Summary
- Notice 2025-72 provides guidance for allocating foreign income taxes between the short 2025 taxable year created by the OBBBA repeal of the one-month deferral and the succeeding 2026 taxable year, allowing taxpayers to elect either a closing-of-the-books or ratable allocation method to avoid distorted foreign tax credit outcomes.
- The notice also offers transition rules for 2024 foreign-currency regulations, requiring 10-year section 987 gain/loss amortization to be pro-rated monthly over 120 months.
- Taxpayers may rely on these rules until forthcoming proposed regulations are issued, and Treasury requests comments on whether additional types of foreign taxes or multi-year amortization regimes should be covered.
On November 25, the Department of the Treasury and the Internal Revenue Service issued Notice 2025-72, providing guidance on the repeal of the election for a one-month deferral by specified foreign corporations (SFCs) in the One Big Beautiful Bill Act (“OBBBA”).[1] The OBBBA provision effectively requires SFCs with a tax year ending November 30 (whose majority U.S. shareholder has a tax year ending December 31) to close their taxable year beginning December 1, 2025, on December 31, 2025 (the short “first required year”),[2] and begin another taxable year on January 1, 2026 (“succeeding taxable year”).[3]
The guidance provides rules for allocating foreign taxes between these two tax years for foreign tax credit purposes. Absent this guidance, some taxpayers may have faced anomalous and very harsh results. Most prominently, for some SFCs, all foreign taxes for the full year ending in 2025 may have been attributed for U.S. tax purposes only to income earned in December 2025, resulting in the SFC having a loss in the first required year and none of the foreign taxes being creditable.
The guidance also contains rules relating to a transition rule from 2024 final regulations on foreign currency that allowed taxpayers to elect to spread out certain foreign currency gain or loss over 10 years.[4]
In general, the notice provides that taxpayers may elect to allocate foreign income taxes accrued in the first required year between such year and the succeeding taxable year using a closing of the books method or a ratable allocation. For taxpayers making the election under the 2024 foreign currency final regulations, the 10 years in which gain or loss are to be recognized are pro-rated on a monthly basis.[5]
Background
OBBBA Section 70352: Repeal of One-Month Deferral
In general, Tax Code section 898(c)(1) requires an SFC[6] to have the same taxable year as its majority U.S. shareholder.[7] Prior to the enactment of the OBBBA, section 898(c)(2) allowed an SFC to elect a taxable year beginning one month earlier than that of its majority U.S. shareholder.
The OBBBA repeals the one-month deferral election, effective for taxable years of SFCs beginning after November 30, 2025.[8] A transition rule provides that an SFC’s first taxable year beginning after such date shall end at the same time as that of its majority U.S. shareholder.[9]
Furthermore, if the provision requires any SFC to change its taxable year for the first taxable year beginning after November 30, 2025, such change shall be treated as initiated by such SFC[10] and shall be treated as having been made with the consent of the Treasury Secretary.[11]
For an SFC with a taxable year ending November 30, and whose majority U.S. shareholder has a taxable year ending on December 31, the SFC taxable year beginning December 1, 2025, would end on December 31, 2025, with a new taxable year beginning on January 1, 2026.
The OBBBA directs Treasury to issue regulations or other guidance for allocating foreign taxes paid or accrued in the first (short) required (taxable) year beginning after November 30, 2025, and the succeeding taxable year, “among such taxable years in the manner the Secretary determines appropriate to carry out the purposes of this section.”[12]
Subpart F Income, GILTI and Foreign Tax Credits
In general, a U.S. shareholder of a CFC must include in gross income its pro rata share of the CFC’s subpart F income for the year.[13] A U.S. shareholder must also generally include in gross income the U.S. shareholder’s global intangible low-taxed income (GILTI).[14] The GILTI inclusion amount is determined by taking into account the U.S. shareholder’s pro rata share of tested items of all CFCs in which the U.S. shareholder owns stock, including tested income and tested loss. A CFC’s Subpart F income and tested income or tested loss takes into account properly allocable deductions (including taxes).[15] The subpart F income and tested income and loss of a CFC are determined in the functional currency of the CFC and translated into U.S. dollars as net amounts using the average exchange rate for the CFC’s taxable year.[16]
A U.S. domestic corporation is generally entitled to foreign tax credits for foreign income taxes paid by its CFCs connected to the CFCs’ foreign income upon which the U.S. corporation is taxed in the U.S. For GILTI income, only 80% of such foreign taxes are eligible for the foreign tax credit.[17]
In general, foreign income taxes accrue in the taxable year in which all the events have occurred that establish the fact of the liability and the amount of the liability can be determined with reasonable accuracy.[18]
The person deemed to have paid or accrued the foreign income tax for foreign tax credit purposes is called the section 901 taxpayer. A partnership is the section 901 taxpayer for a foreign income tax imposed on partnership’s income at the entity level.[19] For a disregarded entity, the person treated as owning its assets is the section 901 taxpayer for foreign income taxes imposed on the entity’s income at the entity level.[20] If either type of entity is transferred, changes entity classification, or undergoes another “covered event” (as defined in Treas. Reg. 1.901-2(f)(5)(ii)) that does not close the entity’s taxable year, the regulations allocate foreign income taxes (except a withholding tax in section 901(k)(1)(B)) amongst the current owner or entity and predecessor entities or prior owners.[21]
