On-Demand: Form 5471 Playbook Take 2!

This is fun for me, so feel free to email me or be in touch if you ever want to discuss Form 5471 or other international issues. So we're going to get started, just pointing out some of the major differences between the 2019 and 2020 forms. Just in case anyone here is not aware, in December of 2020, the IRS released the brand new Form 5471, and a bunch of the schedules are new as well you have extra schedules. Actually just last week, the IRS introduced now these new schedules as well, P and R and Q, which we'll look at later, and they let out new instructions. Now these instructions are still draft instructions. I have read them in detail, but I haven't incorporated everything it says in those drafts instructions to this training today.

Just be aware that there is more out there. We probably are going to want to meet and do this again next year. And of course, everything is dependent on what the current administration changes. So there's always fun when it comes to Form 5471. I think one of the large differences of the form this year from last year that's going to make everybody here very happy is the schedule I-1. In the past, the schedule I-1 you have to complete separately for each category of income. That is no longer. The schedule I-1 is completed only once. That being said, the schedule E, the schedule J and the schedule P are still to be completed for each category of income. It is just the schedule I-1 that no longer has that requirement. The other big, huge change that you guys have probably already started talking about was the new filing categories for the Form 5471.

We have the 1A, the 1B, and the 1C. We have the 5A, the 5B and the 5C. We're going to talk about that more in detail as we move through the slides. Everything else, all the other changes are a line here or there, or just an extra question or another category, and I'll point some of those out as we look at them. Before we start actually looking at the form, we have our vocabulary words, and it's very important to me that you guys know these vocabulary words, and you refer to them. Because as we look at the form, the majority of the words, the majority of the things on the form that are hard to understand is because the IRS is using these vocabulary words, and they're not explaining them. The most important is 959(c)(1), 959(c)(2), 959(c)(3).

If we can translate that into words, we know, we can understand the form much, much better. So 959(c)(1) is earnings invested in U.S. property, or section 956 income. 959(c)(2) is Subpart F or guilty income. And 959(c)(3) income is non-previously taxed PTEP. Non-previously taxed, I guess they call it non-previously tax income. Okay? It's not PTP. It is important also to remember that we used to call PTEP PTI, previously taxed income, and now we call it previously taxed earnings and profits. The rest of the words here should already be familiar to you. Reminder that a U.S. shareholder has to be a 10% or more owner. You cannot be considered a U.S. shareholder if you own less than 10% and suffering weird downwind attributes and situations, which I'll show you in a few minutes. But you're not a U.S. shareholder filing a regular Form 5471 unless you own 10% or more in the CFT.

All right. So we our responses. I am familiar with these vocabulary words. So most of you, the majority of you said somewhat agree. So I take that to mean that most of you are fairly familiar with the basics. We've got our 959(c)(1), (c)(2) and (c)(3) that we have to keep reminding ourselves. So I will say it over again. (c)(1) is earnings invested in U.S. profits. (c)(2) is guilty in some Subpart F and (c)(3) is non-previously taxed income, or earnings and profits. All right, so that being said, I am not going to define for you Subpart F. I have everything in these slides. You can refer back to them as much as you want, but I'm not going to go into detail again on the things that are not new for us this year.

I am going to spend a couple of minutes going into detail with you on downward attribution. The only way to understand the new filing categories is to understand downward attribution. The most important thing for you to remember as we discuss downward attribution is those new categories, 1B and 1C, 5B and 5C are only applicable to foreign controlled CFCs. I'm going to explain to you right now what foreign controlled CFCs are. So if you're filing a regular Form 5471 for a person who owns this company. I think last time we did this, we did a muffin shop. I can't remember. Or a dentist office. But whoever it is, if you're filing your Form 5471 for your dentist who owns his own company and it's just him and there's not many others, he's never going to be that 1B or that 1C, that 5D or that 5C. Those are only applicable in downward attribution situations.

I'm going to show you what I mean by this and again, I am spending time on this, more time than almost on anything else because it is so important to me that you understand the implications of this on the Form 5471. So if you see the structure we have at the bottom, we have a foreign parent that owns a U.S. and a foreign sub. Now, what happens is, is that because of the repeal of section 318(a)(3), a U.S. person is now treated as if they own the shares of their foreign parent. That doesn't mean the foreign parent is treated as if it's U.S. What happens is, is that it's as if that U.S. sub owns the foreign sub. It's constructive ownership, they don't actually have an economic ownership in a foreign sub, but it's as if, for the purposes of attribution, the U.S. sub owns that foreign sub.

What happens then is that foreign sub becomes a CFC, but that foreign sub is actually controlled by a foreign entity. So that's where we get the terminology foreign controlled CFC. That foreign sod becomes known as a foreign controlled CFC. Now, the IRS released in October, 2019 rev prac 2019-40. In it they said that although this might not have been the legislative intent, they are not able to correct these laws, meaning they did not say we're going to make entities not CFCs anymore or we're going to repeal this whole repeal. What they were able to do was say we're going to provide some relief for all of these foreign controlled CFCs that were created. That is where we're going to see our modified Form 5471 filings, or use of alternative information. Even at some point, they said that certain entities don't have to file the Form 5471, although technically we're looking at a foreign controlled CFC.

So I'm going to move on to the next page and I'm going to detail for you some examples over here. Again, we could spend the whole session doing downward attribution. I'm not going to do that, but I want you to get the clear picture of where this fits in with those new filing categories. If we look at the first image, we have a foreign corporation with a U.S. and a foreign sub. Now, because there's a U.S sub of this foreign corporation, the U.S sub is treated as if it owns the shares of the foreign sub, and the foreign sub becomes that foreign controlled CFC. Remember, the new filing categories and all of that is only applicable because we're looking at a foreign controlled CFC. That U.S. person is now called a related constructive U.S shareholder.

They are related to that foreign controlled CFC because they share ownership of 50% or more, but they're constructive. They don't have an economic ownership in the foreign controlled CFC. Therefore they are eligible to file a modified Form 5471. They would be your category 1C and 5C. If we look at the top, there's a U.S. person in the way top of that structure. That U.S. person actually has an economic ownership in the foreign controlled CFC. They are what we would call an unrelated 958(a) U.S. shareholder. They have an economic ownership in the foreign controlled CFC. They are the ones that get to file the modified Form 5471 under category 1B and 5B. Okay? So the guy at the bottom gets to be that category C and the guy at the top gets to be that category B.

