Normally, interest is expensed under §884 on a cash basis regardless of the taxpayer’s method. Accrual basis taxpayers will only be able to recognize the amount that was actually paid within a year, even if more was accrued during that year. Consequently, the excess of the accrued interest over the paid interest is treated the same as the excess interest over the paid interest, an interest payment from a wholly owned domestic corporation to a foreign parent. When the excess is paid in the next year or later, it will be counted as a part of the interest paid in that year. However, §1.884-4(c)(1) provides an election for corporations using the accrual method. Once invoked though, the election remains in effect until the IRS revokes it.
Although §884 defaults to a cash basis, the regulations provide for an election to recognize the interest expense as it accrues. This election is described in §1.884-4(c)(1) and provides the ability for a corporation to ‘compute its excess interest as if such branch interest were paid on the last day of the taxable year in which it accrues.’ (1.884-4(c)(1)(i)) This election applies to all branch interest that is paid or accrued during the year, and once made, will continue applying to all tax years after the election, only revocable with the commissioner’s approval. (1.884-4(c)(1)(iii)) The only exception to this election is interest that is accrued during the year and has already been taxed. (1.884-4(c)(1)(ii)) This can be avoided if the corporation amends prior year returns after making the election, and using an accrual method for those years.
Although one can choose when to make the election, and then whether or not to amend, the election cannot be invoked after the fact, as the Taiyo