Maine Revenue Services Explains IRC § 965 Deferred Foreign Income Taxation

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Maine Revenue Services (MRS) issued guidance and amended the Maine corporate income tax return instructions last week to explain Maine’s conformity to federal taxation of deferred foreign income, also called deemed repatriated income or Internal Revenue Code (IRC) § 965 income.

The federal Tax Cuts and Jobs Act requires shareholders of foreign corporations to report their pro rata “accumulated post-1986 deferred foreign income,” as that term is defined in IRC § 965, in the tax year beginning before January 1, 2018. Pursuant to Maine’s recent tax conformity legislation, Maine will also tax deferred foreign income, subject to several key differences.

First, for federal tax purposes, all shareholders are permitted to deduct amounts in accordance with the participation exemption described in IRC § 965(c). According to MRS, there is no corresponding participation exemption deduction for Maine corporate income tax purposes—but the deduction is allowed for individual and fiduciary income tax filers. Corporations are instead permitted an 80% deduction of deferred foreign income. We note that the existing 50% dividends received deduction does not apply to deferred foreign income. In addition, the 80% deferred foreign income deduction is subtracted from both the numerator and denominator of the sales factor for apportionment purposes.

Second, for federal tax purposes, a shareholder may elect to pay its net deferred foreign income in installments over the course of eight years. S corporation shareholders may elect to defer payment of the deferred foreign income. Maine does not provide for either election.

Taxpayers may need to amend their returns to reflect deferred foreign income. MRS will abate interest and penalties that would otherwise apply to 2017 amended Maine income tax returns to the extent that the interest and penalties are associated with the federal tax law changes addressed by the recently-enacted Maine tax conformity legislation, and if the amended return is filed no later than March 11, 2019. To qualify for abatement, affected taxpayers should write “TAX CONFORMITY” across the top of their return.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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