The regulations provide rules for allocating and apportioning foreign income taxes to statutory and residual groupings.[22] These rules determine a CFC’s net items of subpart F and test income and attribute taxes to the CFC’s income and PTET groups.[23] These rules are used, amongst other purposes, to determine whether an item of income is high-taxed for purposes of the foreign base company high-tax exception in subpart F or the high-tax exclusion from tested income.[24]
The 2024 Final Regulation on Foreign Currency
Section 987 provides rules for taxpayers (including CFCs) that own a qualified business unit (QBU) with a functional currency other than the dollar. Owners of a QBU recognize foreign currency gain or loss when the QBU makes a remittance.[25]
Treasury and the IRS published section 987 final regulations concerning foreign currency on December 11, 2024.[26] The final regulations are generally effective for taxable years beginning after December 31, 2024, but taxpayers may elect to apply the regulations to taxable years ending after November 9, 2023.[27] Amongst other things, the final regulations address foreign currency gain or loss recognized by the owner of a QBU. The final regulations provide transition rules under which taxpayers may elect to ratably recognize gain or loss that arose before the final regulations became effective over a 10-year transition period beginning with the first taxable year in which the section 987 regulations apply.
Notice 2025-72: Allocation of Foreign Taxes
Section 3 of the notice contains rules with regards to foreign taxes accrued by SFCs in the first required year and the succeeding taxable year. The notice does not apply to withholding taxes. The notice also does not apply to foreign income taxes accrued in the succeeding taxable year even though such taxes may relate to income accrued in the first required year.[28]
The notice contains an ordering rule allocating specified foreign income tax[29] accrued in the first required year between an affected corporation’s[30] first required year and its succeeding year.[31]
First, specified foreign income taxes are determined.[32]
Second, the rules in Treas. Reg. § 1.861-20 are applied to allocate and apportion specified foreign income tax to income groups (including PTEP groups)[33] as set forth in the regulation.[34]
Third, the allocation rule in the notice is applied to allocate the amount of specified foreign income tax in each income group to each of the two taxable years.[35]
Fourth, the amounts of tax allocated under the notice to each respective year are, except as provided otherwise, treated as accruing in such year for all purposes of the Tax Code.[36]
Taxpayers may elect to allocate foreign income taxes accrued in the first required year between such year and the succeeding taxable year using either a closing of the books method or a ratable allocation method. The notice refers to the percentage of the specified foreign income taxes allocated to the first required year as the allocation percentage.”[37]
In general, the amount of specified foreign income tax assigned to each income group under step 4 above is allocated to the first required year by multiplying the total specified foreign income taxes by the allocation percentage.[38] The remainder of specified foreign income tax is allocated to the succeeding taxable year with two exceptions.[39]
Amortization Under the 2024 Final Regulations on Foreign Currencies
Section 4 of the notice provides rules with regards to the transition rules under the 2024 final regulations on foreign currencies. The notice anticipates that forthcoming proposed regulations will contain these rules.[40]
If an election is made under the 2024 Final Regulations to recognize pretransition gain or loss ratably over the transition period of 10 years, then such gain or loss is recognized ratably over 120 months beginning with the first day of the first taxable year in which the section 987 regulations apply.[41]
Applicability Dates and Reliance
The forthcoming proposed regulations under section 898 would apply to taxable years of specified foreign corporations beginning after November 30, 2025. Taxpayers may rely on the rules in Section 3 of the notice for foreign taxes paid or accrued in taxable years of specified foreign corporations beginning after such date and ending before the proposed section 898 regulations are published, provided the taxpayer applies those rules in their entirety and in a consistent manner for the first required year and succeeding taxable year of a specified foreign corporation.[42]
The forthcoming proposed regulations under section 987 would apply to taxable years beginning after December 31, 2024, and ending on or after November 30, 2025. Taxpayers may rely on the rules in Section 4 of the notice before the proposed 987 regulations are published for a taxable year to which the section 987 regulations apply, provided the taxpayer applies those rules in their entirety and in a consistent manner with respect to each section 987 QBU, original deferral QBU, and outbound loss QBU for that taxable year and each subsequent taxable year.[43]
Request for Comments
The notice requests comments on the rules set out in sections 3 and 4 of the notice. In particular, the notice requests comments on:
- whether the allocation rule should apply to any foreign taxes in addition to specified foreign income taxes; and
- whether there are other rules similar to the amortization of pretransition gain or loss that apply over multiple years and concerning which Treasury and the IRS should issue guidance in light of the OBBBA repeal of one-month deferral.[44]
[1] Public Law 119-21, 139. Stat. 72, signed into law by President Trump on July 4, 2025. As obliquely hinted by the notice (which refers to the law “commonly known as the OBBBA”), P.L. 119-21 does not technically have a “short title.” As has become customary for partisan reconciliation bills, the Senate minority successfully requested the Senate Parliamentarian to strip the short title from the bill on the grounds that such short title does not in and of itself effect revenues, spending, or the debt limit, and is thus not germane to a reconciliation bill under the Senate’s procedural rule.
