How Does Form 8992 Work? Round-the-world Tour of Global Intangible Low-Taxed Income (GILTI)

It’s not that kind of guilty, your honor.

Form 8992 is an essential IRS tax form that requires U.S. shareholders of controlled foreign corporations (CFCs) to report and calculate Global Intangible Low-Taxed Income (GILTI). GILTI is a provision introduced under the Tax Cuts and Jobs Act (TCJA) to prevent U.S. multinational corporations from shifting their profits to low-tax jurisdictions.

The first step in completing Form 8992 is to gather the necessary information, such as the shareholder’s ownership percentage and earnings of all CFCs during the taxable year. The form allows for the aggregation of corporate income and deductions from different CFCs, simplifying the reporting process.

To calculate GILTI, the Form 8992 follows a specific formula, which includes the deduction of deemed tangible income return (10% of qualified business asset investment) from the shareholder’s net CFC tested income. The remaining amount is then compared to the shareholder’s allowable share of tested income.

Completing Form 8992 requires individuals with worldwide income to provide details of the CFCs and their respective earnings, as well as other designated passive category income and deductions, on their income tax returns. Additionally, it is crucial to consider the specific instructions and updates provided by the IRS to ensure accurate reporting. You can exclude income from a shareholder’s income that’s related to the high-tax exception for low-taxed global income.

This form is of great importance for U.S. shareholders of CFCs as it helps the IRS evaluate the tax liability on income generated by foreign entities. By addressing the challenges of cross-border profit shifting, Form 8992 and GILTI play a crucial role in promoting fairness and transparency in the international tax system.

Global Intangible Low-Taxed Income (GILTI)

Global Intangible Low-Taxed Income (GILTI) refers to the income earned by a US shareholder from their controlled foreign corporations (CFCs) that exceeds a specified return on the financially tangible assets of those corporations. This provision was introduced as part of the Tax Cuts and Jobs Act (TCJA) in 2017. GILTI aims to discourage US multinational corporations from shifting their profits to low-tax jurisdictions by subjecting this excess corporate income to immediate US taxation. The purpose of reporting GILTI on Form 8992 is to calculate the taxable amount of this income and determine the corresponding income tax liability. It is important for taxpayers to accurately report the pro rata share of their GILTI on Form 8992, taking into account the specific instructions provided by the IRS and any updates to the form. By doing so, taxpayers can ensure compliance with the tax law and avoid potential penalties or audits.

Controlled Foreign Corporation (CFC)

A Controlled Foreign Corporation (CFC) refers to a foreign corporation that is majority-owned by US shareholders. Form 8992, commonly known as the Tangible Income Return, is an IRS tax form that is used by domestic corporations and individuals with shares in CFCs to calculate their income tax liability.

To determine if a foreign corporation is classified as a CFC, there are three elements that must be met. First, the foreign corporation must be registered in a foreign country, outside of the United States. Second, it must have US shareholders who hold at least 50% of the total voting stock or the total value of the corporation’s stock. Lastly, the foreign corporation must distribute or have the ability to distribute its earnings and profits to its US shareholders.

The IRS considers different types of ownership when determining CFC status. Direct ownership refers to shareholders who own the stock in the foreign corporation directly. Indirect ownership refers to shareholders who own the stock through another entity, such as a domestic corporation or a domestic partnership. Constructive ownership refers to individuals who are deemed to have ownership of the stock due to certain relationships or arrangements.

Form 8992 is used to calculate the foreign-derived intangible income and global intangible low-taxed income of a CFC. It helps determine the amount of income that is subject to ordinary income tax rates and the amount of income that may be eligible for certain deductions or exclusions.

Why get a CFC designation?

The purpose of the Controlled Foreign Corporation (CFC) designation is closely tied to the implementation of the global intangible low-taxed income (GILTI) tax provisions. GILTI tax laws have significantly changed the way foreign income of US multinational corporations is taxed.

In the past, multinational corporations were able to defer US taxation on foreign income until it was repatriated to the United States. This deferral allowed corporations to accumulate profits overseas without immediate tax consequences. However, the CFC designation aims to prevent this deferral by imposing a minimum tax on certain foreign income.

