IRS proposes new rules for allocating deductions to foreign Section 951A income

The Internal Revenue Service issued a notice of proposed rulemaking (Regulation 117273-25, RIN 1545-BR90) to amend 26 CFR part 1 concerning the allocation and apportionment of deductions to foreign-source Section 951A category income. Written or electronic comments must be received by November 10, 2026.

The proposed regulations implement changes made by the One, Big, Beautiful Bill Act (Public Law 119-21) to section 250(b)(3) and to section 904(b)(5). For taxable years beginning after December 31, 2025, section 250(a)(1)(A) provides a deduction to a domestic corporation equal to a percentage of its foreign-derived deduction eligible income (FDDEI). The OBBBA amendments modify the definition of deduction eligible income and the treatment of expenses other than interest and research or experimental expenditures.

Section 904(b)(5) establishes special allocation rules for foreign-source Section 951A income. Deductions allowed under section 250(a)(1)(B) and taxes under section 164(a)(3) are allocated and apportioned to foreign-source Section 951A income. Interest expense and research and experimental expenditures are expressly excluded from allocation to that income. All other deductions are allocated and apportioned to foreign-source Section 951A income only when they are directly allocable; otherwise they are allocated to U.S. source income.

These rules affect the calculation of the foreign tax credit limitation under section 904(a) and the determination of deduction-eligible income for corporations that operate abroad through foreign subsidiaries or that claim the FDDEI deduction. The IRS will post all comments to the public docket and may hold a public hearing upon request.

For further information, commenters may contact John Lee or Alex Kaplan at (202) 317-6936, or the Publications and Regulations office at (202) 317-6901, or submit comments electronically via regulations.gov referencing IRS and REG-117273-25.