Par. 9. Sections 1.56A-0 through 1.56A-27 are added to read as follows:
(a) Overview. This section provides rules under section 56A(c)(5) of the Code for adjusting AFSI with regard to certain income taxes. Paragraph (b) of this section provides general rules for adjusting AFSI with regard to certain income taxes. Paragraph (c) of this section provides a rule for applicable corporations that do not choose to have the benefits of subpart A of part III of subchapter N of chapter 1 of the Code. Paragraph (d) of this section provides rules for determining if an income tax is considered to be taken into account in an AFS. Paragraph (e) of this section provides examples illustrating the application of the rules in this section. Paragraph (f) of this section provides the applicability date of this section.
(b) AFSI adjustment for applicable income taxes —(1) In general. AFSI is adjusted to disregard any applicable income taxes, as defined in paragraph (b)(2) of this section, that are taken into account (within the meaning of paragraph (d) of this section) in a CAMT entity's AFS.
(2) Definition of applicable income taxes. The term applicable income taxes means Federal income taxes and foreign income taxes that are taken into account (within the meaning of paragraph (d) of this section) in a CAMT entity's AFS as current tax expense (or benefit), as deferred tax expense (or benefit), or through increases or decreases to other AFS accounts of the CAMT entity (for example, AFS accounts used to account for FSI from investments in other CAMT entities, AFS accounts used to account for section 168 property, or AFS accounts used to account for other items of income and expense).
(c) Applicable corporations that choose not to credit foreign income taxes. An applicable corporation that does not choose to have the benefits of subpart A of part III of subchapter N of chapter 1 for the taxable year reduces its AFSI for the taxable year by an amount equal to the deduction for foreign income taxes allowed to the applicable corporation for regular tax purposes under section 164 of the Code (taking into account all other relevant provisions) for the taxable year. For purposes of the immediately preceding sentence, foreign income taxes allowed to the applicable corporation for regular tax purposes include foreign income taxes paid or accrued by a disregarded entity if the applicable corporation is the owner for regular tax purposes, any creditable foreign tax expenditures (within the meaning of § 1.704-1(b)(4)(viii)) of a partnership that are allocated to the applicable corporation as a partner or indirect partner in a tiered partnership, and any other foreign income taxes that are allocated to the applicable corporation as an owner of any other type of pass-through entity.
(d) Requirements for an applicable income tax to be considered taken into account in an AFS. For purposes of paragraph (b) of this section and § 1.59-4, the following rules apply—
(1) Applicable income taxes are considered taken into account in an AFS of a CAMT entity if any journal entry has been recorded in the books and records used to determine an amount in the AFS of the CAMT entity for any year, or in another AFS that includes the CAMT entity, to reflect the taxes;
(2) Such applicable income taxes are considered taken into account in an AFS of a CAMT entity even if the taxes do not increase or decrease the CAMT entity's FSI at the time of the journal entry; and
(3) If applicable income taxes are taken into account in a partnership's AFS, they also are considered taken into account in any AFS of the partnership's partners.
(e) Examples. The following examples illustrate the application of the rules in this section. For purposes of these examples, each of X and Y is a domestic corporation that uses the calendar year as its taxable year and has a calendar-year financial accounting period.
(1) Example 1 —(i) Facts. X does not choose to have the benefits of subpart A of part III of subchapter N of chapter 1 for its 2024 taxable year. In 2024, X pays $200x of foreign income taxes to Country G, for which X claims a deduction for regular tax purposes under section 164. In X's 2024 AFS, X records a current foreign income tax expense of $200x for the foreign income taxes paid to Country G. X also records in its 2024 AFS a deferred Federal tax liability and deferred Federal income tax expense of $50x with respect to an installment sale that occurred in 2024.
(ii) Analysis. Under paragraph (b) of this section, X adjusts its AFSI to disregard the $200x of current foreign income tax expense for Country G taxes and the $50x of deferred Federal income tax expense from the installment sale that are reflected in X's FSI for the 2024 taxable year because both such taxes are applicable income taxes. If X is an applicable corporation for the 2024 taxable year, then for purposes of determining its tentative minimum tax under section 55(b)(2)(A) of the Code for the 2024 taxable year, X also reduces AFSI under paragraph (c) of this section by an amount equal to the $200x deduction for regular tax purposes under section 164 for the Country G taxes because X does not choose to have the benefits of subpart A of part III of subchapter N of chapter 1 for the 2024 taxable year.
(2) Example 2 —(i) Facts. X is an applicable corporation for its 2024 taxable year and chooses to have the benefits of subpart A of part III of subchapter N of chapter 1 for the 2024 taxable year. In 2024, X pays $100x of foreign income taxes to Country G for which X is eligible to claim a credit under section 901 of the Code. X also pays $75x of foreign income taxes to Country H, a country with which the United States has severed diplomatic relations. X is not allowed to claim a credit for the taxes paid to Country H under section 901(j) but is allowed to take a deduction for regular tax purposes under section 164 for those taxes. Both taxes are taken into account as current tax expense in X's 2024 AFS.
(ii) Analysis. In determining X's AFSI for its 2024 taxable year, under paragraph (b) of this section, X adjusts AFSI to disregard both the $100x of Country G taxes and the $75 of Country H taxes because both such taxes are applicable income taxes. Because X chooses to have the benefits of subpart A of part III of subchapter N of chapter 1 for the 2024 taxable year, paragraph (c) of this section does not apply and therefore X is not allowed to reduce AFSI by an amount equal to the deduction taken for the $75x of Country H taxes.
(3) Example 3— (i) Facts. X and Y are applicable corporations for the 2024 taxable year. X and Y each own a 50% interest in PRS, a domestic partnership that uses the calendar year as its taxable year. In 2024, PRS paid $300x of foreign income taxes to Country G, which PRS accounted for as a current tax expense on its AFS. The $300x of foreign income taxes paid to Country G are creditable foreign tax expenditures (within the meaning of § 1.704-1(b)(4)(viii)) of PRS. For the 2024 taxable year, X chooses to have the benefits of subpart A of part III of subchapter N of chapter 1, and therefore claims a credit under section 901 for the $150x of Country G taxes that are allocated to X as a partner. Y does not choose to have the benefits of subpart A of part III of subchapter N of chapter 1 for its 2024 taxable year, and therefore takes a deduction for regular tax purposes for the $150x of Country G taxes that are allocated to Y as a partner.
(ii) Analysis. For purposes of determining PRS's modified FSI under § 1.56A-5(e)(3), PRS disregards the $300x of current tax expense for Country G taxes that are reflected in PRS's FSI. Under paragraph (c) of this section, Y (not PRS) reduces its AFSI by an amount equal to the $150x deduction for regular tax purposes under section 164 for the Country G taxes allocated to Y as a partner. Paragraph (c) of this section does not apply to X because X chooses to have the benefits of subpart A of part III of subchapter N of chapter 1 for its 2024 taxable year.
(f) Applicability date. This section applies to taxable years ending after September 13, 2024.