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QBAI explained: Qualified business asset investment, tested income and tested loss in 2026
Quick answer: QBAI – qualified business asset investment – is the average adjusted basis of depreciable tangible property that a controlled foreign corporation uses in its trade or business, measured under the Alternative Depreciation System.
QBAI determines how much of a CFC’s income is shielded from US tax as a deemed return on tangible assets. The higher the CFC’s depreciable asset base, the more income escapes the GILTI inclusion.
QBAI is defined in IRC Section 951A(d) as in effect for tax years beginning before January 1, 2026 – the One Big Beautiful Bill Act later reassigned this subsection letter to an unrelated provision – with regulatory detail in Treas. Reg. Section 1.951A-3.
It is reported on Schedule I-1 of Form 5471 and aggregated on Form 8992.
Figures in this article are for tax year 2025 returns filed during the 2026 filing season.
Important change for tax year 2026: The One Big Beautiful Bill Act, enacted July 4, 2025, repealed the QBAI reduction from the GILTI calculation for tax years beginning after December 31, 2025. Tax year 2025 is the last calendar year in which QBAI shields CFC income from GILTI. This article covers the rules as they apply to your 2025 return.
The GILTI framework: Why QBAI exists
The Tax Cuts and Jobs Act created GILTI – Global Intangible Low-Taxed Income – under IRC Section 951A. The purpose: to tax US shareholders on excess returns earned by controlled foreign corporations above a deemed routine return on tangible assets.
Without QBAI, every dollar of CFC income above Subpart F would be subject to GILTI – QBAI carves out a routine return on real, depreciable assets.
Under the GILTI QBAI rules, a 10% deemed return on the CFC’s tangible asset base is subtracted from net tested income to arrive at the inclusion amount.
How the pieces fit together
Congress built the GILTI system around a qualified business asset investment QBAI exemption paired with two additional offsets:
- The Section 250 deduction further reduces the inclusion for C corporations – by 50% for tax year 2025, producing an effective corporate rate of 10.5% before credits.
- Foreign tax credits under Section 960 can offset most or all of the remaining liability if the CFC’s home country taxes at or above roughly 13.125%.
QBAI favors capital-intensive businesses with significant physical assets. Service businesses with little tangible property get minimal shelter.
QBAI definition: Specified tangible property and the ADS requirement
Property must pass a two-part test to qualify as specified tangible property for QBAI under Treas. Reg. Section 1.951A-3:
- It must be tangible property used in the CFC’s trade or business – and specifically in the production of gross tested income. If an asset is used partly for tested income and partly for other purposes, only the portion allocable to tested income counts.
- It must be property for which a depreciation deduction is allowable under Section 167 – meaning property of a type recoverable under the general depreciation rules. The adjusted basis is then computed using the Alternative Depreciation System under IRC Section 168(g), which uses straight-line recovery over longer periods than the standard MACRS method.
What does not qualify
The following property types are excluded from QBAI entirely:
- Land – not depreciable under Section 167
- Intangible assets and goodwill – amortized under Section 197, not depreciated under Section 168
- Property not used in the production of tested income – for example, assets generating Subpart F income or effectively connected income
How to calculate QBAI: The quarter-average adjusted basis method
To calculate QBAI for GILTI purposes, follow these four steps:
- Identify all specified tangible property held by the CFC at the close of each quarter of the CFC’s tax year. Only depreciable tangible property used in producing tested income qualifies.
- Determine the ADS adjusted basis of each asset at each quarter-end. Use straight-line depreciation over ADS recovery periods – not MACRS, not the CFC’s local-country book method. Depreciation is allocated ratably to each day under Treas. Reg. Section 1.951A-3, without regard to the applicable convention.
- Sum the quarterly ADS-adjusted bases. Add the total ADS basis of all qualifying property at the close of Q1, Q2, Q3, and Q4.
- Divide by four. The result is the CFC’s average QBAI for the tax year.
QBAI equals the average of the ADS-adjusted bases of specified tangible property measured at the close of each of the CFC’s four quarters.
QBAI is reported on line 8 of Schedule I-1, Form 5471, and carried to Form 8992 Schedule A, column g.
