If you're reporting foreign income or claiming a Foreign Tax Credit, you may come across Section 951A Category Income, commonly referred to as GILTI (Global Intangible Low-Taxed Income).
GILTI is a special category of foreign income created by the Tax Cuts and Jobs Act (TCJA). It represents one of the separate income categories, or "baskets," used when calculating the Foreign Tax Credit (FTC).
Because Foreign Tax Credit limitations are calculated separately for different categories of income, GILTI income must be reported and tracked independently from other foreign income types.
What Is GILTI?
Under Internal Revenue Code Section 951A, certain U.S. shareholders of Controlled Foreign Corporations (CFCs) are required to include a portion of the corporation's foreign earnings in their U.S. taxable income, even if those earnings weren't distributed as a dividend.
This income is generally calculated based on the shareholder's share of the CFC's net tested income, reduced by any applicable tested losses and other required adjustments.
GILTI can be confusing because it usually isn't money you received directly.
Instead, it's a tax rule that requires certain U.S. owners of foreign corporations to report and pay U.S. tax on certain foreign earnings, even when those profits remain inside the foreign company.
In other words, you may have taxable income on your U.S. return without receiving an actual cash distribution from the foreign corporation.
Congress created these rules to discourage businesses from shifting profits to countries with very low tax rates and then deferring U.S. taxation indefinitely.
Who Might Have Section 951A Income?
You may have GILTI income if you:
- Own shares in a Controlled Foreign Corporation (CFC)
- Own part of a foreign corporation through a partnership, S corporation, trust, or estate
- Receive tax reporting forms that disclose a Section 951A inclusion
- Have foreign business interests requiring Forms 5471 or other international reporting forms
Most taxpayers with only foreign bank accounts, foreign mutual funds, or foreign wages won't encounter GILTI reporting.
Why Is It a Separate Foreign Tax Credit Category?
For Foreign Tax Credit purposes, the IRS separates foreign income into different categories.
Section 951A income is treated as its own category because special credit limitation rules may apply. Foreign taxes associated with GILTI generally can't be combined with taxes from other income categories when calculating the allowable Foreign Tax Credit.
As a result, taxpayers with GILTI income often need additional calculations to determine the amount of foreign tax credit they may claim.
How Is GILTI Reported?
The reporting requirements depend on your ownership structure and filing situation.
Taxpayers with GILTI income often receive information from:
- Form 5471
- Schedules K-1
- International tax reporting statements
- Foreign corporation reporting packages
The information is then used to determine the Section 951A inclusion and any related Foreign Tax Credit calculations.
Because the reporting rules can be complex, taxpayers with GILTI income frequently need to review supporting schedules carefully when preparing their return.
What Does "Tested Income" Mean?
"Tested income" is a technical tax term used to identify certain earnings of a Controlled Foreign Corporation that are included in the GILTI calculation.
Not all foreign corporate income is treated as tested income. The calculation excludes specific categories of income and applies various adjustments before arriving at the final amount that may need to be reported by U.S. shareholders.