Form 5471 Schedule E: Reporting foreign income taxes and claiming the deemed-paid credit
Form 5471 Schedule E reports the foreign income taxes a controlled foreign corporation paid or accrued during its tax year. The US shareholder uses this data to claim a deemed-paid foreign tax credit under IRC Section 960, reducing double taxation.
If you own 10% or more of a CFC, Schedule E is the bridge between what the CFC paid in taxes abroad and the credit you can claim against your US tax liability.
Schedule E has three parts, per the Form 5471 instructions: Part I reports taxes the CFC paid, accrued, or is deemed to have paid, broken out by country and income category. Part II covers the election under IRC Section 986(a)(1)(D) to translate foreign taxes using the exchange rate on the date of payment instead of the average annual rate. Part III covers taxes for which the foreign tax credit is disallowed.
A separate schedule, Schedule E-1, is filed alongside Schedule E and tracks how the Part I taxes allocate across previously taxed earnings and profits groups, so each deemed-paid credit matches the correct distribution or inclusion.
The IRS uses Schedule E data to verify that US shareholders are not over- or under-claiming foreign tax credits. Errors on this schedule cascade into Form 1118 for corporations, and for individuals who’ve made a Section 962 election, directly affecting the final US tax bill.
Who must file Schedule E on Form 5471?
Schedule E is required for Category 1, Category 4, and Category 5 filers – anyone reporting on a Section 965 specified foreign corporation or a CFC where a foreign tax credit is in play.
If you fall into any of these categories, you generally must complete Schedule E as part of your annual filing – though, as covered below, Category 1b and 5b filers only need to file it if they’re claiming a deemed-paid foreign tax credit for the year.
- Category 1 filers are US shareholders of a foreign corporation that was a section 965 specified foreign corporation (SFC) at any time during the corporation’s tax year. Like Category 5, Category 1 splits into subcategories: 1a is the default subcategory; 1b covers unrelated Section 958(a) US shareholders of a foreign-controlled SFC, who complete Schedule E and E-1 only if claiming a deemed-paid foreign tax credit for the year; 1c covers related constructive US shareholders, who complete Schedule E only if claiming deemed-paid foreign tax credits under Section 960, and can always leave Schedule E-1 blank.
- Category 4 filers are US persons who had control of a foreign corporation at any time during the tax year. Control means owning more than 50% of the total combined voting power or more than 50% of the total value of all classes of stock.
- Category 5 filers are US shareholders – 10% or more of voting power or value under IRC Section 951(b) – of a foreign corporation that was a controlled foreign corporation at any time during its tax year, provided they still held that stock on the last day of the year in which the corporation was a CFC.
Category 5b filers complete Form 5471, Sch. E and Schedule E-1 only if claiming deemed-paid foreign tax credits. Category 5c filers are not required to complete Schedule E or Schedule E-1.
Constructive ownership rules under IRC Section 958 apply when determining whether you meet these thresholds. Stock owned by certain family members, partnerships, estates, trusts, or other corporations may be attributed to you.
Key definitions: CFC, US shareholder, and deemed-paid credit
Three terms appear throughout Schedule E. Understanding them prevents most filing errors.
- Controlled foreign corporation – CFC. A CFC is any foreign corporation in which US shareholders collectively own more than 50% of the total combined voting power or total value of shares on any day of the tax year. The “any day” rule means a corporation can become a CFC and trigger reporting obligations even if US ownership exceeds 50% for a single day.
- US shareholder. For CFC purposes, a US shareholder is a US person – citizen, resident, domestic corporation, partnership, estate, or trust – who owns 10% or more of the total combined voting power or value of the CFC’s stock under the direct, indirect, and constructive ownership rules of IRC Section 958.
- Deemed-paid credit – IRC Section 960. When a US shareholder includes CFC income on a US return – through a Subpart F inclusion, a GILTI inclusion, or a distribution of previously taxed earnings – the shareholder does not directly pay foreign taxes.
Instead, IRC Section 960 treats the shareholder as having “deemed paid” a proportional share of the CFC’s foreign taxes. That deemed amount becomes a creditable foreign tax, claimable on Form 1118 for corporations and for individuals who make a Section 962 election.
IRS Form 5471 Schedule E is designed to track the foreign taxes associated with each of these income categories and compute the correct deemed-paid credit for each US shareholder.
