Thus, when a foreign corporation makes a distribution to a United States shareholder who has made a section 962 election, the individual may pay tax at normal ordinary income rates but only on the amount of the distribution that exceeds the amount of tax previously paid as a result of the section 962 election. 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. Corporations are required to file Form 8993, Section 250 Deduction for Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI), and Form 1118, Foreign Tax Credit Corporations, in order to calculate the deduction under Sec. Otherwise, the system thinks it is additional tax, double counts it and doesn't re-compute it. Form 1040, line 12a, has box 3 marked with the amount and Statement #1 entered as the description. However, a distribution from a qualified foreign corporation would likely be eligible for the lower rates applicable to qualified dividends. 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. 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. 26 U.S. Code 962 - Election by individuals to be subject to tax at corporate rates U.S. Code Notes prev | next (a) General rule Under regulations prescribed by the Secretary, in the case of a United States shareholder who is an individual and who elects to have the provisions of this section apply for the taxable year (1) All rights reserved. The election is made by filing a statement to such effect with this tax return. 2020-24, the taxable year in which the NOL arose, and the taxpayer's section 965 years. 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. 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. 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. The phrase "included in gross income" should not be overlooked. Enter the foreign taxes paid to be reported on the Section 962 Election Statement. E&P distributed from a corporation to its shareholders generally qualifies for federal tax purposes as a dividend (Sec. This is because South Korea is a country that has entered into a bilateral tax treaty with the United States. This article was originally published in September 2018; it has been updated to reflect the release of final regulations related to sections 250, 951A, and 962. 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. Some are essential to make our site work; others help us improve the user experience. IRC 163(j) The TCJA limited the 163(j) business interest deduction. Tom paid 19 percent corporate taxes to the South Korea government. Third, when the CFC makes an actual distribution of earnings that has already been included in gross income by the shareholder under Section 951(a) or Section 951A requires that the earnings be included in the gross income of the shareholder again to the extent they exceed the amount of U.S. income tax paid at the time of the Section 962 election. Enter the amount of tax to be imposed on Section 951(a) income. (In Drake19 and prior, the entry is made on line 12a (3) of Screen 5) On the SCH screen: 250. Sec. B. Attribution Rules in Sections 958(b) and 318(a) . Moreover, there is often a lack of guidance on any particular issue. 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. Individuals receiving GILTI inclusions may also be subject to an additional Medicare tax of 3.8 percent. value in the foreign corporation may make a Code 962 election. 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 When an actual distribution is made, the earnings and profits (E&P) are "included in gross income" to the extent they exceed the amount of income tax paid by such shareholder under Sec. This information chain from Form 5471, Schedule I, to Form 1040, Schedule 1, to Form 1040 gives the IRS a complete picture. That term is defined as either a corporation incorporated in a U.S. possession (e.g., Puerto Rico or Guam) or a corporation "eligible for benefits of a comprehensive income tax treaty with the United States" (Sec. On July 10, 2020 I will present a live Section 962 webcast that goes into excruciatingly painful detail about preparing a Section 962 tax return. The IRS has a complete picture of how the controlled foreign corporation's Subpart F income ends up creating that precise income tax liability reported by the individual United States shareholder on his/her Form 1040. The Global Intangible Low-Taxed Income tax was put in place to counter-act profit shifting to low-tax jurisdictions. A section 962 election permits an individual U.S. Select section 1 for the Name and Title of the person(s) when an Election requires a signature (or signatures). First, the individual is taxed on amounts in his gross income under corporate tax rates. 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). 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. Therefore, the U.S. taxable income on the inclusion is $500,000. The Section 951(a) income included in the Section 962 election on a CFC by CFC basis. 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 . You have to manually tell them what to credit. In this case, does form 8992 not need to be used? You can see a possible discontinuity. Accordingly, an individual U.S. 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. 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. 965 inclusion amounts by a taxpayer that made a section 962 election for the section 965 inclusion year. If you are in need of legal or tax advice, you should immediately consult a licensed attorney. Suite #100 Pleasanton, CA 94588, 2598 E. Sunrise Blvd. ConclusionAnyone considering making a 962 election should have hypothetical computations of federal tax liabilities with and without the Section 962 election prepared before the election is actually made. Prudence suggests filling in gaps like these with a roll your own statement, even when not required. The current highest federal tax rate applicable to individual CFC shareholders is 37 percent. Enter the pro rata share of gross earnings and profits from the CFC to be reported on the Section 962 Election Statement. 