Form 965-A: Individual Report of Net 965 Tax Liability

Form 965-A: Individual Report of Net 965 Tax Liability

When it comes to U.S. tax compliance, businesses and individuals must be aware of a variety of forms that track their international income and tax obligations. One such form is Form 965-A, which is used to report an individual’s net tax liability under Section 965 of the Internal Revenue Code. This provision relates to the Transition Tax on deferred foreign income of U.S. shareholders, enacted under the Tax Cuts and Jobs Act (TCJA) in 2017.

In this guide, we will provide an overview of Form 965-A, including who needs to file it, how to complete it, and common errors to avoid.

What is Form 965-A?

Form 965-A, titled “Individual Report of Net 965 Tax Liability”, is used by U.S. taxpayers to report their net 965 tax liability. This tax is applied to certain deferred foreign income that U.S. shareholders of foreign corporations are required to bring back into the U.S. for tax purposes. The Transition Tax applies to undistributed foreign earnings accumulated by foreign corporations, which U.S. shareholders (individuals or corporations owning 10% or more of a foreign corporation) must now recognize.

The Form 965-A allows individual taxpayers to calculate and report the tax liability resulting from the repatriation of this foreign income. The form is required for individual shareholders who own a sufficient stake in foreign corporations subject to the transition tax.

Who Needs to File Form 965-A?

Form 965-A is required for U.S. individual taxpayers who meet the following criteria:

• U.S. Shareholders: You are a U.S. citizen or resident who is a shareholder in a foreign corporation (controlled foreign corporations, or CFCs), and you own 10% or more of the total voting power or value of the foreign corporation.
• Subject to Transition Tax: You are subject to the Transition Tax under Section 965, which taxes the deferred earnings of the foreign corporation you own.
• Required Reporting: The IRS will notify U.S. shareholders who are required to report and pay the Transition Tax using Form 965-A.

If you are an individual who has an interest in a foreign corporation subject to the Transition Tax, you may need to file this form to report your net 965 tax liability and any payments related to this tax.

Key Information to Complete Form 965-A

Before you begin completing Form 965-A, it’s important to gather the following necessary information:

1. Taxpayer Identification Number (TIN): Your Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN).
2. Details of Foreign Corporations: Information about the foreign corporations in which you hold an ownership interest, including the amount of deferred foreign income and any related taxes.
3. Taxable Income: Your share of the foreign corporation’s deferred income subject to the Transition Tax.
4. Calculations of Taxes: You will need to calculate your net 965 tax liability, including any credits or deductions, and payments made for the repatriated foreign earnings.

Step-by-Step Instructions for Completing Form 965-A

Here’s a breakdown of how to complete Form 965-A:

Step 1: Provide Personal Information

• At the top of the form, enter your Taxpayer Identification Number (TIN) (either SSN or ITIN).
• Provide your name and address as it appears on your tax return.

Step 2: Report the Amount of Deferred Foreign Income

• Line 1: Report the amount of deferred foreign income that is subject to taxation. This refers to the undistributed earnings of the foreign corporation(s) you own.

Step 3: Calculate Your Net 965 Tax Liability

• Line 2: Determine and report the amount of taxable foreign income you will be required to bring back into the U.S. under Section 965.
• Line 3: The Transition Tax applies to the repatriation of this income. Report the tax liability resulting from this repatriation. This could involve specific calculations related to how much tax is owed based on different tax rates for different types of income (such as cash vs. non-cash assets).

Step 4: Report Payments Made

• Line 4: Report any payments you have already made related to the 965 tax liability, such as estimated payments or payments with other filings.

Step 5: Calculate Balance Due or Refund

• Line 5: Subtract any payments made from the total liability to determine if you owe additional tax or if you are eligible for a refund.

Step 6: Complete Signature Section

• As with all IRS forms, sign and date the form at the bottom to certify that the information provided is true and accurate.

Filing Deadline for Form 965-A

Form 965-A must be filed along with your annual tax return (Form 1040) by the due date of the return, including any extensions. For most individuals, this is April 15th of the year following the tax year. If you are unable to file by this date, you may be able to apply for an extension to extend your filing deadline. However, be mindful that an extension to file does not extend the deadline for tax payments, which are due by the original filing deadline.

What If You Need to Correct Mistakes?

If you realize that you’ve made an error after filing Form 965-A, you can amend your filing by submitting a Form 965-X. This form allows you to adjust any incorrect information you reported, such as incorrect income or tax calculations, and correct your net 965 tax liability.

Common Mistakes to Avoid When Filing Form 965-A

1. Incorrect Calculation of Deferred Foreign Income
   The tax is based on the deferred foreign income of the foreign corporation. Be sure to include the correct amount of income that is subject to the transition tax, as underreporting can lead to penalties.

2. Failure to Report Taxable Amounts
   Make sure you report all taxable foreign earnings, including cash and non-cash assets. The IRS has specific guidelines for determining the tax rates that apply to different forms of income, so it’s important to be accurate.

3. Incorrectly Applying Tax Rates
   The Transition Tax involves different rates depending on whether the earnings are cash or non-cash. Applying the wrong rates could lead to an overpayment or underpayment.

4. Missing Payments
   If you owe any amount for the Transition Tax, make sure to pay it by the filing deadline to avoid late payment penalties.

Conclusion

Form 965-A is a critical form for U.S. individual taxpayers with ownership in foreign corporations subject to the Transition Tax under Section 965. It helps you report your net 965 tax liability and ensures compliance with U.S. tax laws for repatriated foreign income.