California Requires Return Adjustments for Sec. 965 Repatriation

Taxpayers that reported repatriated income under IRC Sec. 965 on their 2017 federal return must adjust their 2017 California return. Taxpayers who have already filed a 2017 California return should file an amended return to remove those amounts.

The Franchise Tax Board (FTB) has issued guidance on the required state adjustments.

Federal “Transition Tax” on Repatriated Income

The Tax Cuts and Jobs Act of 2017 (TCJA) imposes a federal transition tax on untaxed earnings and profits (E&P) of certain foreign corporations. Using IRC Sec. 965, the TCJA requires taxpayers to pay tax on that E&P as if that E&P had been repatriated to the United States.

A separate federal deduction reduces the tax rate on the repatriated income. Federal taxpayers with repatriation income included a transition tax statement with their federal return. This statement is separate from the federal income tax return.

California 2017 Return Adjustments

California does not conform to IRC Sec. 965. Therefore, taxpayers should not include IRC Sec. 965 amounts on their 2017 California return.

If a taxpayer’s California return uses federal numbers, the taxpayer may have to adjust the return. Taxpayers that reported IRC Sec. 965 amounts on their federal return should write “IRC 965” on the top of their California return.

Taxpayers can make adjustments on the following California form schedules:

  • Schedule CA (540), California Adjustments – Residents
  • Schedule CA (540NR), California Adjustments – Nonresidents and Part Year Residents
  • Schedule K (565), Partners’ Shares of Income, Deductions, Credits, etc.
  • Schedule K (568), Members’ Shares of Income, Deductions, Credits, etc.
  • Schedule K (100S), S Corporation Shareholder’s Shares of Income, Deductions, Credits, etc.

Taxpayers should not include federal transition tax statement amounts on these forms or related schedules:

  • Form 541, California Fiduciary Income Tax Return;
  • Form 100, California Corporation Franchise or Income Tax Return;
  • Form 100W, California Corporation Franchise or Income Tax Return – Water’s-Edge Filers; and
  • Form 109, Exempt Organization Business Income Tax Return.

More Information from the Franchise Tax Board

The FTB provides more information on IRC Sec. 965 in its 2017 Summary of Federal Income Tax Changes at

California Guidance – Taxable Year 2017 IRC Section 965 Reporting, California Franchise Tax Board, May 2018

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All stories by: CCHTaxGroup