What Is the IRC 962 Election: Tax Calculation, Filing, and PTEP

The Section 962 election lets an individual U.S. shareholder of a controlled foreign corporation choose to be taxed on Subpart F and GILTI inclusions at the federal corporate rate instead of the individual rate, and to claim the deemed-paid foreign tax credit that individuals otherwise cannot use. For 2026, that can drop the immediate federal rate on GILTI to as low as 12.6% after the Section 250 deduction, and to 21% on Subpart F income, compared with up to 37% at the top individual bracket. The cost of that cut is a second layer of U.S. tax when the CFC eventually distributes the cash, along with recordkeeping demands that trip up even experienced practitioners.

Who Can Make the Election

Section 962 is available only to a U.S. shareholder who is an individual. Treasury regulations expand this to include trusts and estates, which the IRS treats as individuals for this purpose.¹ Domestic C corporations, S corporations, and partnerships cannot make the election at the entity level. A C corporation already pays corporate rates, so the election would be redundant. For partnerships and S corporations, the individual partners or shareholders make the election on their own returns.

To qualify, you must be a U.S. shareholder, meaning a U.S. person who owns at least 10% of the total combined voting power or total value of all classes of the foreign corporation’s stock.² The foreign corporation must be a CFC, meaning U.S. shareholders collectively own more than 50% of its voting power or value.³ Ownership for both tests counts stock held directly, indirectly through foreign entities, and constructively under the attribution rules.

The election covers only amounts included in your gross income under Section 951(a): Subpart F income and GILTI.⁴ You cannot use it for other foreign income. If you own CFCs that generate both Subpart F and GILTI, the election applies to all Section 951(a) amounts for that year. Each individual shareholder decides independently, so co-owners of the same CFC can make different choices.

How the Tax Is Calculated

When you make the election, the IRS treats your CFC inclusion as though a hypothetical domestic corporation received it. This is purely a computational device for that piece of income. Your wages, investments, and self-employment income are still taxed under the normal individual rules.

The starting point is your pro rata share of the CFC’s Subpart F income and GILTI. You then add the foreign income taxes the CFC paid on those earnings, creating a grossed-up income figure. The gross-up is necessary because the foreign tax credit calculation runs off the full pre-tax amount.⁴

Subpart F Income

For Subpart F income, the grossed-up amount is taxed at the flat 21% corporate rate. Suppose your CFC has $100,000 of Subpart F income and paid $15,000 in foreign taxes on those earnings. Your grossed-up income is $115,000. At 21%, the tentative U.S. tax is $24,150. You then claim the $15,000 of foreign taxes as a deemed-paid credit, leaving a net U.S. tax of $9,150.

Compare that with the same income without the election. At the top individual rate of 37%, the tax on $100,000 would be $37,000, offset only by a direct foreign tax credit of $15,000 for a net of $22,000. The election cuts the immediate federal hit by more than half in this scenario.

GILTI and the Section 250 Deduction

GILTI inclusions get a better deal because the hypothetical corporation can claim the Section 250 deduction, which allows a domestic corporation to deduct 40% of its GILTI inclusion including the Section 78 gross-up.⁵ The Treasury regulations explicitly incorporate this deduction into the Section 962 calculation.⁶

Only 60% of the grossed-up GILTI ends up taxed at 21%, producing an effective rate of 12.6%. Using the same numbers with GILTI instead of Subpart F income, the grossed-up amount is $115,000, the Section 250 deduction is $46,000, and the taxable amount is $69,000. Tax at 21% is $14,490. The foreign tax credit is then limited proportionally because the Section 250 deduction shrinks the foreign-source taxable income in the credit limitation formula. Where the CFC’s foreign tax rate is at or above 12.6%, the credit often wipes out the U.S. tax entirely on GILTI.

That split between Subpart F (21% effective) and GILTI (12.6% effective) matters for planning. If most of your CFC income is GILTI, the election produces dramatically lower immediate federal tax than if the income is Subpart F.

