If this return has multiple units of the 962 screen, complete this section only on the first unit of the 962 screen. Thus, in this case, Toms federal tax liability associated with FC 1 and FC 2 (excluding Medicare tax) is only $32,400. Any foreign entity through which the taxpayer is an indirect owner of a CFC under Section 958(a).3. (b) Time and manner of making election. 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. Marrying ESG initiatives to business tax planning, Early access to wages may require new employment tax analyses, Determining gross receipts under Sec. Section 10, hospice care is a benefit under the hospital insurance program. Individuals receiving GILTI inclusions may also be subject to an additional Medicare tax of 3.8 percent. The IRS wants to see tax data connecting gross income to tax liability computations. I have prepared a 962 election for an individual but its pretty manual with a somewhat rough implementation. 1(h)(11)(C)). Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI), with a U.S. tax return to calculate GILTI. The answer, in brief, is to fill an information gap. 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). If this individual makes a section 962 election, his or her current tax liability will be reduced. 962 election must calculate their income, deductions, and foreign tax credits "as if [the income inclusions] were received by a domestic corporation." 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) Finally, the Joint Explan-atory Statement of the Committee of Conference to Public Law 115-97 states that: Should individual. Once made, the election is irrevocable. Greg, Have you found out any information on this yet? CFC shareholders can also claim foreign tax credits for the foreign taxes paid by the CFC. There is a popup box under that for you to enter your election language. This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction. The Section 962 Statement includes gross income inclusions and tax liability computations. 962 election seems like a slam-dunk for an individual U.S. shareholder in a CFC. A second wrinkle appears in the Section 962 election too. We'll do a step-by-step walkthrough of a sample statement. How do I make a Section 962 election in Drake Tax? Sign up to get the early-bird pricing here. The I.R.S. It also allows individual CFC shareholders the ability to offset their subpart F liability with foreign tax credits for taxes paid by the CFC. If a CFC is more interested in deferring his or her tax liability than obtaining tax savings, a 962 election may provide a deferral of tax. Therefore, from a federal tax planning perspective, it is important to consider all the facts and circumstances and to carefully model out the tax impacts on future cash distributions as well as the administrative costs associated with the additional compliance related to a Sec. Lori Anne Johnston, CPA, J.D., is a manager, Washington National Tax for RSM US LLP. US final GILTI/FDII regulations under section 250 include guidance on section 962 elections, pass-through FDII reporting | EY - Global About us Back Close search Trending Why Chief Marketing Officers should be central to every transformation 31 Jan 2023 Consulting The CEO Imperative: How will CEOs respond to a new recession reality? 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. Pro rata share of gross earnings and profits. This brings the total worldwide tax liability to $304 U.S. dollars, a much better answer than the $449 U.S. dollars of worldwide tax in the absence of the election. Note: This article was revised on December 13, 2016, to clarify that the subject is the Hospice . 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. The threat of audit (and its consequences) is used to keep the taxpayer honest with the underlying accounting data at the controlled foreign corporation level. 962 election affects the rate of tax paid on the income, it does not affect the amount of income recognized. 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. 250 and to claim a foreign tax credit, respectively. There is no tax form created just for the individual taxpayer making a Section 962 election, so the Section 962 Statement requirement is the governments way of telling you to do the governments job at your expense. Upon application by the United States shareholder, an election made under this section may, subject to the approval of the Commissioner, be revoked. 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. 962 election should be treated for state purposes. Enter the name, EIN, address, and tax year of the Controlled foreign corporation. 316(a)). Income reported under Section 951(a) for 2019: Section 956 Inclusion _________ Inc. XXXXXXX, Section 956 Inclusion __________ XXXXXXX, Global Intangible Low-Taxed Income XSXXXXX, Total Income Reported Under 951(a) for 2019 XXXXXXXX, Tax at 37% Marginal Rate XXXXXXX, Tax at 21% Corporate Rate XXXXXXXXX, Tax Savings from Election XXXXX. will take the financial data and prepare Form 5471, Schedule I to show the corporations total Subpart F income. That dividend paid from a qualified foreign corporation would be taxed currently at 20% plus potentially an additional 3.8% net investment income tax. 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. Individual taxpayers who are U.S. shareholders in multiple foreign companies operating in different jurisdictions and subject to different foreign income tax rates may need to more carefully consider whether the section 962 election or the GILTI high-tax exclusion election provides a better outcome. The IRS has a complete picture of how the controlled foreign corporations Subpart F income ends up creating that precise income tax liability reported by the individual United States shareholder on his/her Form 1040. Suite 2104 Fort Lauderdale, FL 33304. The Tax Cuts & Jobs Act, however, changed that, pushing the so-called section 962 election into vogue. 