Making a 962 Election on a Tax ReturnThe IRS must be notified of the Section 962 election on the tax return. printing. Thus, the reduced corporate rate of 21 percent will apply and the individual may claim an indirect credit with respect to any foreign taxes that the foreign corporation has paid. Federal Elections can be generated by using worksheets under General > Federal Elections. Joe Trader has a $100,000 Q1 2021 trading loss in securities, and he elects Section 475 by April 15, 2021, to offset the ordinary loss against wage income of $150,000. Enter the amount of tax to be imposed on Section 951(a) income. Below, please see Illustration 2 which discusses the potential federal tax consequences associated with a Section 962 election if an individual was the sole shareholder of two CFCs.Illustration 2.Assume the same facts in Illustration 1. SO, I open that third form, then use the empty boxes to type in what is required: ELECTION TO CAPITALIZE CARRYING COSTS In assessing the state impact of a Sec. 962 election should consider filing Forms 8993 and 1118 as a protective measure (see also Prop. Anyone considering a 962 election should also consider an election to defer tax under Section 954 of the Internal Revenue Code.Anthony Diosdi is a partner and attorney at Diosdi Ching & Liu, LLP, located in San Francisco, California. The current highest federal tax rate applicable to individual CFC shareholders is 37 percent. 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). Form 5471, Schedule I shows 100% of the total Subpart F income. 962 election for state income tax purposes. Welcome back! The taxpayer's virtual corporation can use deemed-paid foreign tax credits paid by the controlled foreign corporation to reduce the . Taxpayers who make a Sec. 962 election, which could result in the double taxation of income subject to the election in Georgia and other states that take a similar approach. IRC Section 962 elections allow individuals and certain trusts that are US shareholders of CFCs to be taxed on GILTI and subpart F income as if they were a domestic corporation. Thats the simple explanation. I have a client that is subject to the Gilti tax as well and per my understanding, by filing a 962 election, it can be taxed at 1/2 the corporate rate of 10.5% and further be reduced by any foreign tax attributed to this income. But, Tom has had the benefit of deferring his tax liability. For years, section 962 was a relatively obscure tax-planning mechanism. 1(h)(11)(C)). 962, individuals can make an election to pay tax on Subpart F income at corporate rates (and claim indirect foreign tax credits under Sec. If a GILTI high-tax exclusion election is made, the GILTI inclusion would be reduced by the amount attributable to the 30%-taxed foreign company. The 2020 Proposed Regulations would replace the reference to "books and records" with an "applicable financial statements" standard, providing for an order of priority when there are various forms of financial statements available. Depending on the facts and circumstances of the case, sometimes making a 962 election can result in a CFC shareholder paying more federal income taxes in the long term.Below, please see Illustration 3 which provides an example when a 962 election resulted in an increased tax liability in the long run.For Illustration 3, lets assume that Tom is the sole shareholder of FC 1 and FC 2.Only this time, FC 1 and FC 2 are incorporated in the British Virgin Islands. 2020-24, the taxable year in which the NOL arose, and the taxpayer's section 965 years. Select section 1 for the Name and Title of the person(s) when an Election requires a signature (or signatures). here. (b)Time and manner of making election. The proposed regulations provide that an election may be made for a CFC to exclude under 954 (b) (4)and thus exclude from gross CFC tested incomegross income subject to foreign income tax at an effective rate that is greater than 90 percent of the maximum U.S. corporate tax rate (18.9 percent based on the current rate of 21 percent). Computers can easily check for omitted gross income, simply by cross-checking the issuance of a Form 1099 by the payor against the existence of a gross income item on the payees tax return. It also allows individual CFC shareholders the ability to offset their subpart F liability with foreign tax credits for taxes paid by the CFC. Anthony Diosdi may be reached at (415) 318-3990 or by email: adiosdi@sftaxcounsel.com. The following diagram compares the treatment of a taxpayer who makes a section 962 election to one who does not: TheGILTI high-tax exclusionintroduced in final Treasury Regulation section 1.951A-2(c)(7) created a major new consideration for U.S. individual shareholders making section 962 elections. Under current law, this means that GILTI may not apply