Reg. 1.951A-1: Net CFC Tested Income, Forms, and Penalties

Net CFC tested income is the amount of a controlled foreign corporation’s active earnings that a U.S. shareholder must include in gross income each year under Section 951A, whether or not the money is ever paid out.¹ It is the new statutory name for what used to be called Global Intangible Low-Taxed Income, or GILTI. The One Big Beautiful Bill Act (P.L. 119-21), signed on July 4, 2025, renamed GILTI to Net CFC Tested Income (NCTI) for tax years beginning after December 31, 2025, and adjusted several of the numbers that drive the final tax bill.² The underlying mechanics of Section 951A did not change.

What Changed for 2026

Three figures moved when the rename took effect:

The Section 250 deduction for corporate shareholders dropped from 50% to 40% of the inclusion.
The deemed-paid foreign tax credit under Section 960(d) rose from 80% to 90% of tested foreign income taxes.³
The effective U.S. corporate rate on NCTI (before foreign tax credits) is now roughly 12.6% (21% × 60%), up from 10.5%.

The regulation at § 1.951A-1 still uses the older GILTI vocabulary because Treasury has not rewritten the regulatory text. For 2026 returns, the statute controls; older IRS forms and instructions may still say GILTI during the transition. The concepts are identical.

Who Has to Include NCTI

The rule applies to a “United States shareholder,” meaning any U.S. person who owns at least 10% of the voting power or value of a foreign corporation’s stock.⁴ That covers citizens, resident aliens, domestic partnerships, corporations, estates, and trusts. Ownership can be direct, indirect through foreign entities, or constructive through family members and related parties under Section 958.⁵

The foreign corporation itself has to be a controlled foreign corporation (CFC), which happens when U.S. shareholders collectively own more than 50% of its voting power or stock value.⁶ Constructive ownership rules matter here: shares held by a spouse, parent, child, or related entity can push someone over the 10% threshold without any purchase on their part. Shifts in stock value or voting rights during the year can also trigger CFC status mid-year.

For domestic partnerships that own CFC stock, the NCTI calculation happens at the individual partner level, not the partnership level.⁷ Each partner who qualifies as a U.S. shareholder computes their own inclusion using their pro rata share of the CFC’s income.

How the Inclusion Is Calculated

The math starts at each CFC and ends at the shareholder. At the CFC level, “tested income” is gross income minus five categories that are taxed under other rules or excluded by statute:⁸

Effectively connected income already tied to a U.S. trade or business.
Subpart F income (passive earnings like dividends, interest, and rents).
Dividends received from related persons.
Foreign oil and gas extraction income under Section 907.
Income excluded under the high-tax exclusion election.

What remains is the CFC’s tested income, representing its active business earnings. If deductions exceed remaining gross income, the CFC has a tested loss instead. The U.S. shareholder aggregates pro rata shares of tested income across all CFCs and offsets tested losses from other CFCs. That net figure is the shareholder’s net CFC tested income before the tangible-asset carve-out.

The Deemed Tangible Income Return

Not every dollar of active foreign income gets pulled into the inclusion. Section 951A carves out a routine return on physical assets, on the theory that profits from factories, equipment, and warehouses are less mobile than profits from patents or software. That carve-out is the Net Deemed Tangible Income Return (DTIR).⁸

The starting point is each CFC’s Qualified Business Asset Investment (QBAI), the quarterly-averaged adjusted basis of depreciable tangible property used to produce tested income.⁹ The shareholder takes 10% of the aggregate pro rata QBAI, then subtracts “specified interest expense” (the excess of pro rata tested interest expense over tested interest income). The result is the floor below which foreign earnings escape the inclusion. A CFC with $50 million of depreciable property generates a $5 million DTIR offset before interest adjustments; only profits above that line feed into NCTI.

The High-Tax Exclusion

If a CFC’s income is already taxed abroad at 90% of the U.S. corporate rate (18.9%, or 90% of 21%) or higher, the shareholder can elect to strip that income out of tested income entirely.¹⁰ The election is made annually by the CFC’s controlling domestic shareholders and is all-or-nothing for each CFC. For CFCs in high-tax countries, the exclusion often beats running the income through the full NCTI calculation and claiming foreign tax credits, but shareholders with CFCs across several jurisdictions need to run both scenarios.

What Corporate Shareholders Actually Pay

Domestic C corporations get a Section 250 deduction equal to 40% of the NCTI inclusion (plus the Section 78 gross-up for deemed-paid foreign taxes) for tax years beginning in 2026.² Only 60% of the inclusion is actually taxed, producing an effective rate of 12.6% before credits.

Foreign tax credits then cover much of what remains. A domestic corporation is deemed to have paid 90% of its inclusion percentage of aggregate tested foreign income taxes.³ Working through the math, a CFC that pays a foreign tax rate of roughly 14% or higher produces enough deemed-paid credits to offset the U.S. tax on NCTI after the Section 250 deduction. Below that rate, the shareholder owes the IRS the gap. The 10% haircut on credits means some double taxation persists by design.

What Individual Shareholders Pay

Individuals do not get the Section 250 deduction on their personal returns. Without an election, an NCTI inclusion is taxed at ordinary rates up to 37%, and the deemed-paid credit under Section 960 is not available.