If we look to our right, to the other image, we have a U.S. and a foreign person that each own a piece of a foreign entity. Now that foreign person has a share of only 5% in some random other U.S. partnership. But what happens is, is that that random other U.S. partnership is treated as if it owns 90% of that foreign entity and that foreign entity becomes a foreign controlled CFC. Again, our U.S. person has economic interest in that foreign controlled CFC. So they are an unrelated 958(a) U.S. shareholder. They get to file both category 1B and 5B. That partnership, though, is what's called an unrelated constructive U.S. shareholder. So one of the relief provided in rev proc 2019-40 is that the unrelated constructive U.S. shareholder does not have to file the Form 5471 at all.

Which makes a lot of sense if you think about it. They have nothing to do with that foreign corporation period. They're completely unrelated. So they are exempt from filing the Form 5471 at all. Another relief provided by the rev proc was is that if that U.S. person did their due diligence to figure out if that entity was a foreign controlled CFC, meaning they asked the foreign corp or they didn't really have a relationship with a foreign corp, but they asked the foreign controlled CFC if they knew whatever levels of due diligence they took to determine if the foreign controlled CFC was one, if they were not able to determine that it was a CFC and if they therefore did not file the Form 5471, they would be protected from any penalties for failure to file the Form 5471.

The last release provided by the rev proc was the use of alternative information. So you know that when we look at the income statement and the balance sheet on the 5471, it says U.S. gap. So the rev proc said for foreign control CFCs, you don't have to use U.S. Gap. U.S gap is the first choice, but if you can't do that, you can go down the list and use all these other different types of alternative information to complete your form 5471. I think most of us use these alternative information items anyways when we're completing the Form 5471 and I have heard people say that this is maybe the way that the IRS is getting through the back door, saying, "We know you're not really doing these things by U.S gap, but for now this alternative information is specifically applicable for our foreign control CFCs." Okay?

So I'm going to skip through all of these category filers. Again, they're here for you to look at another time or reference if you need to, but we know what they are. We've worked with them before. We're just going to remind our category 1B and 5B, which is new, it's for our unrelated section 958(a) U.S. shareholder and our 1C and our 5C is for our related constructive U.S. shareholders. If we look back at that image that I showed before, you would see and remember how you can be one of those entities. Now, this is from the new draft instructions. So that's why you might not have even seen this yet. It is still draft. So it's possible to change. But what you can see is is that the 1B and the 1C don't file nearly as much forms as the 1A. The 5B and the 5C don't have to file as many forms as the five. They're literally providing a modified 5471 filing to make life easier on those owners of the foreign controlled CFCs.

You will note that the 5B, I believe, still has to compute guilty. They have the I and the I1 so they're not necessarily scot free, but just keep that in mind.

All right, look at that, and that means that people understood what I was saying. Fantastic. The correct answer is true. An unrelated section 958(a) U.S. shareholder is eligible to file the modified Form 5471. Again, they would be the 1B and the 5B. I was asked to quickly say the difference between the category one and the category five. The category one Is for the specified foreign corporation versus a category five is for if you have 10% or more ownership in the CFC. That's still true for the 1B and the 5B. That differentiation is still true for the 1C and the 5C.

Now, in general, based on the definition of specified foreign corporation, if the entity is a category five, if you're a category five filer on the form 5471, you're going to be a category one filer as well. So it's just a lot of boxes to check. One of those questions that were like, "Why does the IRS still have the category one," but it is there. So we move on to the first page of the Form 5471. This should look fairly familiar to you. There aren't that many changes, but there are a couple of updates that it's important for you to look at. First of all, as you can see on the top by our categories, they added the extra boxes for the 2B and the 1C, the 5B and the 5C. Remember, and I'm saying it again, because it's really important to me, you don't ever need to check those boxes unless you're dealing with downward attribution.

So for all of those regular forms, you're just going to be the one. For all of those regular filings, you're just going to be the 1A or the 5A. Now, I'm being asked to continue with that. I'm going to go back for a minute just because I it is important to me that you understand these differences. A category one filer is a U.S. shareholder of a foreign corporation that's considered a specified foreign corporation. A specified foreign corporation is any CFC or any foreign corporation that has a 10% or more domestic corporation that's a shareholder of the entity. So what's why I was saying before, anytime that you are a category five, you're also a category one because you're not a category five unless the entity is a CFC. And as we can see here, you're category one when you're filing the 5471, because the entity is either a controlled foreign corporation or any foreign corporation with a domestic corporation as its shareholder, meaning that as long as you're a CFC, as long as you're filing the 5471 because you are a CFC, you will be a category one filer as well. You can be a category one filer and not a category five filer. I believe a corporation that owns a certain amount of a foreign entity would file as a specified foreign corporation even if the entity was not a CFC, but in general, what we're looking at today, what we do in our practices, if you're a category five filer or a category four filer you will check the box category one filer because this makes the entity a SFC, or a specified foreign corporation because of the definition of an SFC is a CFC.

Now this is a lot of circular talking. So if you don't understand it, let me know. Seriously, somebody because a bunch of you wrote that that wasn't clear. So somebody write to me that it's clear before I move on because it's very important to me that you do understand this. The definition of a category one filer is anybody who's a specified foreign corporation. The definition of the word specified foreign corporation is either a controlled foreign corporation, a CFC, or a foreign corporation where they have a domestic corporation as a shareholder. That means that you are automatically a category one filer if you're a category five filer. The definitions ring true for the Cs and the Bs as well.

I am going to move on. It's too bad I can't see your faces nodding so I don't know if you understood. And it's a little bit backwards so I apologize for if it's not clear, or if I repeated myself too much. If we look at this first page of the form 5471, as I said, it's fairly familiar to us, but we've got our extra categories over there, the 1B and the 1C, the 5B and the 5C. And then if we look down at the check boxes, they've added also, "Let us know if you're relying on alternative information when you're filing 5471." Who again is going to be the one that's going to check that box that they're relying on their alternative information? Only a foreign controlled CFC. Only an entity that became a CFC because of downward attribution. You would not check that box if the entity is not a foreign controlled CFC.

So again, we had our 1Bs and our 1Cs, and then we had our questions down below all those check boxes that got added. So the most important one, the new one that's going to be difficult for you to understand is check this box if you relied on alternative information when you prepared the tax return. So that means you're a foreign controlled CFC and you relied on alternative information. The rest of this form looks the same as it has always looked. Those are the only differences to the first page on the form 5471. I think that you guys are okay and you can see things, but let me know if you run into an issue.

