Section 6038D(a) of the Internal Revenue Code requires any individual who, during a taxable year, holds any interest in a Specified Foreign Financial Asset (SFFA) to attach Form 8938 to his or her tax return, if the aggregate value of such assets exceeds $50,000 at the end of the year, or exceeded $75,000 at any point during the year.
SFFAs are defined as a financial account maintained by a foreign financial institution above the monetary threshold. Additionally, SFFAs include any stock or security issued by a non-US person; any financial instrument or contract held for investment that has an issuer or counterparty other than a US person; and an interest in a foreign entity.
Understanding the Two-Step Threshold
In early 2016, the Treasury Department issued final regulations applying the rules regarding SFFAs to domestic entities. Currently, there is a two-step threshold to determine whether an entity must file Form 8938.
First, it must be determined if the entity owns any SFFAs. Second, it must be determined if the entity is one that is subject to these reporting rules.
A domestic entity will be subject to filing Form 8938 if it is a domestic corporation, partnership, or trust formed or availed for the purpose of holding SFFAs (directly or indirectly). A trust will be deemed formed or availed for purposes of holding SFFAs if it has one or more specified persons as a current beneficiary who at any time during the taxable year is entitled to income or principal from the trust. However, the regulations do provide that a domestic trust can be exempt from such reporting if:
- The trustee has supervisory authority over SFFA obligations;
- The trustee files all required returns timely; and
- The trustee is a bank overseen by a national regulatory agency, a financial institution registered with the SEC, or a domestic corporation whose stock is regularly traded on an established market.
A domestic corporation or partnership will be deemed to have been formed for the purpose of holding SFFAs if:
- It is closely held by a US Taxpayer (at least 80% of voting stake), and at least 50% of the entity’s gross income for the taxable year is passive income; or
- At least 50% of the assets held for the taxable year are assets that produce passive income.
Contact Us for Details
Taxpayers need to be aware of the rules regarding SFFAs, as failure to comply may lead to significant financial penalties. If you have or think you have, an interest in SFFAs, we encourage you to contact your CPA or attorney prior to the filing of your personal tax return.