Your Q2 2026 Form 10-Q is being drafted right now. If your company has controlled foreign corporations, every OBBBA international tax change, which is effective for tax years beginning after December 31, 2025, is already flowing through your second-quarter tax provision. The GILTI regime no longer exists for 2026. It has been replaced by Net CFC Tested Income, or NCTI.
This is not a name change with identical mechanics underneath. The Section 250 deduction dropped from 50% to 40%. The QBAI exclusion that previously sheltered 10% of tangible asset returns from US tax was eliminated entirely. The foreign tax credit haircut improved from 80% to 90%. Each of those changes affects your estimated annual effective tax rate for 2026, your current-period income tax provision, and, depending on whether you elected the period cost method for GILTI, potentially your deferred tax balances as well.
The One Big Beautiful Bill Act was signed July 4, 2025. The changes landed in the 2025 year-end income tax footnote for calendar-year filers. But the substantive tax calculation differences hit Q1 2026 first and are fully embedded in Q2. This post explains the NCTI changes, what they mean for your effective tax rate, what the ASC 740 disclosure requirements are for the Q2 10-Q, and what the MD&A needs to say about all of it.
What Is NCTI and How Is It Different From GILTI?
NCTI stands for Net CFC Tested Income. The OBBBA, signed into law July 4, 2025, renamed GILTI to NCTI effective for CFC tax years beginning after December 31, 2025, which for most calendar-year-end companies means the 2026 tax year. Thomson Reuters confirms that for tax years beginning after December 31, 2025, the term GILTI is no longer used in the Internal Revenue Code.
The renaming reflects a computational change, not just a label swap. Under GILTI, the inclusion amount was calculated as net CFC tested income minus the net deemed tangible income return, which was 10% of QBAI minus interest expense. Under NCTI, the NDTIR deduction is gone entirely. There is no longer a return on qualified business assets to subtract before computing the US shareholder's inclusion. The result is that all net tested income from CFCs flows into NCTI without the tangible asset carve-out that previously sheltered a significant portion of income earned by capital-intensive foreign operations.
A second computational change: the Section 250 deduction, which a US corporate shareholder takes against its NCTI inclusion, is now 40%, down permanently from the 50% rate that applied under GILTI in years through 2025. Under the TCJA, that deduction was scheduled to drop to 37.5% for tax years beginning after December 31, 2025. The OBBBA instead set it at 40% permanently, which represents a better outcome than the scheduled rate but a worse outcome than the 50% rate companies used in 2025.
The combined effect of eliminating QBAI and reducing the Section 250 deduction to 40% raises the pre-foreign-tax-credit effective US tax rate on NCTI from 10.5% to 12.6% for corporate shareholders.
One partially offsetting improvement: the deemed-paid foreign tax credit available against NCTI increased from 80% to 90% of foreign taxes paid by the CFCs. For companies with significant foreign taxes, this improvement in the FTC haircut partially offsets the rate increase and the QBAI elimination.
What Did the OBBBA Change About the Tax Rate on Foreign Earnings?
Three specific rate and mechanics changes flow through simultaneously for 2026 NCTI, and all three affect the Q2 tax provision.
The Section 250 deduction dropped to 40%. Before the OBBBA, the TCJA had set the GILTI Section 250 deduction at 50% through tax years ending before January 1, 2026, at which point it was scheduled to fall to 37.5%. The OBBBA instead set it at 40% permanently for tax years beginning after December 31, 2025. At the 21% corporate rate, a 40% deduction produces a pre-FTC NCTI rate of 12.6%, calculated as 21% multiplied by 60%, where 60% is the portion of NCTI remaining after the 40% deduction. This is the headline rate figure most coverage quotes for NCTI.
The QBAI-based exclusion was eliminated. Under prior GILTI rules, a US shareholder could exclude from its GILTI inclusion the net deemed tangible income return, equal to 10% of the CFC's qualified business asset investment minus associated interest expense. The QBAI exclusion meant that companies with substantial tangible assets in their foreign subsidiaries, factories, warehouses, distribution centers, physical retail operations, had a natural shield reducing their GILTI inclusion. Eliminating the QBAI exclusion subjects all of the CFC's tested income to US tax treatment, not just the income attributable to intangible assets and above-normal returns. PKF O'Connor Davies confirms that this change eliminates the distinction between tangible and intangible income for NCTI purposes, which was the conceptual foundation of the original GILTI regime.
