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Demystifying IRC section 965 Math

For foreign earnings, an overview of the taxation.

With the bit of time of professionals or taxpayers to prepare for them, the tax code’s tax jobs and cuts introduced many changes. The revision of internal revenue code section 965, one of the most complex changes involved in it, maintains the United States taxes earnings from ownership in foreign corporations. To pay the required taxes and proper calculation, the author provides a detailed demonstration and gives a brief overview of the new IRC section code 965.

Internal revenue code (IRC), the newly revised section 965, looks very little like its old self; in fact, it also represents a new way of taxing foreign corporations. Dividends received deduction introduced as a part of the creative act and American jobs of 2004. The old section 965 was the one year temporary. Enacted by the jobs act and tax cuts of 2017 (JATC), the new section code 965 attributes to the shareholders for the U.S. taxes the retained earnings of foreign corporations. Before 1, January 2018 for the last tax year of the business beginning, the income inclusion calculated of the foreign corporation on the U.S. shareholders tax return will include the untaxed earnings. Thus, in previous years’ tax returns that they have not had to include most of the U.S. shareholders’ future tax returns will contain income. Through complex calculations and profits (E & E&P) allocated to U.S. shareholders, this will consist of post – 1986 earnings. A single year is a scary proposition for many, the thought of repatriating accumulated foreign profits of 31 years. Owed without interest and over eight years, the taxpayer pays any balance, and the tax rate for these repatriated earnings is a discount.


Unfortunately, how to do the actual calculations and how it interacts with other existing sections of the tax code, unfortunately, IRC section code 965 present some uncertainly around. From the new rules after the beginning of the filing season 2018 tax returns containing income, the late enactment of the tax cuts and jobs act (TCJA) required the IRS to process for a tax return to revise forms and updates its system. This led to incomplete and late releases of official guidance, coupled with the already strained budget. On the tax forms how to execute the IRC section code 965 transaction taxes, on 15 March, the IRS published a set of FAQs that provided some practical guidance. Form 5471 by the filing deadline of 17 April, the IRS did not finish revising. After 2 April, until containing the repatriation of earnings, their system was not ready to accept electronically filed tax returns.


Furthermore, if they intended to pay over eight years; tax liability by 17 April, in time for them to pay 8% of the section 965 CAPs initially needed to have all of a Client’s tax liabilities computed. The necessary calculation provided by IRS publication 5292 and contained an error and confusion in the worksheet, so it was not published until 6 April. Subsequently, eight years were extended for election dates to pay over and take advantage of these changes. Leeway was allowed for CAPs to amend early filed returns. On 1 August, the IRS released 249 pages of proposed regulations and the revision to form 5471. This author anticipates that will have to be released additional clarifications, hopefully before the new filing season begins.

Who is a U.S. shareholder and how to the changes, it is essential to go deeper than a glossary of key and the conceptual level of terms to recognized, constructive ownership rules will affect taxpayer and how to repeal the IRC section 958(b)(4), and what is a foreign corporation controlled. The newly required statement and on the tax forms how to run arrives and math at the correct numbers to put on records, this article will provide an overview of the new IRC section 965 and illustrates.


Here are some basics of IRC section 965:

To pay the required tax, to be U.S. shareholders [that will be defined in IRC section 957(c)] and all the U.S. persons who meet the criteria, their tax returns must include their pro-rata share of deferred earnings from foreign corporations. All in the above, if the taxpayer is so elects (with no interest), the IRC section 965(h) (1) allows the tax liability to be paid over eight years, and the rate is more favorable than in the past. Before 1, January 2018 their tax returns included the last taxable year of the foreign corporation that, making all the taxpayers, should have begun these disclosures and payment (i.e., their tax returns of 20170.


As a portion of the accumulated E&P on their tax returns with positive reserved post – 1986 E7P will include in their taxable income, and the gist is the U.S. shareholders of foreign corporations, how these taxes are cannot be answered in a couple of short sentences that are paid and calculated. The amount will depend on whether the corporation was assets or cash-heavy. That had negative E & E & E&P, also such things as whether the U.S. shareholders also owned a foreign corporation. As well as any carried forward from the last ten years, they have the current year taxpayers will be allowed to utilize foreign tax credits, as long as they are for the same income category to offset the section 965. That is deemed paid by the foreign corporation to take a foreign tax credit for a portion of the foreign taxes. Under section 962, to have the section 965 income taxed using the corporate rates, individually, taxpayers will also be allowed to make an election. Election to their tax return, and they will be required to prepare and attach a sworn statement. Previously taxed income and tax pools must be adjusted when the returns have been completed. Regulations must be formulated and the plan for next year to mitigate the new global intangible low taxed income (GILTI) and anti-abuse tax (BEAT) and base erosion.

