I have a client who has elected to have their CFC treated as a disregarded entity.
I'm getting conflicting or unclear information from other sources and the code is confusing me with all the cross references. As this is a 1 off and their return is pretty straight forward without this I need some guidance on a few things please.
They made a late election and the IRS accepted this as effective on Jan 30 2019.
No subpart F income, all subject to GILTI (thinking to elect s.962). Personal service company, no ECI or PTI, fixed assets for QBAI is a computer. No s.965 tax as all losses until 2019.
1) I noticed their 2018 return has a GILTI loss inclusion reported on their 1040 as the CFC made losses up until 2019. This isn't correct is it?? I'm pretty sure it's not deductible against ordinary income and an amendment is needed.
2) The deemed liquidation of the CFC in Jan 2019. Section 331 right? Is it the acc. E&P taking the PY losses into consideration (CFC made losses until 2019) or the current year E&P (which is large due to a reversal of a PY expense on the books - any way to reduce this - show a book tax timing difference somehow?)?
3)How does the Section 962 interact with the above? I think it will be a good choice because of the disregarded entity election but will this throw up any funny stuff I'm not thinking of?
4) I'm right to treat this as a short year to end of Jan and report the remainder as a pass through on Schedule C and 8858? I can split it, I don't need to double report the whole year right?
5) The deemed dividend from s.331 liquidation is reported on Schedule B?
It's such a tricky area of tax and I've spent ages researching this but need a bit of practical confirmation before I'm satisfied.
Appreciate it all. TIA.
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Tested loss CFC has no QBAI; the computer was, therefore, irrelevant.
There is also no such thing as a GILTI loss inclusion. See §951A(b)(1). No, net tested loss does not flow through to the F.1040.
Agree §331 would be the applicable provision. Treating the foreign entity as a DRE would simplify the reporting but it is not the only and may not be the best option, depending on your client's facts and circumstances.
Why do you think §962 may be applicable?
You spoke of a short tax year but you never mentioned what the fiscal year of the entity was.
Hi thanks for responding.
The loss was in 2018 and so they have reported it on the 1040 as a reduction to income. Their return needs amended for this and a wrongly claimed FTC.
The client had already applied for the classification and been approved by the IRS when they came to me so that's done and just need to report the change properly.
It was a late election and IRS back dated it 75 days to Jan 30 2019 when the DE became effective.
S. 962 I'm thinking would be a good idea because the CFC is a UK entity (high tax) and 80% deemed paid foreign tax credit after the 50% GILTI deduction would cover the tax for the period 1/1/19 to 1/31/19. Client is also a high earner and marginal tax rate is 32% so GILTI is definitely not the better option. What I wonder is though how that affects the DRE classification for the rest of the year if the US SH elects to be treated as a domestic corp? Can it just be for the CFC period January 2019 before FDE classification?
Entity is on a calendar year ending 12/31/2019. So I had thought to treat the CFC on a short year up to 30/1/2019 when it becomes an FDE then the remainder from Feb to Dec is on the Schedule C and 8858.
With the deemed liquidation upon entity classification they would have a deemed dividend. I've calculated the CY E&P (positive) and the ACC E&P(which is $0 for distributions for tax because it's negative). The basis in stock is very small leaving a sizeable amount to be distributed from CY E&P.
However, in that month we had a cancelled/recovered accrued expense from the PY that I think we can exclude as it had no effect on the tax (income or GILTI) under s.111. If that's the case we could bring that dividend down I think - another thing to think about 🙂
Thanks for you input.