Unless otherwise noted, contributors are members of or associated with RSM US LLP. The statement bridges that critical data gap to make the governments job easier. With that said, Section 962 requires that subpart F and GILTI inclusions be included in the individual CFC shareholder income again to the extent that it exceeds the amount of the U.S. income tax paid at the time of the Section 962 election. GILTI Tax Example- US Corporation. The Section 962 election is made annually for all CFCs in which an individual is a U.S. shareholder, including indirectly through pass-through entities. Tax Section membership will help you stay up to date and make your practice more efficient. The more you buy, the more you save with our quantity discount pricing. Pass-through structures such as S corporations are popular in the United States in large part because they eliminate the domestic double-taxation of corporate income. Calculating income tax liability is a trivial exercise. CFC shareholders can also claim foreign tax credits for the foreign taxes paid by the CFC. FC 1 and FC 2 are CFCs. 1(h)(11)(B)). Subpart F requires U.S. shareholders of a controlled foreign corporation (CFC) to take into current income their pro rata share of Subpart F income. (d) Effect of . If the Cyprus company generates $1,000 U.S. dollars of income, that income is first subject to $125 U.S. dollars of Cyprus taxes, then potentially the entire $875 U.S. dollars remainder could be currently taxed as GILTI and subject to an additional 37 percent U.S. individual tax rate in the year incurred2(note that GILTI inclusions are not eligible for the new section 199A business income deduction3). Lori Anne Johnston, CPA, J.D., is a manager, Washington National Tax for RSM US LLP. When an individual U.S. shareholder of a CFC has an income inclusion under either Subpart F or GILTI and makes an election pursuant to Sec. The right choice will vary depending on each taxpayers unique circumstances andneeds. Individual taxpayers will also be allowed to make an election under section 962 to have the section 965 income taxed using the corporate rates and take a foreign tax credit for a portion of the foreign taxes that are deemed paid by the foreign corporation; they will then be required to prepare and attach a sworn statement and elections to their . The only requirement is that you attach a statement to your return claiming your election, it doesn't affect your tax calculation and is normally the last page of a paper filing. Consider a U.S. individual taxpayer who is a U.S. shareholder in one foreign company subject to a foreign income tax rate of 30%, and one foreign company subject to a foreign income tax rate of 0%. And, just as importantly, we will talk about how to prepare a good Section 962 Statement. What you do is to go to screen 45.3 under other taxes. 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. 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. 962 election should keep detailed workpapers and records regarding: Where an individual makes a Sec. Under the tax treaty, the $162,000 distribution will be eligible for a preferential 20 percent qualified dividend rate. 1.962-1, issued in March 2019, allows individuals to make a Sec. Tom received pre-tax income of $100,000 FC 1 and $100,000 of pre-tax income from FC 2. FC 1 and FC 2 are both CFCs. 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. Association of International Certified Professional Accountants. Note: This article was revised on December 13, 2016, to clarify that the subject is the Hospice . 962 (Regs. 962 and the underlying regulations repeatedly say that individuals who make a Sec. This article is not legal or tax advice. 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. 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. Proc. However, there is a reason this election went largely unused until now. To make a Section 962 election for the Section 965 tax, follow these steps: Note that when the GILTI income amount from Form 8992 is included in "other income" (Form 1040, Schedule 1, line 8), and you are electing to tax the amount at the corporate rate with the Section 962 Election, you will need to make an offsetting entry on Screen4, line24z. For additional information about these items, contact Bill Tziouras ([email protected]) and Ramon Camacho ([email protected]). Prudence suggests filling in gaps like these with a roll your own statement, even when not required. You can see a possible discontinuity. Individual Income Tax Return. are included in the individuals gross income under section 951(a) be an amount equal It does allow me to input the 962 tax (21%) on GILTI income. Thus, in this case, Toms federal tax liability associated with FC 1 and FC 2 (excluding Medicare tax) is only $32,400. . Upon application by the United States shareholder, an election made under this section may, subject to the approval of the Commissioner, be revoked. Thats the simple explanation. Proconnect has a field where you can enter the 962 tax and the election (under Other Taxes, Schedule J). 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. 165(g)(3), Recent changes to the Sec. 2020-24, the taxable year in which the NOL arose, and the taxpayer's section 965 years. In the next chapters we will talk about what information is required for the Section 962 Statement. 962 election can be made on a year-on-year basis and is made on a timely filed U.S. tax return, including amended returns, but it will apply to all appropriate CFCs of the shareholder making the election for the year. This Tax Alert addresses how the Final Regulations affect IRC Section 962 elections. The outcome: a current effective tax rate of approximately 45 percent, regardless of whether the individual owner draws a dividend or reinvests the business earnings. 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 . While the impact of a Sec. 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. For a taxpayer whose only GILTI exposure is from such high-taxed foreign companies, the section 962 election may no longer be necessary as the GILTI inclusion may be fully eliminated. Examples of 962 ComputationsWhen a CFC shareholder does not make a Section 962 election, he or she is taxed at ordinary income tax rates and the CFC shareholder cannot claim a foreign tax credit for foreign taxes paid by the CFC.Below please see Illustration 1 which demonstrates the typical federal tax consequence to a CFC shareholder who did not make a Section 962 election. Exactly how much tax is due depends on the amount of tax originally paid under Sec. Sign up to get the early-bird pricing here. Lets Have a Conversation +1 (626) 689-0060. Section 10, hospice care is a benefit under the hospital insurance program. The first category is excludable Section 962 E&P (Section 962 E&P equal to the amount of U.S. tax previously paid on amounts that the individual included in gross income under Section 951(a). In this example, by making the 962 election, Tom increased his tax liability by $17,010 ($77,004 $59,994 = $17,010). A FTC is available of up to 80 percent of the Cyprus taxes, or $100 U.S. dollars. The Sec. 962 election with respect to a GILTI inclusion. 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. 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. This number will be included on line 5 of the Section 962 Election Tax Worksheet. Washington, D.C. (October 31, 2018) - The American Institute of CPAs (AICPA) today submitted an extensive set of recommendations and comments to the Internal Revenue Service (IRS) about proposed regulations (REG-104226-18) regarding the transition tax . Comprehensive research, news, insight, productivity tools, and more. A Section 962 election is an election made by a domestic shareholder of a controlled foreign corporation to be taxed at corporate rates. Sec. If both foreign companies are profitable, the U.S. shareholder may recognize a GILTI inclusion on the combined income of both companies. 962, Election by Individuals to Be Subject to Tax at Corporate Rates. What if the United States shareholder owns less than 100% of the controlled foreign corporation? If this return has multiple units of the 962 screen, complete this section only on the first unit of the 962 screen. The election is administratively simpler than forming an actual intermediary corporation,but subtle differences in distribution ordering and other rules could cause it to provide different tax outcomes which may need to be modeled in advance. Now the government does not have a tax liability question to answer. The application for consent to revocation shall be made by the United States shareholder's mailing a letter for such purpose to Commissioner of Internal Revenue, Attention: T:R, Washington, DC 20224, containing a statement of the facts upon which such shareholder relies in requesting such consent. See IRC Section 986(b); 989(b)(3). 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. However, when an actual distribution is made from income previously taxed (PTEP), the distribution less any federal taxes actually paid under the 962 election will be taxed again. These figures are then entered into 1040. However, that same dividend paid by a nonqualified foreign corporation would be taxable at full ordinary rates to that individual. 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. The Global Intangible Low-Taxed Income tax was put in place to counter-act profit shifting to low-tax jurisdictions.
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