962 election. This is where the controlled foreign corporations Subpart F income is revealed to the IRS. Individuals making a 962 election will be permitted to claim a Section 250 deduction. 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. Under these circumstances, it is not too difficult to imagine scenarios where a CFC shareholder pays more in federal, state, and foreign taxes than the actual distributions they receive from the CFC. If in a future year those $875 U.S. dollars of earnings are distributed, the first $5 U.S. dollars will be non-taxable in the U.S., and the remaining $870 U.S. dollars will be treated as a qualified dividend to the shareholder taxable at 20 percent, for an extra $174 U.S. dollars of U.S. tax at the shareholder level. See IRC Section 986(b); 989(b)(3). Section 1.962-2(b) lists the information that must be included on the IRC Section 962 election statement and Ive listed that Regulation here for your easy reference to generate such statement. I had also filed the 8992 at the individual level and for lack of guidance, I made an entry to other income to back out the GILTIincome that flows from form 8992 with a reference to "GILTI taxed at Corp rates-See 982 tax on Sch. section 1.964-1(c)(5)) of CFCs may make a GILTI HTE election by filing a statement with eith er a timely filed original return or an amended tax return as long as (1) the amended return is filed within 24 months of the Click HELP screen on any line to see exact wording of the election(s). 962 election at the federal level is relatively clear, state tax treatment of the election is murky at best. The FTC offsets $100 U.S. dollars of the $105 U.S. dollars of corporate-level tax and, assuming the Cyprus earnings are not distributed to the shareholder, there are just $5 U.S. dollars of residual U.S. tax in the current year. to make the election. (a)Who may elect. Sample Hospice Election Statement . Greg, Have you found out any information on this yet? A second wrinkle appears in the Section 962 election too. Now the government does not have a tax liability question to answer. reg. Your online resource to get answers to your product and industry questions. The government just has an accounts receivable problem to solve. shareholders of a controlled foreign corporation (CFC) must include any subpart F income or global low-taxed income (GILTI) as ordinary income on their taxable income. 962 election is made, the amount of that income is included in the taxpayer's gross income. Anthony Diosdi advises clients in tax matters domestically and internationally throughout the United States, Asia, Europe, Australia, Canada, and South America. SO, I open that third form, then use the empty boxes to type in what is required: ELECTION TO CAPITALIZE CARRYING COSTS A Section 250 deduction allows U.S. shareholders to deduct (currently 50%, but decreases to 37.5% but decreases to 37.5% for taxable years beginning after December 31, 2025) of the corporations GILTI inclusion (including any corresponding Section 78 gross-up). The basics of Sec. (2) Revocation. 1Treasury Regulation section 1.962-2(a) 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. In fact, most only partially conform or do not conform at all. 1.962-2 - Election of limitation of tax for individuals. Distributions actually received by the taxpayer during the year on a CFC by CFC basis with details on the amounts that relate to 1) excludable Section 962 E&P 2) taxable Section 962 E&P and 3) E&P other than 962. Making a 962 Election on a Tax ReturnThe IRS must be notified of the Section 962 election on the tax return. I would appreciate if you could pass on any information you found out about this. A CFC will probably use a foreign currency as its functional currency. The election statement must state that the taxpayer is electing to apply 172(b)(1)(D)(v)(I) under Rev. Individual Income Tax Return. Calculating income tax liability is a trivial exercise. The box called Section 962 tax should be the credit you compute and should be negative. 1.962-2(b) requires the taxpayer to prepare and attach a statement. In the case of distributions of the CFC, the amount of deemed distributions and the earnings and profits out of which the deemed distribution is made are translated at the average exchange rate for the tax year. In this example, by making the 962 election, Tom increased his tax liability by $17,010 ($77,004 $59,994 = $17,010). (d) Effect of . 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. There are no special forms that need to be attached to a tax return. Welcome back! 962 and the underlying regulations repeatedly say that individuals who make a Sec. FC 1 FC 2Pretax earnings and profits $100,000 $100,000Foreign income taxes $19,000 $19,000Earnings and profits $81,000 $81,000Taxable GILTI inclusion $81,000 $81,000Assuming that Tom did not make a Section 962 election, federal tax liability on the GILTIInclusion will be as follows: FC 1 $81,000 FC 2 $81,000Total federal tax liability $162,000 x 37% = $59,994 Since Tom did not make a Section 962 election, for U.S. federal income tax purposes, he cannot a deduction for the foreign income taxes paid by his CFC.As discussed above, CFC shareholders making a Section 962 election are taxed at favorable corporate rates on subpart F and GILTI inclusions. 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. To be eligible to elect hospice care under Medicare, an individual must be entitled to Part A of Medicare and be certified as . 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. However, that same dividend paid by a nonqualified foreign corporation would be taxable at full ordinary rates to that individual. Without the election, Joe . 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.