The foreign tax credit haircut improved from 80% to 90%. Under prior GILTI rules, only 80% of the CFC's foreign taxes could be credited against the US shareholder's GILTI liability, meaning 20% of foreign taxes were permanently lost as a credit. The OBBBA increased this to 90%, so only 10% of foreign taxes is now permanently non-creditable. The threshold at which a CFC's foreign taxes fully offset NCTI rises to approximately 14%, meaning a CFC paying a foreign effective rate of 14% or more should have sufficient credits to eliminate US residual NCTI tax after applying the FTC, though this depends on the specific FTC basket calculations and limitations.
The income inclusion timing rule changed. Under prior law, a US shareholder was required to include subpart F and GILTI income only if it held CFC stock on the last day of the CFC's tax year. The OBBBA changed this: US shareholders must now include their pro rata share of NCTI if they held CFC stock at any time during the taxable year, not just on the last day. This change is particularly relevant in years with CFC ownership changes, including M&A transactions, and creates new coordination obligations between parties in CFC acquisition or disposition transactions.
What Is the QBAI Elimination and Why Does It Matter?
The QBAI exclusion was not a minor computational technicality. For manufacturing-heavy multinationals, commodity companies, hospitality groups, and any company with significant physical assets in its foreign subsidiaries, the QBAI exclusion was often the difference between having meaningful GILTI exposure and having minimal or zero US residual tax on foreign earnings.
The mechanics under prior law: the CFC's qualified business asset investment was the average of the adjusted tax bases of the CFC's tangible, depreciable business assets. Ten percent of QBAI, minus certain interest expense allocable to those assets, was excluded from the GILTI inclusion before the Section 250 deduction and FTC were applied. A CFC with $100 million in QBAI would exclude $10 million from the GILTI inclusion base, which at a 21% tax rate and 50% Section 250 deduction would have reduced US tax by approximately $1.05 million before FTC.
For 2026, that exclusion is gone. The CFC's entire tested income flows into NCTI. The BDO analysis of the OBBBA's ASC 740 implications confirms the Section 250 deduction reduction from 50% to 40%, noting that this raises the effective rate on what was formerly GILTI from 10.5% to 12.6% pre-FTC.
The elimination of QBAI also has a parallel structural change in how expenses are allocated. Under prior law, various expenses including interest and R&E costs were apportioned to the GILTI basket for foreign tax credit limitation purposes, which could reduce the FTC available against GILTI. Under NCTI, only directly allocable deductions, meaning the 40% Section 250 deduction and certain directly allocated taxes, reduce foreign-source NCTI. Interest expense and R&E expenditures are no longer apportioned to the NCTI basket. This change is favorable for companies with significant domestic interest expense or R&E costs, because it removes those costs from reducing the FTC capacity in the NCTI basket.
What Is FDDEI and How Is It Different From FDII?
FDDEI, Foreign-Derived Deduction Eligible Income, is the OBBBA's replacement for FDII, Foreign-Derived Intangible Income. The same enactment date applies: effective for tax years beginning after December 31, 2025.
The underlying structure is the same. FDDEI provides a preferential US effective tax rate on income derived by US corporations from serving foreign markets, specifically income from selling property to foreign persons for use outside the United States and from providing services to foreign persons located outside the United States. The deduction under Section 250 for FDDEI reduces the effective US tax rate on qualifying export income.
What changed under OBBBA:
The Section 250 deduction for FDDEI was set at 33.34%, down from the 37.5% rate that was scheduled to apply under TCJA for tax years after 2025. This produces an effective tax rate on FDDEI income of approximately 14% at the 21% corporate rate, calculated as 21% multiplied by 66.66%, where 66.66% is the portion of FDDEI income remaining after the 33.34% deduction. BDO's analysis confirms this effective rate of approximately 14%, which compares to the prior scheduled rate of approximately 13.125% under the pre-OBBBA framework.
The QBAI elimination under FDDEI works similarly to the NCTI change: the 10% deemed return on QBAI that previously excluded certain tangible-income components from the FDII calculation is eliminated, expanding the pool of income that qualifies for the preferential rate.
Interest expense and R&E expenditures are no longer allocated to FDDEI for expense apportionment purposes, consistent with the parallel change in NCTI. Under prior law, R&E expenditures were allocated partly to foreign income, reducing the income eligible for the FDII benefit. Under FDDEI, all domestic R&E is effectively treated as related to US income, maximizing the income that can qualify for the FDDEI benefit.
For the Q2 10-Q, if FDDEI was a material driver of your FDII benefit in prior periods, the disclosure needs to reflect both the renaming and the rate change, specifically that the effective rate on export income has increased from 13.125% to approximately 14%.
What Changes in Your Q2 2026 Effective Tax Rate?
The NCTI changes began flowing through the annual estimated effective tax rate starting in Q1 2026. By Q2 2026, the AETR should already reflect the full-year impact of the new NCTI mechanics.