1.962-3(a)). (d) Effect of . An IRC Sec. The Section 962 Statement solves that problem. First, the individual is taxed on amounts in his gross income under corporate tax rates. Reg. Because of the significant reduction in the federal corporate tax rate to 21%, taxpayers began to seek relief from GILTI inclusions by making Sec. 11, which accounts for "all income from whatever source derived." This enables the taxpayer to benefit from the 21-percent corporate tax rate as well as the Section 250 deduction (for GILTI purposes only). Individuals making a 962 election will be permitted to claim a Section 250 deduction. 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. The election under section 962 may be made only by a United States shareholder who is an individual (including a trust or estate). Any other foreign dividend would be treated as ordinary income. Reg. From here, the train goes off the tracks: How can the IRS follow the data trail from Form 5471, Schedule I (the controlled foreign corporations total Subpart F income) to the individual United States shareholders tax liability? Making a 962 Election on a Tax ReturnThe IRS must be notified of the Section 962 election on the tax return. The only opaque part of the picture (to the IRS) is the raw financial data at the controlled foreign corporation level. Electronic Code of Federal Regulations (e-CFR), CHAPTER I - INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY. 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). This number will be included on line 5 of the Section 962 Election Tax Worksheet. However, a distribution from a qualified foreign corporation would likely be eligible for the lower rates applicable to qualified dividends. 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. Proc. 1.962-1, issued in March 2019, allows individuals to make a Sec. While a Sec. 962 (Regs. (a)Who may elect. This is because a federal Section 962 election does not alter the components of federal AGI for a taxpayer. GILTI Tax Example- US Corporation. What to include on a 962 election statement. 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. 962 election should consider filing Forms 8993 and 1118 as a protective measure (see also Prop. A taxpayer considering making this election should consult his or her tax professional or advisor to discuss his or her specific situation. 962 election were made. 962 election for state income tax purposes. Input is also available on worksheet General > Federal Elections. 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). 962 election, the individual will generally pay tax on their pro rata share of GILTI as if they were a U.S. C Corporation. It is imperative to note that each state must be considered on a case-by-case basis. 351 Stmt of Disclosure. 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 Finally, the injustice of the double tax on dividends received by United States shareholders from foreign corporations was put to rest for good at least for those United States shareholders who were also already using a corporate tax structure. (In Drake19 and prior, the entry is made on line 12a (3) of Screen 5) On the SCH screen: However, that same dividend paid by a nonqualified foreign corporation would be taxable at full ordinary rates to that individual. 962 election, unless that specific state has explicit rules excluding GILTI or Subpart F income where a Sec. The current highest federal tax rate applicable to individual CFC shareholders is 37 percent. 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. Discover what makes RSM the first choice advisor to middle market leaders, globally. Regs. The right choice will vary depending on each taxpayers unique circumstances andneeds. 962 election should keep detailed workpapers and records regarding: Where an individual makes a Sec. The gross income information has been reported, and the tax calculation formula is mechanical. IntroductionU.S. . Except as provided in 1.962-4, 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. And, just as importantly, we will talk about how to prepare a good Section 962 Statement. For those who were not, some temporary relief may be available in the form of a section 962 election. This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19. 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. 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). How can the IRS easily verify that the correct amount of gross income was taken into account for the United States shareholder? The basics of Sec. Has anyone done a 962 election in regards to GILTI (Form 8992) for an individual? Section 962 Elections for Taxpayers with GILTI Inclusions industries services people events insights about us careers industries Aerospace & Defense Agribusiness Apparel Automotive & Dealer Services Communications & Media Construction E-Commerce Financial Services Food & Beverage Forest Products Foundations Government Services Health Care The net tax liability under Section 965 should be included . Association of International Certified Professional Accountants. 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. Anytime a 962 election is made for a CFC which has a functional currency that is not the dollar, the rules stated in Section 986 and Section 986 of the Internal Revenue Code must be used to translate the foreign taxes and E&P of the CFC. printing. By making a Sec. 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.