As a U.S. shareholder in a foreign corporation, you are potentially liable for the transition tax, added by the 2017 Tax Cuts and Jobs Act under Code Sec. 965. Mandatory One-Time Tax on Accumulated Offshore Earnings. The transition tax is a mandatory one-time tax on the untaxed post-1986 foreign earnings of certain foreign corporations of U.S. shareholders. The tax is determined by reference to the foreign corporation’s post-1986 foreign earnings for its last tax year, beginning before January 1, 2018.
Due Dates. Accordingly, for calendar year foreign corporations with tax years ending on December 31, 2017, the tax is due and payable with the taxpayer’s 2017 return. This is because the foreign corporation’s tax year ends during a fiscal taxpayer’s 2017 tax year or with a calendar year taxpayer’s 2017 tax year. For fiscal year foreign corporations, the last tax year beginning before January 1, 2018 (e.g., December 1, 2017) will end during or with a taxpayer’s 2018 tax year and the return is due with the 2018 return.
Stock in Foreign Corporations. We will want to determine whether the transition tax applies by examining your stock holdings in foreign corporations. The tax can apply based on your direct or indirect ownership of stock in a foreign corporation or your ownership in a pass-through entity that owns stock in the foreign corporation.
Filing and Payment. The rules for computing the transition tax are complex and guidance issued by the Treasury and IRS provide additional rules for computing the correct transition tax. To ensure that the tax is correctly computed, we will need to gather additional information based on this guidance. We can also discuss with you various elections that may be made to pay the tax in installments or defer the tax.
Please call our office so that we can discuss this complex and mandatory one-time tax.