State Corporate Income Tax Consequences of IRC Section 965 Repatriation Income

August 28, 2018

State guidance that has been issued so far reveals the complexity and variation among them, and taxpayers must analyze the rules carefully to understand the impact and ensure they are properly reporting the income.

By Jeff Glickman, SALT Partner

While most of the impact of the Tax Cuts and Jobs Act of 2017 (“TCJA”) will be felt in 2018, one significant change is affecting the 2017 tax year: Internal Revenue Code (IRC) section 965 repatriation income.  Under that section, U.S. shareholders in foreign entities that meet certain requirements are required to report their deferred (i.e., unrepatriated) foreign income pursuant to section 965(a) (which will treat such income as an addition to Subpart F income).  That income will be taxed at preferential rates, and such treatment is accomplished via a deduction under section 965(c).  Finally, certain shareholders may have the ability to elect to pay the tax due with respect to such income over an eight-year period.

So, what does this mean for state income taxes?  The impact will depend on whether the U.S. shareholder reporting the tax is a C-corporation, S-corporation, partnership, individual, or trust/estate, and if the income is flowing through from a pass-through entity return (e.g., a C-corporation that is a partner in a partnership where such partnership is the U.S. shareholder of a foreign corporation).  As we have already seen, C-corporations do not include this income in federal taxable income on Form 1120, but instead they report on a separate Transition Tax Statement (“TTS”); however, other taxpayers will generally report this income directly on their applicable federal tax return.[1]

That difference is affecting state guidance on how to report such income, since states generally start their computation of corporation tax liability with federal taxable income.  For example, on Aug. 21, 2018, North Carolina issued “IRC Section 965 Repatriation Guidance,” which details the specific mechanics that C-corporations and other taxpayers should follow for reporting IRC section 965 amounts.  Even though under North Carolina’s statutes, C-corporations would be able to subtract any 965 amounts from federal taxable income, the state guidance instructs C-corporations to not include the 965 amounts at all since they are already not included in federal taxable income on Form 1120.  Ultimately, the result is the same, but the mechanics are different.[2]

Other issues that must be addressed to determine the state income tax treatment of section 965 include:

  • State IRC Conformity – Not all states conform to the current version of the IRC. For example, California still incorporates the provisions of the IRC as are in effect on Jan. 1, 2015.[3]  Therefore, California does not incorporate section 965 repatriation rules for all taxpayers.[4]
  • Including Section 965 Amounts on the State Return – If a state incorporates section 965 amounts into federal taxable income on the state return, the initial question is whether that amount is the gross income amount (i.e., section 965(a)) or the net income amount (section 965(a) less section 965(c)). Most states appear to incorporate the net amount since that is the amount that would be in federal taxable income on Form 1120 if not for the TTS.  However, Indiana requires C-corporations to add back to federal taxable income the amount reported on Line 1 of the TTS (i.e., the gross section 965 amount under 965(a)).[5]
  • State Modifications for Subpart F or Section 965 Income – Many states provide a modification from federal taxable income for Subpart F income or section 965 income, allowing C-corporations to subtract amounts included in federal taxable income, with the net result being that the state won’t tax the repatriation income (these are not typically available for individuals). Taxpayers must be aware of any state addbacks for expenses related to the excluded income.[6]  For example, even though Georgia excludes 965 amounts on the C-corporation return, the guidance requires an addback for expenses directly attributable to the net 965 amount.[7]
  • State Dividend Received Deductions (“DRD”) – Another potential modification from federal taxable income may be a dividend received deduction (these are not typically available for individuals). These amounts often depend upon ownership percentage, and they do not always follow the federal rules.  Therefore, the amount of the DRD may not offset the entire amount of 965 income included in federal taxable income.  Also, addbacks for expenses related to such deducted dividends may be required.
  • Installment Payments – Almost universally, states are not allowing taxpayers to pay any 965 tax liability over the same eight-year period as allowed for federal income tax purposes. However, under legislation passed by Utah this year, the state has authorized eligible taxpayers to pay the state 965 tax liability over eight years.[8]
  • Apportionment – Ultimately, C-corporations must determine what amount, if any, of the 965 income must be included in the sales factor and whether those amounts belong in the numerator. States have not been issuing guidance on this issue as much as they have on inclusion generally, but Indiana’s guidance explains that only C-corporations will apportion the repatriation income.  The amount of the 965 income (i.e., 965(a) in Indiana), after subtracting any DRD, is included in the receipts factor denominator, and it will be included in the numerator if the C-corporation’s commercial domicile is in Indiana.[9]

The bottom line is that state treatment of IRC section 965 varies a great deal, and taxpayers need to analyze these issues carefully to understand the specific mechanics as well as the ultimate effect.  State guidance continues to be issued on these matters, and Aprio’s SALT team has been following and analyzing the impact very carefully.  If you have any questions or concerns about how section 965 will affect you at the state level, please contact Jeff Glickman, Partner-in-Charge of State & Local Taxes, at 770-353-4791 or

This article was featured in the August 2018 SALT Newsletter

[1] This article will focus on C-corporations.

[2] Georgia has similar guidance pursuant to Policy Bulletin IT 2018-01 issued on June 26, 2018.

[3] Cal. Rev. & Tax Code § 23051.5.  There is an exception for certain IRC provisions that are specifically referenced with respect to water’s edge combined reporting, which does not affect section 965.

[4] See

[5] See

[6] These are generally referred to as expense attribution addbacks, and they require taxpayers to addback any expenses related to the such excluded amounts.  Some states provide a specific or safe-harbor amount instead of requiring taxpayers to specifically trace expenses.  For example, recent legislation in Connecticut imposes a 5% addback on deductible dividends (effectively making the dividend received deduction 95% instead of 100%).  See Connecticut S.B. 11 and

[7] O.C.G.A. § 48-7-21(b)(8).  See also Policy Bulletin IT 2018-01.

[8] See Utah SB 244 and HB 2002, which enacted and then amended Utah Code § 59-7-118.

[9] See

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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About the Author

Jeff Glickman

Jeff Glickman is the partner-in-charge of Aprio, LLP’s State and Local Tax (SALT) practice. He has over 18 years of SALT consulting experience, advising domestic and international companies in all industries on minimizing their multistate liabilities and risks. He puts cash back into his clients’ businesses by identifying their eligibility for and assisting them in claiming various tax credits, including jobs/investment, retraining, and film/entertainment tax credits. Jeff also maintains a multistate administrative tax dispute and negotiations practice, including obtaining private letter rulings, preparing and negotiating voluntary disclosure agreements, pursuing refund claims, and assisting clients during audits.

(770) 353-4791