United States shareholder who does not make the Section 962 election will prepare and file a tax return that gives the IRS enough information to assure that the correct tax liability has been computed by the taxpayer. Enter Section 962 Election as thedescriptionand the GILTI income as a positive amount in that field. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI), with a U.S. tax return to calculate GILTI. The election under section 962 may be made only by an individual (including a trust or estate) who is a United States shareholder (including an individual who is a United States shareholder because, by reason of section 958(b), he is considered to own stock of a foreign corporation owned (within the meaning of section 958(a)) by a domestic pass-through entity (as defined in 1.965-1(f)(19))). On the other hand, for federal tax purposes, domestic C corporations that are shareholders of CFCs are taxed on subpart F and GILTI inclusions at a rate of only 21 percent.Because of the differences in these tax rates and because CFC shareholders are not permitted to offset their federal tax liability with foreign tax credits paid by the foreign corporation, many CFC shareholders are making so-called 962 elections. A taxpayer considering making this election should consult his or her tax professional or advisor to discuss his or her specific situation. Tax is reported at Form 1040, line 12a. Tom received pre-tax income of $100,000 FC 1 and $100,000 of pre-tax income from FC 2. In general, 962 allows an individual U.S. shareholder who owns at least 10 percent of a controlled foreign corporation (CFC) to elect to treat their foreign earnings in their 10 percent or more owned CFCs as "if" they were taxed as a corporation. This is where the controlled foreign corporations Subpart F income is revealed to the IRS. Your online resource to get answers to your product and industry questions. The election under section 962 may be made only by a United States shareholder who is an individual (including a trust or estate). Until now, shareholders had rarely invoked the Sec. However, as previously mentioned, that income may have already been taxed at the state level when it was taken into account as GILTI or Subpart F income on the taxpayer's federal return. Form 1040, line 12a, has box 3 marked with the amount and Statement #1 entered as the description. AICPA lists 15 recommendations that would provide clarification and guidance. The government just has an accounts receivable problem to solve. 962 in state statutes. Sec.962 is the election to treat that income for this particular year as corporate income reported on the personal tax return. Section 10, hospice care is a benefit under the hospital insurance program. Except as provided in 1.962-4, a United States shareholder shall make an election under this section by filing a statement to such effect with his return for the taxable year with respect to which the election is made. Regs. If a Section 962 election is made, the reporting will be on Form 1118 instead of Form 1116. . Each election statement must have the applicable title and, in the case of an attachment in Portable Document Format (.pdf) included with an electronically filed return, the file name reflected in the following table: . However, this method of reporting this income and related tax liability does not have a direct correlation with the amount that is technically included in the individual's gross income under Sec. 87-834, which introduced the Subpart F rules of the Code. You have to manually tell them what to credit. The Tax Cuts & Jobs Act, however, changed that, pushing the so-called section 962 election into vogue. This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction. Tax on Section 951(a) income at corporate rates. Consider an individual who owns, directly or through a pass-through entity, 100 percent of a Cyprus-based services company which pays a 12.5 percent rate of local income tax. The Section 962 Statement includes gross income inclusions and tax liability computations. By using the site, you consent to the placement of these cookies. If you are in need of legal or tax advice, you should immediately consult a licensed attorney. The distribution, if in excess of tax previously paid under Sec. 962 to be taxed at corporate rates, the amount of income itself is not reported on Form 1040, U.S. Corporations are required to file Form 8993, Section 250 Deduction for Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI), and Form 1118, Foreign Tax Credit Corporations, in order to calculate the deduction under Sec. US final GILTI/FDII regulations under section 250 include guidance on section 962 elections, pass-through FDII reporting | EY - Global About us Back Close search Trending Why Chief Marketing Officers should be central to every transformation 31 Jan 2023 Consulting The CEO Imperative: How will CEOs respond to a new recession reality? From here, the train goes off the tracks: How can the IRS follow the data trail from Form 5471, Schedule I (the controlled foreign corporations total Subpart F income) to the individual United States shareholders tax liability? Finally, the injustice of the double tax on dividends received by United States shareholders from foreign corporations was put to rest for good at least for those United States shareholders who were also already using a corporate tax structure. A dividend from a qualified foreign corporation is taxed as a qualified dividend at long-term capital gain rates (Sec. 250 deduction, and foreign tax credits generally do not apply at the state level, which could result in incremental state, but not federal, tax. These figures are then entered into 1040. Backup for the Sec. In this case, does form 8992 not need to be used? In reality, however, this benefit is a timing difference, as the subsequent distribution will be subject to tax. 962(a)). (5) Such further information as the Commissioner may prescribe by forms and accompanying instructions relating to such election. The box called Section 962 tax should be the credit you compute and should be negative. Do Not Sell or Share My Personal Information (California), Provides benefit of 21 percent corporate rate on GILTI and subpart F income, Provides benefit of indirect foreign tax credit on GILTI and subpart F income, Partial benefit of 50 percent GILTI deduction available to an actual C corporation, Additional administrative requirements in making election annually, Imposes second layer of tax; could increase effective rate after distribution, Distribution may not be eligiblefor qualified dividend treatment available to the shareholder of the C Corporation, unless paid by a qualified foreign corporation. How do I make a Section 962 election in Drake Tax? No new contributions can be made. Assume that the foreign earnings of FC 1 and FC 2 are the same as in Illustration 1. Individuals receiving GILTI inclusions may also be subject to an additional Medicare tax of 3.8 percent. 4 To prevent the cross-crediting of . Prudence suggests filling in gaps like these with a roll your own statement, even when not required. As discussed above, regardless of how GILTI and Subpart F income are reflected on Form 1040 when a Sec. Sec. Taxpayers should expect significant scrutiny of their positions by state tax authorities given the lack of guidance, and complete documentation will be critical in mounting a successful defense. Thats the cloud-shaped mystery at the far left of the diagram, and this is what the IRS expects. When Subpart F was enacted, the top federal tax rate for corporations was 52% while individuals were taxed at rates as high as 91% and could not take advantage of indirect foreign tax credits available to corporations. An election under 1.965-2(f)(2) is generally made by attaching a statement, signed under penalties of perjury, to the section 958(a) U.S. shareholder's return for the first taxable . 78 gross-up of $180,000. The above-mentioned new IRS proposed regulations, issued March 6 th, also allow an individual who has made the 962 election to take a deduction of 50% of the GILTI when computing the tax on the GILTI! The section 962 election allows an individual to take indirect foreign tax credit to help offset the tax on the subpart F or GILTI income. What to include on a 962 election statement. A taxpayer who tallies $100,000 of GILTI income (after grossing up for the deemed-paid FTC), therefore, would potentially pay $21,000 of income taxes. Additionally, most states do not recognize the Sec. In other words, depending on the CFCs E&P, a 962 election generates a second layer of tax as if the CFC shareholder received a dividend from a C corporation.
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