Taxpayers that previously reported income under section 965 likely have a filing, and payment, deadline approaching on April 15. In light of the upcoming deadline, it is worth highlighting a few issues, which may have an impact on upcoming tax filings.
- Second installment payments are due April 15
Many taxpayers have received 965 payment schedules from the IRS, however, not every taxpayer has and not all of those received have been accurate. Nevertheless, taxpayers that have made an election to pay their section 965 liability in installments must make their second payment by April 15. This payment must be made separately from any other tax payment made to the IRS.
For more information on section 965 payment obligations please see our previous alerts, IRS reverses position on transition tax & refunds in new FAQs, and IRS issues payment guidance affecting taxpayers subject to section 965.
- Form 965 must be filed
The filing of Form 965 is not a single year requirement. 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.
Furthermore, individuals receiving a Schedule K-1 from either a partnership or an S-corporation are required to file Form 965 if there is any section 965 liability reported. For 2018, partnerships and S-corporations reporting a section 965 liability are required to provide a pro forma Form 965 to their partners and shareholders respectively. This includes schedules F, G, and H for all foreign earnings from any deferred foreign income corporation (“DFIC”).
Lastly, Form 965 must be filed if the taxpayer has an interest in any DFIC. This is true even if there was no inclusion reported in the prior year return.
For more information on the new Form 965 please see our previous alert, Taxpayers subject to 965 must use new forms.
- Taxpayers with section 965(h) or 965(i) election must file Form 965-A
Taxpayers that elected to pay their 965 liability in installments with a section 965(h) election and those S Corporation shareholders electing to defer under section 965(i) are required to file Form 965-A. Form 965-A is required to be filed with the taxpayer’s income tax return each year as long as there is any section 965(h) net tax liability or section 965(i) net tax liability remaining unpaid at any time during a tax year. Failure to attach the election statement to the tax return may result in an acceleration of the deferred section 965 liability.
For more information on the 965(h) and 965(i) elections please see our previous alerts, Service releases memo regarding tax overpayments and Sec. 965(h) and S corp owners must file paper return to make a 965(i) election.
- Changes to basis election due May 6
Certain U.S. shareholders of a DFIC may, or may not, have elected to adjust their basis in the foreign corporation in order to avoid being double taxed in the future as a result of certain aspects of the transition tax calculation. Under final section 965 regulations taxpayers wishing to make or revoke a previously made basis adjustment election must do so by May 6, 2019, if their tax returns were otherwise due by May 6, 2019. For all other taxpayers, the basis adjustment election must be made with taxpayer’s first return that includes a section 965(a) inclusion amount and cannot be revoked. In addition, the final regulations provide that section 9100 relief is not available to file a late election.
For more information on the basis election please see our previous alert, Section 965 basis adjustment elections due May 6, 2019.