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Connect on LinkedInIf you own a business overseas, you might already know that the U.S. can tax your share of its profits — even if you never transfer a cent back home. For some business owners, that means getting hit with a U.S. tax bill on top of taxes they’re already paying abroad.
The Section 962 election is a tax option that can help. It lets certain individuals choose to be taxed on their foreign business profits the way a U.S. corporation would be taxed. In many cases, that means a lower rate and the ability to claim additional foreign tax credits—two things that can make a real difference to your bottom line.
For U.S. expats and small business owners facing high taxes on foreign earnings, 2025 is a good time to take another look at this election and see if it could work in your favor.
📋 Key Updates for 2025
- Starting in 2026, GILTI will be renamed Net CFC Tested Income (NCTI) and the Section 250 deduction will drop from 50% to 40%, increasing the effective tax rate.
- The foreign tax credit “haircut” for NCTI will be reduced from 20% to 10%, increasing the value of the 962 election.
- The 10% QBAI exclusion (deemed tangible return) will be eliminated, meaning more foreign profits will be included in the NCTI base and subject to U.S. tax.
What is a Section 962 election?
Section 962 of the Internal Revenue Code gives certain U.S. individuals — including those who own shares in a Controlled Foreign Corporation (CFC) directly, through a partnership, or via an S corporation—the option to be taxed on specific types of foreign income as if they were a domestic C corporation.
This election typically applies to:
- Subpart F income: Certain categories of passive or easily moveable income earned by CFCs.
- GILTI (Global Intangible Low-Taxed Income): A type of income introduced by the Tax Cuts and Jobs Act to capture low-taxed foreign profits.
The key effects of making a 962 election are:
- Your share of this income is taxed at the corporate income tax rate rather than your individual rate.
- You may be able to claim an indirect (deemed-paid) foreign tax credit for taxes paid by the CFC.
- When the CFC distributes profits, those amounts may be taxed again — but often at the qualified dividend rate if a tax treaty applies.
Understanding your gross income, pro rata share of CFC earnings, and the resulting effective tax rate is essential before making the election. Done right, it can reduce tax liability and bring your overall U.S. tax closer to what a C corporation would pay on the same net income.
💡 Pro Tip:
A 962 election can save money in the right circumstances, but if your CFC is in a no-tax or low-tax jurisdiction, you might face U.S. tax now and tax again when profits are distributed—so run the numbers with a qualified international tax advisor before filing.
When (and why) would a U.S. person make a 962 election?
A 962 election can be a smart move for an individual U.S. shareholder of a controlled foreign corporation when the default tax rules would otherwise leave them paying more U.S. tax than necessary on GILTI income or subpart F income. By choosing to be taxed “like” a domestic corporation for these specific earnings, you can access a lower corporate income tax rate and, in many cases, claim an indirect foreign tax credit for the taxes your CFC already paid abroad.
This strategy often makes sense if:
- You’re in a high-tax foreign jurisdiction and want to use the corporate foreign tax credit to reduce or eliminate additional U.S. tax.
- Your CFC earns consistent GILTI income and the lower corporate rate will meaningfully reduce your taxable income for U.S. purposes.
- You want to defer some tax until you actually receive a distribution from the CFC.
But it’s not without downsides. Under the general rule, when the CFC eventually makes a distribution, you could face a second round of tax—often at ordinary income rates if you don’t qualify for the reduced rate under a tax treaty. The rules also require careful year-by-year tracking and extra compliance work, so it’s rarely a “set it and forget it” decision.
💡 Pro Tip:
A 962 election can lower your current U.S. tax bill, but the long-term impact depends on when (and how) you take profits out of the CFC — a timing mismatch could erase the initial savings.
The mechanics: How to make a Section 962 election
Making a Section 962 election isn’t a separate IRS form — it’s an election you make when filing your regular Form 1040. As a United States shareholder, you’ll report your pro rata share of the CFC’s GILTI inclusion, foreign earnings, and tested income, and you’ll include a statement with your return that clearly references IRC Section 962.
The basic steps are:
- Prepare your GILTI schedules (often on Form 8992 and related worksheets) showing your share of income for federal tax purposes.
