IRS Proposes Foreign Tax Allocation Changes Post-Deferral Repeal Era
Published Date: 8/3/2026
Proposed Rule
Summary
This document contains proposed regulations that relate to allocating foreign taxes of foreign corporations affected by the repeal of the one-month deferral election and to the disallowance of foreign tax credits on certain distributions of previously taxed earnings and profits. The proposed regulations would affect taxpayers that operate in foreign countries through certain foreign corporations and taxpayers that claim the foreign tax credit.
Analyzed Economic Effects
3 provisions identified: 1 benefits, 2 costs, 0 mixed.
10% foreign tax credit disallowance
The proposed rules implement section 960(d)(4) to disallow 10 percent of any foreign income taxes paid or accrued (or deemed paid) with respect to distributions of previously taxed earnings and profits (PTEP) that result from a section 951A inclusion occurring in a U.S. shareholder's taxable year ending after June 28, 2025. The regulations split the section 951A PTEP group into pre-06/29/2025 and post-06/28/2025 groups and allocate and apportion the disallowed portion to the post-06/28/2025 PTEP under Sec. 1.861-20.
Allocate foreign taxes after year change
If you are a U.S. shareholder of a foreign corporation required to change its taxable year because the one-month deferral election was repealed, the proposed rules allocate certain foreign net income taxes between the corporation's "first required year" and its succeeding taxable year. The allocation percentage is based on the portion of foreign-law taxable income attributable to the first required year, and taxpayers may elect alternative treatments (for example, income-group specific allocation, treating certain partnership tax shares as allocable, or electing not to allocate). The rule is proposed to apply for taxable years beginning after November 30, 2025, and the Treasury expects to finalize these regulations by January 4, 2027.
Elections and paperwork for affected shareholders
Controlling domestic shareholders must make elections (for example, to not allocate taxes, to treat certain partnership tax shares as allocable, or to use income-group specific allocation) by attaching a statement to their timely filed federal income tax returns for the years in which (or with which) the first required year and the succeeding taxable year end. Certain elections are irrevocable, others may be made or revoked on amended returns if filed within 24 months of the original return due date. The proposal estimates an average information-collection burden of 1.5 hours per response and an estimated maximum cost of $169.74 per small entity for this paperwork.
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Key Dates
Department and Agencies
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