See our guide to Form 5471 Schedule Q for how the income-group data on Schedule Q supports the Section 960 credit calculation alongside Schedule I-1.
QBAI calculation example: Based on a common TFX client scenario
Based on a common TFX client scenario, here is a worked example. A US citizen owns 100% of a single CFC that operates a manufacturing facility abroad. The CFC holds depreciable equipment with the following ADS-adjusted basis at each quarter-end for tax year 2025:
| Quarter-end | ADS-adjusted basis |
|---|---|
| Q1 – March 31 | $4,000,000 |
| Q2 – June 30 | $3,800,000 |
| Q3 – September 30 | $3,600,000 |
| Q4 – December 31 | $3,400,000 |
The QBAI calculation produces an average of $3,700,000:
$4,000,000 + $3,800,000 + $3,600,000 + $3,400,000 = $14,800,000 ÷ 4 = $3,700,000
The deemed routine return – Net Deemed Tangible Income Return – equals 10% of QBAI:
$3,700,000 × 10% = $370,000 NDTIR for tax year 2025
This $370,000 NDTIR reduces the CFC’s GILTI inclusion dollar-for-dollar. If the CFC’s tested income is $500,000, the GILTI inclusion is $130,000 – not $500,000.
Net deemed tangible income return (NDTIR): The 10% QBAI rate explained
NDTIR equals 10% of aggregate QBAI across all of a US shareholder’s CFCs, reduced by any specified interest expense. This amount is subtracted from net tested income to arrive at the GILTI inclusion.
The 10% QBAI rate means that for every $1 million of average tangible asset basis, $100,000 of CFC income escapes GILTI taxation for tax year 2025.
The formula under IRC Section 951A(b)(2), as in effect for tax years beginning before January 1, 2026:
NDTIR = 10% × aggregate QBAI, minus specified interest expense
If a shareholder owns multiple CFCs, the QBAI of each tested-income CFC is combined. The aggregate is then reduced by specified interest expense. The result is a single NDTIR that offsets the shareholder’s total net tested income.
Tested income and tested loss: Core inputs to the GILTI calculation
Tested income is the starting point for the GILTI formula. It equals the gross income of a CFC, reduced by allocable deductions, after excluding the following:
- Subpart F income
- Effectively connected income
- Income excluded under the GILTI high-tax exclusion
- Related-party dividends under Section 954(d)(3)
- Foreign oil and gas extraction income under Section 907(c)(1)
A CFC with positive tested income contributes that amount to the shareholder’s aggregate tested income.
A CFC with a tested loss – where allocable deductions exceed the income described above – contributes that loss, which offsets tested income from other CFCs in the same tax year.
Tested-loss CFCs and QBAI
A tested-loss CFC has zero QBAI for the year. Under Treas. Reg. Section 1.951A-3, none of its tangible property counts as specified tangible property while the CFC is in a loss position.
A CFC can hold millions in depreciable equipment, but if it posts a tested loss, that equipment contributes nothing to QBAI. The NDTIR shield drops, and the shareholder’s GILTI inclusion from profitable CFCs rises.
Tested losses do not carry forward. A $200,000 tested loss in 2025 offsets tested income in 2025 only.
Tested loss QBAI amount: How losing CFCs reduce the QBAI pool
The tested loss QBAI amount is a separate concept from QBAI itself. Treas. Reg. Section 1.951A-4 defines it as 10% of the QBAI the tested-loss CFC would have had if it were a tested-income CFC.
Its only function is to reduce the tested-loss CFC’s contribution to specified interest expense – not to add to or subtract from the aggregate QBAI pool.
Here is how it works:
- A tested-loss CFC’s tested interest expense is reduced by its tested loss QBAI amount before that interest enters the specified interest expense calculation under Treas. Reg. Section 1.951A-4.
- This reduction is taxpayer-favorable: it slightly increases NDTIR because specified interest expense is smaller.
- The amount is reported on Schedule I-1, line 9c, and on Form 8992 Schedule A, column h.
QBAI for FDII: How the same concept applies to domestic corporations
QBAI also appeared in the Foreign-Derived Intangible Income calculation under former IRC Section 250(b)(2)(B), as in effect for tax years beginning before January 1, 2026 – the One Big Beautiful Bill Act later removed this provision and renumbered subsection (b).
