IRC 962 Election: Individual CFC Shareholder Practitioner Guide (2026)

1. What Is the IRC 962 Election?

Section 962 of the Internal Revenue Code permits a U.S. individual who is a shareholder of a CFC to elect to be taxed on inclusions from that CFC at the corporate tax rate rather than at the individual's ordinary income rate. Without the election, NCTI and subpart F income inclusions flow through to the individual and are taxed at rates that can reach 37% (plus net investment income tax in many cases). With the election, the same inclusions are taxed at the 21% corporate rate, and the individual may also claim a deemed-paid foreign tax credit under IRC 960, subject to the IRC 78 gross-up requirement described below.

The statutory authority is IRC 962(a), which provides that an individual CFC shareholder may elect to be treated, for purposes of IRC 951 and 951A inclusions, as if such amounts were received by a domestic corporation. IRC 962(b) limits the tax to the amount that a corporation would pay on the same income. IRC 962(d) governs subsequent distributions from the CFC.

The core policy rationale is parity: a U.S. C corporation that owns a CFC directly is already subject to the 21% corporate rate on its NCTI and subpart F inclusions, and it may claim a deemed-paid FTC under IRC 960. Without IRC 962, a U.S. individual owning an identical CFC stake would face ordinary income rates with no deemed-paid FTC. The 962 election narrows that gap. It does not eliminate it entirely (because subsequent distributions are treated differently), but it is the closest mechanism available to individual CFC shareholders for achieving corporate-equivalent treatment.

2. Who Can Make the IRC 962 Election?

Only U.S. individuals who are "United States shareholders" of CFCs under IRC 951 or IRC 951A may make the 962 election. A United States shareholder is any U.S. person who owns, directly, indirectly, or constructively (under IRC 958), 10% or more of the total combined voting power or total value of the CFC's stock. The election covers:

• NCTI inclusions under IRC 951A (Net CFC Tested Income, renamed from GILTI effective for tax years beginning after December 31, 2025 under OBBBA).
• Subpart F income inclusions under IRC 951(a).

Domestic partnerships and S corporations do not make the election at the entity level; it is available to individual partners or shareholders who are themselves U.S. shareholders of CFCs, though the mechanics depend on how the entity is treated. Trustees and estates may also be eligible. Verify current eligibility and entity-flow-through rules at IRS.gov and in the applicable Treasury regulations, as this area has been the subject of regulatory guidance.

3. OBBBA 2026: Four Simultaneous Impacts on the 962 Election

Change 1: GILTI Renamed to NCTI

Effective for tax years beginning after December 31, 2025, the income item previously described in IRC 951A as "global intangible low-taxed income" (GILTI) is renamed "Net CFC Tested Income" (NCTI). The underlying computation structure is modified by the other OBBBA changes (see below), but the renaming itself is important for compliance: 2026 returns and client communications should use the NCTI terminology. Every existing checklist, engagement letter, or software module that references "GILTI" is partially outdated for 2026 returns. Verify the current statutory terminology at IRS.gov.

Change 2: IRC 250 Deduction Reduced from 50% to 40%

Under the 962 election, the individual applies the IRC 250 deduction to the NCTI inclusion before computing the corporate-rate tax. Pre-OBBBA, the IRC 250 deduction was 50%, yielding an effective NCTI rate of approximately 10.5% (21% multiplied by 50% of the inclusion). Post-OBBBA, the deduction drops to 40%, raising the effective NCTI rate to approximately 12.6% (21% multiplied by 60% of the inclusion). This is a meaningful increase. Verify the current IRC 250 deduction percentage at IRS.gov and re-run benefit models accordingly.

Subpart F income does NOT receive the IRC 250 deduction. For subpart F inclusions, the effective 962 election rate is the full 21% corporate rate (reduced only by available FTCs after the IRC 78 gross-up). The 250 deduction change therefore affects only the NCTI portion of the analysis.

