The Internal Revenue Service (IRS) will now require shareholders of controlled foreign corporations (CFCs) that report a CFC's income, deductions, taxes and assets by "CFC income groups" for purposes of sections 960(a) and (d) of the Internal Revenue Code (IRC) to report loss allocation when filing Schedule Q. The IRS issued updated instructions highlighting changes for filing the Information Return of US Persons with Respect to Certain Foreign Corporations (Form 5471) and its accompanying schedules.
Beginning tax year 2020, taxpayers use Schedule Q to report the CFC's income in each CFC income group to the US shareholders of the CFC. Previously, the IRS did not require shareholders to report loss allocation on Schedule Q.
According to the updated instructions, the IRS added columns for reporting of loss allocations to reflect Treasury Regulations section 1.861-20(e), which provide that in determining foreign taxable income in each statutory grouping, or the residual grouping, foreign gross income in each grouping is reduced by deducting any expenses, losses or other amounts that are deductible under foreign law that are specifically allocable to the items of foreign gross income in the grouping under the laws of that foreign country.
In addition, the IRS added a new question pertaining to the US person's pro rata share of subpart F income or tested items from a CFC and revised certain wordings for clarity. More specifically, the IRS amended the wording of questions pertaining to claiming a foreign-derived intangible income deduction with respect to any transactions with the foreign corporation to reflect the final regulations under IRC section 250 (T.D. 9901, 85 FR 43042, 15 July 2020, as amended by 85 FR 68249, 28 October 2020 and T.D. 9956, 86 FR 52971, 24 September 2021).