to the income of controlled foreign companies paying an 18.9% foreign tax rate or greater. Lets also assume that FC 1 and FC 2 did not pay any foreign taxes. Tom wholly owns 100 percent of FC 1 and FC 2. To show why a Section 962 Statement is needed and required, lets look a taxpayer who does not make a Section 962 election. Additionally, most states do not recognize the Sec. Individuals and pass-through entities receive no such benefits. An individual who makes the Section 962 election must send a statement to the IRS with their return. Toms total federal tax liability associated with the 962 election will be $77,004. Furthermore, the Preamble to the Final Regulations explains that the general rules concerning who is authorized to sign tax returns apply to the Section 965 election statements. Section 951(a) income elected to be taxed at corporate rates. A 21% corporate tax rate, a 50% deduction, and a foreign tax credit can greatly reduce an individual's tax liability and in some cases eliminate it entirely in the year in which the income is recognized. 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. Ask questions, get answers, and join our large community of tax professionals. 962 election is made, the amount of that income is included in the taxpayer's gross income. Such understanding is useful when assessing conduct and identifying potential claims and pitfalls. If the U.S. shareholder makes a section 962 election, the GILTI inclusion would be subject to a lower immediate rate of tax (10.5% effective rate at corporate level). Outside of Georgia, there is little to no mention of Sec. Tom paid 19 percent corporate taxes to the South Korea government. However, the U.S. shareholder would still have a taxable GILTI amount from the 0%-taxed foreign company. Form 1040, line 12a, has box 3 marked with the amount and Statement #1 entered as the description. A section 962 election allows an individual to be taxed as if he or she was a US corporate shareholder and to use Canadian taxes paid by Canco on the E & P as a credit against his or her US tax liability. 962(a)). (In Drake19 and prior, the entry is made on line 12a (3) of Screen 5) On the SCH screen: By having access to information from transaction to tax return, the IRS reduces the opportunity for taxpayers to fib. (5) Such further information as the Commissioner may prescribe by forms and accompanying instructions relating to such election. Summary. domestic corporation.". By using the site, you consent to the placement of these cookies. Only through a hypothetical computation can a CFC shareholder know if he or she will reduce his or her federal tax liability through a 962 election. Visit rsmus.com/about for more information regarding RSM US LLP and RSM International. 50% Section 250 GILTI Deduction with a Deadline! Except as provided in subparagraph (2) of this paragraph and 1.962-4, an election under this section by a United States shareholder for a taxable year shall be applicable to all controlled foreign corporations with respect to which such shareholder includes any amount in gross income for his taxable year under section 951(a) and shall be binding for the taxable year for which such election is made. Applying GILTIs rules for corporate indirect foreign tax credits and section 250 deductions, the $1,000 U.S. dollars of pre-tax income is eligible for a 50 percent deduction ($500 U.S. dollars) and the net income of $500 U.S. dollars is subject to a 21 percent U.S. corporate rate. Shareholder to be taxed on its GILTI in substantially the same manner as a U.S. corporation. The election may be made on an annual basis with respect to all controlled foreign corporations in which an individual is a United States shareholder, including those owned through a pass-through entity.1Individuals who make a section 962 election are taxed as if there was an imaginary domestic corporation interposed between them and a foreign corporation that creates GILTI or other Subpart F income (income of the foreign corporation which is taxable to the U.S. shareholder in the current year even if no dividend was paid). 1.962-2(b) requires the taxpayer to prepare and attach a statement. 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. Accordingly, an individual U.S. 1 How Section 962 Election for GILTI Works 2 GILTI 3 Corporations with GILTI Receive a 50% Deduction 4 26 U.S. Code 962 - Election by Individuals to be Subject to tax at Corporate Rates U.S. Code 5 962 Election Can Reduce and Eliminate GILTI Tax Liability 6 Golding & Golding: International Tax Lawyers Worldwide The more you buy, the more you save with our quantity discount pricing. FC 1 FC 2 TotalGILTI inclusion $81,000 $81,000 $162,000Section 78 gross up $19,000 $19,000 $38,000Tentative income $100,000 $100,000 $200,000Section 250 deduction -$50,000 $50,000 $100,000Net Income $50,000 $50,000 $100,000Corporate tax 21% $21,000Foreign tax credit -$38,000962 tax liability 0When the $162,000 E&P is distributed in a future year to Tom, the distribution will be subject to federal income tax. Sec. Montana voters chose electors to represent them in the Electoral College via a popular vote, pitting the Republican Party's nominee, incumbent President Donald Trump and running . 