Schedule A is the same, nothing changed. That's nice because it's very easy, but they always seem to find ways to complicate easy things. So it's nice that they've left this one easy for us, at least for right now. Schedule B, Part 1 also hasn't changed. Schedule B, Part 2 also hasn't changed, but since this is relatively new, I'm going to remind you that if you're a category four filer, you will list all the direct owners of the CFC. If you're a category one, three or five filer, you're going to list all of the direct owners of the CFC that gave you that ownership in the CFC. So if you own the CFC indirectly, you would list all of the other entities that you have to go through in order to get to your ownership in the CFC.

Keep in mind that in part 1 and part 2, you have to put yourself, or the taxpayer, and you have to put the taxpayer twice. Again, the IRS likes to complicate easy things. Why they do it like that, I do not know. And then we move on to our Schedule C. Again, this one did not change, which makes our lives a little bit easier, but I'm pointing out again, US staff, if you're a foreign controlled CFC, you don't have to do in accordance with US GAAP. And from what we've talked about before and in prior discussions, most of us aren't necessarily doing full conversions from ISRST US GAAP, and when I say most of us, I don't just mean the 60 people on this call right now. I mean accountants everywhere. And one of the questions that I was just asked is how many people in the IRS are trained to scrutinize the 5471 version 2020? Probably very few.

And this is one of those areas where I would say it is most likely a waste of time to be doing major conversions from whatever your financial statements are in to US GAAP. This is just one of those, everybody has to weigh their own comfortable things, but the only time I've ever really seen it is with a client that I have that's an airplane company. And we do recalculate the E&P because the depreciation of airplanes is so massive and so different according to ADP versus how it's being done on their books. And we need to recalculate the earnings and profits, but in general, unless you're working with really significant large numbers, it's not really, if you're looking at the time benefit of what you're doing, translating to US GAAP is not the greatest suggestion.

Another question before I move on to the polling question is what if the direct owner doesn't provide information? So if we're going back to our Schedule B, Part 2, if the direct owner doesn't provide information, they should, but again, if they don't, there is no safe harbor about not filling out that information. So I think you really do need to try to get it. But again, this is one of those things. How many people are actually inspecting this in detail? I don't think very many. This form has changed so much and who knows what it's going to look like next year after Biden gets to it. So I think you just do the best you can. I think we make that a rule with our 5471s that we do the best we can because some things are just not reasonable. And with that, I'm going to move on to the polling question.

While everyone's answering, I'm asking for more clarification on the 1B, the 5B, the 1C and the 5C. So let me just clarify one thing, the Bs and the Cs are the same as whenever if you're a category five filer, that means you're a 10% or more shareholder in a CFC. If you're a category B, or 5B or 5C filer, that means that you're a 10% or more shareholder in a foreign controlled CFC. It's the same original definition, it's just that it's applicable to a foreign controlled CFC and you're one of those special shareholders in that foreign controlled CFC. Again, with category one, if you're a category one filer, that means that you're a US shareholder in a specified foreign corporation. If you're a category 1B or 1C filer, that means that you're a US shareholder of a specified foreign corporation and that is only a specified foreign corporation because it is a foreign controlled CFC.

I hope that clarifies things a little bit for you guys. I guess we can talk about it more later, should you need to, but I think the most important thing to remember is that the Bs and the Cs are only applicable when we're talking about foreign controlled CFCs and the regular clients of most of the people on this call, you're not going to be checking those boxes. You can ignore them. Only when you start dealing structures and downward attribution and all of these other things with different tiered entities would you need to worry. And if you get to that situation, send me an email. I'd be more than happy to discuss it with you.

The form 5471 Schedule C income statement should be reported according to US GAAP. That is true. Somebody wrote the answer really should be "it depends" and they're right, it depends. That's really the correct answer, because if you are a foreign controlled CFC, you can rely on alternative information. And most of us rely on alternative information anyway. But per the instructions to the form, it should be done on US GAAP.

Let me move on. I hope everyone can see. I'm skipping over the rest of Schedule C since it's fairly simple. And this is where I start to get to the complicated things. Schedule E. Schedule E changed a lot. It used to be that Schedule E 1 was a separate schedule. Now schedule E 1 is part of Schedule E. As I said before, Schedule E is still going to be your separate categories of income. And then they have Part 1. Part 1 they've now divided into two sections, section one and section two. Section two is taxes paid or accrued directly by the CFC. I mean, section one. Section two is for taxes that are deemed paid by the CFC.

What does this mean? If the CFC were filing an 1120, and there were indirect taxes that they were eligible to take a foreign tax credit on, meaning one of their subsidiaries is the one that paid those taxes, those would go in section two. The ones going in section one would be the ones paid directly by the CFC. Again for our regular, plain vanilla US shareholder, our dentist, I'm just going to keep going back to the dentist, he's only going to fill in the taxes that he paid in section one, because he's not going to have multiple tiered structures and taxes paid by subsidiaries. Should you have that, then you would need to fill out section two. Now there is a section three as well, or part three. This is for foreign taxes where the tax credit is disallowed. These are generally speaking taxes paid to sanctioned countries. So if anybody's doing business with Iran, that would go over there.

All right. Now I see some questions that are not applicable to the Schedule E, so I will come back to them at the end, just because I want to stay with some sort of direction. And I see that people are still confused about some of the filing requirements, some of the category filers. But if you're going to look at our Schedule E 1 now, like I said, this has become part of the form. This is also going to be in US dollars. They added column A, which is the taxes paid applicable to the current E&P. That needs to come out, meaning it's going to start at zero and it's going to end at zero. What you're going to do is in line four, you're going to put the taxes that the entities paid that year and then you're going to reclassify that to whatever the correct applicable column is. So if you're relying on the high tax exception and you're not picking up any GILTI or any Subpart F, it's going to go from line A to line B. You're going to put it in on line four. And now you're going to look down to rows nine, 10, 11, 12. This is where our vocabulary words become really important.

So remember those vocabulary words. We said we had the 959(c)1, which is our earnings invested in US property. 959(c)2, which is our Subpart F and our GILTI. And 959C3, which is not previously taxed income. So we're going to take our taxes paid, let's say we paid a hundred dollars in taxes, and we're going to put it on column A line four. Let's pretend that we didn't have any previously taxed income. We need to figure out how to get it from column A line four to column B.