With the additional example and clarification in the proposed regulations, the publication 5292 and the basic steps are outlined in notice 2018 – 7, 2018 – 13 the section 965 FAQs.


As an example, calculating IRC section 965 taxable incomes:

The IRC section 965 inclusion years is 2017, and every corporation is a calendar year reporter. And consider U.S. shareholders of three foreign corporations.

Step 1:

For IRC section 965, is the client a U.S. shareholder? Of a non-U.S. corporation, more than 10% by value or vote, this term includes U.S. citizens, resident aliens, green card holders, and domestic entities that own (constructively, directly, or indirectly). Known as specified foreign corporations (SFC), a foreign corporation with U.S. shareholders; any foreign corporation with one or more domestic corporate shareholders, including controlled foreign corporations (CFC). IRC section 965(e) (2) expands CFC to include 10 – 15 corporations is an essential caveat to this decision is the fact. It is expected from the application of IRC section 965, under the traditional definition, not a CFC and if the foreign entity is also a passive foreign investment company (PFIC). Note that some taxpayers in prior years will now be under U.S. shareholders who expanded the new definition of CFC where they were not.

Furthermore, each corporation is considered an SFC. At least 10% of each company the taxpayer in the example above is considered U.S. shareholders because it owns.

Step 2:

Is it carrying a deficit on the balance sheet, or does the SFC have accumulated post – 1986 E&P? Required some math for the correctly answering of this question; on two different dates (2, NOV. 2017 and 31, DEC. 2017), the number is calculated twice and does not include connected effectively U.S. income (under a different code section which is already being taxed), (another code section also taxed) subpart F income, and previously taxed income (PTI). 2 November 2017 was the chosen date because it was the date when the tax bill was introduced in the house of representatives; the earnings subject of taxation it was intended to negate any preemptive movements to lower, once the statement was public, the cash position (on the earnings which dictates the tax rate that will be imposed). 1, January 1987, this number does not include E&P prior when the corporation did not meet the definition of an SFC and nor does it has E&P from periods.

The taxpayer officially has a deferred foreign income corporation (FDIC), and if the amount for both testing dates is a positive number and after the requisite calculations are pre–formed. Conversely, the taxpayer is considered to have an E&P deficit foreign corporation and if the amount for both dates is negative. The corporation is an FDIC if the number is positive E&P on one and negative on the others. (See notice section 3.10, 2018 – 13) that there is a particular situation where a CFC is neither.

In this example for the taxpayer, after a negative adjustment for the U.S. (ECI) effectively connected income, current year subpart F, and PTI, CFC1 and considered DFICs and are CFC, 3 have positive E&P and is regarded as an E&P deficit foreign corporation. In contrast, it has a negative accumulated post – 1986 E&P bye CFC 2.

Step 3:

The earnings amount calculates the IRC section 965(a). For each FDIC, accumulated of post – 1986 E&P starts with the larger amounts. For this step, ignore the E&P deficit of foreign corporations. For each FDIC by the taxpayer’s ownership percentage, multiply the E&P for each testing date; the IRC section 965(a) earnings amount is the greater of the two. For a total E&P amount of $168,250 of the example of taxpayer, this is $11,250 for CFC 3 and $157,000 for CFC1. (See Exhibit 2).

Step 4:

For inclusion, the amount calculates the IRC section 965. By the prorated E&P deficit from the deficit CFSs and the earning amount for each FDIC, first, reduce the IRC section 965. To reflect the taxpayer’s ownership percentage using the loss amount on the 2, November is the testing date and prorates each FDIC result.

[ total deficit E&P × accumulated post – 1986 E&P of each deficit CFC ÷ total reserved post – 1986 E&P for all CFCs]

Finally, from each FDIC accumulated post – 1986 E&P, subtract the prorated deficit. As stated in notice 2018-13, this result is the IRC section 965 inclusion amount. Calculation of taxpayer’s example is shown in exhibit 3.

