Massachusetts Issues Draft IRC Sec. 965 Guidance for Corporations

Massachusetts issued draft guidance that explains the impact on corporate excise taxpayers of IRC Sec. 965 income. The guidance includes a chart that shows where to report the income on various tax forms.

What Is IRC Sec. 965 Income?

The Tax Cuts and Jobs Act of 2017 (TCJA) enacted IRC Sec. 965. It requires taxpayers to include untaxed foreign earnings and profits from post-1986 tax years in their Subpart F income. It also allows a deduction under IRC Sec. 965(c) for part of the earnings that reduces the tax rate.

Taxpayers must report the entire amount of IRC Sec. 965 income on their 2017 federal income tax return. A taxpayer can elect to pay tax on the income in installments over 8 years.

How Do Taxpayers Report IRC Sec. 965 Income?

The guidance states that taxpayers must include IRC Sec. 965 in their Massachusetts income. Massachusetts will not allow the deduction under IRC Sec. 965(c).

Massachusetts will treat the income as dividend income. So, taxpayers can claim a dividends received deduction for 95% of IRC Sec. 965 income.

How Does IRC Sec. 965 Income Impact Apportionment?

The sales factor of the Massachusetts apportionment formula for business corporations excludes dividends. Thus, a corporation cannot include IRC Sec. 965 income in either the numerator or denominator of its sales factor.

In contrast, the receipts factor for financial institutions includes dividends from:

  • investment assets and activities; and
  • trading assets and activities.

So, a financial institution can include IRC Sec. 965 income in both the numerator and denominator of its receipts factor.

Combined filing groups that include both business corporations and financial institutions must adjust the apportionment factors.

Does Massachusetts Allow Installment Payments?

The election to pay tax liability on IRC Sec. 965 income in installments does not apply for Massachusetts corporate excise tax purposes.

Working Draft TIR 18-XX: Treatment of Deemed Repatriated Income, Massachusetts Department of Revenue, September 11, 2018

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