Schedule E Part I: Reporting taxes paid or accrued by the CFC
Part I of Schedule E of Form 5471 is the core section where filers record the actual foreign income taxes the CFC paid or accrued during its tax year. Each row describes a country, a tax year, income subject to tax, foreign taxes paid, and foreign taxes accrued.
The following five items are reported in Part I for each column group:
- Country – the jurisdiction that imposed the tax
- Tax year – the CFC’s tax year to which the foreign taxes relate
- Income subject to tax – gross income in the relevant category
- Foreign taxes paid – taxes actually remitted to the foreign government in cash during the CFC’s tax year
- Foreign taxes accrued – taxes the CFC owes for the tax year under the accrual method, whether or not paid by year-end
Part I also separates taxes into the correct foreign tax credit limitation categories – general, passive, GILTI under Section 951A, foreign branch, and others.
Getting the basket right matters: a tax allocated to the wrong category can reduce or eliminate the credit the US shareholder ultimately claims.
When foreign taxes are reported on a US return affects which tax year they offset – see our foreign income timing guide for details.
Schedule E-1: Tracking taxes across PTEP groups
Schedule E-1 of Form 5471 is a separate sub-schedule that allocates the foreign taxes reported in Part I across each previously taxed earnings and profits group. PTEP represents CFC income already included in a US shareholder’s gross income – through Subpart F, GILTI, or Section 965 – and therefore not taxed again when distributed.
Form 5471, Sch. E-1 ensures the correct deemed-paid credit is matched to the correct distribution.
The main PTEP groups tracked on Schedule J and allocated on Schedule E-1 include:
- Section 965(a) PTEP – earnings included under the one-time transition tax
- Section 965(b) PTEP – deficits used to reduce the Section 965 inclusion
- Section 951A PTEP – GILTI inclusions
- Section 245A(d) PTEP – deductions disallowed under the Section 245A dividends-received deduction
- Section 951(a)(1)(A) PTEP – Subpart F inclusions
- General Section 959(c)(1) PTEP other previously taxed amounts not tied to a specific source
Each PTEP group carries its own pool of foreign taxes. When a distribution comes out of a specific PTEP group, the deemed-paid credit under IRC Section 960(b) draws from that group’s tax pool – not from the CFC’s aggregate tax balance.
How Schedule E connects to the deemed-paid foreign tax credit under IRC Section 960
Schedule E on Form 5471 is the source document that feeds the deemed-paid credit calculation on Form 1118 – the corporate foreign tax credit form, which individuals also file if they’ve made a Section 962 election.
The taxes reported on Schedule E flow directly into the foreign tax credit computation, reducing the US shareholder’s federal tax liability dollar-for-dollar up to the applicable limitation.
IRC Section 960 operates through three subsections:
- Section 960(a) – deemed-paid credit for Subpart F inclusions. When a US shareholder includes Subpart F income under IRC Section 951(a)(1), the shareholder is deemed to have paid the CFC’s foreign taxes properly attributable to that income.
- Section 960(b) – deemed-paid credit for PTEP distributions. When a CFC distributes previously taxed earnings excluded from gross income under IRC Section 959(a), the shareholder receives a deemed-paid credit for taxes in the PTEP group’s tax pool that have not been previously credited.
- Section 960(d) – deemed-paid credit for GILTI. For GILTI inclusions under IRC Section 951A, the deemed-paid credit equals 80% (2025) of the tested foreign income taxes attributable to the shareholder’s GILTI inclusion. This is lower than the 100% credit available for Subpart F, but a CFC taxed at roughly 13.125% or higher for tax year 2025 can still see the 80% deemed-paid credit under IRC Section 960(d) fully offset the 10.5% effective US rate on GILTI.
The Section 962 election is a strategy for individual US shareholders who own CFCs.
Without Section 962, individuals include Subpart F and GILTI income at their personal marginal rate – up to 37% – but cannot claim the deemed-paid credit. By electing under Section 962, the individual is taxed at the corporate rate of 21% on the inclusion and gains access to the credit.
Schedule E and GILTI: What US shareholders need to know
GILTI taxes appear in Schedule E-1 under the Section 951A PTEP group, and accurate reporting here determines whether a US shareholder can claim the deemed-paid credit against GILTI income. Four aspects matter most.