Change 3: QBAI Eliminated

Before OBBBA, the NCTI (GILTI) computation under IRC 951A subtracted a "net deemed tangible income return" (NDTIR) from tested income. The NDTIR was equal to 10% of the CFC's Qualified Business Asset Investment (QBAI), which is the CFC's aggregate adjusted basis in tangible depreciable property used in its trade or business. OBBBA eliminates QBAI entirely for tax years beginning after December 31, 2025. The result: the full amount of tested income (gross tested income minus tested deductions) is now included in NCTI, without any subtraction for a tangible asset return. Practitioners whose clients have CFCs with significant tangible asset bases will see a meaningfully larger NCTI inclusion post-OBBBA. Verify the current statutory treatment at IRS.gov.

Change 4: Foreign Tax Credit Haircut Reduced from 20% to 10%

Under a 962 election, the individual may claim a deemed-paid FTC under IRC 960 for the foreign taxes paid by the CFC attributable to the NCTI or subpart F inclusion. Pre-OBBBA, IRC 904(d) imposed a 20% haircut on NCTI basket foreign taxes, meaning only 80% of the applicable foreign taxes were creditable. OBBBA reduces this haircut to 10%, so now 90% of the applicable foreign taxes are creditable. This change directly increases the value of the 962 election for individuals with CFCs in high-tax jurisdictions. Verify the current FTC haircut percentage at IRS.gov.

Net Effect on the 962 Election Benefit Analysis

The four changes pull in different directions. Changes 2 and 3 (higher effective NCTI rate, larger inclusion base) make the election less attractive on the tax-rate side. Change 4 (more FTCs available) makes the election more attractive for high-tax CFC jurisdictions. The net result:

• High-tax CFC jurisdictions (effective foreign rate above approximately 13%): The 962 election is generally MORE attractive post-OBBBA. The combination of the 90% FTC crediting rate and the 21% corporate rate (net of the 40% IRC 250 deduction) produces a lower net U.S. tax than individual ordinary rates, and the FTC can significantly offset remaining liability.
• Low-tax or zero-tax CFC jurisdictions: The election requires careful re-analysis. The higher effective NCTI rate (approximately 12.6% vs. approximately 10.5% pre-OBBBA) narrows the benefit, and without significant FTCs, the election may produce no net saving for individuals already in the 22% or lower marginal bracket.

4. NCTI Mechanics Under a 962 Election

The following is a step-by-step computation framework for an individual making a 962 election with respect to an NCTI inclusion. All figures are illustrative. Verify current rates, percentages, and limitations at IRS.gov and in the applicable Treasury regulations.

Step (a): Determine the NCTI Inclusion Amount

Compute the individual's pro-rata share of the CFC's Net CFC Tested Income under IRC 951A. Post-OBBBA, the computation is: Gross Tested Income minus Tested Deductions (no QBAI subtraction). The individual's NCTI inclusion is the pro-rata share of this net amount based on the individual's ownership percentage of the CFC's stock for the tested income inclusion period.

Step (b): Apply the 21% Corporate Rate

Under the 962 election, the individual is treated as a domestic corporation for purposes of computing tax on the NCTI inclusion. The applicable rate is 21% (the current corporate rate). No individual rate brackets apply to the 962-elected portion. Verify the current corporate tax rate at IRS.gov.

Step (c): Apply the IRC 250 Deduction (40% Post-OBBBA)

Before applying the 21% rate, the individual may reduce the NCTI inclusion by the IRC 250 deduction, which post-OBBBA is 40%. Therefore, only 60% of the NCTI inclusion is subject to the 21% rate, yielding an effective NCTI rate of approximately 12.6%. Apply the deduction only to the NCTI portion; subpart F income inclusions do not qualify for the IRC 250 deduction.