So where do we find column B? So we're going to look down here and we're going to read. Line nine says taxes being paid with respect to inclusions under 959(a)1. 959(a)1 is actually another one our vocabulary words. It just means it's another way to say Subpart F income basically. Just means gross income included in the taxable income of the US shareholder. Then we have taxes being paid in respect to inclusions under 951(a). We know that 951(a) is GILTI. Taxes being paid with respect to actual distributions. That's actually a coming out line, that's going to be if we have actual distributions. And we have taxes on amounts reclassified to 959(c)1 E&P from 959(c)2 E&P. So when are we going to use that? We're going to use that when we have income that was Subpart F but is also earnings invested in US property.

And we keep going, reading down the list. So there's reductions. Again, your column A has to start with zero and end with zero. And the question is, where would you put that $100 if everything was just zero? So honestly it's very not clear over here where that would go, which is just like I said, the IRS, as I just went through with you, where does that fit? The IRS did not make this very clear. What I would do is put it in line nine. You take it from line four, you put the 100 in on line four A, take the 100 out on line nine A and put it in on line nine B.

Now we move on to the next page of the Schedule E 1. And here is all of those titles and all of those columns that make no sense. So what did I do? I started reading these and I started digging into them and going, "What the heck are these? And what does this mean?"

I'm going to answer those two questions in a minute, hold on. What the heck are these? And what does this mean? So I started to read the instructions for the form and what I understood was that all of these words, they're nicknames. They come from Rev Proc 2019-01 and they're actually nicknames or abbreviations in Rev Proc 2019-01 where if we look over here, the IRS made a list of all the different PTEP categories. And what you see in those columns are literally the nicknames that the IRS gave to any one of these different types of PTEP. So what I did for you is I went through that list, there's actually 16 of them on their list. The form only shows 10, they left a couple out, but what I did for you was I went through that list. You can see what they did.

I'm going to use number four as an example, E&P described in section 959(c)(1)(A), remember 959(c)(1)(A) is earnings invested in US property, that was initially described in 959(c)2. So that still doesn't really, by reason of section 951A(f)(2), that's still doesn't really make any sense. It's still not English unless you know all of these sections off by heart. And then they called it reclassified section 951A PTP, which makes even less sense. So I translated it for you. The red is my translation. Whenever you see the word reclassified, what that means is that it's income that would be earnings invested in US property but because it's GILTI or because it's Subpart F income, it's not being taxed as earnings invested in US poverty, it's being taxed as GILTI or Subpart F income.

So this number four reclassified section 951A PTEP is just GILTI income that if it were not GILTI income would be treated as earnings invested in US property. And anytime we see the word reclassified, and I hope this answers your question, the person that asked me to clarify line 10, anytime we see the word reclassified, we are dealing with income that if it wasn't for the fact that it was GILTI or Subpart F, it would be taxed as earnings invested in US property. But because it's either GILTI or Subpart F, it's not being taxed as earnings invested in US property.

So now if we go back to the form, keeping in mind that these are just nicknames and that you're never going to understand them if you haven't read 2019-01 or you have my cheat sheet, I'm going to point out for you the three most important ones on this list. Again, every time you see the word reclassified it means income that would otherwise be 956 income but because it's GILTI or Subpart F, it is not earnings invested in US property.

Now, column E3 is general section 959(c)(1) PTEP. We know 959(c)1, we know that's our vocabulary word. 959(c)1 is earnings invested in US property. Great. If I have section 956 income, it's going to go in on column I. If I have straight up Subpart F income, it's going to go in on column six, VI section 965(a) PTEP. That's just Subpart F income.

And if I have GILTI, where's that going to go in? That's going to go in in eight, VIII, section 951(a) PTEP. Again, these are nicknames. They're not going to make any sense to you unless you've looked at the Rev Proc. So keep in mind that those are your three basics and if it doesn't fall into one of those three basics, look at my cheat sheet and get the translation, or actually look in the Rev Proc. But understand, I know last year when these forms first came out and we're all staring at them and going, "What the heck do these mean?" You couldn't understand what they meant because they're nicknames. They're shorthand. They can't actually explain it, which again is just the IRS having fun, complicating things and making it hard for us in my personal opinion.

Okay. So if we go back here for a minute, someone's asked me to clarify line 10, taxes being paid with respect to inclusions under section 951(a), that's taxes paid in connection to GILTI income. So that's perfect because I was about to say, let's say that our $100 that we had, instead of it just going into not previously taxed PTEP, I'm going to do an example now so for those of you that are asking, I'm going to do an example. I think the example is going to make you understand this better. If it doesn't, I will repeat, but let's say I have my a hundred dollars and this time my taxes have a hundred dollars in connection to my income. And this time my entire a hundred dollars was GILTI.

It's still going to go in the line four column A, but now I need to reclassify it. So I started in line four column A and I need to say, "Okay, I'm going to take it out of line four column A, and I'm going to put it in the column that it belongs to." So in this case, I'm going to go to line 10 because line 10 is taxes being paid with respect to inclusions under 951(a). And I'm going to take that $100 and I'm going to take it out over there. It's going to be minus a hundred in column A, and I'm going to go to the next page and I'm going to find column E8, section 951(a) PTEP. And I'm going to go to line 10 and I'm going to put the $100 in over here. Okay. I guess you guys can't see my screen. You can't see my mouse moving, but I'm going to go to line 10, column 8 and I'm going to stick the $100 in. Give me one second, I'm going to read the questions and I'm going to get back to you. Okay, I'll go one second. Okay. So two questions. On the chart, where would the taxes paid in respect to income that you're not paying taxes on? So these are actually the same question, I apologize for flipping through this quickly. What do column B, C and D stand for? Okay. So column B, is where you're going to put any of your income that for whatever reason, if you have high tax exception or something else, any of your taxes with respect to income that was not being treated as previously taxed in the current year, is going to go into line B.

