Item B Form 5471 (New) Updated Categories of Filer Changes

Item B Form 5471 (New) Updated Categories of Filer Changes

Item B Form 5471 (New) Updated Categories of Filer Changes

(New) Item B Form 5471 Updated Categories of Filer Changes: When it comes to completing Internal Revenue Service form 5471 (information return of US persons with respect to certain foreign corporations) one of the most important aspects is to determine which category of filer(s) the Taxpayer qualifies as (Taxpayer may qualify for multiple categories in the same year). The category of filer determines which schedules the taxpayer has to complete in support of form 5471. Recently, in the 2020 version of the form — which is filed in 2021 in order to report the 2020 information — the category filer information was updated and expanded. More specifically, categories one and 5 were further broken down into different subsections.  This was done in accordance with Section 8 of Revenue Procedure 2019 -40. Let’s take a romp through Form 5471, Item B.

Form 5471 (2020) Update to Categories of Filers

As provided by the IRS: 

      • On page 1 of Form 5471, item B (category of filer), the checkbox for category 1 has been deleted and replaced with checkboxes for new categories 1a, 1b, and 1c.

      • Also, the checkbox for category 5 has been deleted and replaced with checkboxes for new categories 5a, 5b, and 5c. These changes are being made because section 8 of Rev. Proc. 2019-40 provides relief for certain types of category 5 filers.

      • These instructions clarify that this relief is extended to similarly situated category 1 filers.

      • See Certain Category 1 and Category 5 Filers for details.

Revenue Procedure 2019-40

Section 8 of revenue procedure 2019-40 is relatively brief and provides the following:

      • Section 957 ownership requirements

        • The term “section 957 ownership requirements” means, with respect to a foreign corporation and any given day of a taxable year of the foreign corporation, stock ownership described in section 957 that would cause the foreign corporation to be a CFC on such day.

Item B Form 5471 (New) Updated Category 1

These categories include a U.S. shareholder of a foreign corporation that is a section 965 specified foreign corporation (SFC) (defined below) at any time during any tax year of the foreign corporation, and who owned that stock on the last day in that year on which it was an SFC, taking into account the regulations under section 965.

However, see Certain Category 1 and Category 5 Filers, later, which may apply. U.S. shareholder.

For purposes of Category 1 filers, a U.S. shareholder is

      • a U.S. person who owns (directly, indirectly, or constructively, within the meaning of sections 958(a) and (b))

      • 10% or more of the total combined voting power of all classes of voting stock of a section 965 SFC or,

      • in the case of a tax year of a foreign corporation beginning after December 31, 2017, 10% or more of the total combined voting power or value of shares of all classes of stock of a section 965 SFC. U.S. person.

      • See Category 5 Filers, later, for definition. Section 965 specified foreign corporation (SFC).

      • For purposes of Category 1 filers, an SFC (as defined in section 965) is:

        • A CFC (see Category 5 Filers, later, for definition), or

        • Any foreign corporation with respect to which one or more domestic corporations is a U.S. shareholder.

        • However, if a passive foreign investment company (as defined in section 1297) with respect to the shareholder is not a CFC, then such corporation is not a section 965 SFC. See section 965 and the regulations thereunder for exceptions.

        • A U.S. shareholder who is a Category 1 filer (defined above) must continue to file all information required (see below) as long as:

          • The section 965 SFC has accumulated E&P related to section 965 that is reportable on Schedule J (Form 5471), or

          • The U.S. shareholder has previously taxed E&P related to section 965 that is reportable on Schedule P (Form 5471).

      • Category 1a Filer

        • A U.S. shareholder who is a Category 1 filer (defined above) must complete Form 5471 and file all information required of a Category 1a filer if that U.S. shareholder does not qualify as a Category 1b or 1c filer.
      • Category 1b
        • Filer See Unrelated section 958(a) U.S. shareholder, later, for instructions pertaining to when Form 5471 may be completed as a Category 1b filer.
      • Category 1c Filer

        • See Related constructive U.S. shareholder, later, for instructions pertaining to when Form 5471 may be completed as a Category 1c filer.

What does this mean?

It means that when a person qualifies as a category 1a filer they still have significant more reporting to complete than if they qualify as a 1b or 1c, since they have to complete Schedule J (Accumulated Earnings & Profits (E&P) of Controlled Foreign Corporation)

Item B Form 5471 (New) Updated Category 5

These categories include a U.S. shareholder who owns stock in a foreign corporation that is a CFC at any time during any tax year of the foreign corporation, and who owned that stock on the last day in that year on which it was a CFC.

However, see Certain Category 1 and Category 5 Filers, later, which may apply. U.S. shareholder.

For purposes of Category 5 filers, a U.S. shareholder is a U.S. person who:

      • Owns (directly, indirectly, or constructively, within the meaning of sections 958(a) and (b)) 10% or more of the total combined voting power of all classes of voting stock of a CFC

      • or, in the case of a tax year of a foreign corporation beginning after December 31, 2017, 10% or more of the total combined voting power or value of shares of all classes of stock of a CFC; or 2. Owns (either directly or indirectly, within the meaning of section 958(a)) any stock of a CFC (as defined in sections 953(c)(1)(B) and 957(b)) that is also a captive insurance company.

      • U.S. person.

        • For purposes of Category 5 filers, a U.S. person is:

        • A citizen or resident of the United States,

        • A domestic partnership,

        • A domestic corporation, and

        • An estate or trust that is not a foreign estate or trust as defined in section 7701(a)(31). See section 957(c) for exceptions.

      • A CFC is a foreign corporation that has U.S. shareholders that own (directly, indirectly, or constructively, within the meaning of sections 958(a) and (b)) on any day of the tax year of the foreign corporation, more than 50% of:

        • The total combined voting power of all classes of its voting stock, or
        • The total value of the stock of the corporation.
      • Category 5a Filer

        • A U.S. shareholder who is a Category 5 filer (defined above) must complete Form 5471 and file all information required of a Category 5a filer if that U.S. shareholder does not qualify as a Category 5b or 5c filer.
      • Category 5b Filer

        • See Unrelated section 958(a) U.S. shareholder below for instructions pertaining to when Form 5471 may be completed as a Category 5b filer.
      • Category 5c Filer

        • See Related constructive U.S. shareholder below for instructions pertaining to when Form 5471 may be completed as a Category 5c filer. Certain Category 1 and Category 5 Filers

What does this mean?

Like preceding Category 1a, 1b, 1c, — it means that when a person qualifies as a category 5a filer they still have a significant amount of reporting to complete, but if they qualify as a 5b or 5c filer, they have more limited reporting that is required.

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