Step (d): Apply the IRC 78 Gross-Up

When the individual claims a deemed-paid FTC under IRC 960, IRC 78 requires that the deemed-paid foreign taxes be added back to the individual's gross income. This gross-up increases the taxable inclusion by the amount of the deemed-paid taxes before the FTC is computed. Omitting the IRC 78 gross-up overstates the net benefit of the 962 election. See Section 10 of this guide for a full discussion.

Step (e): Apply the IRC 960 Deemed-Paid FTC (90% Creditable Post-OBBBA)

The individual may claim a deemed-paid FTC under IRC 960 for the foreign taxes paid by the CFC on the NCTI. Post-OBBBA, 90% of the applicable foreign taxes are creditable (haircut reduced from 20% to 10%). The FTC is limited by the IRC 904 limitation computed using the NCTI basket. The FTC may not exceed the U.S. tax attributable to the NCTI inclusion after the IRC 250 deduction and the IRC 78 gross-up.

Step (f): Net Tax Result

The net U.S. tax on the NCTI inclusion equals the 21% corporate rate applied to 60% of the NCTI inclusion (post-OBBBA IRC 250 deduction), plus the IRC 78 gross-up income at 21%, less the allowable IRC 960 deemed-paid FTC. For high-tax CFC jurisdictions, the FTC often substantially offsets the resulting tax. For low-tax jurisdictions, the net U.S. tax may be material relative to individual-rate alternatives.

5. Subpart F Income and the 962 Election

The IRC 962 election applies to subpart F income inclusions under IRC 951(a)(1) as well as to NCTI inclusions. The benefit analysis for subpart F differs from the NCTI analysis in one critical respect: subpart F income does NOT receive the IRC 250 deduction.

For subpart F inclusions under a 962 election, the effective rate is the full 21% corporate rate (not the approximately 12.6% effective rate applicable to NCTI). The individual may still claim a deemed-paid FTC under IRC 960 for the foreign taxes attributable to the subpart F income, and the IRC 78 gross-up applies in the same manner as for NCTI.

For practitioners advising clients with both NCTI and subpart F inclusions in the same year, the 962 election is made at once and covers both categories, but the tax computation must be performed separately for each category because the IRC 250 deduction applies only to NCTI. The FTC analysis is also basket-specific: NCTI goes into the NCTI basket, while different categories of subpart F income go into the general basket or the passive basket depending on the nature of the income. Verify current basket allocation rules at IRS.gov.

Common subpart F categories include foreign personal holding company income (FPHCI, such as dividends, interest, rents, and royalties), foreign base company sales income, and foreign base company services income. If the CFC has significant subpart F income that is not subject to substantial foreign taxes, the benefit of a 962 election on the subpart F portion may be limited to rate arbitrage between 21% and the individual's marginal rate. Form 5471 (Information Return of U.S. Persons with Respect to Certain Foreign Corporations) is required for individuals who are CFC shareholders; consult that form's instructions for reporting mechanics.

6. How to Make the IRC 962 Election

The mechanics for making the IRC 962 election follow Treas. Reg. 1.962-2. While specific regulatory requirements should be verified at IRS.gov (as the regulations have been the subject of proposed and final guidance), the general mechanics are:

1. Prepare the election statement. The individual must attach a written statement to their Form 1040. The statement must identify: (a) the CFC(s) to which the election applies; (b) the NCTI or subpart F income inclusions covered; (c) the individual's pro-rata share percentage; and (d) a computation showing the tax benefit of the election (i.e., the tax at corporate rates vs. individual rates, with the FTC and IRC 78 gross-up included).
2. Attach to the timely-filed Form 1040. The election statement must be attached to the individual's Form 1040 (or Form 1040-NR, if applicable) for the taxable year in question. The return must be timely filed (by the original due date or any valid extension). The election may also be made on a timely filed amended return if the original return was filed without the election.
3. Compute and report the tax. The individual reports the NCTI or subpart F inclusion on Form 1040, computes the tax at the corporate rate after the IRC 250 deduction (for NCTI), adds the IRC 78 gross-up, and claims the IRC 960 deemed-paid FTC on Form 1118 (Foreign Tax Credit for Corporations, which is used by individuals making the 962 election). Verify the current Form 1118 filing requirement and instructions at IRS.gov.
4. Track the PTI account. After making the election, the individual must maintain records of the previously taxed income (PTI) attributable to the 962-elected inclusions. This account is needed to determine the tax treatment of future CFC distributions, as described in Section 7 of this guide.
5. Repeat the analysis each year. Because the election is annual, the practitioner must revisit the benefit analysis for each subsequent tax year. A year in which the individual has no NCTI or subpart F inclusions, or a year in which the election is not beneficial, requires no filing (though the practitioner should document the analysis).

