GILTI Deferred Tax Accounting: Period Cost vs. Deferred Method

Under ASC 740, GILTI deferred tax accounting is a policy election: a U.S. parent with controlled foreign corporations either treats the tax on Global Intangible Low-Taxed Income as a period cost when incurred, or recognizes deferred tax assets and liabilities for basis differences that will drive future GILTI inclusions. The FASB confirmed in its Staff Q&A on Topic 740, No. 5 that both approaches are acceptable under GAAP.¹ Once made, the election shapes the provision workpaper, the balance sheet, and the effective tax rate disclosure, and it applies to all of a company’s CFCs rather than being made subsidiary-by-subsidiary.

The stakes shifted in 2026. The Section 250 deduction dropped from 50 percent to 37.5 percent, lifting the baseline U.S. rate on GILTI from 10.5 percent to 13.125 percent before foreign tax credits.² Deferred balances measured at the old rate need to be remeasured. Companies that missed the remeasurement carry a provision error into the next audit.

Why the Election Exists

ASC 740 was written before GILTI, and it doesn’t cleanly answer whether GILTI produces deferred taxes. The tax isn’t a conventional Subpart F inclusion, computed CFC-by-CFC, but it isn’t a territorial tax either. The aggregate mechanics, which offset tested income in one country against tested losses in another and layer on a QBAI carve-out and a foreign tax credit basket, create real disagreement about whether the asset-and-liability framework fits.¹

Rather than pick a side, the FASB staff acknowledged two defensible readings and left the choice to preparers. That is the election.

The Period Cost Method

Under the period cost method, GILTI hits the income statement in the year it is incurred. No deferred tax assets or liabilities are recognized for temporary basis differences that might produce GILTI inclusions in future periods.

The reasoning is practical. A GILTI projection depends on future tested income and losses across jurisdictions, future QBAI, future foreign tax credits, and future tested interest expense. Modeling all of that out years into the future can generate deferred balances that never materialize. Skipping the exercise avoids booking numbers the underlying data can’t reliably support.¹

The provision workpaper is dramatically simpler. Tax teams don’t track inside basis differences for each CFC’s depreciable assets, and they don’t project reversal schedules. The cost is effective tax rate volatility. A year in which large temporary differences reverse into GILTI inclusions will spike the rate; a QBAI-heavy year may suppress it. Investors see the economics only when the cash tax arrives, not when the underlying transaction created the exposure. Unpredictable rate swings tend to draw questions on earnings calls.

The Deferred Tax Method

The deferred tax method treats GILTI closer to Subpart F, recognizing deferred taxes for basis differences that are expected to produce GILTI inclusions when they reverse. If a CFC holds depreciable equipment with a lower tax basis than book basis, reversal of that difference will raise tested income and drive a larger inclusion. Booking the tax effect now matches the expense to the period that created it, and it smooths the effective rate over time. The balance sheet then reflects a deferred liability tied to current foreign investments.

The Look-Through and Three Categories of Deferred Effects

GILTI is computed on the CFC’s tested income, which is driven by inside basis, not on distributions, which are driven by outside basis. So the deferred method requires looking through the outside basis of each CFC to the underlying assets and liabilities. That look-through applies even when there is no overall outside basis difference, which catches teams accustomed to a pure outside-basis analysis for foreign subsidiaries.

A company using the deferred method identifies three categories of deferred tax effects:

Inside basis differences between the book and U.S. tax basis of the CFC’s underlying assets and liabilities that will affect future GILTI inclusions when they reverse.
Anticipatory deferred taxes reflecting the U.S. tax effect of settling the CFC’s local-country deferred tax assets and liabilities, because those settlements change tested income.
Any residual outside basis difference between the investment’s book carrying value and its outside tax basis that isn’t explained by inside basis items and doesn’t qualify for an ASC 740-30 exception.

This is where the real work of the deferred method lives, and it is the principal reason many companies elect period cost instead.

Rate Inputs That Drive Either Method

Whichever method is elected, the same statutory inputs shape the provision. Under the deferred method they also shape the measurement of deferred balances.

The Section 250 Deduction Step-Down

For tax years beginning after December 31, 2025, the GILTI deduction under Section 250 is 37.5 percent, down from 50 percent under the original TCJA.² The baseline U.S. rate on GILTI is 21 percent multiplied by 62.5 percent, or 13.125 percent, before any foreign tax credit offset.³

Deferred balances originating before 2026 that reverse in 2026 or later must be measured at 13.125 percent, not 10.5 percent. The remeasurement should have run through the provision when the rate change became enacted law. Any leftover mismatch is a known error.

QBAI

Qualified Business Asset Investment equals the average of a CFC’s aggregate adjusted bases, determined at each quarter-end, in specified tangible property used in a trade or business and eligible for depreciation under Section 167.⁴ The net deemed tangible income return, equal to 10 percent of QBAI reduced by certain interest expense, subtracts from tested income before the GILTI inclusion is computed.⁵ Companies with heavy fixed-asset bases abroad may have little or no GILTI inclusion, which shrinks the deferred exercise. Detailed fixed asset ledgers matter because the QBAI figure has to hold up at audit.

Foreign Tax Credits and No Carryover

Section 960(d) allows a domestic corporation a deemed-paid credit equal to 90 percent of the product of its inclusion percentage and the aggregate tested foreign income taxes paid by its CFCs. Pub. L. 119-21, enacted in 2025, raised this from 80 percent to 90 percent, so the disallowed haircut fell from 20 percent to 10 percent.⁶ The same legislation added Section 960(d)(4), which disallows a credit for 10 percent of foreign income taxes attributable to distributions of previously taxed GILTI earnings. The Section 78 gross-up, which adds the deemed-paid taxes back into taxable income as a constructive dividend, is calculated without regard to the 90 percent limitation.⁷

One constraint controls the deferred tax analysis: unused foreign tax credits in the GILTI basket cannot be carried forward or carried back. Section 904(c) prohibits it. Credits above the limitation in a given year are simply lost.⁸ For deferred tax purposes, that means excess credits in one year cannot shelter GILTI in a later year, and deferred tax assets for GILTI foreign tax credit carryovers are generally not appropriate. Each year stands on its own.

