Since the Tax Cuts and Jobs Act was enacted, Internal Revenue Service (“IRS”) Form 5471 has given tax practitioners fits. Much of this confusion is the result of the Section 959 ordering and basketing rules. Things are not likely to improve next tax season. This is because the IRS has decided to add two more schedules to Form 5471. Beginning in this tax season, controlled foreign corporation (“CFC”) shareholders could be required to attach all new Schedule Q and Schedule R to the Form 5471. Category 4 and Category 5 filers will be required to attach Schedule Q and Schedule R to their Form 5471. A Category 4 filer is a U.S. person who had “control” of a foreign corporation for an uninterrupted period of at least 30 days during the foreign corporation’s annual accounting period. Control is defined as more than 50% of the voting power or value of the CFC. A Category 5 filer is a U.S. person who is a ten percent or greater shareholder in a corporation that was a CFC for an uninterrupted period of thirty days during its annual accounting period and who owned stock in the CFC on its last day of its annual accounting period. Below, is a brief discussion of the new Schedule Q and R.
Introduction to Schedule Q of Form 5471
Schedule Q will be used to report a CFC’s income, deductions, taxes, and assets by CFC income groups. A CFC shareholder required to complete Schedule Q will be required to disclose subpart F income in functional currency by each relevant country. In particular, the CFC shareholder must disclose dividends, rents, royalties, net gains from certain property, net gain from commodities, and net currency gains. It will also be necessary to disclose foreign base company sales income, foreign base company services income, insurance income, international boycott income, bribes, kickbacks, and recaptured subpart F income on the Schedule Q. Each of these aforementioned items of subpart F income will be required to be categorized into a number of different categories. Schedule Q will also require the CFC shareholder to categorize tested income into a number of different groups. Finally, CFC shareholders will be required to account and disclose any foreign income on Schedule Q that was excluded from U.S. federal tax under the GILTI and subpart F high-tax exclusions.
Introduction to Schedule R of Form 5471
Schedule R will be used to report basic information pertaining to distributions from foreign corporations. According to the instructions for Schedule R, the information reported on the schedule is required by Sections 245A, 959, and 986(c) of the Internal Revenue Code. Schedule R will consist of columns (a) through (d).
Column (a) is entitled “description of distribution.” Each CFC shareholder required to complete Schedule R will be required to state whether it received a distribution in cash, non-cash, taxable, or nontaxable distributions from the CFC. The distribution will need to be identified under code sections. For example, “taxable cash dividend eligible for a dividends received deduction under Section 245A.” If non-cash distributions were made, the CFC shareholder will be required to attach a statement and show both the tax bases and the fair market value of the distribution.
Column (b) is entitled “date of distribution.” Each CFC shareholder required to complete Schedule R must enter the month, day, and year of distributions received from the CFC.
Column (c) is entitled “amount of distribution in foreign corporation’s functional currency.” Each CFC shareholder required to complete Schedule R must disclose the amount of any money paid plus the fair market value of any property transferred to the shareholder from the CFC reduced by the following liabilities: 1) any liability of the corporation the shareholder assumes in connection with the distribution; or 2) any liability to which the property is subject immediately after, the distribution.
Column (d) is entitled “amount of E&P distribution in foreign corporation’s functional currency.” Each CFC shareholder required to complete Schedule R must report whether the distribution made to them was made from either current earnings and profits (“E&P”) or accumulated earnings and profits. If a PTEP (the term “PTEP” refers to E&P of a CFC) was distributed, any currency gains or losses under Section 986(c) must be disclosed on Schedule R.
Conclusion
The new Schedule Q and Schedule R will make an already difficult Form 5471 more complicated and time consuming. In the very near future we plan to write more extensively about these new schedules.
Anthony Diosdi is one of several international tax attorneys at Diosdi Ching & Liu, LLP. As an international tax attorney, Anthony Diosdi provides international tax advice to closely held entities and publicly traded corporations. Anthony Diosdi also represents closely held entities and publicly traded corporations in IRS examinations. Diosdi Ching & Liu, LLP has offices in San Francisco, California, Pleasanton, California and Fort Lauderdale, Florida. Anthony Diosdi advises clients in international tax matters throughout the United States. Anthony Diosdi may be reached at (415) 318-3990 or by email: adiosdi@sftaxcounsel.com.
This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.