For FDII, a domestic C corporation computes deemed intangible income by subtracting 10% of its QBAI – based on domestic depreciable tangible property – from total deduction-eligible income.
The FDII QBAI concept mirrors GILTI QBAI, but applies to a US corporation’s domestic depreciable tangible property rather than a CFC’s foreign assets.
The FDII deduction is available only to domestic C corporations – not to individuals, S corporations, or partnerships, and not through the Section 962 election.
The OBBBA also repealed QBAI from the FDII calculation for tax years beginning after December 31, 2025, and renamed FDII to “foreign-derived deduction eligible income.” For tax year 2025, the old rules still apply. C corporations that receive dividends from CFCs should also review the Section 245A dividends-received deduction, which interacts with both FDII and GILTI planning.
See our guide to FDII and GILTI final regulations for the reporting mechanics on Form 8993.
Partnership QBAI: Allocating tangible asset basis through pass-through structures
When a CFC holds a partnership interest, the QBAI rules look through to the underlying partnership assets. Three rules govern this under Treas. Reg. Section 1.951A-3:
- Look-through applies. A tested-income CFC that is a partner in a partnership includes its proportionate share of the partnership’s specified tangible property in its own QBAI. The proportionate share is based on the CFC’s distributive share of partnership income with respect to that property.
- ADS basis controls. The CFC’s share of partnership QBAI is measured using the ADS-adjusted basis of the partnership’s qualifying assets – the same rules that apply to directly held property.
- Trade-or-business requirement. The look-through applies only to the extent the partnership property is used in the CFC’s trade or business and produces gross tested income. Property used in activities that generate Subpart F income or ECI does not count.
See our guide to Section 1446 partnership withholding for the separate obligations that apply when a partnership has foreign partners with effectively connected income.
ADS depreciation vs. MACRS: Why the depreciation method matters for QBAI
QBAI is computed under the Alternative Depreciation System, which uses straight-line recovery over longer periods than MACRS.
Because ADS uses longer recovery periods than MACRS, a CFC’s QBAI is generally larger than it would be under regular US depreciation – this is intentional policy to maximize the GILTI exemption for tangible-asset-heavy businesses.
Key differences:
- MACRS uses accelerated methods and shorter recovery periods. A $1 million asset might have a MACRS basis of $400,000 after three years.
- ADS uses straight-line depreciation over the ADS class life. The same $1 million asset might have an ADS basis of $700,000 after three years.
CFCs that use a local-country book method or MACRS for other tax purposes must compute QBAI basis separately under ADS. This may require a separate depreciation workpaper maintained specifically for QBAI reporting.
QBAI and the foreign tax credit: Interaction and planning considerations
A larger QBAI reduces the GILTI inclusion – but it also reduces the deemed-paid foreign tax credits available under Section 960(d), as in effect for tax year 2025.
The credit is computed using an inclusion percentage: the ratio of the shareholder’s GILTI inclusion to aggregate tested income. When QBAI increases NDTIR and shrinks the inclusion, the inclusion percentage drops – and the creditable taxes drop proportionally.
Maximizing QBAI is not always optimal – a smaller GILTI inclusion can reduce the deemed-paid credit, potentially increasing net US tax if the CFC pays high foreign taxes.
For tax year 2025, only 80% of deemed-paid foreign taxes are creditable under Section 960(d). The remaining 20% is a permanent cost.
Credits in the GILTI basket cannot be carried forward or back – unused credits are lost in the year they arise.
For shareholders with CFCs in high-tax jurisdictions, the GILTI high-tax exception is often more effective than QBAI maximization. It removes income from tested income entirely, avoiding the credit haircut.
See our guide to the foreign tax credit vs. the FEIE for the broader FTC framework that applies alongside these GILTI-specific rules.
QBAI reporting: Form 5471 and the GILTI calculation schedules
QBAI flows through three reporting touchpoints on a tax year 2025 return:
- Schedule I-1, Form 5471 – reports each CFC’s tested income or tested loss on line 6, QBAI on line 8, tested loss QBAI amount on line 9c, tested interest expense on line 9d, and tested interest income on line 10c. This is the CFC-level schedule that feeds the shareholder-level calculation.