Foreign Tax Credit Baskets

The foreign tax credit has to be calculated within the correct basket. GILTI sits in its own separate basket, and Subpart F income generally falls in the general or passive category depending on the nature of the underlying earnings. If your CFC operates in multiple countries with different tax rates, the calculation gets messy fast, because excess credits in one basket cannot offset tax in another. Modeling the credit limitation is where much of the real value or disappointment of the election lives.

How to Make the Election

The election is made by attaching a statement to your Form 1040 for the year of the Section 951(a) inclusion. The deadline is the due date of that return, including extensions. There is no dedicated IRS form. The statement must contain the information prescribed by the Treasury regulations.¹

At a minimum, the statement must include:

The name, address, and taxable year of every CFC for which you are a U.S. shareholder, plus every entity in the ownership chain between you and the CFC.
The Section 951(a) inclusion from each CFC, broken out by corporation.
Your pro rata share of each CFC’s earnings and profits and the foreign income taxes paid on those earnings.
Any distributions received during the year from each CFC, identified by source (excludable previously taxed income, taxable previously taxed income, and other earnings and profits) and by the year the underlying income was originally included.

You will also file Form 5471 reporting the CFC’s financial information. The election statement, Form 5471, and the tax calculated under Section 962 all attach to the same Form 1040. One unusual feature: the GILTI or Subpart F income does not appear as a line item on Schedule 1. You track it separately and report only the resulting tax.

The election is annual. You make it fresh each year by filing a new statement. Skipping the statement in a given year simply means you are taxed at your individual rates on that year’s inclusion; you do not need to revoke a prior year’s election to stop electing now. Revoking a past election after the return is filed is a different matter. The IRS will only approve a revocation if a material and substantial change in circumstances has occurred that you could not have anticipated when you made the election.⁷ In practice that is an extremely high bar. Treat each year’s election as final once the return is filed.

What Happens When the CFC Distributes the Cash

This is where the election gets expensive. The income you paid corporate-rate tax on becomes previously taxed earnings and profits (PTEP). Under the normal rules for non-962 PTEP, actual distributions of previously taxed income come out tax-free. Section 962 overrides that favorable treatment.

When the CFC distributes earnings that were subject to a Section 962 election, you include the distribution in gross income to the extent it exceeds the U.S. tax you already paid on those earnings.⁸ The regulations split this into two buckets: excludable PTEP equal to the tax you already paid, and taxable PTEP covering everything else. Distributions are allocated first to the excludable bucket, then to the taxable bucket.⁹

Run the Subpart F example forward. You paid $9,150 in U.S. tax on a $100,000 deemed inclusion. When the CFC later distributes $100,000, the first $9,150 is excludable (the tax you already paid). The remaining $90,850 is taxable as a dividend. If the distribution qualifies as a qualified dividend under the general rules, the $90,850 would be taxed at the preferential long-term capital gains rate rather than ordinary income rates. The total tax across both layers ends up close to what you would have owed without the election, but with the advantage of deferring the second layer until actual cash arrives.

Basis Adjustments

Under the normal Subpart F rules, your stock basis in the CFC increases by the full Section 951(a) inclusion. Section 962 changes that. Your basis increase is limited to the U.S. tax you actually paid on the inclusion, not the inclusion itself.¹⁰ In the example, your basis goes up by $9,150 rather than $100,000. When distributions occur, basis decreases only by the amount excluded from gross income after applying the Section 962(d) rules.

That reduced basis creates a real cost if you sell the CFC stock before all PTEP has been distributed. Your gain on the sale will be substantially larger than it would have been without the election, because the basis never got the full inclusion increase. If a sale or liquidation is on the horizon, model the combined tax cost before electing.

PTEP Recordkeeping

Tracking these amounts across years and across multiple CFCs is the single most burdensome part of the election. The IRS requires annual PTEP accounts broken into ten groups and two subgroups, one of which specifically tracks taxable Section 962 PTEP.¹⁰ Each group has an associated dollar basis pool and a foreign tax pool. A single error in one year cascades into every later distribution and gain calculation. Most taxpayers making this election need professional help maintaining the records.