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How GILTI taxes appear on Schedule E-1. The CFC’s tested foreign income taxes flow from Part I of Schedule E into the GILTI column on Schedule E-1. Only taxes on income that qualifies as tested income – not Subpart F income, not effectively connected income – belong in this column.
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The 80% deemed-paid credit limitation (2025). Under IRC Section 960(d), the deemed-paid credit for GILTI is limited to 80% of the CFC’s tested foreign income taxes attributable to the US shareholder’s inclusion. For a corporation, the effective tax rate on GILTI income is 10.5% – the 21% corporate rate multiplied by the 50% Section 250 deduction – and the 80% limitation means foreign taxes must exceed approximately 13.125% for the credit to fully offset the US tax.
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The GILTI high-tax exception. If a CFC’s effective foreign tax rate on tested income exceeds 90% of the US corporate rate – that is, exceeds 18.9% for tax year 2025 – the taxpayer can elect to exclude that income from the GILTI computation entirely. Income excluded under the high-tax exception does not appear on Schedule E’s GILTI columns.
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Impact on the effective tax rate calculation. IRC Section 960(d) limits the deemed-paid credit to 80% of the foreign taxes allocated to the GILTI income basket, making accurate Schedule E reporting critical to avoiding over- or under-claiming credits.
Note for tax year 2026 and beyond: The One Big Beautiful Bill Act renamed GILTI to “net CFC tested income” (NCTI) and changed the deemed-paid credit from 80% to 90% while reducing the Section 250 deduction from 50% to 40%. Both changes are effective for tax years beginning after December 31, 2025. For tax year 2025, the figures in this article apply.
Subpart F income and its role in Schedule E reporting
Foreign taxes paid on Subpart F income create a separate income basket for Schedule E allocation.
Taxes allocated to passive Subpart F income cannot offset taxes in the general limitation basket. This basket separation is the reason Schedule E splits taxes by category in Part I.
Three points matter for Schedule E:
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Subpart F income is taxed at 100% inclusion with no Section 250 deduction. The deemed-paid credit under IRC Section 960(a) is also 100% – not reduced like GILTI’s 80%. Foreign taxes on Subpart F income can fully offset the US tax, up to the foreign tax credit limitation.
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Passive Subpart F income – foreign personal holding company income under IRC Section 954(c) – must be allocated to the passive category basket on Schedule E. General category Subpart F income goes to the general basket. Mixing the two distorts the foreign tax credit limitation.
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Taxes allocated to Subpart F on Schedule E must be traceable to specific CFC income items. The IRS instructions require the taxes to be “properly attributable” to the income, meaning the filer must identify which foreign taxes apply to which Subpart F item rather than allocating a pro rata share.
If you want to read more about how Subpart F works, check our Subpart F income guide.
Earnings and profits: Why E&P calculations drive Schedule E
Schedule E of Form 5471 ties the CFC’s foreign taxes to its earnings and profits, since a CFC’s Subpart F and GILTI inclusions – and the credits that follow from them – depend on the CFC having positive E&P in the relevant category.
Four E&P concepts affect Schedule E:
- Current E&P – the CFC’s earnings for the current tax year, calculated under US tax principles, not local GAAP
- Accumulated E&P – prior-year retained earnings carried forward
- Deficit E&P – a net operating loss at the E&P level, which can reduce or eliminate the CFC’s Subpart F or GILTI inclusion in the relevant category, and with it the underlying credit
- Previously taxed E&P – income already included in the US shareholder’s return under Subpart F, GILTI, or Section 965, tracked on Schedule J and allocated on Schedule E-1
Every foreign tax reported on Schedule E must be traced to the CFC’s income and, for PTEP distributions, to a specific PTEP group. For Subpart F and GILTI inclusions, the deemed-paid credit under IRC Section 960(a) and 960(d) is based on foreign taxes “properly attributable” to the shareholder’s inclusion for the current year – not a ratio of taxes to E&P.
For distributions of previously taxed earnings, the Section 960(b) credit draws from the tax pool tied to the specific PTEP group the distribution comes from, so a current-year E&P deficit in one income category doesn’t by itself block a credit in another.