Section 962 offers a workaround. An individual can elect to be taxed on the inclusion as if they were a domestic corporation.¹¹ The election caps the federal rate at 21%, allows use of the deemed-paid foreign tax credit, and lets the individual claim the Section 250 deduction on the inclusion. Combined, these can sharply reduce or eliminate the current-year U.S. tax on NCTI when the CFC has already paid meaningful foreign taxes.

There is a cost on the back end. When the CFC eventually distributes those previously taxed earnings, the distribution is included in the individual’s gross income to the extent it exceeds the tax already paid under the election.¹¹ The election defers part of the individual-level tax rather than erasing it. The election is made annually by attaching a statement to the return that identifies which income it covers.

The Forms and the Order They Go In

Reporting an NCTI inclusion runs through a chain of forms, each feeding into the next.

Start at the CFC. Every U.S. shareholder who meets the filing threshold prepares a Form 5471 for each CFC, with Schedule I-1 capturing the CFC-level data (tested income or loss, QBAI, tested interest expense, tested interest income) that drives the calculation.¹²

Those numbers flow into Form 8992, which aggregates the data across all of a shareholder’s CFCs and produces the actual inclusion amount.¹³ Corporate shareholders then carry that result to Form 8993, which computes the Section 250 deduction.¹⁴ The net inclusion lands on Form 1120 through the Schedule C dividends and inclusions line.¹⁵ Individuals report the inclusion on Schedule 1 of Form 1040, which has a dedicated line for Section 951A amounts.¹⁶

Basis and Later Distributions

After including NCTI in gross income, the shareholder’s basis in the CFC stock increases by the amount of the inclusion. This adjustment under Section 961(a) prevents the same earnings from being taxed again when the stock is sold.¹⁷

When the CFC later pays out those earnings, the distribution comes from “previously taxed earnings and profits” (PTEP) and is generally excluded from gross income under Section 959(a).¹⁸ Stock basis then decreases by the distribution amount; any excess over remaining basis is recognized as gain. PTEP has to be tracked by year and by category, because distributions follow a specific ordering rule and getting it wrong can produce unexpected taxable dividend income.¹⁹ On the credit side, no additional foreign tax credit is available on the 10% of foreign taxes previously disallowed at inclusion.³

Penalties for Getting It Wrong

Two penalty regimes can hit at once. The Section 6038 information return penalty for failing to file Form 5471 starts at $10,000 per CFC per year, with continuation penalties of $10,000 per month up to $50,000 if the failure persists after IRS notification.²⁰ The Section 6662 accuracy-related penalty adds 20% of any underpayment caused by negligence or a substantial understatement.²¹ They stack.

Records should be kept longer than the usual three-year window. Because NCTI calculations feed PTEP tracking that matters for distributions years down the road, and because the assessment period stretches to six years when unreported income exceeds 25% of gross income or relates to foreign financial assets over $5,000, six years is the more workable minimum for anyone holding CFC stock.²²

1
eCFR. 26 CFR 1.951A-1 – General Provisions
2
Office of the Law Revision Counsel. 26 USC 250 – Foreign-Derived Deduction Eligible Income and Net CFC Tested Income
3
Office of the Law Revision Counsel. 26 US Code 960 – Deemed Paid Credit for Subpart F Inclusions
4
Office of the Law Revision Counsel. 26 US Code 951 – Amounts Included in Gross Income of United States Shareholders
5
Office of the Law Revision Counsel. 26 US Code 958 – Rules for Determining Stock Ownership
6
Office of the Law Revision Counsel. 26 US Code 957 – Controlled Foreign Corporations; United States Persons
7
Internal Revenue Service. IRS and Treasury Issue Guidance Related to Global Intangible Low-Taxed Income
8
Internal Revenue Service. Concepts of Global Intangible Low-Taxed Income Under IRC 951A
9
eCFR. 26 CFR 1.951A-3 – Qualified Business Asset Investment
10
Federal Register. Guidance Under Sections 951A and 954 Regarding Income Subject to a High Rate of Foreign Tax
11
Office of the Law Revision Counsel. 26 US Code 962 – Election by Individuals to Be Subject to Tax at Corporate Rates
12
Internal Revenue Service. Instructions for Form 5471
13
Internal Revenue Service. Instructions for Form 8992
14
Internal Revenue Service. About Form 8993, Section 250 Deduction for Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI)
15
Internal Revenue Service. U.S. Corporation Income Tax Return
16
Internal Revenue Service. Schedule 1 (Form 1040) – Additional Income and Adjustments to Income
17
Internal Revenue Service. Guidance Related to Section 961 and Certain Inbound Nonrecognition Transactions
18
Office of the Law Revision Counsel. 26 US Code 959 – Exclusion From Gross Income of Previously Taxed Earnings and Profits
19
Internal Revenue Service. Previously Taxed Earnings and Profits Accounts
20
Office of the Law Revision Counsel. 26 US Code 6038 – Information Reporting With Respect to Certain Foreign Corporations and Partnerships
21
Office of the Law Revision Counsel. 26 US Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments
22
Internal Revenue Service. How Long Should I Keep Records