As the 2024 tax season approaches, C-corporations with foreign income, assets, or transactions must navigate a complex array of international tax reporting requirements. While Form 1120 is the cornerstone of a C-corporation’s tax filing, there are numerous additional forms and disclosures that may apply when foreign activities are involved. Overlooking these requirements can lead to significant penalties and compliance risks.
Below, we outline some of the unique foreign income tax reporting items that C-corporations should keep in mind when preparing their 2024 Form 1120.
1. FBAR (Report of Foreign Bank and Financial Accounts)
C-corporations must file FinCEN Form 114 (commonly known as the FBAR) if they have ownership or signature authority over foreign financial accounts and the aggregate value of those accounts exceeds $10,000 at any point during the year.
Key Points to Remember:
- Common Oversight: Many corporations forget that even accounts with minimal activity or balances need to be reviewed.
- E-File: The Foreign Bank Account Report (FBAR) is an annual filing requirement that must be received by the U.S. Department of the Treasury on or before April 15 of the year following the calendar year being reported. This filing deadline is not subject to extension. The FBAR is not submitted to the IRS; instead, it is administered by the Financial Crimes Enforcement Network (FinCEN), a bureau of the Treasury Department. The FBAR must be filed electronically either through FinCEN’s BSA E-Filing System or via batch filing using an authorized third-party transmitter.
2. Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations)
C-corporations that own 10% or more of a foreign corporation may be required to file Form 5471. This form provides detailed information about the foreign corporation’s financials, income, and ownership structure.
Key Points to Remember:
- Complexity: Form 5471 is highly detailed and requires extensive information, including income statements, balance sheets, and shareholder data.
- Penalties: Failure to file can result in significant penalties per form, per year, with additional penalties for continued noncompliance.
- Compliance Automation: Review your compliance software for automation opportunities around trial balances, E&P adjustments, Schedule E & E-1, Schedule H, Schedule I, Schedule I-1, Schedule J, Schedule M, Schedule P, Schedule Q, and Schedule R.
3. Form 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business)
If a C-corporation is at least 25% foreign-owned or engages in certain reportable transactions with foreign-related parties, it must file Form 5472.
Key Points to Remember:
- Reportable Transactions: These include loans, payments, or transfers of property between the C-corporation and its foreign-related parties.
- Common Oversight: Routine intercompany transactions, such as management fees, are often overlooked.
- Compliance Automation: Reportable transaction data is often available through your ERP system and other tax data sources and can be leveraged to populate Form 5472 through imports into your compliance software.
4. Form 8858 (Information Return of U.S. Persons With Respect to Foreign Disregarded Entities and Foreign Branches)
C-corporations with direct or indirect ownership of foreign disregarded entities (FDEs) or foreign branches must file Form 8858, which reports the activities and financial information of the FDE or branch.
Key Points to Remember:
- Common Oversight: Taxpayers often overlook this form when they have small or inactive foreign branches. Also, true branches did not require filings prior to 2017.
- Compliance Automation: Review your compliance software for automation opportunities around trial balances, E&P adjustments, Schedule J, and Schedule M.
5. Form 926 (Return by a U.S. Transferor of Property to a Foreign Corporation)
If a C-corporation transfers tangible or intangible property to a foreign corporation, it may be required to file Form 926 to ensure compliance with U.S. tax rules on outbound transfers of property.
Key Points to Remember:
- Common Oversight: Transfers of intellectual property, such as patents or trademarks, are often overlooked.
- Compliance Software Insight: While consolidations within compliance systems can be complex to configure, the IRS simplifies the process for Form 926 by requiring entity-specific (company-by-company) reporting.
Conclusion
Foreign income tax reporting for C-corporations is a complex and often overlooked area of compliance. Taxpayers preparing for their 2024 Form 1120 should carefully review their foreign income, assets, and transactions to ensure that all applicable forms are filed. By staying proactive and informed, C-corporations can navigate the complexities of foreign tax reporting and focus on their business goals without unnecessary tax risks. GTM’s International Tax Services team is here to help you manage these challenges—contact us to learn more.