- Form 8992, Schedule A – aggregates tested income, tested loss, and QBAI data from all of the shareholder’s CFCs. Column G pulls QBAI directly from Schedule I-1, line 8. Part II computes the GILTI inclusion after subtracting NDTIR.
- Form 1118 or Form 1116 – computes the foreign tax credit. C corporations and Section 962 electors use Form 1118 with the Section 951A category basket. Non-electing individuals use Form 1116 but generally cannot claim deemed-paid credits for CFC-level taxes.
The Section 250 deduction is computed on a separate form – Form 8993 – filed alongside Form 8992.
Penalty exposure
Failure to file Form 5471 carries an initial penalty of $10,000 per foreign corporation per annual accounting period.
If the failure continues more than 90 days after IRS notice, an additional $10,000 applies for each 30-day period, capped at $50,000 in additional penalties – up to $60,000 total per corporation per year.
Common QBAI mistakes and how to avoid them
The single most costly QBAI mistake is using book or MACRS depreciation schedules instead of ADS – this error can overstate or understate QBAI by hundreds of thousands of dollars.
The five most common errors:
- Using MACRS basis instead of ADS basis. QBAI must be computed under the Alternative Depreciation System. A CFC’s local-country book depreciation or regular US MACRS basis produces the wrong number.
- Omitting partnership look-through property. When a CFC holds a partnership interest, its proportionate share of the partnership’s depreciable tangible assets counts toward QBAI. Leaving it out understates NDTIR.
- Counting tested loss QBAI as if it still applies. A tested-loss CFC has zero QBAI for the year – all of its tangible property is excluded from specified tangible property. This is one of the most misunderstood rules in the GILTI calculation.
- Using year-end basis instead of the quarter-average method. QBAI is the average of four quarterly measurements, not a single snapshot at December 31.
- Misclassifying intangible assets as specified tangible property. Goodwill, intellectual property, customer lists, and other intangible assets amortized under Section 197 do not qualify.
QBAI under the GILTI high-tax exception: Does it still matter?
When a CFC elects the GILTI high-tax exception under Treas. Reg. Section 1.951A-2, its tested income is excluded from the GILTI calculation entirely. The CFC’s QBAI is also removed from the aggregate pool.
If a CFC qualifies for the GILTI high-tax exception, its QBAI is excluded from both the tested income and the aggregate QBAI pool, which can paradoxically increase GILTI for other CFCs in the group.
The HTE election is made annually and applies on a tested-unit basis, not per country. It must be applied consistently across all CFCs in the same CFC group for the tax year.
For shareholders with mixed CFC portfolios – some in high-tax and some in low-tax jurisdictions – the HTE decision requires modeling. Removing a high-QBAI CFC from the pool can reduce the NDTIR shield enough to increase the GILTI inclusion on the remaining CFCs’ tested income.
QBAI for individual US shareholders vs. C corporations: Key differences
Individual US shareholders get no Section 250 deduction, so QBAI is their primary – and often only – tool for reducing GILTI exposure.
For tax year 2025, the QBAI tax benefit differs sharply by taxpayer type:
| Feature | Individual US shareholder | C corporation |
|---|---|---|
| GILTI inclusion rate | Ordinary income rates – up to 37% for tax year 2025 | 21% corporate rate for tax year 2025 |
| Section 250 deduction | Not available without a Section 962 election | 50% of GILTI inclusion for tax year 2025 – effective rate 10.5% |
| Effective tax rate impact of QBAI | QBAI reduces the inclusion dollar-for-dollar, saving up to $0.37 per dollar | QBAI reduces the inclusion, but Section 250 and FTC often shelter most of the remaining amount |
The Section 962 election is a potential workaround for individuals. It allows the individual to be taxed at the 21% corporate rate, claim the Section 250 deduction, and access deemed-paid foreign tax credits. See also our guide to specified foreign corporations for how the ownership rules interact with Section 962.
The trade-off is a potential second layer of tax when earnings are distributed.
QBAI planning strategies for US expat business owners
The following strategies can increase QBAI and reduce the GILTI inclusion for tax year 2025:
- Capitalize and depreciate tangible assets under ADS. Leased assets generally do not count toward QBAI. Purchasing equipment, machinery, or other depreciable property directly increases the CFC’s tangible asset base.
