Implementation of new foreign tax allocation reporting in Schedule E (Form 5471) instructions

On August 3, 2026, the Treasury Department and the IRS issued proposed regulations (REG-115145-25) under section 70352(c)(1) of P.L. 119-21, commonly known as the One Big Beautiful Bill Act (OBBBA), that provide for the allocation of foreign taxes of foreign corporations affected by the repeal of section 898(c)(2).  The rules of the proposed regulations provide for several elections, including an election permitting the allocation of certain taxes accrued in a specified foreign corporation’s succeeding tax year to its first required year. Taxpayers are permitted to rely on the rules of the proposed regulations to the extent provided in the preamble of the proposed regulations.

The instructions for separate Schedule E (Form 5471), Part I, Section 1, column (j), should now read as follows.

“Enter the tax paid or accrued in the local currency in which tax is payable and not the functional currency of the payor or foreign corporation.  See sections 986(a) and 905(c).

Section 70352 of Public Law 119-21, 139 Stat. 72 (July 4, 2025) (“the OBBBA”) repeals the 1-month deferral election that was permitted under section 898(c)(2) effective for tax years of specified foreign corporations beginning after November 30, 2025. CFCs affected by this provision will have a “first required year” that will end at the same time as the required year defined in section 898(c)(1). Taxes may be allocated from a CFC’s first required year to the CFC’s succeeding tax year, and in certain cases if an election is made, from the CFC’s succeeding tax year to its first required year.

A Form 5471 should be filed for the first required year of a CFC affected by this provision. For the Form 5471 filed for its first required year, a CFC that accrued foreign income taxes that are subject to allocation under applicable guidance must list in column (j) the amount of each foreign income tax allocated to the year for which this Form 5471 is filed and must attach a statement providing all information shown in the table below for each foreign income tax subject to allocation. If the tax subject to allocation was accrued in the succeeding tax year, enter “succeeding year tax” in the “Allocation method used” column along with the allocation method used.

If the U.S. shareholder filing the Form 5471 is a controlling domestic shareholder of the CFC and is making an election described in Proposed Regulations section 1.898(c)-1(c)(2), (e)(3) or (4), or (f), the U.S. shareholder filing this Form 5471 must attach a statement containing the information required under Proposed Regulations section 1.898(c)-1(h)(3)(A).”