Column C, is in this case taxes related to any income that's not previously taxed from before 2018. Okay. So basically, column B, C, and D are all for income that's not previously taxed. Meaning if you're not including income in your current year, it's going to go in column B, C or D. D is for losses. B is for the current year, any income that any tax is paid in respect to income that otherwise, would not be treated as that is not being PTEP. This year it's not being taxed and column C is for anything from before 2018. Some of them ask me again, if you have high tax exception, where did the taxes go? The taxes will go in that column B, okay? They'll go in column B because there are not applicable to PTEP, in the current year. They will stay in your column B and it will be that way throughout a column J and column P as well, even though the income is exempt from GILTI just because of a, that's an interesting line. You guys can't read the questions and then I'm responding to them, I'm a little silly. Maybe it's the isolation I've been in from the last week. But even though you can say, okay, this is not GILTI just because of high tax exception, it still doesn't fall into the PTEP bucket. It's not PTEP and it will go in column B. Now, somebody just said, it seems like the taxes on E are going to closely match the earning classifications on J. I'm not just going to say they're going to closely match, they will match E, J, M, P in terms of the columns and the lines, all match. Once you understand column E, you will understand column J and column P. Which is why I'm going to give you another minute or two to ask questions because I need you to understand column E. If you can't understand column E, you won't understand J or P.

So my next question is, so column C is something that was earned in previous years but not taxed because there was no GILTI , would there be tax in the current year? So this is a good question. Why would we have column C really? Because we have repatriation tax. So really, anything from before 2018, from 123117, should have been previously taxed income. For some reason, that income was not previously taxed, it wasn't included in repatriation, it's still from 2018, it's sitting in column C. It would not be taxed in the current year. We're only going to look at our current year income when we're calculating our GILTI or subpart F, unless we have suspended or whatever, subpart F, but it's just going to sit in that bucket and why it's sitting there for some reason, they didn't pay the repatriation tax on it or they made a 962 election. Don't forget, when you make a 962 election, there is no PTEP or they made a 962 election. If you make a 962 election, you don't show PTEP and you're going to stick the current year in column B and anything from the prior year. If your repatriation taxes down with the 962 election, it's going to go in column C. And then someone else said that we could also have deficits in there. Yes. You either didn't have repatriation tax because you had losses, didn't have repatriation tax because you made a 962 election or some other weird reason why you didn't have repatriation tax, you'll have that income sitting in column C. And again, if you make a 962 election, even if you pick up GILTI, it's going to be in column B. Now, if you have 956 income, it's going to be an E3. If you have subpart F income, it's going to be in E6. And if you have GILTI , it's going to be in E8. Okay? When does current year EMP go into column G and on? A, B, C, D, E. Where's G? Meaning these guys, I don't see a column G. I don't know if I'm missing something.

Does anybody else have any other questions on this? Or please even just write that as "clear" and you think you understand it well enough because it's really important to me that you understand this. If I spend the rest of my time, just making sure you guys understand this, you'll be able to fill out the rest of the form. So please, right now, I'm giving you like 30 seconds for anybody else to write a question. If you just want to be nice and right, "it's good, you can move on." Can please do that as well.

Awesome. Thank you Riskabar for telling me that it was clear. I'll give it one more minute. I really do miss seeing everybody's faces. It's really nice that we're able to do this, like this, but it is really hard not to see your faces and to see you shaking your heads and knowing that you actually understand it. All right. So I am getting some questions. One of the questions that I'm getting is, for column C pre 1987 EMP, if the income was earned acronine at 1987 but not taxed, where does it go? Pre 1987 is in C and B is post 1986. And there it says pre 2018 but this is where it's going to go, always. And let's see, there's so many more questions there, all right, let's see. The next one. Does anything on a form change if you're like 962 and 51118?

What changes is that we're not showing previously taxed PTEP. So everything is just going to sit in column B. Can you get a recording? Hi, Yusefa. I'm calling you out, but yes, you can get a recording of, it'll be an on demand, repeat of this. So you can listen to my voice over and over again. I believe you'll get it in an email, in about an hour or so. I think they even write it out and I can read it and see all the "umms" and "okays" that I said and feel really stupid. Where are we putting untaxed 2020 income? Again, it's going to go in this column B. I know that sounds funny because it says pre post 1986, pre 2018 but that is where we're going to put it.

All right. I think we're going to move on. Again, use this cheat sheet, if you need to, keep in mind that every time you hear reclassified, it's income that would be 956 if it wasn't for the fact that it's GILTI or subpart F.

I got a really interesting question. I don't know the answer but it now as column D, can those suspended tax be used for the high tax exception calculations in 2020? I don't know. I assume not but that's a great question and I don't know the answer to that. But really good question, who knows.

All right, we got our answers here. So I wanted everybody to say "strongly agree" but I'll take it that 60% of you feel like you're ready to accurately prepare schedule E. I'm sorry if it wasn't clear enough, it's pretty complicated but feel free to reach out to me afterwards, I'm happy to discuss it further. We move on to the balance sheet. Again, it says U.S. GAAP. Again, you can't rely on alternative information. Again, most of us don't actually use U.S GAAP but nothing has actually changed on our balance sheet. Schedule G, the IRS added a bunch of more questions. So questions 20 and 21, has to do with 163J and if your CFC was subject to 163J. Question 22, which is also new, has to do with, if the shareholder was a 50% or more, shareholder in the CFC, meaning they were a Category 4 Filer and they got rid of 10% or more of their shares in the CFC.

So those are the two new questions. Question 19. You still can't answer without looking to the instructions to the form and I believe there is something there about high tax exception. So take a look. The racks have already been there in the past but again, what I did for you as a little cheat sheet, just an explanation of what the questions are. So you can take a look at that on your own time because we only have a half an hour left and I want to get through to the harder stuff. And then we get to schedule H. Now we're like, "okay, this looks different." All right. So what the IRS did here, was they started setting the stage for not having to divide the forms into the different categories of income. I really hope that they continue to allow us like they're doing the schedule I1, to not file a bunch of different forms to different categories of income.

So far, it's only applicable to the I1. That's the only place it's been updated but we can see that they're setting the stage over here. So the beginning lines 1 to line 5A are the same as our schedule H has always been and are in functional currency. Then we take a look at number five. So 5B is this DATSM, which is like a specific type of financial statement, accounting and reporting, which I assume none of us are going to see. I've never seen it once in my career. I don't know if anyone here has but what 5C1 and 2 are, how much, and this, you're going to do in functional currency. How much of the income online, 5A is applicable to your general category and how much is applicable to your passive category?

