Revised Form 5471; 2017 Tax Reform Impact on Tax Compliance Continues
Each year, the IRS shuts down e-filing in mid-November to update their systems, and in the ‘offseason’ between Thanksgiving and the New Year updates tax forms. Generally, these changes are cosmetic. With the passing of the recent tax reform, that is no longer the case. The ‘what’s new’ section of the Form 5471 instructions are almost as long as the actual form (1548 words versus 2226 words) and, even to the stodgiest of accountants, not exactly a ‘page turner’.
Certainly, changes were anticipated, but in many ways, Form 5471 is simply a brand new form, and the end result is increased compliance costs for owners of foreign corporations, and especially CFCs (controlled foreign corporations).
Nitty Gritty - What's new?
If you’ve ever seen the movie ‘Just Friends’, the new 5471 is Ryan Reynolds after moving to Los Angeles; completely made over and hardly recognizable. New schedules were added, old schedules expanded, and schedules previously included in form 5471 are now separated.
- New Schedule B
- Schedule G expanded
- Separate Schedule E
- New Schedule E-1
- Separate Schedule H
- Modified Schedule I
- New Separate Schedule I-1
- Separate Schedule J
- Separate Schedule M
- New Separate Schedule P
- Schedules E, H, I-1, J, and P must be completed separately for each applicable category of income (i.e., section 965(a) inclusions and GILTI inclusions )
- Modified attribution rules for determining whether a U.S. person is a U.S. shareholder and whether a foreign corporation is a CFC
Don’t forget the new GILTI Tax - an annual tax levied on owners of Controlled Foreign Corporations (CFC) that must be paid to the IRS every year, regardless of whether he has other taxable income or not.
With the new form 5471, the scope of entities subject to GILTI and the mandatory Transition Tax has been expanded. Under prior law, a US shareholder would be required to pay Transition Tax only if that foreign corporation was a CFC for at least 30 consecutive days during its tax year. Under the new rules, the foreign company may be subject to Transition Tax and GILTI inclusion if it was a CFC for at least one day during the tax year.
Transition Tax still due for CFC owners who did not pay in 2018
Section 965 Transition Tax, the Tax Reform addition to the IRS Code, was due in 2018 year for the owners of a CFC with a foreign accounting period ending after November 2, 2017.
A CFC with a corporate tax year ending earlier than Nov 2, 2017 will pay transition tax in 2019 with their 2018 tax return. Thus, an owner of UK CFC with an accounting period ending on March 31, 2017, will pay transition tax based on the corporate accounting period ending on March 31, 2018, with their 2018 U.S. tax return.