962 election is made, the U.S. individual will recognized GILTI income of $820,000 plus the IRC Sec. States shareholder may elect to have the tax imposed under chapter 1 on amounts that 250 and to claim a foreign tax credit, respectively. Thus, both spouses should sign any Section 965 election statements. Only income which is effectively connected to a United States trade or business is eligible for the deduction 962 election for corporate rates may also deduct 50% of the amount of the GILTI inclusion under Sec. More recently, the TCJA required U.S. shareholders to take into account their pro rata share of a CFC's global intangible low-taxed income (GILTI) in a way that is similar to Subpart F. The GILTI rules in new Sec. The net tax liability under Section 965 should be included . In the larger white box, enter a statement detailing the election being made that also shows how the taxpayer computed the tax. 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 In this case, does form 8992 not need to be used? As a result, the pro rata share of Subpart F income is part of the individual shareholders gross income. Later, there will be a complete recorded webcast/course materials package available. However, in this case, Tom made a 962 election. The tax then flows to Form 1040 Line 11 and a statement. If a Section 962 election is made, the reporting will be on Form 1118 instead of Form 1116. . Per the instructions it states to use Form 1118 specifically. 1Treasury Regulation section 1.962-2(a) 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! A section 962 election permits an individual U.S. 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. Individual Income Tax Return. 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. Sec. If a taxpayer is electing making the safe harbor election for a real estate enterprise under Notice 2019-07 and electronically filing his/her return, a signed copy of the election must be submitted as a PDF attachment to e-filed return reports Tax Notes Today.In an article in the March 11, 2019 edition of Tax Notes Today, Eric Yauch reports that IRS Office of Chief Counsel Attorney Robert . Note that you may need to make adjustments to the 962 Election Tax Worksheet when using Schedule J or Form 8615 to calculate tax. In this case Tom will owe an additional $59,994 (assuming federal tax from the first layer of 962 tax cannot be used to offset the second layer of 962 tax) in federal income tax (excluding Medicare tax). FC1 FC2 TotalGILTI Inclusion $81,000 $81,000 $162,000 Section 78 gross up 0 0 0Tentative taxable income $81,000 $81,000 $162,000Section 250 deduction -$40,500 -$40,500 -$81,000Net income after deduction $40,500 $40,500 $81,00021% corporate tax rate $17,010Foreign tax credit 0First layer 962 tax $17,010At the time of the 962 election, Tom will pay $17,010 in taxes (excluding Medicare tax). Form 1099 income is an example of a raw data to tax liability data trail available to the IRS. The Internal Revenue Service Criminal Investigation Process, Pre-Indictment Department of Justice Representation, Criminal Aspects of Failing to Disclose Foreign Financial Accounts, Residency Planning for U.S. Income Tax Purposes, U.S. Tax Planning for Foreigners Intending to own U.S Real Estate, Minimizing U.S. Tax Consequences of U.S. Citizens and Residents Working Overseas, Captive Insurance Compliance & Audit Representation, Report of Foreign Bank & Financial Accounts, FinCen Form 114 / Treasury Form TD F 90-22.1, Voluntary Disclosures of Foreign Financial Accounts, Report of Foreign Bank and Financial Accounts FBAR Litigation. Backup for the Sec. I would appreciate if you could pass on any information you found out about this. Section 986 uses the average exchange rate of the year when translating foreign taxes. If an IRC 962 election is made, do not report the relevant section 965(a) amount, the relevant section 965(c) deduction, the . It will be taxed at the corporate rate of 21%, and the individual U.S. shareholder will be allowed to take an indirect credit for foreign taxes the CFC paid on that income in the past. 