And then 5C3 goes back to your 901J category. What's your 901J category? It's all those countries that you're not really supposed to be doing business with but you did, but you're not eligible for the foreign tax credit on them. So if you're doing business with Iran, the income's going to go in the 5C3A, that's complicated. Can you follow that? If it's a general category, it's just going to go in 5C1 and if it's passive, it's going to go in 5C2 and then down by 5E, you're still going to stick your exchange rate and 5D is you are going to show it in USD. So everything on this chart besides for 5D, is going to be in functional currency. The question five is really just now dividing it into what buckets you would have it on your 1116s, so to speak, if you're filing an 1116 for this.

All right, let me go to schedule I, which also, changed a little bit. They made this line 1 very long and what they did was they broke out all the different types of subpart F income. So line 1 is subpart F, is all the different types of subpart F income. Now you have to remember something about schedule I. Schedule I is all of the income that the U.S. shareholder is including on their personal tax return or whatever personal corporate tax return, from the CFC, except for GILTI income. This is where you'd put dividends. This is where you'd put subpart F. This is where you'd put section 956 income. Schedule I1 is where you're going to show your GILTI and this amount you're going to do, actually, in USD. Number one is going to be all your different types of subpart F income. In general, probably, the subpart F income that we see on the day-to-day basis, is our dentist has a lot of extra cash on the side, in he earn too much interest or he got dividends because he made investments and now all of a sudden, we have to calculate foreign personal holding company income. Or we have to say his company became like a holding company because he had more than 5% of passive income.

That's going to be 1E. So, that's going to be the place that you're going to see the most of your subpart F income going. Line two it's going to be your earnings invested in U.S. property and so on and so forth. Line five is all different types of dividends, which again, you're mainly not going to have all these different types of dividends and you're just going to, actually, if there are dividends, you're going to just stick them at 5E, which is literally a catchall. Dividends not reported online, 5A, 5B, 5C or 5D. So if you stick it into 5E, you'll stick it into 5E unless you've got some of these 245A dividends has to do with dividends from subsidiaries and other.

Again, our dentist doesn't have subsidiaries that he's receiving dividends from. So we would just look at 5E and generally speaking for subpart F income, again, I'm repeating myself, we're going to look at 1E. So we've got 1E, 5E and 2. Those are the ones that are going to be the most important to us. If I have a highlighter on the form with me right now, I was circled those ones because those are the ones that you will probably see on a day-to-day basis, more often than not. And there are some questions at the bottom. Was any of the income from the foreign corporation blocks? Again, these are not applicable to our dentist.

So I'm going to ask the question. Do you fill out the schedule I for the high tax exception instead of the schedule I1 because you're not doing GILTI? I'm going to show you the schedule I1 right now and I'm going to show you how you fill it out if you're making me high tax exception. You wouldn't put anything on the schedule I1 because the schedule I is literally only the income that is going to flow through to your tax return. So the schedule I again, I was asked to repeat. So if you have subpart F income because it's interest or dividends or whatever over the 5%, that's going to be 1E. If you have section 956 income or earnings invested in U.S property, that's going to be 2.

And if you have dividends from your CFC, that's going to be 5E. So now I'll show you the schedule I1. The schedule I1, believe it or not, didn't change. So it still says the separate category, even though we were being told on the new instructions that we don't need separate categories, which is kind of interesting but the form itself didn't change, which is really nice for us because a lot of other things have changed. So if we look at Rose income line 1, that's going to be the same. We're going to stick our gross income, not our net income, our gross income on line 1. On line 2, is all of the exceptions, anything that wouldn't be treated as GILTI. So we looked at line 2C, high tax exception.

If you don't have GILTI because of high tax exception, let's say we had $1000 of gross income, we'd put $1000 line 1 and we'd put $1000 line 2C which would make line 3 or line 4 be 0 and we wouldn't have a GILTI inclusion amount. This is where we're going to show that we're taking the high tax exception. We also would take out any income at subpart F income and income at ECI effectively connected with the U.S trader business. All of those are going to come out in your exclusions, in the rows 2 and finally, on line 5, you're going to stick your deductions that are applicable to whatever's gross income is left. So if you're making the high tax selection and you had $1000 of gross income and $1000 of that came out on line 1C, you're not going to have any deductions that are applicable.

You're just going to leave it at zero. The rest of your form or the rest of that part is going to be blank. Line 5 is going to be your tested income or loss, which is going to be your line 1, minus your line 5. The bottom down there is we're going to put your taxes, your QBI. The schedule I1, is theoretically, how your shareholder is going to populate their form 8992, is how they are going to calculate their GILTI inclusion. So pretend that you're a partnership for one minute and you yourself, are not calculating the GILTI inclusion amount but you're going to go give this to your partners, who are more than 10% owners in the CFC to calculate their own GILTI inclusion amount. This is why you're going to want to give them. This is what's going to make it that they're able to file and calculate their GILTI. Okay? So, this is just literally the breakdown of all that information. It doesn't actually calculate your GILTI inclusion amount here, it provides all the information that you need to calculate your GILTI inclusion. It does get you your tested income, it does get you your QBI, your interest income, all the components but it doesn't actually do the calculation.

All right. And let me get to schedule J. Now, we don't nearly we don't nearly need to take as much time on schedule day as we took on schedule E because it's pretty much the same. We have our separate categories of income. There is a place to check in the box if the U.S shareholder doesn't have all of the information applicable. Remember, the schedule J is from the perspective of CFC. Okay? We're going to look at the schedule P in a few minutes, which is different, it's from a different perspective but the schedule J is from the perspective of the CFC. So what we're looking at over here, is the full picture of what's going on with this corporation and their earnings and profits. But if you don't have all the information for whatever reason, meaning you're not the only one that owns it, someone else does too and you don't have every piece of what their PTP or whatever is going to be, you can check that box.

This is going to be filled out the same way that we filled out the schedule E. We have our column A, that's going to be where we're going to put our current year amounts. Now, unlike the schedule E, you don't have to pull it out of column A, it can stay in column A. We have our column B, which is our 1986 to 2018. We have our column C, which is from pre 1987 and our column B, which is hovering deficits or losses. And then we start with our column E, which has all of our different types of previously taxed earnings and profits, which is listed in 2019-01 and the IRS just use the nicknames over here. So just remember. That all of those are nicknames.

