Introduction – Punishing You For Your Past and Destroying Your Future Punishing You For Your Past – Retroactive Taxation And The Sec. 965 Transition Tax
The 2017 U.S. Tax Reform AKA – The Tax Cuts and Jobs Act ushered in significant changes for Americans abroad who carry on business through small business corporations. Section 965 was an attempt to impose retroactive taxation on 31 years of corporate earnings that were NOT subject to U.S. taxation at the time that they were earned. In Canada Canadian Controlled Private Corporations are used as private pension plans. The effect of the Sec. 965 transition tax was/is to confiscate the pensions which were earned in Canada by Canadian residents. It’s simply wrong.
In early of 2018 Dr. Karen Alpert and I worked on a series of videos to explain the Sec. 965 Transition Tax. Those vides spawned a series of 27 posts about the Sec. 965 transition tax. Destroying Your Future – Presumed GILTI – The Sec. 951A GILTI Tax Continue reading →
Individuals can make a certain election under Code Section 962 to be treated as a corporation for purposes of the transition tax. Assuming the maximum tax rates and not making the election under Code Section 962, the tax rate to an individual shareholder would be 17.54% (15.5% for a corporate shareholder) on accumulated E&P attributable to the corporation’s cash and cash equivalents and approximately 9.05% (8% for a corporate shareholder) on the accumulated E&P attributable to the corporation’s non-cash assets.
So, what is the 962 election and how can it reduce the “transition tax”?
(a) General rule Under regulations prescribed by the Secretary, in the case of a United States shareholder who is an individual and who elects to have the provisions of this section apply for the taxable year—
(1) the tax imposed under this chapter on amounts which are included in his gross income under section 951(a) shall (in lieu of the tax determined under sections 1 and 55) be an amount equal to the tax which would be imposed under section 11 if such amounts were received by a domestic corporation, and
(2) for purposes of applying the provisions of section 960  (relating to foreign tax credit) such amounts shall be treated as if they were received by a domestic corporation.
An election to have the provisions of this section apply for any taxable year shall be made by a United States shareholder at such time and in such manner as the Secretary shall prescribe by regulations. An election made for any taxable year may not be revoked except with the consent of the Secretary.
(c) Pro ration of each section 11 bracket amount
For purposes of applying subsection (a)(1), the amount in each taxable income bracket in the tax table in section 11(b) shall not exceed an amount which bears the same ratio to such bracket amount as the amount included in the gross income of the United States shareholder under section 951(a) for the taxable year bears to such shareholder’s pro rata share of the earnings and profits for the taxable year of all controlled foreign corporations with respect to which such shareholder includes any amount in gross income under section 951(a).
(d) Special rule for actual distributions
The earnings and profits of a foreigncorporation attributable to amounts which were included in the gross income of a United States shareholder under section 951(a) and with respect to which an election under this section applied shall, when such earnings and profits are distributed, notwithstanding the provisions of section 959(a)(1), be included in gross income to the extent that such earnings and profits so distributed exceed the amount of tax paid under this chapter on the amounts to which such election applied.