What is Section 965 Transition Tax?

 Posted on July 25, 2018 in Taxation Law

The tax laws in the United States are complex and ever-changing. As the Internal Revenue Service (IRS) works to ensure that taxpayers are paying their fair share, the agency regularly announces compliance campaigns to address new issues that arise. Recently, the Large Business & International (LB&I) division of the IRS noted several areas it would be focusing on, and one notable compliance campaign involves taxes on foreign earnings under Code Section 965.

Transition Taxes on Repatriated Foreign Earnings

Section 965 of the Internal Revenue Code requires taxpayers who are shareholders in certain foreign corporations to pay a transition tax on foreign earnings when these earnings are repatriated to the United States. Depending on the profits and losses of the foreign corporations taxpayers hold shares in, they may be able to reduce the amount of these earnings that are included in their income. The transition tax rates are 15.5 percent for inclusions equal to the taxpayer’s aggregate foreign cash position and 8 percent for gross income above that amount.

Taxpayers who may be affected by Section 965 include shareholders of controlled foreign corporations (also known as deferred foreign income corporations), as well as shareholders that are domestic corporations. Shareholders may include individual taxpayers, partnerships, estates, trusts, S corporations, REITs, and tax-exempt organizations.

When determining whether they are subject to transition taxes, taxpayers should look at interests held in foreign corporations that had a tax year that ended within the taxpayer’s previous taxable year. They should then determine whether there were any earnings that had not been taxed during that year. If any transition taxes are owed, they can be paid in a single lump sum or in an annual installment plan over eight years. Taxpayers who fail to comply with their requirements for reporting foreign income and paying transition taxes may be subject to penalties and interest.

Contact a San Jose, CA Tax Law Attorney

The requirements for reporting income earned from foreign corporations and paying transition taxes on repatriated earnings are complex, and taxpayers may have difficulty understanding how they are affected by recent changes to the tax laws. However, it is important to report any untaxed foreign earnings and become complaint in order to avoid tax penalties. If you need help determining your tax liabilities on foreign income or addressing compliance issues, John D. Teter Law Offices can provide you with the assistance and representation you need. To schedule a consultation with our San Jose tax compliance attorney, call our office at 408-866-1810.

Sources:

https://www.law.cornell.edu/uscode/text/26/965

https://www.irs.gov/businesses/section-965-transition-tax

https://www.irs.gov/newsroom/questions-and-answers-about-reporting-related-to-section-965-on-2017-tax-returns