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

Form 965-A, “Individual Report of Net 965 Tax Liability,” is a document for individual taxpayers to report their share of the Section 965 transition tax. Established by the Tax Cuts and Jobs Act (TCJA), this one-time tax applies to deferred foreign income held by certain foreign corporations. The form serves as a cumulative report and payment record for this liability.

This document is an attachment that must be filed with an individual’s main income tax return, such as Form 1040. It is filed for every year that a tax liability under this provision remains outstanding.

Who Must File Form 965-A

An individual must file Form 965-A if they have a net tax liability under Internal Revenue Code Section 965. This requirement applies to U.S. shareholders of a Deferred Foreign Income Corporation (DFIC), which is a foreign corporation with accumulated and untaxed post-1986 earnings. A U.S. shareholder is a U.S. person who owns 10% or more of the foreign corporation, and the obligation to file arises when these foreign earnings are included in the individual’s income.

The filing requirement extends to individuals who hold their interest in a DFIC indirectly. This occurs when an individual is a partner in a domestic partnership or a shareholder in an S corporation, and that entity is the U.S. shareholder of the DFIC. The tax liability flows through the partnership or S corporation to the individual partners or shareholders, who then become responsible for reporting and paying their share.

An individual may not need to file Form 965-A if they owe no net tax liability. This can happen if foreign tax credits are sufficient to completely offset the calculated tax.

Information Required to Complete the Form

To complete Form 965-A, a taxpayer must gather specific financial data, including the total Section 965(a) inclusion amount. This represents the taxpayer’s share of the foreign corporation’s deferred income. For many individuals, this amount is provided on a Schedule K-1 received from a partnership or an S corporation.

Another data point is the aggregate foreign cash position, which is used to determine the portion of the income inclusion subject to different tax rates. The taxpayer will also need the total amount of foreign earnings and profits (E&P) of the foreign corporation. This information is often determined at the corporate or partnership level.

The taxpayer must also have the amount of foreign income taxes that are deemed paid with respect to the income inclusion, as these foreign tax credits can reduce the final U.S. tax liability. If a Form 965, “Inclusion of Deferred Foreign Income Upon Transition to Participation Exemption System,” was previously filed, information from that form will be needed for consistency.

Reporting the Net 965 Tax Liability

Form 965-A is used to report a net 965 tax liability that has already been calculated separately. This calculation begins with the Section 965(a) inclusion amount, which is separated into two portions based on the foreign corporation’s cash and non-cash assets.

These portions are subject to different effective tax rates. While corporations benefit from rates of 15.5% on cash assets and 8% on non-cash assets, the rates for individuals are based on their marginal income tax rate for the inclusion year. Any available foreign tax credits are applied during this calculation to determine the final net 965 tax liability that must be reported on Form 965-A.

Completing the Form and Making Payment Elections

The form is organized into several parts. Part I is used to report the total net 965 tax liability and to make the election to pay the liability in installments over eight years. Part II serves as a cumulative record of all payments made toward the liability in prior and current years. Part III is used by S corporation shareholders to make a separate election to defer payment of their liability until a triggering event occurs.

If a taxpayer makes the election to pay in installments, the payments are due over eight years. The first five annual installments are each 8% of the total tax liability. The remaining balance is paid in subsequent years: 15% in the sixth year, 20% in the seventh year, and the final 25% in the eighth year.

The completed Form 965-A must be attached to the individual’s annual income tax return and submitted by the return’s due date, including extensions. Taxpayers must maintain thorough records of their Form 965-A filings and all installment payments until the entire liability is satisfied.