AL: Guidance issued on reporting Section 965 income

The Alabama Department of Revenue recently issued guidance on the state’s treatment of amounts required to be included in income under IRC section 965. For corporate taxpayers, the notice explains that although, for federal purposes, repatriation income is reported on IRC 965 Transition Tax Statement, and not on Federal Form 1120, the repatriation income and related expenses are still considered to be included within federal taxable income. Accordingly, the repatriated income and related expenses must be reported on Schedule A of the Alabama Form 20C. If the reporting corporation owns more than 20 percent of the controlled foreign corporation from which the section 965 income is received, the repatriated income may be offset by a dividends received deduction. Taxpayers should include a copy of their IRC 965 Transition Tax Statement with their Alabama Form 20C.

For partnerships, the notice explains that because Alabama Form 65 closely mirrors Federal Form 1065, the reporting requirements for IRC section 965 income and expense mirrors the reporting utilized for federal purposes. With regards to S Corporations, Alabama law provides that the taxable income of an Alabama S corporation is determined in the same manner as an individual. Thus, Alabama S Corporations are not required to report repatriation income if the S Corporation is a direct shareholder of a foreign corporation subject to the provisions of IRC section 965.

Individual taxpayers with an ownership interest in a partnership directly owning an interest in a foreign corporation subject to the provisions of IRC section 965 are required to report their share of the repatriated income in a manner similar to how it is reported on the taxpayer’s federal return (report on Form 40, Page 2, Part I, line 8, Other Income, and include a description on the line provided). An individual taxpayer receiving repatriation income required to be reported federally, but not for Alabama purposes, should disclose the amount and source as income reported on the federal return not reported on the Alabama return (Part IV, line 5 of the Alabama Form 40). If you have any questions, please contact Varoon Laddha at (404) 979-2047.