7. Subsequent Distributions of Previously Taxed Income

When an individual makes a 962 election, the NCTI and subpart F inclusions that were taxed at the corporate rate are tracked in a previously taxed income (PTI) account under IRC 962(d). This account represents the earnings that have already been subjected to U.S. tax at the corporate level (via the election). Subsequent distributions from the CFC that are attributable to PTI are treated as follows:

• Distributions up to the PTI balance: Generally excluded from the individual's income (because those earnings were already taxed). The excluded distribution reduces the individual's adjusted basis in the CFC stock, which can create gain recognition if the basis is reduced below zero.
• Distributions exceeding the PTI balance: Taxable to the individual as ordinary income (or as a dividend, depending on the earnings and profits analysis). These excess distributions do not receive the corporate-rate treatment from the election because they were never included in income under the election.

An important nuance: the PTI exclusion under IRC 962(d) operates differently from the PTI exclusion under IRC 959 that applies to shareholders of CFCs generally. Under IRC 959, PTI from prior subpart F or NCTI inclusions (whether or not a 962 election was in effect) is excluded from income on distribution. Under IRC 962(d), the exclusion of the 962-period PTI is further conditioned on the individual having been taxed at the corporate rate under the election. Practitioners must track these accounts separately to avoid errors. Verify the current regulatory treatment of PTI accounts and CFC distributions at IRS.gov.

Distribution planning considerations: if an individual's CFC has accumulated substantial earnings and profits and the individual plans to take distributions in the near term, the PTI account mechanics should be modeled before advising on the 962 election. In some cases, it may be preferable NOT to make the 962 election in a year where immediate distribution is planned, if the effective rate difference does not justify the added complexity of the PTI tracking. In other cases, the 962 election creates a more favorable tax profile for distributions by sheltering the inclusion year's tax and allowing the distribution to come out at basis.

8. When to Make (and Not Make) the IRC 962 Election

Scenarios Where the Election Is Generally Beneficial

High-tax CFC jurisdiction: If the CFC operates in a country with an effective tax rate above approximately 13% on its tested income, the combination of (a) the 21% corporate rate applied to 60% of NCTI (the 40% IRC 250 deduction leaves 60% taxable) and (b) the 90% FTC crediting rate post-OBBBA will often reduce the net U.S. tax to near zero or a small residual. The individual's effective U.S. rate on the NCTI inclusion will generally be well below 37% (or even 22%), making the election substantially beneficial.

Individual in the top bracket: An individual whose marginal rate on ordinary income is 37% faces the sharpest contrast with the approximate 12.6% effective NCTI rate under the election. Even with partial FTC offsets, the election will typically save 20 or more percentage points of U.S. tax on the NCTI inclusion (before the IRC 78 gross-up adjustment, which must be modeled to arrive at the correct net figure).

Long-term deferral of distributions: If the individual does not plan to take distributions from the CFC for several years, the PTI account complexity is manageable and the tax deferral benefit of locking in the lower corporate rate now is maximized.

Scenarios Where the Election Is Generally Not Beneficial

Low-tax or zero-tax CFC jurisdiction: If the CFC pays little or no foreign taxes, the 962 election produces no FTC offset. The individual is taxed at approximately 12.6% (or 21% for subpart F) with no meaningful credit. If the individual's marginal rate is below approximately 12.6% (for example, the 10% or 12% bracket), making the election would result in MORE tax than not making it.