What the Election Does Not Change

Net Investment Income Tax

Section 962 replaces the tax imposed under Sections 1 and 55 (the regular individual income tax and the alternative minimum tax) with the corporate-rate tax under Section 11.⁴ It says nothing about Section 1411, which imposes the 3.8% net investment income tax on individuals with modified adjusted gross income above $200,000 ($250,000 for joint filers).

The default under the NIIT regulations is that Section 951(a) inclusions are not automatically counted as net investment income unless the CFC’s earnings come from a passive activity or trading in financial instruments.¹¹ You can elect under the same regulation to treat CFC inclusions as net investment income in the year of inclusion. Why volunteer for that tax earlier? Because without the election, when the CFC actually distributes cash in a later year, the distribution is a dividend that is almost certainly net investment income. If your MAGI is above the threshold in that later year, you pay NIIT then. The election lets you line up the NIIT with the income tax inclusion and smooth out your liability across years.

If the CFC operates an active business and you do not make the Section 1411 election, you may effectively avoid NIIT on the inclusion itself. Do not assume the NIIT disappears entirely. It likely surfaces when distributions arrive or when you sell the CFC stock at a gain.

State Tax

Section 962 is a federal provision. Most states either ignore it, have no guidance on it, or treat it inconsistently. States that use adjusted gross income or federal taxable income as their starting point will generally include the full Subpart F or GILTI amount in state income regardless of the federal election. The Section 250 deduction is typically not recognized at the state level, and state foreign tax credits are either unavailable or severely limited. You may owe state income tax at your full individual rate on the same income that you paid a reduced federal rate on. Factor that in before assuming the election produces a net benefit.

The GILTI High-Tax Exclusion Alternative

If your CFC pays a high effective foreign tax rate, an alternative exists: the GILTI high-tax exclusion under the Treasury regulations. It lets you exclude CFC income from GILTI entirely when the foreign effective tax rate exceeds 90% of the U.S. corporate rate, an 18.9% foreign rate threshold under the current 21% corporate rate. Excluded income is not subject to U.S. tax at all for GILTI purposes, which beats paying a reduced rate under Section 962.

The choice depends on where your CFCs operate. If all of them pay foreign taxes above 18.9%, the high-tax exclusion likely produces a better outcome. If you have CFCs in both high-tax and low-tax jurisdictions, the decision gets harder. Without the high-tax exclusion, excess foreign tax credits from the high-tax CFC can cross-credit against U.S. tax on the low-tax CFC’s GILTI within the same basket. Applying the high-tax exclusion removes the high-tax CFC from the calculation, eliminating those excess credits and potentially raising the net U.S. tax on what remains. Both elections are annual and independent, so you can adjust each year as the CFC’s income mix and foreign tax rates change.

1
eCFR. 26 CFR 1.962-2 – Election of Limitation of Tax for Individuals
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IRS. IRC 958 Rules for Determining Stock Ownership
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IRS. Determination of U.S. Shareholder and CFC Status
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Office of the Law Revision Counsel. 26 USC 962 – Election by Individuals to Be Subject to Tax at Corporate Rates
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Office of the Law Revision Counsel. 26 USC 250 – Foreign-Derived Intangible Income and Global Intangible Low-Taxed Income
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eCFR. 26 CFR 1.962-1 – Limitation of Tax for Individuals on Amounts Included in Gross Income Under Section 951(a)
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GovInfo. Internal Revenue Service, Treasury Section 1.962-2
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Office of the Law Revision Counsel. 26 USC 962 – Election by Individuals to Be Subject to Tax at Corporate Rates – Section: Special Rule for Actual Distributions
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eCFR. 26 CFR 1.962-3 – Treatment of Actual Distributions
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Federal Register. Previously Taxed Earnings and Profits and Related Basis Adjustments
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eCFR. 26 CFR 1.1411-10 – Controlled Foreign Corporations and Passive Foreign Investment Companies