Entity Setup
Handling Foreign Corporation Investments: Key Changes Under OBBBA’s Sections 898(c) and 960(d)(4)
New proposed IRS regulations under Section 898(c) and Section 960(d)(4) may require U.S. shareholders of foreign corporations to track foreign tax allocations and potential credit disallowances more closely—insights and tips here.
By NomadicTax Research Team • 5-8 min read • September 9, 2026
## Background: What Changed in the One, Big, Beautiful Bill Act (OBBBA)
Congress, via **OBBBA (Pub. L. 119-21)**, made sweeping changes to foreign income tax rules—including the **repeal of the one-month deferral election** under section 898(c)(2), and introduced a new foreign tax credit disallowance under section 960(d)(4). These changes impact U.S. shareholders of controlled foreign corporations (CFCs) and their tax treatment. ([irs.gov](https://www.irs.gov/irb/2026-37_irb?utm_source=openai))
## Proposed Regulations: What to Expect
- **Transition rules for Section 898(c):** Regulations propose allocating foreign taxes between the first required year and succeeding taxable year for foreign corporations affected by the repeal of deferral. ([irs.gov](https://www.irs.gov/irb/2026-37_irb?utm_source=openai))
- U.S. shareholders will need to compute allocation percentages potentially across income groups, using closing-of-books methods, or elect a simplified allocation. Some elections (e.g., to allocate or not to allocate) must be made on a timely filed original or amended return. ([irs.gov](https://www.irs.gov/irb/2026-37_irb?utm_source=openai))
- **Section 960(d)(4) disallowance guidance:** The proposed rules clarify how to calculate foreign income taxes “paid or accrued (or deemed paid)” in connection with **PTEP distributions** (previously taxed earnings & profits) stemming from section 951A inclusions. ([irs.gov](https://www.irs.gov/pub/irs-irbs/irb26-37.pdf?utm_source=openai))
## Who’s Most Affected? Practical Implications
| Stakeholders | Key Impacts |
|-------------|-------------|
| U.S. shareholders of CFCs | New rules for timing and allocation of foreign taxes; potential surprises in what can be credited vs disallowed. |
| Foreign corporations operating under new tax years | Must adapt accounting, possibly allocate taxes differently or adjust return years. |
| Tax preparers and international businesses | Greater complexity; need systems to track income groups, tax accruals, and distributions under PTEP. |
## Examples to Illustrate
- A U.S. company owning 60% of a foreign corporation must now apply the transition rule if the foreign entity is changing its taxable year due to repeal of section 898(c)(2). It will have to allocate foreign tax credits between its first required year and the succeeding year using possibly new elections.
- If a U.S. shareholder receives a PTEP distribution resulting from subpart F or GILTI (under section 951A), section 960(d)(4) may disallow some foreign tax credits unless the rules correctly attribute foreign taxes as paid or accrued under the new rules.
## What You Should Do Now
- Review ownership in any foreign corporations or pass-throughs; identify CFCs and analyze whether you’ll be subject to the new transition rules.
- Track foreign tax payments and accruals carefully throughout 2026; maintain clear records by income group.
- Decide elections: some are optional, but the timing (original vs amended return) matters. Missing deadlines can lock you in to less favorable rules.
- Consult international tax counsel if you deal with PTEP, GILTI, or subpart F; these areas are especially nuanced under the proposed regulations.
Understanding regulations under Sections 898(c) and 960(d)(4) is now more important than ever. With thoughtful planning and timely action, you can minimize disallowed credits and ensure compliance under the OBBBA framework.