Step 5:

Aggregate the cash position to determine the taxpayers. Inclusion amount to the two tax rates of 15.5% and 8%. This calculation is required to apportion the IRC section 965. The balance will be taxed at the lower rate, and the amounts allocated to the cash positions will be taxed at the higher rate.

Cash equivalents as determined using two different dates. The aggregate cash position is the greater of cash: inclusion year of 31 December (generally 2017 for individuals), and 31 December of the average of the two prior years (typically 2015 and 2016). For each corporation, this is then prorated to the taxpayer’s percentage of ownership.

Foreign cash or cash equivalents and the term cash include the U.S., receivable, net accounts (less payable receivable), government securities, short term obligations, certificates of deposit, actively traded investments, and IRS identifies as economically equivalent (such as loans between related parties) and any other assets.

The example taxpayer had a more prominent aggregate cash position on 31 December 2017, as seen in exhibit 4, at $76,250. The excess will be taxed at 8%; this is the portion of the inclusion amount subject to a 15.5% tax rate.

Step 6:

Apply and calculate the participation exemption. To be assessed at the appropriate rates for the final tax liability, the return must be reduced the amount of income added to taxable income. For the long-term capital gains on form 1116 as the capital gains rate differential adjustment, this calculation uses the same thought process and foreign tax credit. Areas follow the reduction percentages:

  • Equivalent percentages 55.7% = 15.5% rate ( for the aggregate cash position)
  • Equivalent percentages 77.1% = 8% rate (for the balance)

This example for the taxpayer calculation is in exhibit 5.

Step 7:

Line 21, Drop the result on form 1040 and add this number together, with a marginal notation of “SEC 965”. On the tax return, this is the amount of income to be included.

Calculating for the foreign tax credits:

Suppose the taxpayer is making a section 962 election to be taxed as a corporation. The next step is how foreign taxes deemed paid by each of the foreign corporations and entail the determination can be utilized to reduce the IRC tax obligation. Of course, another few rounds of math are involved.

Step 8:

First, for the accumulated post – 1986 E&P and determine the individual’s pool of deemed taxes. To assess the balance of the tax pool uses the regular rules.

Step 9:

Foreign tax credit computes the amount disallowed. They must be reduced to prevent double-dipping; before the deemed, paid taxes can be used. Subpart F inclusions the first reduction is for the amount allocated to the current year.

[Deemed tax pool × subpart F income ÷ (accumulated E&P – PTI)

It is not part of the IRC section 965 computation, but this amount is available as a foreign tax credit. When making section 962, form 1118, the transition tax’s election must be attached to the return.

Next, the applicable participation exemption percentage reduces the deemed paid taxes. Against the resulting tax before applying for credits, that reduction must be mirrored since the income added to the return is reduced. Also, an amount equal to the creditable taxes will be added to schedule B as a dividend. The IRC section 78 gross-up rules still apply under section 11 and section 965 exclusion amount to calculate the tax liability. Would be eligible who makes the election under IRC section and note that only individuals and C corporations.

Tax is allocated to current subpart F income, using basic proration equations, then inclusion amount to section 965(a). The calculation of the taxpayer’s example is shown in exhibits 6 and 7. Its tax pool is not used in the current year. Note that since CFC 2 was in a deficit position, but instead forward carried.

Step 10:

Section 78 grossed up to the return and compared the tax after adding the IRC section 965 income. That can be paid in multiple installments, and a single installment and the difference in tax will be the IRC section 965 amount. Line 44, on form 1040, and the marginal notation “965” should be added. Line 73, make an entry on form 1040. If the taxpayer elects to pay the amount over eight years, add “TAX” and tick box d to be paid overtime.

Final tax calculations of taxpayer’s example are shown in exhibit 8 and exhibit 9, over eight years contains a schedule of payments, and make should that election of taxpayer’s.

Step 11:

Steps 1 – 10 should be attached and completed to the filing, contain specific numbers from the calculations outlined, and an “IRC 965 transition tax statement”. At the bottom, signed by the taxpayer and prepares, should be sure to include a jurat, if not using a template available on the IRS website. Also, including the eight-year payment option, if the taxpayers are making any of the allowed elections, contain all the required information. In proper form, the election should be attached. The due date of the following tax return (without extensions), the taxpayer must make the first and second installment payment no later and keep the section 962 election valid. Lastly, such as forms 8938, 5471, and the FBAR (report of foreign bank and financial accounts), and be sure to file any other documents that may be required.