The IRS has issued Frequently Asked Questions (FAQs) on the Code Sec. 965 transition tax. The FAQs relate to 2018 return filing and payment obligations. The IRS previously issued FAQs for 2017 tax returns.
These FAQs address a number of questions that taxpayers who make the election to pay the tax in eight annual installments might have. The portion of the installment due is referred to as the section 965(h) net tax liability. FAQs also provide examples to illustrate the principles of the election.
Transition Tax Installment Election
The FAQS explain:
- for 2017 elections, how the section 965(h) net tax liability portion of the 2017 income tax liability was assessed and how to make the second installment payment;
- for 2018 elections, how the section 965(h) net tax liability portion of the 2018 income tax liability is assessed and how to make the first installment payment;
- whether a refund, or credit is allowed for the 2019 tax year, for a 2018 income tax overpayment;
- how 2018 tax payments are applied if the election is made on a 2018 return; and
- the application of 2018 estimated tax payments to the 2018 net tax liability.
Transition Tax Forms
Form 965 and either Form 965-A or 965-B must be attached to the 2018 income tax return. If income is reported in the 2017 tax year, or the 2018 tax year, or both, the Form 965 must be attached to the 2018 tax return.
Thus, individuals (or taxpayers taxed as individuals) must file Form 965-A, with their income tax return when:
- they have a section 965 net tax liability,
- in either tax year 2017 or 2018, or both.
If a taxpayer elects to pay the tax in installments, including an S Corporation shareholder’s election to defer tax under Code Sec. 965(i), then the taxpayer must continue to file Form 965-A as long as there is net tax liability remaining unpaid at any time during the tax year.
A corporate taxpayer must file Form 965-B with the 2018 tax return when:
- there is a net section 965 tax liability,
- in tax year 2017, or 2018, or both.
If an election to pay the tax in installments is made, including an election by a REIT under Code Sec. 965(m), Form 965-A must continue to be filed as long as there is net tax liability remaining unpaid at any time during the tax year, or the REIT has 965 amounts taken into account at any time during the tax year.
Tax-exempt organizations must file Form 965 only if the Code Sec. 965 amounts are unrelated business income or private foundation investment income.