- Time asset acquisitions to increase the quarter-average basis. Acquiring property early in the CFC’s tax year means it appears in all four quarterly measurements. A December purchase appears only in Q4.
- Consolidate tangible assets in tested-income CFCs. Only tested-income CFCs contribute QBAI. Moving depreciable equipment from a holding company or a loss-making CFC to a profitable operating CFC preserves QBAI that would otherwise be zero.
- Model the tested-loss QBAI effect before disposing of loss-CFC assets. Selling or transferring assets out of a tested-loss CFC has no impact on QBAI – those assets already contribute nothing. But restructuring the CFC to generate tested income can restore QBAI in the following year.
- Review partnership agreements for look-through QBAI. Confirm that the CFC’s distributive share of partnership depreciable property is captured on Schedule I-1.
Based on a common TFX client scenario, moving depreciable equipment from a holding company to an operating CFC increased QBAI by over $500,000 for tax year 2025 and eliminated the GILTI inclusion entirely.
QBAI and the Section 250 deduction: How they work together for C corporations
For C corporations, QBAI and the Section 250 deduction reduce the GILTI tax in sequence.
The formula for tax year 2025:
- Start with net tested income across all CFCs.
- Subtract NDTIR – 10% of aggregate QBAI minus specified interest expense. The result is the GILTI inclusion.
- Apply the Section 250 deduction: 50% of the GILTI inclusion plus 50% of the Section 78 gross-up for tax year 2025.
- Tax the remaining amount at 21%.
The QBAI deduction does not appear as a separate line on the shareholder’s return. Instead, NDTIR reduces the inclusion amount at the calculation stage – before it reaches the return.
For tax years beginning after December 31, 2025, the Section 250 deduction drops from 50% to 40% under the OBBBA – and QBAI is repealed entirely. The combined effect increases the effective corporate GILTI rate from 10.5% to 12.6%.
Frequently asked questions
QBAI stands for Qualified Business Asset Investment. In the GILTI formula, the practical QBAI meaning is the quarterly average of a CFC’s depreciable tangible assets measured under ADS – it sets the size of the deemed return that shields CFC income from US tax. QBAI was defined in IRC Section 951A(d) as in effect for tax years beginning before January 1, 2026, and reported on Schedule I-1 of Form 5471.
QBAI uses the Alternative Depreciation System under IRC Section 168(g), which applies straight-line recovery over ADS class lives. Book value follows local accounting standards, which may use different methods and useful lives. The two figures are rarely the same.
No. QBAI consists only of depreciable tangible property used in the CFC’s trade or business. A CFC whose value sits entirely in intellectual property, cash, or intangible assets has zero QBAI.
A tested-loss CFC has no QBAI for the year under Treas. Reg. Section 1.951A-3. None of its tangible property qualifies as specified tangible property.
The “tested loss QBAI amount” under Treas. Reg. Section 1.951A-4 only reduces the CFC’s specified interest expense – it does not restore QBAI.
QBAI is computed at the CFC level, not the US shareholder level. If an S corporation or partnership is a US shareholder of a CFC, the CFC’s QBAI is calculated the same way as for any other shareholder type. The resulting GILTI inclusion then flows through to the individual partners or shareholders on their own returns via Schedule K-1.
Partnership QBAI is the CFC’s proportionate share of depreciable tangible property held by a partnership in which the CFC is a partner, under Treas. Reg. Section 1.951A-3, the CFC looks through to the partnership’s qualifying assets and includes its distributive share in its own QBAI. This applies only to tested-income CFCs and only to partnership property used in producing tested income.
Once a CFC elects the high-tax exception, what QBAI is for GILTI no longer matters for that entity – its tested income and QBAI are both removed from the aggregate calculation. The HTE threshold is 18.9%, meaning the CFC’s effective foreign tax rate must exceed 90% of the 21% US corporate rate.
QBAI is reported on line 8 of Schedule I-1, Form 5471, for each CFC. It flows to Form 8992 Schedule A, column g, where the shareholder aggregates QBAI across all CFCs to compute NDTIR in Part II. The Section 250 deduction is separately computed on Form 8993. Related previously taxed earnings are tracked on Schedule P.
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