Under the new GILTI tax rules, US shareholders of CFCs are required to include their share of the CFC’s income in their own taxable income, regardless of whether the income is distributed to them. The GILTI provisions aim to target income earned by CFCs that is considered intangible, such as royalties, patents, or trademarks. This ensures that multinational corporations cannot avoid US taxation on highly mobile or easily transferable income streams.

To be classified as a CFC, a foreign company must meet certain criteria. This includes being registered in a foreign country, having US shareholders that collectively own at least 50% of the total combined voting power or value of the corporation’s stock, and having the ability to distribute earnings and profits to its US shareholders.

Overall, the CFC designation serves the purpose of preventing US multinational corporations from avoiding US taxation on foreign income by subjecting certain types of income earned by CFCs to the GILTI tax.

Get to Know Form 8992

Video by Forrest Baumhover.

The Instructions for Form 8992 provides guidance on how to report the income of controlled foreign corporations (CFCs) for US shareholders. This form is an essential tool for individuals and entities that have an ownership interest in foreign corporation income and need to comply with the Internal Revenue Service (IRS) tax requirements. The introductory material of Form 8992 offers an overview of the purpose and scope of the form, explaining the necessity of reporting CFC income and the criteria that define a CFC. Understanding these instructions is crucial for proper reporting and avoidance of penalties related to CFC taxation. The form simplifies the process by detailing the steps to determine the taxpayer’s share of income, calculating the income inclusion amount, and making necessary adjustments based on the CFC’s activities. Compliance with the instructions ensures that US shareholders accurately report their share of CFC income and fulfill their tax obligations.

What is Schedule B for Form 8992 for?

Schedule B for Form 8992 is an integral component used by companies that own a Controlled Foreign Corporation (CFC) to report their Global Intangible Low-Taxed Income (GILTI). This schedule is particularly relevant to complex business structures and multinational companies operating in a global marketplace.

The purpose of Schedule B is to determine the company’s GILTI inclusion amount, which represents the CFC’s income subject to the GILTI tax. This schedule requires detailed calculations involving various components such as the CFC’s tested income, qualified business asset investment (QBAI), and the section 250 deduction.

Companies need to accurately complete Schedule B to ensure compliance with the Internal Revenue Service (IRS) regulations regarding the taxation of GILTI income. It is crucial for companies with CFCs to understand the intricacies of this reporting requirement to avoid any potential penalties or audits.

It is important to note that Schedule B for Form 8992 is typically relevant to large and complex business structures rather than everyday business owners living abroad. This schedule is part of the IRS’s efforts to ensure that multinational companies pay their fair share of taxes in relation to their global operations.

In conclusion, Schedule B for Form 8992 plays a vital role in reporting GILTI income for companies with CFCs. Its function is crucial in determining the appropriate tax liability of multinational companies, ensuring compliance with IRS regulations.

If You Don’t File Form 8992, You Could Face Penalties

If a taxpayer fails to file Form 8992, they may face various consequences, including penalties for failure to file and additional penalties for noncompliance of income tax requirements after notification by the IRS. These penalties can impact both individuals and businesses with controlled foreign corporations (CFCs).

For individuals who are required to file Form 8992 as U.S. shareholders, the failure to file penalty can be significant. The penalty amount is typically calculated based on the length of the delay in filing, with the penalty increasing the longer the form remains unfiled.

In addition to the failure to file penalty, taxpayers who fail to comply with the IRS requirements after being notified may face further penalties. These additional penalties can include substantial monetary penalties, as well as potential criminal charges for willful noncompliance.

It is important to note that not all taxpayers are required to file Form 8992. Only U.S. shareholders with controlled foreign corporations that have “tested income” or “tested loss” are mandated to file this form. This requirement is applicable to individuals and businesses that have substantial ownership interests in foreign corporations and earn income from these entities.

To avoid the consequences of not filing Form 8992, it is vital for U.S. shareholders with controlled foreign corporations and qualifying income or losses to accurately complete and submit this form. Consulting with a tax professional who specializes in international taxation can help ensure compliance with IRS regulations and minimize the risk of penalties and audits.

References:

“IRS Form 8992 walkthrough (U.S. Shareholder Calculation of Global Intangible Low-Taxed Income)” – Forrest Baumhover, Certified Financial Planner and tax practitioner at Teach Me! Personal Finance.

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