Step-by-step: How to complete Schedule E Part I
Completing Schedule E Part I requires seven distinct steps. The Form 5471 Schedule E instructions walk through each column group in detail. Based on a common TFX client scenario involving a CFC operating in Germany with both passive and active income:
- Identify the CFC’s tax year. Enter the CFC’s annual accounting period. For most CFCs, this is the calendar year – January 1 through December 31, 2025.
- List each country where taxes were paid or accrued. Enter each foreign jurisdiction separately. If the CFC paid taxes to Germany and France, each country gets its own column group.
- Enter gross income subject to tax in each country. Report the CFC’s taxable income in the country’s functional currency before converting to USD.
- Enter foreign taxes paid in functional currency. Record the actual taxes remitted during the CFC’s tax year in the CFC’s functional currency, not yet translated.
- Translate to US dollars at the average annual exchange rate. Under IRC Section 986, use the average exchange rate for the CFC’s tax year to convert accrued taxes to USD. The IRS publishes yearly average rates, or you can calculate from the Federal Reserve’s daily rates.
- Allocate taxes to the correct income basket. Assign each tax amount to the proper foreign tax credit limitation category – general, passive, Section 951A for GILTI, or foreign branch. Misallocation here directly reduces the deemed-paid credit.
- Carry totals to Schedule E-1. The totals from Part I flow into Schedule E-1, where they are further allocated across PTEP groups for deemed-paid credit purposes.
Common errors on Schedule E and how to avoid them
The following five errors account for most Schedule E problems across TFX client filings. Review the Form 5471, Sch. E instructions alongside this list to catch these before filing.
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Wrong exchange rate used. Using the spot exchange rate on the payment date instead of the average annual exchange rate required by IRC Section 986 for accrual-method taxes. This can overstate or understate the credit by thousands of dollars.
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Taxes accrued vs. paid confusion. Reporting taxes in the “paid” column when the CFC uses the accrual method, or vice versa. The IRS instructions require consistency with the CFC’s method of accounting.
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Incorrect income basket allocation. Placing passive-category taxes in the general basket, or allocating GILTI taxes to the Subpart F column. Each misallocation distorts the Form 1118 or 1116 credit calculation.
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Failure to file Schedule E-1 alongside Part I. Category 5b filers (unrelated section 958(a) shareholders) only need to file Schedule E and Schedule E-1 at all if they’re claiming a deemed-paid foreign tax credit for the year – if they’re not claiming the credit, neither schedule is required. Category 5c filers are not required to file Schedule E or Schedule E-1.
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Ignoring lower-tier CFC taxes. If a CFC owns a lower-tier foreign corporation, the taxes of that lower-tier entity may need to be reflected on Schedule E under the look-through rules of IRC Section 960(b). Omitting these taxes understates the available deemed-paid credit.
Schedule E vs. Form 1118 vs. Form 1116: Which form claims the credit?
Schedule E, Form 1118, and Form 1116 each play a distinct role in the foreign tax credit system, but they work together as a single pipeline.
Schedule E does not itself claim the foreign tax credit – it is the source document that feeds the credit calculation on either Form 1118 for C corporations or Form 1116 for individuals.
Schedule E provides the raw tax data. Form 1118 or Form 1116 applies the foreign tax credit limitation formula to determine the actual credit amount.
| Form | Who files it | What it reports | How it connects to Schedule E |
|---|---|---|---|
| Schedule E on Form 5471 | US shareholders of CFCs and Section 965 SFCs – Category 1, 4, and 5 filers | Foreign taxes paid or accrued by the CFC; deemed-paid credit data | Source document – generates the tax data |
| Form 1118 | C corporations, and individuals who make a Section 962 election | Foreign tax credit computation across all income baskets | Receives Schedule E data to compute corporate FTC, including for individuals electing Section 962 treatment |
| Form 1116 | Individuals, for foreign taxes they paid directly | Foreign tax credit computation for individual returns | Does not receive Schedule E data; used separately for foreign taxes the individual paid directly |
For individuals making a Section 962 election, the process runs through Form 1118, using the corporate tax rate. The deemed-paid credit from Schedule E offsets the corporate-rate tax calculated on the inclusion.
Schedule E for expats: Special considerations for individual US shareholders abroad
Individual US shareholders living abroad face four additional considerations when dealing with Schedule E and the deemed-paid credit.