Individual in a low bracket: An individual with a marginal ordinary income rate at or below approximately 12.6% has no rate arbitrage benefit from the election. The added complexity of the IRC 78 gross-up, the PTI account, and the Form 1118 filing produces compliance cost with no tax saving.

Immediate distribution planned: If the CFC plans to distribute its current-year earnings promptly after year-end, the PTI account benefit (exclusion of subsequent distributions) is only a timing item. The distribution will be taxable regardless (either the inclusion was taxed at corporate rates via the election, or the distribution is taxable at dividend rates without the election). Model both scenarios to determine which produces the lower combined tax over the relevant period.

Annual Decision Framework

Because the election must be made each year, practitioners should build an annual decision checklist into the CFC shareholder engagement. The minimum inputs for the annual analysis are: (a) projected NCTI and subpart F inclusions for the year; (b) the CFC's effective foreign tax rate on tested income; (c) the individual's projected marginal rate; (d) the IRC 250 deduction percentage in effect (verify at IRS.gov); (e) the FTC haircut percentage in effect (verify at IRS.gov); (f) the IRC 78 gross-up on deemed-paid taxes; and (g) the existing PTI account balance and any planned distributions.

9. Comparison Table: 962 Election vs. No Election

10. IRC 78 Gross-Up and FTC Basket Mechanics

How the IRC 78 Gross-Up Works

When a taxpayer claims a deemed-paid foreign tax credit under IRC 960, IRC 78 provides that the deemed-paid taxes must be included in the taxpayer's gross income in the same year the FTC is claimed. The purpose is to ensure that the FTC is applied against tax computed on a gross-up income amount, preventing a double benefit from the deduction of foreign taxes (via the exclusion of the FTC) and the credit itself.

Mechanics under a 962 election: Suppose the individual's pro-rata share of the CFC's NCTI is $100,000, and the deemed-paid foreign taxes under IRC 960 are $15,000 (90% creditable post-OBBBA from $16,667 of CFC-level taxes, rounded). The IRC 78 gross-up adds $15,000 to the individual's income, making the taxable NCTI base $115,000. The 40% IRC 250 deduction applies to the original $100,000 NCTI (not to the gross-up portion, which is not NCTI). The resulting corporate-rate tax is computed on $60,000 (60% of NCTI) plus $15,000 (gross-up), totaling $75,000, taxed at 21%, producing $15,750 of tax. The FTC of $15,000 offsets $15,000 of this, leaving a net U.S. tax of $750. This is a simplified illustration; actual computations require detailed E&P and tested income records. Verify current rules at IRS.gov.

The practitioner's duty is to include the gross-up step in any client-facing benefit analysis before recommending the election. A spreadsheet model that shows the election saving money by reducing tax from the ordinary rate to approximately 12.6%, but that ignores the IRC 78 gross-up, is incorrect and may lead to a client underpaying tax.

FTC Basket Mechanics for the NCTI Inclusion

Under IRC 904(d), income from a controlled foreign corporation is allocated among separate "baskets" for FTC limitation purposes. For NCTI, all amounts are allocated to the NCTI basket (renamed from the GILTI basket for tax years beginning after December 31, 2025, consistent with the GILTI-to-NCTI rename). The FTC from the NCTI basket can only offset U.S. tax attributable to NCTI basket income. It cannot be used to offset U.S. tax on income in the general basket or the passive basket.

Practitioners advising individuals with both CFC-sourced NCTI and other foreign income must model the baskets separately. Excess FTCs in the NCTI basket cannot be applied against general limitation or passive category income. A high-tax CFC may generate excess FTCs in the NCTI basket that are wasted if the individual's NCTI base is insufficient to absorb them. This basket segregation is one reason that the 962 election benefit analysis is individual- and fact-specific.