That's why they don't make any sense. But in my cheat sheet, look at 2019-01 if you're in the mood to test your brain a little, to understand them. If we have income and again, we looked down at the rows as well. We have to keep in mind, our vocabulary words. Our current year EMP is going to go in column 3. Okay? So whatever your current year income is, it's going to start in column A3. If you're making a 962 election or it's not GILTI because of the high tax exception, you'll leave it there. If you have subpart F or you have GILTI, you're going to go down to line 8, amounts reclassified to section 959C2 EMP from 959C3 93 EMP. What's 959C3? That's just regular, not previously taxed income. 959C2 EMP is GILTI or subpart F. So, if you had $100 of income, you're going to put it in on line 3. If you made in a high tax exception, you're going to leave it on line 3. If you made a 962 election, you're going to leave it on line 3. If that $100 of income, all of that was GILTI or subparf F, you're going to take it out on line 8 and I'm going to show you in a second where you're going to put it. If all of that $100 was 956 income or earnings invested in US property, you can put it in line 11, amounts included as earnings invested in US property. So again, you're going to take it out on line eight. If it's Subpart F for GILTI, you're going to take it out on lin 11, if it's earnings invested in US property, we're going to switch over to the next page and it looks a little bit different, but it is all the same nicknames that we saw on the schedule lead that I already translated for you, that you have that big list that you could look at. But that little 3i is for 956 income. Six is for your regular sub-products income and eight is for your GILTI.

So again, if I have a hundred dollars of income and it's treated as GILTI, I'm going to put it in column A row three. In column A row eight, I'm going to show a minus a hundred dollars. And then in column eight VII, row eight, I'm going to put in the hundred dollars. Okay. This is the same as our schedule E. Now someone just asks, assuming software still don't allow e-file or 951A category. Do you still advise to put the general category to allow e-file? And yes, last year, a lot of people asked me this question. If I separated by categories of income, they wouldn't let me e-file the tax return and especially coming from Israel in the middle of COVID, like what the heck am I going to do? And I advise everyone just to put general and I still hold by that.

And again, this goes back to how many people in the IRS actually understand what they're looking at here, probably very, very few and what's the time value of your money and your sense of time and your money. What's the money value of your time and the risk benefit reward factor of picking something in the mail, especially in the middle of COVID is going to be much more of a risk than just e-filing with that same general category. So I do still think if you can't e-file, if it doesn't say general, just stick it in as general. Another question that I had is high tax is the actual percentage of tax paid, meaning if prior losses reduced your income to zero, then the high tax is not applicable? And that's correct. I didn't really talk too much about the high tax exception right now, but I will say this, you need to actually look at the high tax that the tax is actually paid in the current year and look at your effective tax rate.

It's not good enough that, that taxes in Israel are applicable to the high tax exception. Someone had losses last year, which made them not have to pay taxes in Israel this year, they will have to pay GILTI. If somebody is in one of these special zones, like Sdarot or something like that but they're not paying taxes in Israel. They will have to pay GILTI. The high tax exception is applicable when your effective tax rate, the actual taxes you paid in the current year, is at least 90% of the tax rate of the US corporate tax rate. Now, something else that I find really, really interesting, or is just going to be what happens with the Biden administration, because it is extremely possible that the corporate tax rate is going to go up in this high tax election, which has made our lives all much easier, Israel is going to go away.

So stay tuned. I've definitely heard him saying that he's going to raise it to 25 or 26%. So there's definitely something to keep out for. Okay. So that's your schedule J. Schedule M, I'm going to change.

Yeah. We only have about 15 minutes left. I told them an hour and a half wasn't enough. But I told you, the marketing team said that I am not allowed to do longer than an hour and a half if I want to keep my audience awake. I am going to get through to some of the most important things. But remember you have the slide. I put a lot of effort and energy into them so that you would have them to reference during this tax year. So please look at them, read them and let me know if you have questions. Again, I really enjoy talking about this. I'm sure there's a bunch of you here in this room. I know that can say, "We were stopped by Ayelet before." So feel free.

All right. Awesome. Somewhat agree. So 45% of you said that you somewhat agree that we don't need to discuss schedule O. Again, we really only have 15 minutes left. I don't want to keep you so much, but I will tell you that the point out of schedule O is if you purchased or disposed of 10% or more in a foreign corporation, even if it's not FCFC. Part I is if you are a US officer or director in the corporation. And part II is if you're the actual US shareholder and you fill out all the different little details and data, all the questions, and it's a lot of repetition and sometimes it's indirect, which is why, if it's your indirect ownership or it's just why. Again, if sometimes there's just indirect ownership. So if your dentist, then it's just the same.

You're literally writing the name of a shareholder over and over and over again. But I have situations where I have tiered structures, which is why the names aren't going to be a little bit different as I fill out this form. This section D is for your disposition of stock. We've got additional information which has questions, and I'm going to skip through it really quickly. I just had another question that I think is important to respond to. He said the high tax exception, is there a formal election that we should be filing in? There is actually a formal election. It's a piece of paper. It's a white paper, but you should be including that with your tax return. I think in the regs somewhere, but you can also ask me and I will send you a copy of the words that you should be using for the high tax election.

Another question that I had asked, if a company was formed in the current year, do you need to complete a schedule O? And the answer is, yes, you do. And when they're going over 10%, that also means in the year of formation, you wouldn't write purchase, you would write formation. And then one more question is, if you have a company under 10% owner, but he's a director, should he also be included in the list of shareholders in schedule B? No. Remember you're not ever considered a US shareholder unless you own 10% or more in the CFC. So if somebody is a director, they might have to do part one, but they would not be considered a shareholder in part B, for purposes of CFC purposes. Now we're up to our schedule P.

I got asked for more detail. I asked now if the company was formed, do you have to prepare the schedule or was if the company existed, but the owner wasn't NRA until the current year. Would they now be a category three filer?

It's really an interesting question. I personally wouldn't file the category three but there are people in the audience that would disagree with me. So it's just an interesting point. I don't have a hundred percent clear answer for you on that but a good question. I am going to move on to schedule P and I have 13 minutes left. I will stick around for a couple of extra minutes if you guys have questions, they'll leave this open for an extra half an hour, I believe so. If people have questions, I'm more than happy to stick around for a little bit, but I do want to finish up just so that all of you can get your CPE credit and you can leave if you need to or whatever. So schedule P did change. One of the really big changes from schedule P for last year versus this year is now they have part one and part two.