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The Section 962 election is the gateway to the deemed-paid credit. Without a Section 962 election, individual shareholders are taxed at personal rates on Subpart F and GILTI inclusions but cannot claim the deemed-paid credit – that credit is available only to domestic corporations. The election allows individuals to be taxed at the 21% corporate rate and access the credit.
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Interaction with the foreign earned income exclusion. CFC income reported on Schedule E is not “earned income” and does not qualify for the FEIE. However, if the expat also has wages from the CFC, the FEIE may apply to the wages while the deemed-paid credit applies to the CFC inclusions – the two operate on different income streams.
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Impact of tax treaties. Some tax treaties reduce the foreign tax rate on certain types of CFC income – dividends, royalties, interest. A treaty-reduced rate means lower taxes available for the deemed-paid credit on Schedule E, which can increase the US residual tax.
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Additional complexity with FBAR and Form 8938. If you own more than 50% of the CFC, or have signature authority over its accounts, you likely have a separate FBAR financial interest in the CFC’s own foreign accounts. Below that ownership level, FBAR generally doesn’t reach the CFC’s accounts unless you have signature authority. On Form 8938, checking Item E on Form 5471 lets you avoid reporting the same CFC stock twice. Schedule E addresses a different obligation – the tax credit side – and applies independently of your FBAR and Form 8938 filing status.
If you want to read more about the foreign tax credit vs. the foreign earned income exclusion, check our FTC vs. FEIE comparison.
How Schedule E interacts with Schedule J and other Form 5471 schedules
Form 5471 is a system of interconnected schedules. An error on Schedule E cascades into incorrect balances on Schedule E-1, Schedule J, and ultimately the foreign tax credit claimed on the US return.
Four key inter-schedule relationships:
- Schedule E → Schedule E-1. Part I totals flow into E-1, where they are distributed across each PTEP group.
- Schedule E-1 → Schedule J. PTEP balances reconcile with Schedule J, which tracks accumulated E&P by PTEP category. The taxes allocated on E-1 must tie to the PTEP movements on Schedule J.
- Schedule H and Schedule J → Schedule E. Schedule H computes the CFC’s current-year E&P, which flows into Schedule J’s accumulated E&P and PTEP balances. The deemed-paid credit ratio on Schedule E is calculated against those Schedule J balances, so an error on Schedule H carries through to Schedule J and then to the credit on Schedule E.
- Schedule I → Schedule E. Schedule I identifies the Subpart F income categories. Schedule E’s basket allocation for Subpart F taxes must match the income categories on Schedule I.
If you want to read more about Schedule J and E&P tracking, check our Form 5471 Schedule J guide.
Amended returns and correcting Schedule E errors
If you discover an error on a previously filed Schedule E, correcting it requires five steps:
- Identify the error. Determine whether it affects the deemed-paid credit, the basket allocation, the exchange rate translation, or the PTEP group assignment.
- Determine whether it changes the credit amount. If the error changes the deemed-paid credit, an amended return adjusting Form 1118 or 1116 is likely necessary.
- File an amended Form 5471 with a corrected Schedule E. Attach a statement explaining the change.
- Consider the statute of limitations. Because this is a foreign tax credit adjustment, IRC Section 6511(d)(3)(A) gives you 10 years from the due date of the return for the year the foreign taxes were paid or accrued to file a refund claim – not the standard 3-year window that applies to most other refund claims.
- Evaluate whether the amendment triggers a refund or additional tax. An amended return that increases the deemed-paid credit produces a refund; one that reduces it produces additional tax owed plus interest.
Schedule E filing deadlines and extension rules for tax year 2025
Schedule E is filed as part of Form 5471, which is attached to the US shareholder’s income tax return. There is no standalone filing deadline for Schedule E – it shares the same deadline and extension rules as the underlying return.
For tax year 2025, filed in the 2026 filing season:
- Regular deadline: April 15, 2026
- Automatic 2-month extension for US persons abroad: June 15, 2026 – no form required; the taxpayer must be living and working outside the US and Puerto Rico on the regular due date
- Extended deadline with Form 4868: October 15, 2026 – Form 4868 must be filed by the applicable original or extended due date
- Discretionary additional extension: December 15, 2026 – requires a letter to the IRS explaining the reason, sent by October 15, 2026
These extensions extend the time to file, not the time to pay. Tax owed, including any residual tax after the deemed-paid credit, is due by April 15, 2026.