RSM's Q1 2026 provision considerations note confirms that most US multinationals account for GILTI (now NCTI) as a period cost, meaning the NCTI inclusion affects current taxes only and does not produce deferred tax assets or liabilities. For companies on the period cost method, the AETR for 2026 reflects the new 12.6% pre-FTC NCTI rate applied to the projected annual NCTI inclusion, with the 90% FTC applied against that amount to the extent available, included as a component of the Q2 estimated annual effective tax rate from the beginning of Q1.
The practical rate impact varies significantly by company. The key variables are:
The size of the QBAI pool that previously reduced the GILTI inclusion: companies with large tangible foreign asset bases see a larger absolute increase in their NCTI inclusion compared to 2025.
The effective foreign tax rate in the NCTI basket: companies with CFCs paying foreign taxes at rates above approximately 14% should have sufficient FTCs to fully offset NCTI even at the 90% haircut level, meaning their effective rate on NCTI may be zero regardless of the QBAI elimination.
Companies with low foreign effective tax rates in their CFC groups, specifically those paying foreign taxes at rates below the approximately 14% threshold needed to fully offset NCTI after the 90% credit, will see the highest absolute rate increases.
For the Q2 10-Q rate reconciliation, the change from the prior year GILTI line to the 2026 NCTI line should reflect both the name change and the numerical change. If NCTI expense is higher than 2025 GILTI expense for the comparable period, the rate reconciliation explanation needs to attribute that increase specifically to the QBAI elimination and Section 250 deduction reduction, not just to changes in foreign earnings.
What Are the ASC 740 Disclosure Requirements for NCTI in Your 10-Q?
ASC 740 is the primary accounting standard governing income tax accounting and disclosure. The NCTI changes affect the Q2 10-Q in specific, identifiable ways under this standard.
Effective tax rate reconciliation. ASC 740-10-50-12 requires disclosure of the significant differences between the expected tax computed at the statutory rate and the actual income tax expense for the period. For the Q2 10-Q, the rate reconciliation line item previously labeled GILTI should now be labeled NCTI. If the NCTI expense is materially different from the prior year comparable quarter, the reconciliation explanation must specifically address the drivers of that difference: the QBAI elimination, the Section 250 deduction rate change, and the FTC haircut change.
Law change disclosure under ASC 740-10-50-9(g). This provision requires disclosure of the tax effects of adjustments to deferred tax assets or liabilities resulting from enacted changes in tax laws or rates. For calendar-year-end filers, the OBBBA was enacted July 4, 2025, and its effect on deferred tax balances was reflected in the 2025 annual financial statements. The Q2 2026 10-Q does not need to repeat that enacted-date disclosure, but it does need to reflect the actual NCTI calculations for the year-to-date period and update the AETR accordingly.
ASU 2023-09 income tax disclosure. For public business entities, ASU 2023-09, Improvements to Income Tax Disclosures, was effective for annual periods beginning after December 15, 2024, meaning calendar-year 2025 annual reports were the first to include the expanded rate reconciliation format and the expanded income taxes paid disclosure. The Q2 2026 10-Q falls within the year covered by this standard, and the NCTI line in the rate reconciliation must meet ASU 2023-09's specificity requirements, which require quantitative disclosure of line items meeting the 5% threshold and descriptive disclosure of the nature of the item. Baker Tilly confirms that NCTI impacts should be reflected in the income tax footnote under this new disclosure standard.
Period cost vs deferred method. Most US multinationals account for NCTI as a period cost, consistent with the FASB's practical expedient under ASC 740-10-25-52 that allows entities to account for GILTI (now NCTI) as a period cost rather than recognizing deferred taxes related to temporary differences that will reverse into NCTI. If your company has historically elected the period cost method, no deferred tax adjustment is required as a result of the QBAI elimination or the Section 250 deduction change. However, if your company previously recorded GILTI-related deferred tax assets or liabilities, you need to reassess those balances under the new NCTI mechanics, because the rate at which temporary differences reverse is now 12.6% pre-FTC rather than the prior rate.
Impact on valuation allowances. The higher NCTI effective rate increases the US tax cost of foreign earnings for companies that were near the FTC offset threshold. For companies that have deferred tax assets dependent on projections of future NCTI-related foreign tax credits, the reassessment of whether those credits remain realizable under the higher-rate NCTI framework may affect valuation allowances. RSM confirms that for many taxpayers, the primary ASC 740 effect of the OBBBA's international changes was assessing whether the provisions affect the realizability of deferred tax assets, which could trigger valuation allowance changes.
