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Form 965 – Deferred Foreign Income

Note: Form 965 and related schedules have only been partially implemented for tax year 2019.

Form 965, Inclusion of Deferred Foreign Income Upon Transition to Participation Exemption System, is used to report the following items:

  • Section 965(a) inclusions from pass-through entities, the related foreign taxes deemed paid, and the related foreign taxes deemed paid but disallowed under section 965(g);
  • Section 965(c) deductions from pass-through entities.

Three types of foreign entities are relevant to IRC Section 965:

  • Controlled foreign corporation (CFC) – A foreign corporation is considered a CFC if U.S. shareholders own either 50% of the total value of its stock or more than 50% of the total combined voting power of all classes of stock. A CFC is also, by definition, a SFC.
  • Specified foreign corporation (SFC) – In addition to CFCs, an SFC is “any foreign corporation with respect to which one or more domestic corporations is a United States shareholder.”
  • Deferred foreign income corporation (DFIC) – With respect to a U.S. shareholder, a DFIC is an SFC of the shareholder that has accumulated post-1986 deferred foreign income greater than zero as of November 2, 2017 or December 31, 2017.

Form 965 is filed by partners, shareholders, and beneficiaries of a pass-through entity that is a U.S. shareholder of a DFIC that received Section 965(a) income. Form 965 must also be filed by non-profits with Section 965(a) amounts subject to tax under unrelated business income or private foundation investment income rules.

If foreign taxes were paid, two other schedules will also need to be completed:

  • Schedule F, Foreign Taxes Deemed Paid by Domestic Corporation – This schedule computes the foreign taxes deemed-paid credit for foreign taxes deemed paid related to section 965(a) inclusions.
  • Schedule H, Section 1, Amounts Reported on Forms 1116 and 1118 and Disallowed Foreign Taxes – This schedule is fed from Schedule F.

Because Schedules F and H are interrelated, information from an entity need only be entered once to flow to both schedules. Be sure to categorize the income correctly, whether passive, general, or section 901(j).

To access Form 965 in Keystone Tax Solutions Pro, from the Main Menu of the tax return (Form 1040) select:

  • Miscellaneous Forms
  • Form 965

Note: This is a guide on Form 965 in the Keystone Tax Solutions Pro program. This is not intended as tax advice.

Additional Information:

Form 965 instructions

IRS: International Taxpayers and Businesses (select “Transition Tax on Foreign Earnings”)

Updated on September 9, 2020

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