[2] Notice 2025-73, section 3.02(2). More technically, the first required year is the first taxable year beginning after November 30, 2025, which will begin on December 1 for an SFC whose majority U.S. shareholder’s taxable year is the calendar year.
[6] A specified foreign corporation (SFC) is a foreign corporation treated as a controlled foreign corporation (CFC) for any purpose under subpart F [of subchapter N of Chapter 1 of Subtitle A of the Tax Code] if any United States shareholder owns more than 50% of the stock of the CFC by vote or value. Section 898(b).
[7] References herein to a “Section” are to sections of the Internal Revenue Code and the Treasury regulations (“Treasury Regulations” or “Treas. Reg.”) promulgated thereunder.
[10] OBBBA § 70352(c)(1)(A).
[11] OBBBA § 70352(c)(1)(B).
[12] OBBBA § 70352(c)(1)(C).
[14] Section 951A(a). Section 70323 of the OBBBA made several significant changes to GILTI, effective for taxable years beginning after December 31, 2025, including changing its name to Net CFC Test Income.
[15] Sections 954(b)(5) and 951A(c)(2)(A)(ii).
[16] Sections 986(b), 989(b)(3) and Treas. Reg. § 1.951A-1(d)(1).
[17] Section 70312 of the OBBBA increases this percentage to 90% for taxable years beginning after December 31, 2025.
[18] Treas. Reg. §§ 1.446-1(c)(1)(ii)(A) and 1.461-4(g)(6)(iii)(B).
[19] See Treas. Reg. § 1.901-2(f)(4)(i).
[20] See Treas. Reg. § 1.901-2(f)(4)(ii).
[21] Treas. Reg. § 1.901-2(f)(5).
[22] See also Treas. Reg. § 1.861-8(f).
[23] See Treas. Reg. §§ 1.960-1(d), 1.960-2(b)(2), 1.960-2(c)(4) and 1.960-3(d)(1)(i)(A).
[24] See Treas. Reg. §§ 1.954-1(d) and 1.951A-2(c)(7).
[26] 89 FR 100138. The final regulations were issued under sections 861, 985, 987 through 989, and 1502.
[27] Treas Reg. § 1.987-15.
[29] Specified foreign income tax means a foreign net income tax accrued by an affected corporation in its first required year for which the affected corporation is the section 901 taxpayer. Notice § 3.03(4).
[30] An affected corporation is an SFC taking into account foreign income taxes under an accrual method of accounting that is required to change its first taxable year beginning after November 30, 2025, under the OBBBA. Notice § 3.03(1).
[33] Treas. Reg. § 1.960-3(c).
[34] Notice § 3.04(2); however, certain tentative gross tested income items are treated as income groups instead of certain tested income groups. Special rules determine whether any item meets the high-tax exception to foreign base company income or the high-tax exclusion from tested income in either year.
[36] Notice §§ 3.04(a) and (b); however, the amount of specified foreign income tax allocated to the succeeding taxable year under step 3 [section 3.04(3) of the notice] is not treated as accruing in the succeeding taxable year for purposes of sections 905(c) and 986(a). Foreign income taxes accruing in the first required year are not allocated to the succeeding taxable year for purposes of sections 905(c) and 986(a). Thus, for purposes of sections 905(c)(1)(B) and 986(a), the specified foreign income taxes relate to the first required year. Any change in the liability for a specified foreign income tax has the following results: (1) the specified foreign income tax in the first required year is adjusted to reflect the change; (2) the first three steps [in 3.04(1), (2) and (3)] are applied based upon this adjusted amount of foreign specified income tax; and (3) the amounts of specified foreign income tax accruing in each year [under 3.04(4)] are adjusted to reflect the reapplication of the first three steps.
[37] Notice § 3.05(1)(a).
[38] Notice § 3.05(1)(a).
[39] Notice § 3.05(2). First, the amount of a specified foreign income tax assigned to any PTEP group under the notice is allocated to the first required year. The foreign taxable income corresponding to such amount of specified foreign income tax is excluded in determining the allocation percentage. Notice § 3.05(1)(b).
Second, if an affected corporation is the section 901 taxpayer of a portion of a specified foreign income tax due to the application of Treas. Reg. § 1.901-2(f)(5) and the affected corporation’s period of ownership began on or before the beginning of the first required year the denominator of the fraction used to compute the allocation percentage is the total taxable income attributable to the affected corporation’s period of ownership. If the affected corporation is the section 901 taxpayer of a portion of a specified foreign income tax due to the application of § 1.901-2(f)(5) and the affected corporation’s period of ownership began after the beginning of the first required year, the allocation percentage is 100%. Notice § 3.05(3).