Interest accrues on unpaid balances from that date regardless of which extension applies.
Section 1248 and Schedule E: Dividend recharacterization
When a US shareholder sells stock in a CFC, IRC Section 1248 recharacterizes part or all of the gain as a dividend to the extent of the CFC’s accumulated earnings and profits. This recharacterization has three implications for Schedule E.
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The gain treated as a dividend generates a deemed-paid credit. The recharacterized dividend amount triggers IRC Section 960, entitling the shareholder to a deemed-paid credit for foreign taxes in the CFC’s E&P pool – just as if the CFC had made an actual distribution.
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The Section 1248 amount must be traced through Schedule E. The deemed-paid credit on the recharacterized dividend flows through Schedule E’s PTEP tracking. The E&P consumed by the Section 1248 gain reduces the CFC’s accumulated E&P, and the corresponding taxes move out of the tax pool.
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Interaction with PTEP accounts on Schedule E-1. When Section 1248 applies, the recharacterized dividend amount and associated PTEP must be accurately tracked on Schedule E-1, making accurate E&P tracking essential even in exit transactions.
If you want to read more about the transition tax and Section 965 PTEP, check our article on the Section 965 transition tax.
Penalties for incorrect or missing Schedule E filings
Failure to file a complete and accurate Schedule E as part of Form 5471 exposes the US shareholder to the same base penalty that applies to the entire form. The penalty amounts are statutory – not inflation-adjusted.
The Form 5471 penalty structure works as follows:
- Initial penalty: $10,000 per form, per annual accounting period
- Continuation penalty: An additional $10,000 for each 30-day period the failure continues after 90 days past IRS notice, capped at $50,000 in additional penalties per form
Beyond the civil penalty, failure to file can trigger a reduction of the foreign taxes available for credit under IRC Section 6038(c) – 10% initially, plus an additional 5% for each 3-month period the failure continues after 90 days past an IRS notice, up to the greater of $10,000 or the CFC’s income for the period. This directly reduces the deemed-paid credit that Schedule E supports.
Frequently asked questions
Schedule E Part I reports the foreign income taxes the CFC paid or accrued, broken out by country and income category. Schedule E-1 of Form 5471 takes those totals and allocates them across PTEP groups to determine which deemed-paid credit under IRC Section 960(b) applies to each distribution.
No. Schedule E is required for Category 1, Category 4, and Category 5 filers. Within Category 1, subcategory 1b completes Schedule E and E-1 only if claiming deemed-paid foreign tax credits. Within Category 5, subcategory 5b completes Schedule E and E-1 only if claiming deemed-paid foreign tax credits; subcategory 5c is not required to complete Schedule E or Schedule E-1.
Not directly – IRC Section 960 grants the credit only to domestic corporations.
However, an individual can make a Section 962 election to be taxed at the 21% corporate rate on Subpart F and GILTI inclusions.
This unlocks the deemed-paid credit, claimed on Form 1118.
Under IRC Section 986(a), accrued foreign income taxes are translated to US dollars using the average exchange rate for the CFC’s tax year. The 5471 Schedule E instructions specify this rate – do not use the spot rate on the date the tax was paid.
An incomplete Form 5471 triggers the same penalty as a complete failure to file: $10,000 per form per year, with additional penalties of $10,000 per 30-day period – capped at $50,000 additional – if the failure continues after IRS notice.
GILTI income and attributable foreign taxes are reported under the Section 951A column on Schedule E. The deemed-paid credit for GILTI is limited to 80% of the tested foreign income taxes for tax year 2025, compared to 100% for Subpart F.
Schedule E must clearly separate GILTI taxes from Subpart F taxes.
Usually, yes, if you’re a Category 1, 4, or 5 filer – the Schedule E instructions for Form 5471 require filing even when all lines are zero. The exception: if your CFC qualifies as a “dormant foreign corporation” under Rev. Proc. 92-70 (very limited gross income and assets, no share activity or distributions during the year), you can instead use the summary filing procedure and file only page 1 of Form 5471, skipping Schedule E entirely. If you want to read more about dormant CFC reporting, check our article on dormant foreign corporations.
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