Section 962 Ordering Rules
Section 962 of the IRC provides an election for individual U. S. shareholders of CFCs to be taxed at corporate rates on their Subpart F income and global intangible low-taxed income inclusions. The Section 962 ordering rules dictate how distributions of PTEP are treated when this election is in place. If a Section 962 election has been made, disregard the easing of administration comments noted as it relates to the Section 965 priority rule.
Key features of the Section 962 ordering rules include:
Taxation at Corporate Rates
Basis Adjustments
When this election is made, the individual shareholder is taxed at corporate rates on income inclusions, and the amounts are treated as if they were received by a domestic corporation for purposes of applying the foreign tax credit. The highest rate of corporate tax is 21 %, while individual tax rates can reach 37 %.
The rule also provides for adjustments to the basis of the stock or other property with respect to which the PTEP is received. This prevents double benefits that could arise from the basis provided under Section 961 for the inclusion that gave rise to the PTEP.
Additional Level of Taxation Coordination With Other Provisions
The rule ensures PTEP distributed to an individual who made this election is subject to an additional level of taxation. This is because the distributed PTEP is included in the individual’ s gross income to the extent it exceeds the amount of tax paid on the prior income inclusion in the year of the election.
The rule works in conjunction with other provisions of the tax code to ensure that the tax treatment of PTEP is consistent and equitable, preventing both double taxation and double non-taxation.
Here to Guide You
The Section 965 priority rule and Section 962 ordering rules are both essential components of the U. S. international tax system. They provide a structured approach to the distribution and taxation of PTEP, ensuring tax liabilities are appropriately managed.
Understanding these rules is crucial for taxpayers navigating the complexities of international taxation, as they have significant implications for tax planning and compliance. Proper tracking is necessary to correctly report PTEP and avoid challenges( and potential assessment of penalties) from the IRS
About the Author
JAMES MIESOWICZ, CPA
PRINCIPAL, DOEREN MAYHEW ASSURANCE PRINCIPAL, DOEREN MAYHEW ADVISORS, LLC miesowicz @ doeren. com
With a career spanning over 30 years, Jim is a trusted advisor within the firm’ s International Services Group, helping businesses and individuals deal with inbound and outbound international tax issues.
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