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. Check out the TCJA overview! Individual shareholders need to evaluate whether a high-tax kick-out election is more beneficial compared to planning under Section 962, use of a domestic corporation (if available and can avoid domestic penalty tax rules) or check-the-box planning where the shareholders elects to treat the CFC as transparent and income and FTCs of the CFC pass . Marrying ESG initiatives to business tax planning, Early access to wages may require new employment tax analyses, Determining gross receipts under Sec. to make the election. For a corporate taxpayer, the combination of a reduced corporate rate, a special deduction, and access to indirect foreign tax credits (FTCs) largely mitigates the impact of GILTI except in scenarios where the foreign entity was paying an extremely low local tax rate. 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))). The statement shall include the following information: (1) The name, address, and taxable year of each controlled foreign corporation with respect to which the electing shareholder is a United States shareholder and of all other corporations, partnerships, trusts, or estates in any applicable chain of ownership described in section 958(a); (2) The amounts, on a corporation-by-corporation basis, which are included in such shareholder's gross income for his taxable year under section 951(a); (3) Such shareholder's pro rata share of the earnings and profits (determined under 1.964-1) of each such controlled foreign corporation with respect to which such shareholder includes any amount in gross income for his taxable year under section 951(a) and the foreign income, war profits, excess profits, and similar taxes paid on or with respect to such earnings and profits; (4) The amount of distributions received by such shareholder during his taxable year from each controlled foreign corporation referred to in subparagraph (1) of this paragraph from excludable section 962 earnings and profits (as defined in paragraph (b)(1)(i) of 1.962-3), from taxable section 962 earnings and profits (as defined in paragraph (b)(1)(ii) of 1.962-3), and from earnings and profits other than section 962 earnings and profits, showing the source of such amounts by taxable year; and. 951A affect the vast majority of U.S. shareholders of CFCs. The current regulation requires that the section 754 election statement (i) set forth the name and address of the partnership making the election, (ii) be signed by any one of the partners, and (iii) contain a declaration that the partnership elects under section 754 to apply the provisions of section 734 (b) and section 743 (b). FOR ASSISTANCE WITH YOUR PARTICULAR FACT PATTERN AND HOW TAX LAW PERTAINS TO THAT PATTERN, PLEASECONTACTOUR OFFICE TO ARRANGE AN ENGAGEMENT WHEREUPON OUR OFFICE CAN OFFER ADVICE IN THE COURSE OF THE ENGAGEMENT. Connect with other professionals in a trusted, secure, environment open to Thomson Reuters customers only. value in the foreign corporation may make a Code 962 election. 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 . IRC section 266 and Regulations section 1.266-1 (b) (1), election to capitalize interest, taxes and other carrying charges incurred during the tax year. reg. An IRC Sec. 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. 962 (Regs. 962 election for the taxable year ending December 31, 2018 must be made with the individual USS's timely filed federal income return for 2018, on Form 1040, which is due on April 15, 2019. The Section 951(a) income included in the Section 962 election on a CFC by CFC basis. 951(a) and 951A dictate how to include the income. The Section 962 Election. The member firms of RSM International collaborate to provide services to global clients, but are separate and distinct legal entities that cannot obligate each other. 962 in state statutes. And, just as importantly, we will talk about how to prepare a good Section 962 Statement. A taxpayer considering making this election should consult his or her tax professional or advisor to discuss his or her specific situation. When a U.S. individual makes a Section 962 election, the taxpayer is treated as owning the CFC through a fictitious domestic corporation. Thus, in this case, Toms federal tax liability associated with FC 1 and FC 2 (excluding Medicare tax) is only $32,400. The Section 962 Statement includes gross income inclusions and tax liability computations. I probably wont publish the notes as part of the webcast, but I will be sharing drafts on the blog. The only opaque part of the picture (to the IRS) is the raw financial data at the controlled foreign corporation level. No new contributions can be made. Noncorporate US shareholders have generally reduced the effect of GILTI by either making a section 962 election to be subject to corporate tax rates (thereby permitting a 50% deduction and a foreign tax credit), by contributing the shares of CFCs to a domestic C corporation, by engaging in check-the-box planning to treat each CFC as a transparent

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