United States

Pennsylvania: Department Issues Information Notice on Section 965 income

Apr 30, 2018
From KPMG TaxWatch

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The Pennsylvania Department of Revenue has issued an information notice providing guidance on the Commonwealth’s corporate and individual income tax treatment of amounts required to be included in income under IRC section 965. The Department, at the outset, notes that section 965 income will be included in a corporation’s federal Subpart F income and Subpart F income is included in the definition of federal taxable income. Because the starting point in computing Pennsylvania corporate taxable income is federal taxable income before NOLs and special deductions, the repatriated amounts will be subject to Pennsylvania corporate net income tax (although such amounts will not be reported on page 1 of the Federal Form 1120). Furthermore, because the deduction allowed under section 965(c) is not a “special deduction,” set forth in Part VIII of the IRC, it will likewise be allowed for Pennsylvania purposes. The Pennsylvania dividends-received deduction, which is equal to the deduction that would be allowed for dividends received from a domestic corporation, applies to the net amount of repatriated income. Because the repatriated income is treated as dividend income for Pennsylvania tax purposes, it will be excluded from the sales factor entirely (dividends are specifically excluded from the sales factor in Pennsylvania). Finally, the notice confirms that there is no Pennsylvania election to defer payment of the tax on repatriated income over an eight-year period. However, Pennsylvania will conform to the federal election available to REITs under section 965(m) to defer the income inclusion over an eight-year period. For Pennsylvania corporate net income tax purposes, REITs that elect to defer the income inclusion will need to include both the repatriated income and 965(c) deduction in their corporate net income tax base as those amounts are included in federal taxable income over the eight year period. For individual income tax purposes, the repatriated income will not be treated as taxable dividend income and is therefore not subject to Pennsylvania tax unless an actual distribution of cash is made to a Pennsylvania individual income taxpayer. Pass-through entities required to report repatriated amounts federally should make adjustments to remove the repatriated amount from the Pennsylvania tax base. Such taxpayers should also include a statement explaining the adjustment. Please contact Howard Sklaroff at 267-256-2891 with questions on the information notice.

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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.