- Calculate the tax as if you were a domestic corporation, applying the corporate rate and factoring in any available indirect foreign tax credit.
- Attach a signed statement to your taxable year’s return. The statement must include detailed items listed in Reg. §1.962‑2(b) (CFC names/tax years, §951(a) amounts, pro‑rata E&P and foreign taxes, distributions by category, etc.)
The election must be made by the due date of your return (including extensions). If your tax planning changes later, you can revoke or amend a 962 election — but you’ll need IRS consent if you want to reverse the choice for the same year.
Remember, while a 962 election can lower your immediate tax burden and allow some deferral until an actual distribution occurs, you may still face double taxation when those earnings are eventually paid out.
💡 Pro Tip:
If you make a 962 election, keep a permanent file with your election statement, calculations, and CFC income details—you’ll need the same data year after year to track deferrals, distributions, and potential double taxation.
Section 962 election, GILTI, and the IRS: How it all fits together
The 962 election works alongside the GILTI tax rules introduced by the Tax Cuts and Jobs Act (TCJA). When you make this election, the IRS applies the corporate tax rate to your share of GILTI income, even though you’re filing as an individual on your tax return.
You’ll also apply the “gross-up” rules, which increase your reported income by the amount of foreign tax paid by the CFC — a required step before claiming the deemed-paid foreign tax credit. This credit allows you to offset U.S. tax with foreign income tax already paid by your CFC, and in some cases, pairing the election with the high-tax exception can reduce or even eliminate GILTI for U.S. tax purposes.
Whether the 962 election benefits you depends on:
- Gross income from the CFC
- Type of distribution you receive (actual vs. deemed)
- Timing of repatriation and when profits are brought back to the U.S.
A well-timed election can lead to a much lower effective tax rate, while poor timing can leave you paying more than if you hadn’t elected at all.
💡 Pro Tip:
Model the numbers for several years before making the election — the timing of repatriations and the mix of deemed vs. actual distributions can make or break the tax savings.
Making the 962 election work for you
The Section 962 election can be a powerful tool for individual taxpayers with foreign earnings, but it’s not a “check a box and forget it” kind of move. The way your tax treatment plays out depends on when you take distributions, how your tax year lines up, your gross income, and whether you get the reporting right. Done well, it can cut the income tax paid to the U.S.; done poorly, it can leave you with more tax due than before.
If you’re not sure whether a 962 election belongs in your tax strategy, that’s exactly the kind of puzzle we love solving at Bright!Tax.
We’ll help you minimize your U.S. income tax, navigate GILTI with confidence, and handle the moving parts of complex international tax planning — so you can focus on running your business, not wrestling with the Internal Revenue Code.
Ready to run the numbers? Get in touch to see if a 962 election could work for you this year.
Frequently Asked Questions
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What is a Section 962 election?
It’s a provision in the Internal Revenue Code that lets certain U.S. individuals who own shares in a controlled foreign corporation (CFC) be taxed on specific foreign income as if they were a U.S. C corporation.
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Who can make a 962 election?
Any individual U.S. shareholder of a CFC — including those who own their interest through an S corporation or partnership — as long as they have subpart F income or GILTI.
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What’s the main benefit of a 962 election?
Access to the lower corporate tax rate and the ability to claim the deemed-paid foreign tax credit, which can reduce or even eliminate the U.S. tax on that income.
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Are there downsides?
Yes — you could face double taxation if you later take a distribution, and the compliance is more complex than the default rules.
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Does a 962 election apply to all my foreign income?
No. It applies only to subpart F income and GILTI from CFCs, not to other types of foreign earnings.
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How do I make the election?
By attaching a statement to your timely filed tax return (Form 1040) indicating you are electing under IRC Section 962 and including the required details.
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Can I revoke a 962 election?
Yes, but only with the consent of the IRS (Secretary/Commissioner). You must submit a request — typically a written letter to the Commissioner — and demonstrate that a “material and substantial change in circumstances” occurred, one that couldn’t have been anticipated when the election was made. Without IRS approval, the election is binding for that taxable year.
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Should I get professional advice before making a 962 election?
Absolutely. The tax savings can be significant, but the wrong timing or miscalculation can lead to more tax due than if you hadn’t elected at all.