What Deferred Tax Adjustments Are Required?
The deferred tax question for NCTI in Q2 2026 depends entirely on which accounting method the company has elected.
Companies on the period cost method for NCTI (formerly GILTI period cost). No deferred tax adjustments are required specifically because of the NCTI mechanics changes. The QBAI elimination and Section 250 deduction reduction change the current-period NCTI inclusion and the AETR, but they do not create or modify deferred tax balances, because the company is not tracking temporary differences that reverse into NCTI.
There is one exception: if the company has deferred tax assets related to foreign tax credit carryforwards arising from its GILTI position, those assets need to be reassessed under the 2026 NCTI mechanics, including the 90% FTC haircut. Credits that may have been unrealizable under the 80% haircut may now become realizable under the 90% haircut. Conversely, companies that projected future GILTI FTC generation based on the QBAI-reduced inclusion may now find those projections understated because the elimination of QBAI increases the NCTI inclusion and therefore the associated FTC need.
Companies that elected to record GILTI deferred taxes. If your company made an affirmative policy election to account for GILTI by recognizing deferred taxes on temporary differences that will reverse as GILTI inclusions, you need to remeasure those deferred tax balances under the new NCTI mechanics. The QBAI elimination changes the amount of income that temporary differences reverse into, and the Section 250 deduction change alters the rate at which that reversed income is taxed. Baker Tilly and RSM both confirm that companies should evaluate these changes to the extent any deferred tax amounts should be adjusted if they historically elected to compute GILTI deferred taxes.
State and local tax implications. The NCTI changes are federal. States vary in their conformity to GILTI and to the new NCTI rules. Some states tax GILTI, some do not. State conformity to the OBBBA's NCTI changes needs to be assessed separately for each material state. Companies operating in states that conform to the federal NCTI changes will see a pass-through of the federal rate increase. States that decouple from GILTI and NCTI will not conform. BDO confirms that companies must review state conformity rules to determine the appropriate state tax effect and may need to adjust state current and deferred tax balances in addition to federal balances.
What MD&A Disclosures Should Your Company Be Making?
The MD&A results of operations section and the income taxes discussion need to address NCTI specifically if it is a material driver of the change in the effective tax rate between Q2 2025 and Q2 2026.
RSM's year-end provision guidance confirms that projected effective tax rates disclosed in MD&A should reflect the estimated impact of NCTI and FDDEI changes. For the Q2 2026 10-Q, the MD&A income tax discussion should include:
Explicit identification of the transition from GILTI to NCTI. A disclosure that states the OBBBA renamed GILTI to NCTI effective for tax years beginning after December 31, 2025, and specifically identifies the three primary mechanics changes: Section 250 deduction reduced from 50% to 40%, QBAI exclusion eliminated, and FTC haircut improved from 80% to 90%. The transition itself should be identified rather than simply rolling forward language that still references GILTI.
Quantification of the NCTI impact on the Q2 effective rate. If NCTI is a material component of the company's effective tax rate difference versus the prior comparable period, the MD&A needs to quantify that difference. A generic statement that the effective rate changed due to international tax provisions is not sufficient if the NCTI change is the primary driver.
Forward-looking rate guidance adjustment. If the company provides ETR guidance for the full year, that guidance should be updated to reflect the 2026 NCTI mechanics rather than projecting forward from the 2025 GILTI rate.
FDDEI if material. If FDDEI (formerly FDII) is a material driver of the company's ETR, the Q2 MD&A should note the renaming and the rate change from 13.125% to approximately 14%, with a statement about how the income pool qualifying for FDDEI has changed with the QBAI elimination.
What Questions Should Your CFO and Tax Director Be Asking Right Now?
Five questions that should be on the CFO and Tax Director's checklist for Q2 close.
Has the company updated its NCTI inclusion calculation to remove QBAI? This is the most operationally immediate question. If any component of the provision or the AETR model still carries a QBAI deduction for the 2026 NCTI computation, the effective rate and current tax liability are understated.
Has the company reassessed its Section 250 deduction at 40% rather than 50%? The rate change is straightforward but must be applied to every CFC group aggregate computation for the year.
Has the company applied the 90% FTC haircut rather than 80% for 2026? For companies with significant foreign taxes, the improvement from 80% to 90% is favorable and may partially or fully offset the QBAI and deduction rate changes. The full-year AETR should reflect the 90% rate.
Has the company evaluated state conformity for NCTI? The federal changes are confirmed. State conformity varies materially. The Q2 provision needs state tax calculations that correctly apply each state's treatment of NCTI rather than assuming conformity.
