United States

Illinois: Department of Revenue Issues Guidance on Inclusion of Mandatory Repatriation

Mar 26, 2018
From KPMG TaxWatch

Transcript Only

On March 13, 2018, the IRS released a Frequently Asked Questions (FAQ) document entitled “Reporting Related to Section 965 on 2017 Tax Returns.” In somewhat of a surprise, the IRS indicated that the amount of section 965 income and the related tax calculation are not to be included in federal taxable income reported on page one of Form 1120. Rather these items will be included on a separate “IRC 965 Transition Tax Statement” and added to the computation of tax on page three of the Form 1120. The FAQ further indicates that the Transition Tax Statement is to include (among other items) the full amount to be included in income under section 965(a), the deduction taken under section 965(c), the computation of net tax liability on the 965 income, and whether the taxpayer will be electing to pay the tax in installments over eight years. Recently, the Illinois Department of Revenue issued an Informational Bulletin (FY-2018-23), which provides some guidance on the foreign income repatriation transition tax in light of the federal FAQ. The bulletin confirms that due to the separate nature of the IRC section 965 Transition Tax Statement, the repatriated amounts will not be included in federal taxable income on the face of the Form 1120. However, this income must be included when determining Illinois base income. As such, the Department has revised its 2017 Corporation Income Tax IL-1120 Instructions to address the treatment of section 965. Specifically, IRC section 965 net income [section 965(a) amount less section 965(c) deduction] must be accounted for on Illinois Schedule M. The Schedule M Instructions provide that IRC section 965 net income (Line 1 of the IRC Transition Tax Statement minus Line 3) will be reported on Line 10 of the Schedule M and the net amount reported under IRC section 965 is also reported on the applicable Lines 7 through 9 of Illinois Schedule J, Foreign Dividends. Based on the taxpayer’s ownership percentage in each deferred foreign income corporation, the taxpayer will be entitled to a deduction from the amounts included. For IL-1065 filers, the revised instructions provide that taxpayers should include the amounts from Line 1 of the IRC 965 Transition Tax Statement [related to 965(a)] as “other income” on Step 2, Line 6 of the IL-1065. Similarly, the amount from Line 3 of the IRC 965 Transition Tax Statement [related to 965(c)] is included as “other expense” on Step 2, line 11 of the IL-1065. Finally, the instructions provide that any IRC Section 965 income or deduction passed through to partners must be identified by attaching a statement to Schedule K-1-P.

A copy of the IRC 965 Transition Tax Statement must be attached to the return and the Instructions provide specific guidance on how to properly submit this statement if the taxpayer is filing electronically in Illinois. The Informational Bulletin also indicates that Illinois does not follow the election under IRC section 965(h) to pay the tax liability in installments over eight years or the election under IRC section 965(i), which allows S corporation shareholders to defer payment of the tax liability until the taxable year which includes a triggering event. Please contact Brad Wilhelmson at 312-665-2076 with questions.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.