Part one is in functional currency, just like our schedule J is and functional currency. Part two is in US dollars, just like a schedule E is in US dollar. So, that's interesting. Now we have to do this in functional currency and US dollars. Now I want to bring up a very important point about schedule P, if you remember, I said that the schedule J was specifically focused on the CFC. The schedule B is specifically focused on the shareholder. We're not asking now for the PTEP of the whole CFC, we're asking for your share of the PTEP. Let's say, you own the company 50%. And it's always just been an even split 50% and the other shareholder is a US person. So you guys are both picking up your GILTI and all of that, your schedule P would be identical to your schedule J but you would only show 50% Of it.

The other big difference between the schedule P and the schedule J is that the schedule P doesn't care about not previously taxed income. Schedule P is only looking at the previously taxed earnings and profits that belong to that US shareholder. Okay. It's very important to remember that. So we're only going to start with, before what would have been our column E and our IIs and I3s and all of those things. We're going to have those, just be Column A, B and C here, and remember if it's in functional currency and US dollars.

But Schedule P. So the titles are the same. It's the same nicknames that we have that whole list for that we now know are from rev proc 2019-01 and we're going to start a functional currency, and then we're going to do it in US. Literally the drafts instructions that came out yesterday, I thought that they would provide clarity on this. They don't, nobody says exactly how you're transplanting to USD in terms of, should we be layering on each year or should we be looking at it and translating everything into this year as average exchange rate? I really believe we should be layering it on each year, meaning if we look at the US dollar section, whatever's in line one is going to be the cumulation of all the prior year exchange rates, which means that our ending number at the bottom of our part one is not going to match and then we can't just say, "This year's exchange rate is 3.2 or whatever it is, and divide by that number to get to whatever number we're going to see at the bottom of our US dollar part."

I believe whatever numbers we put in this year, we're going to use those average exchange rates, but we're going to be layering on with different exchange rates by year. Okay. This section is the same. Remember it's the same, the columns are the same. So if I have a hundred dollars and it's treated as GILTI this year, we're going to look to line seven, amounts reclassified to section 959C to EMP from section 959C3 EMP. I'm going to stick my hundred dollars or my hundred shekels, because this is my functional currency in six, which is section 951, APTP, that's H okay. That's where it's going to go. And it's going to be the same thing. If we have 965 AP TMP, this F column is going to be your Subpart F and your C column over here is going to be our earnings invested in US property. Remember, anytime you see the words reclassified, it's income that would be earnings invested in your property if not for the fact that it was sub products or GILTI income. And that really is the schedule T in a very quick “we have eight minutes” left nutshell.

Yeah. So are we going to end up with accumulated foreign currency difference? Yeah, that's exactly what I meant before. We're going to end up with accumulated foreign currency difference. So, yes, that is what I was trying to say. The numbers are going to look very, very different because of that. You're not going to be able to just divide whatever numbers were in the foreign currency part to get your US B numbers. It's not going to work that way. And also if you make a 962 election, this is what I wanted to say before. If you make a 962 election, it's not being treated as previously tax PTP, you are not filling out your schedule P. All right. If you would have been GILTI, but there was no income. So nothing was taxed. It's not PTEP.

If you had a high tax exception, it's not PTEP. It is not going to be on your schedule P. All right, now I'm just going to point out that the IRS just released this schedule Q and schedule R. I don't have much clarity on them yet. I can tell you that the schedule Q is supposed to assist with the 1118 that the corporations are entitled to, based on the foreign taxes paid by the CFC. And the schedule R is the distributions received from the schedule P. If I'm the CFC, like actual cash property received from the CFC, they're both drafts. It says on it, do not file. So we are not filing these forms. Right now.

Right now. I wanted you to know that they exist, that we're going to have to meet next year and discuss what these forms do, know that they are existing and the 5471 is constantly changing much to all of our chagrin, but it's not for right now. I was asked again, which income did I say is not reported on the schedule P. The schedule P is only PTEP. So you are not going to report the PTEP in less. You're not going to report on the schedule P unless it's PTEP. It is not PTEP. If it was not passed because of the high tax exception, it is not PTEP. If you made a 962 election, it is not PTEP. If you had losses, so there was no income in the current year.

All right. Debbie, I want to skip to the polling question. I'll quickly show you in the few minutes we have left. This is the 8992. So if you remember our schedule one is going to flip to our 8992. Our schedule I one is going to flip to our 8992. So if we have a number of CFCs, we're going to take our schedule I one, all that information that we had on our Schedule I one, we're going to use to fill out part A of our 8992. Part A of our 8992 is going to flow to part one and part two of our 8992. And that's how we're going to actually calculate our GILTI inclusion amount. I'm not going to go into more detail than that right now, just because of the length of time.

Awesome. All right. This was a trick question because I didn't actually discuss it with you yet, but GILTI equals net tests and income minus DTIR. And DTIR is 10% of QBI minus specified interest. So the answer is actually false, but I tricked because you missed the specified interest income expense thing. I did try to help you with GILTI. Again, we don't have a lot of time. And I think that I put a lot on your brains for today I really am proud of this picture that I put together, just to understand all the pieces of the GILTI and again, your schedule, I one includes all of these pieces. So your GILTI is your net tested income. That's aggregate tested income minus aggregate tested loss minus net DTIR, which is your 10% of your QBI minus your specified interest expense. And interest expenses is your interest expense minus your interest income.

And I did do a little example and then put it into a chart for you, but I don't want to go into it now in the three minutes we have left, just because I think that my brain is tired. I assume your brains are tired as well from all the information that I piled on you. If we look at our form 8993, I did want to bring that up because if you're making a 962 election, you need 8993. 8993 is a form that's included on a corporate tax return. So if we have our regular dentist and he's applicable for GILTI, he's Alaska, the high tax exception. He's not going to need the 8993, but if are making a 962 election, you are going to use the 8993, you're going to come over to part three of 8993.

You're going to stick your GILTI inclusion amounts on line 22. And you actually get to do your 50% reduction of the GILTI. So you're going to have your GILTI deduction on line 29. And that's really important to keep in mind. Again, if you're making a 962 election, you do need a form 8993. With that, I'm going to finish talking. I finished a minute early, I'm very proud of myself. So I'm going to give you guys a couple of minutes.

Thank you. See you can tell the marketing team, Debbie, that I made for not to put my audience to sleep. But I'll give you a few minutes to ask some questions if you have any and if not, I will just sit here or take a deep breath.

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