Proposed regs address Section 898 and PTEP FTC rules

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The Treasury Department and IRS issued proposed regulations (REG-115145-25) implementing two international tax provisions enacted by the One Big Beautiful Bill Act (OBBBA): the repeal of the one-month deferral election and the new 10% foreign tax credit (FTC) disallowance for certain distributions of previously taxed earnings and profits (PTEP).

The regulations proposed on Aug. 3 generally follow Notices 2025-72 and 2025-77, while adding several new taxpayer-favorable elections. The proposed regulations, which relate to Section 898(c)(2) and Section 960(d)(4), do not address the Section 987 guidance described in Notice 2025-72. Instead, Treasury and the IRS state that proposed regulations implementing those provisions will be issued separately.

Section 898 transition rules

The repeal of the one-month deferral election under Section 898(c)(2) applies to specified foreign corporation (SFC) taxable years beginning after Nov. 30, 2025. As a result, an SFC with a Nov. 30 year-end and a calendar-year majority U.S. shareholder generally will have a short taxable year from Dec. 1 through Dec. 31, 2025.

Consistent with the approach set forth in Notice 2025-72, the proposed regulations generally allocate foreign net income taxes accrued by an affected corporation in its first required taxable year following the repeal of the one-month deferral election, for which it is the Section 901 taxpayer, between that year and the succeeding taxable year based on foreign-law taxable income attributable to each period.

In addition, the proposed regulations add four elections:

1. Election to allocate specified distributive shares of creditable foreign tax expenditures (CFTEs): An election to treat all qualifying distributive shares of certain CFTEs of certain partnerships affected by the repeal of the one-month deferral election as specified foreign income taxes
2. Election to apply income group-specific allocation method: An election under which an affected corporation may assign specified foreign income taxes to each income group by applying an allocation percentage determined under the principles of Treas. Reg. Section 1.1502-76(b) using the closing-of-the-books method
3. Election to not allocate specified foreign income taxes: Permits an affected corporation to elect not to apply the transition allocation rules to its specified foreign income taxes. If the election is made, all specified foreign income taxes are taken into account in the first required year.
4. Election to allocate relevant succeeding-year taxes: An irrevocable election to allocate certain foreign net income taxes accrued in the succeeding taxable year between the first required year and that succeeding taxable year

An affected corporation’s controlling domestic shareholders make the elections for the first required year by attaching a statement to their timely filed federal income tax, including extensions, for the years in which the first required year and the succeeding taxable year end.

The elections to allocate specified distributive shares of CFTEs and to apply an income-group-specific allocation method also may be made on an amended return, and all elections other than that the election to allocate relevant succeeding year taxes may be revoked on an amended return. Any amended return making or revoking an election must be filed within 24 months of the unextended due date of the original return for the first required year.