What is the Section 962 election?

What it is

U.S. shareholders of a CFC must include certain CFC income currently, whether or not it is distributed. A domestic corporation owning the same CFC would be taxed at 21%, with a §250 deduction for NCTI and a credit for foreign taxes. An individual would otherwise be taxed at individual rates of up to 37%, with no credit for the CFC's foreign taxes.

Section 962 lets an individual elect corporate-style treatment for those inclusions. The trade-off comes later: when the CFC distributes the earnings, part of the distribution is taxed again.

What the law says

IRC §962(a) provides that an individual United States shareholder who elects is taxed on amounts included under §951(a) at the tax that would apply under §11 if those amounts were received by a domestic corporation, and that §960 applies as if the amounts were received by a domestic corporation. Section 962(d) provides that earnings attributable to the elected inclusions are included in gross income when distributed to the extent they exceed the tax paid under the election.

Treas. Reg. §1.962-1(b)(1)(i)(B)(3) allows an electing individual the portion of the §250 deduction that a domestic corporation would receive for these inclusions. Under §250(a)(1)(B), as amended by the One Big Beautiful Bill Act, that deduction is 40% of net CFC tested income and the related §78 amount for tax years beginning after December 31, 2025. Under §960(d), the deemed-paid credit for those inclusions is 90% of the relevant foreign income taxes.

The election is made on the individual's return for the year and applies to all CFCs for that year. The regulations govern how and when it is made and when it can be revoked.

Requirements and tests

Consider the election when:

• You are an individual U.S. shareholder (10% or more by vote or value) of a CFC, directly or through a pass-through entity.
• You have Subpart F or NCTI inclusions large enough to matter.
• The CFC pays foreign income tax that would be creditable at the corporate level.
• You understand how and when the CFC's earnings will be distributed.
• You know whether the CFC is a qualified foreign corporation whose dividends can get qualified dividend rates.
• You have modeled the state tax effect in your state of residence.

How it works

With the election, you compute the inclusion plus the §78 gross-up, subtract the §250 deduction for NCTI, apply 21%, and subtract the deemed-paid foreign tax credit, subject to the §904 limitation. Subpart F inclusions do not get the §250 deduction.

When the CFC later distributes the earnings, the amount above the U.S. tax you paid under the election is taxable. Whether that amount is a qualified dividend depends on whether the CFC is a qualified foreign corporation. In Smith v. Commissioner, 151 T.C. No. 5 (2018), a distribution from a Hong Kong company, which was not a qualified foreign corporation, was taxed at ordinary rates.

Without the election, you pay tax at individual rates on the inclusion, and the later distribution of those previously taxed earnings is generally not taxed again for regular income tax purposes.

Because the answer depends on the CFC's foreign tax rate, the distribution plans, and the treaty status of the foreign country, compare both approaches every year. Required filings include Form 5471 and, for NCTI, Form 8992.

Some owners use a domestic corporation to hold the CFC instead, which provides corporate treatment without the §962(d) rule but adds a second layer of U.S. tax on dividends from the domestic corporation.

Risks and IRS scrutiny

Common errors include omitting the §250 deduction, ignoring the §904 limitation, making the election inconsistently across CFCs, and failing to track the earnings subject to §962(d). Missing Form 5471 carries significant penalties and can keep the assessment period open.

Who it is not for

This is not for owners who plan to distribute the earnings soon from a CFC whose dividends are not qualified, because the later tax can exceed the savings. It is not for owners whose inclusions are small. And it is not a set-and-forget decision; the answer can change year to year.

How ebotCPA helps

We model your inclusions with and without the election, including the §250 deduction, foreign tax credits, and future distributions, and we prepare Forms 5471 and 8992 and the election statement.

Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.

Primary sources

1. 26 U.S.C. §962(a). Election by individuals to be taxed at corporate rates.

   “the tax imposed under this chapter on amounts which are included in his gross income under section 951(a) shall (in lieu of the tax determined under sections 1 and 55) be an amount equal to the tax which would be imposed under section 11 if such amounts were received by a domestic corporation”

   Taxes an electing individual's §951(a) inclusions at corporate rates with §960 credits.

2. 26 U.S.C. §962(d). Distributions of earnings attributable to elected amounts.

   “be included in gross income to the extent that such earnings and profits so distributed exceed the amount of tax paid under this chapter on the amounts to which such election applied.”

   Taxes later distributions to the extent they exceed the tax paid under the election.

3. Treas. Reg. §1.962-1(b)(1)(i)(B)(3). Section 250 deduction for electing individuals.

   Allows an electing individual the §250 deduction a domestic corporation would receive.

4. 26 U.S.C. §250(a)(1). Deduction for net CFC tested income.

   “40 percent of—”

   Sets the deduction at 40% of net CFC tested income and the related §78 amount for tax years beginning after 2025.

5. 26 U.S.C. §960(d). Deemed-paid credit for §951A inclusions.

   Deems 90% of the relevant foreign income taxes paid for tax years beginning after 2025.

6. Smith v. Commissioner, 151 T.C. No. 5 (2018). Rate on §962(d) distributions.

   Held that a §962(d) distribution from a Hong Kong corporation, which was not a qualified foreign corporation, was not qualified dividend income.

Frequently asked questions