Valuation Allowances

If it is more likely than not that some portion of a GILTI-related deferred tax asset won’t be realized, a valuation allowance reduces the asset. The assessment weighs projected tested income, expected QBAI, and foreign tax credit availability across the CFCs in the aggregate. Because GILTI nets income and losses across jurisdictions, one underperforming CFC can still sit inside a positive overall inclusion, which makes the analysis less linear than it is for a domestic deferred tax asset.

The GILTI High-Tax Exclusion Can Shrink the Problem

Before modeling deferred taxes for a given CFC, check whether the high-tax exclusion applies. Under Treasury Regulation 1.951A-2(c)(7), controlling domestic shareholders can elect to exclude a CFC’s tested income from GILTI entirely if it is subject to a foreign effective rate exceeding 90 percent of the U.S. corporate rate, currently 18.9 percent.⁹

The effective rate is determined on a tested-unit basis, with tested units of a CFC in the same country generally grouped together. The election is annual and binding on all U.S. shareholders of the CFC for that year.¹⁰ Income excluded under the election drops out of the GILTI computation, so basis differences in assets held by CFCs that consistently qualify need no deferred tax accrual. For groups with significant operations in higher-rate countries, this can meaningfully reduce the deferred workload.

Disclosure Obligations

The footnotes have to name the elected method. ASC 235-10-50 requires disclosure of significant accounting policies, and the FASB staff specifically placed the GILTI election within that requirement.¹ Beyond the policy paragraph, the tax footnote should let a reader trace how the 21 percent statutory rate becomes the reported effective rate, moving through the Section 250 deduction and foreign tax credits.

Rate Reconciliation Under ASU 2023-09

For public business entities with annual periods beginning after December 15, 2024, ASU 2023-09 rewrote the effective tax rate reconciliation. GILTI falls under Category 4, “Effect of cross-border tax laws,” disaggregated by both percentage and dollar amount. Any reconciling item with a tax effect exceeding 5 percent of the product of pre-tax income and the statutory federal rate must be broken out further. For a U.S.-domiciled company that means any item with a tax effect greater than 1.05 percent of pre-tax income, calculated as 21 percent times 5 percent, needs separate identification. Companies that previously buried GILTI inside a generic “foreign operations” line will likely need more granular disclosure, and immateriality is not an automatic exit; both quantitative and qualitative factors have to be evaluated before a category can be omitted.

Pillar Two Sits on Top

Dozens of countries have enacted or are implementing the OECD’s Pillar Two rules, which impose a 15 percent global minimum effective tax rate on large multinational groups. The United States has not enacted domestic legislation implementing Pillar Two, but U.S. multinationals operating in adopting jurisdictions still absorb its consequences.

The GloBE rules are generally designed to apply after domestic CFC regimes like GILTI, preserving rule order. Where a jurisdiction imposes a Qualified Domestic Minimum Top-up Tax, those payments are generally expected to be creditable as foreign income taxes for U.S. purposes, since they function like other local income taxes. IRS Notice 2023-80, however, distinguishes QDMTTs from “final top-up taxes” imposed under the Income Inclusion Rule or Undertaxed Profits Rule, proposing that such extra-jurisdictional top-up taxes are not creditable for U.S. foreign tax credit purposes.

For deferred tax accounting, the FASB has not issued a blanket exception from recognizing deferred taxes for Pillar Two top-up taxes, in contrast to the IASB’s temporary mandatory exception under IAS 12. U.S. GAAP preparers therefore need to evaluate whether a GloBE top-up tax meets the definition of an income tax under ASC 740-10-20 and, if so, whether deferred taxes should be recorded. GloBE payments do not create a credit carryforward against the regular tax system, and they do not feed back into the jurisdictional GloBE effective tax rate in future years.

Changing the Election Later

Switching between period cost and deferred is not casual. Under ASC 250, a voluntary change in accounting principle requires the company to demonstrate that the new method is preferable, meaning documentation of why the alternative better reflects the economic substance of the international tax position. The change triggers restatement of prior periods for comparability, and auditors will scrutinize the rationale. Companies rarely switch, which is why the initial election deserves the analysis up front rather than after the first provision closes.

1
Financial Accounting Standards Board. FASB Staff Q&A Topic 740, No. 5 – Accounting for Global Intangible Low-Taxed Income
2
Office of the Law Revision Counsel. 26 USC 250 – Foreign-Derived Intangible Income and Global Intangible Low-Taxed Income
3
Joint Committee on Taxation. Overview of the Taxation of Global Intangible Low-Taxed Income and Foreign-Derived Intangible Income Sections 250 and 951A
4
eCFR. 26 CFR 1.250(b)-2 – Qualified Business Asset Investment (QBAI)
5
Congressional Research Service. GILTI Proposed Changes in the Taxation of Global Intangible Low-Taxed Income
6
Office of the Law Revision Counsel. 26 USC 960 – Deemed Paid Credit for Subpart F Inclusions
7
Office of the Law Revision Counsel. 26 USC 78 – Gross Up for Deemed Paid Foreign Tax Credit
8
Internal Revenue Service. FTC Carryback and Carryover
9
Federal Register. Guidance Under Sections 951A and 954 Regarding Income Subject to a High Rate of Foreign Tax
10
eCFR. 26 CFR 1.951A-2 – Tested Income and Tested Loss