Does the Q2 10-Q income tax footnote explicitly identify NCTI by name? A Q2 10-Q that still refers only to GILTI, without identifying the transition to NCTI and the specific mechanics changes, will not satisfy the specificity requirements of either ASC 740-10-50-12 or ASU 2023-09 for a company where the NCTI changes are material.
Frequently Asked Questions
What is NCTI and is it the same as GILTI?
Net CFC Tested Income (NCTI) replaced GILTI effective for CFC tax years beginning after December 31, 2025, as enacted by the One Big Beautiful Bill Act signed July 4, 2025. The income being captured is substantively similar, both tax US shareholders of CFCs on certain foreign earnings, but the mechanics are different. NCTI eliminates the QBAI exclusion that previously reduced the GILTI inclusion, reduces the Section 250 deduction from 50% to 40%, and increases the available foreign tax credit from 80% to 90% of foreign taxes paid by the CFCs. The combined effect raises the pre-FTC effective US rate from 10.5% to 12.6%.
What is the new effective tax rate on NCTI?
The pre-FTC effective corporate tax rate on NCTI is 12.6%, calculated as 21% multiplied by 60% (the after-deduction portion at the 40% Section 250 deduction rate). With foreign tax credits applied at the 90% haircut, a CFC paying an effective foreign tax rate of approximately 14% or above should have sufficient credits to fully offset the US residual NCTI tax. Companies with CFC effective foreign rates below that threshold will have US residual NCTI tax ranging from zero to the full 12.6% pre-FTC rate depending on their specific FTC position.
What happened to the QBAI deduction under OBBBA?
The 10% qualified business asset investment exclusion, which previously allowed US shareholders to reduce their GILTI inclusion by 10% of the CFC's net tangible asset base, was eliminated entirely effective January 1, 2026. There is no longer any deemed tangible income return that reduces the CFC tested income before computing the NCTI inclusion. All of the CFC's net tested income is now subject to NCTI inclusion, regardless of the level of tangible assets in the foreign operation.
What ASC 740 disclosures are required for NCTI in Q2 2026?
The Q2 2026 10-Q income tax footnote must: (1) identify the transition from GILTI to NCTI by name and describe the key mechanics changes, (2) reflect the NCTI impact in the rate reconciliation under the updated ASU 2023-09 format with quantification where the line item is material, (3) confirm or update the company's accounting policy (period cost vs deferred method) as it applies to NCTI, and (4) assess and disclose any valuation allowance changes driven by the NCTI mechanics changes affecting deferred tax asset realizability.
When did the NCTI rules take effect?
For CFC tax years beginning after December 31, 2025, which means the 2026 tax year for calendar-year-end CFCs. The OBBBA itself was enacted July 4, 2025, which was the ASC 740 enactment date for reflecting deferred tax effects in the 2025 annual financial statements. The actual NCTI calculations began affecting current tax provisions starting January 1, 2026.
Key Takeaways
- The OBBBA, signed July 4, 2025, renamed GILTI to Net CFC Tested Income (NCTI) effective for CFC tax years beginning after December 31, 2025. For calendar-year filers, the NCTI rules apply fully beginning January 1, 2026 and are embedded in the Q1 and Q2 2026 tax provisions.
- Three primary mechanics changes: Section 250 deduction reduced from 50% to 40%, raising the pre-FTC corporate effective rate from 10.5% to 12.6%; QBAI exclusion eliminated entirely, subjecting all CFC tested income to NCTI without a tangible asset carve-out; FTC haircut improved from 80% to 90% of foreign taxes, partially offsetting the rate increase for companies with significant foreign taxes.
- FDII was simultaneously renamed to FDDEI with a Section 250 deduction of 33.34%, producing an approximately 14% effective rate on qualifying export income, up from 13.125% under prior law.
- Most US multinationals account for NCTI as a period cost. For these companies, no deferred tax adjustments arise from the NCTI mechanics changes themselves, but the AETR must reflect the new 12.6% pre-FTC rate and the elimination of QBAI in the full-year inclusion projection.
- The Q2 2026 10-Q income tax footnote must identify NCTI by name, quantify its impact on the effective rate reconciliation under ASU 2023-09 requirements, and ensure the rate reconciliation no longer refers solely to GILTI without noting the transition.
- State tax conformity to NCTI varies. The federal mechanics changes do not automatically flow through to state current and deferred tax calculations. Each material state's conformity to the OBBBA NCTI provisions must be separately assessed.
- The Q2 MD&A income tax discussion must explicitly address the transition from GILTI to NCTI, quantify the NCTI contribution to the effective rate change from Q2 2025, and update any forward-looking ETR guidance to reflect 2026 NCTI mechanics.
