By Bethany Bouw, CPA
Foreign corporations sound innocuous enough but when you delve into the reporting requirements it opens up a Pandora’s box of complex tax issues. There are so many aspects to consider in preparing to report foreign corporations and there has been a lot in the news lately regarding foreign corporations due to the new tax reform.
Many of the new changes apply to what is known as a controlled foreign corporation. Controlled foreign corporations are filed on a Form 5471 to disclose ownership, financial information, and includable income. Typically, those who are required to file a Form 5471 (though there are many exceptions and nuances) are those who control the corporation, have/acquire above a threshold percentage in a controlled foreign corporation, or have a role of officer or director for the foreign corporation. While the subject area is complex and broad, there are many important things to know as you prepare Form 5471 (otherwise known as “Information Return of U.S. Persons with Respect to Certain Foreign Corporations”). Below you will find ten tips for filing Form 5471.
Tips & Reminders
- Make sure you know your category of filer: The category of filer impacts which schedules are completed with the filing, making this a crucial piece to know. It is also possible to meet the definitions of multiple categories at the same time. Should this happen, you will select all that apply.
- Do not forget to fill out the reference ID number if the foreign corporation does not have an employer identification number.
- If completing Schedule B, ensure that all US shareholders of the foreign corporation are disclosed. This is not just your name and information to be completed as a US shareholder. Anyone else who meets the definition of US shareholder must also be included.
- Report the Income Statement & Balance Sheet in accordance with US GAAP (Generally Accepted Account Principles). Many foreign financial statements are presented using IFRS (International Financial Reporting Standards) and there are differences in how certain areas are reported. You will need to adjust for the presentation of the financials under US GAAP. A big area is unrealized gains and losses. We see this often on foreign financial statements.
- Fully consider the questions of Schedule G Other Information. Do not just select ‘no’ without thinking through what is being asked. Software often has default responses for these. Take the time to read the question, consider it, and answer it properly.
- Do not forget to consider Subpart F. It is important to check the definitions for the elements of subpart F income and complete the worksheets provided by the IRS to determine if the inclusion is required this year. These elements include foreign personal holding company income, foreign base company sales income, and more.
- Remember to complete Schedule J Accumulated Earnings & Profits in the functional currency. This is tracked not in USD (unless the US dollar is the functional currency), but rather in the functional currency of the corporation.
- Keep track of the various “pots” of accumulated earnings & profits on Schedule J. The previously taxed E&P must be kept separate from the not previously taxed E&P. Additionally, all distributions should be properly classified.
- Remember that forms like Schedule M Transactions between CFC and Shareholders/related persons is important for transfer pricing. The IRS may be looking at forms like Schedule M when they consider transfer pricing to see what is being disclosed as related party transactions. Make sure you are appropriately disclosing and keeping in line with proper transfer pricing rules.
- Do not forget Form 8938 if you cross the reporting threshold. If you file Form 5471, make sure you disclose the number of forms filed on the face of Form 8938 under Excepted Specified Foreign Financial Assets. If you don’t have a filing requirement for Form 5471, but do have ownership of a foreign corporation and meet the filing threshold for Form 8938 – do disclose your ownership as an Other Foreign Financial Asset.
There may be additional forms that are required related to the foreign corporation and not listing them in the above tips does not mean they do not apply. Feel free to check out our list of major forms, though not all inclusive. It should also be noted that Form 5471 (along with many of the other foreign-related IRS forms) come with a hefty penalty for non-compliance. The penalties can be $10,000 per delinquent form which can add up quickly if there are multiple years or entities out of compliance. Also, in regards to many of the foreign forms, the statute for the year may not have started running if there was a form required that wasn’t filed or was incomplete. It is very important to engage qualified tax professionals to assist with these forms.
The International Tax Team at Ryan & Wetmore is well-versed in foreign informational filings. For questions or concerns regarding your international accounts and assets, click here to email our foreign tax team. Please be aware that tax issues are complicated and may vary based on the details of your situation. For this reason, an initial phone call is generally required to obtain the facts and address the questions.
Bethany Bouw CPA, is a manager at Ryan & Wetmore and has been with the firm for over eight years. She has experience with offshore voluntary compliance and assisting taxpayers with foreign asset and entity reporting requirements.
Traci Getz CPA, is a partner with Ryan & Wetmore, P.C. Traci has over fifteen years of experience providing accounting, tax, and consulting services to small and medium-sized business owners. She works with clients to understand their accounting and tax issues while specializing in international tax, healthcare, and construction.
Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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