Year-End Close for Your U.S. Subsidiary: Four Things to Settle Before January
When a U.S. subsidiary closes its books, the hardest numbers are often the ones shared with the foreign parent. A clean 2026 close comes down to four things: reconcile intercompany balances with the parent, document pricing, capture the 2026 federal changes while tracking separate California numbers, and collect the forms needed for information returns before January.
Short answer
A clean year-end close for a U.S. subsidiary of a Chinese or other foreign parent comes down to four things: reconcile intercompany balances with the parent, document pricing, capture the 2026 federal changes while tracking separate California numbers, and collect the forms needed for information returns before January.
Key facts and figures
- Intercompany transactions drive Form 5472; the penalty is $25,000 per Form 5472, per year (Instructions for Form 5472, Rev. 12/2024, verified Oct 15, 2026).
- Federal: 100% bonus depreciation is permanent for property acquired and placed in service after January 19, 2025, and domestic research costs are deductible under §174A; California conforms to neither (Notice 2026-11; FTB, verified Oct 15, 2026).
- For payments made after December 31, 2025, the threshold for most Form 1099-NEC and 1099-MISC payments is $2,000 (IRS, verified Oct 15, 2026).
- A U.S.-formed subsidiary has no BOI filing obligation under FinCEN's August 2026 final rule (Federal Register, verified Oct 15, 2026).
- Calendar-year Form 1120 and California Form 100 are due April 15, 2027 (IRS; FTB, verified Oct 15, 2026).
1. Reconcile intercompany accounts
Match every intercompany receivable, payable, loan and fee to the parent's books, in both currencies. Form 5472 reports transactions with each related party, such as sales, services, rents, royalties, loans and interest (Form 5472 instructions). A U.S. corporation is a reporting corporation if a foreign person owns at least 25% of its vote or value, and a foreign-owned single-member LLC is treated as a corporation for these rules.
A separate Form 5472 is required for each related party, foreign or U.S., including sister companies, with which the corporation had a reportable transaction. Accrual-method filers report accrued amounts. A foreign-owned single-member LLC files a pro forma Form 1120 with Form 5472 attached, by fax or mail (no e-filing). The IRS definition of related party is broad: a direct or indirect 25% foreign shareholder, a person related to the reporting corporation, and a person related to a 25% foreign shareholder (Form 5472 instructions).
The penalty is $25,000 per Form 5472, per year. If the failure continues more than 90 days after IRS notice, an additional $25,000 applies for each related party for each 30-day period (or part of one) that follows (Form 5472 instructions; §6038A(d)). The instructions are Rev. 12/2024, used with the December 2023 form; no 2026 revision was found.
Amounts accrued to a foreign related party (interest, royalties and certain fees) are generally not deductible until paid (§267(a)(3)), with exceptions such as effectively connected income, so confirm what was actually paid by December 31 (§267; Reg. §1.267(a)-3).
Example (illustrative numbers)
A California subsidiary deals with 4 related parties: its Shenzhen parent, a Hong Kong sister company, and two other affiliates, and each of the four had reportable transactions. If none of the four Forms 5472 is filed, the initial penalty exposure could be $25,000 x 4 = $100,000 before any continuation penalties. Exposure is per form, which is why we confirm the related-party list first.
2. Support transfer pricing
Intercompany prices should meet the arm's-length standard of §482. Section 6038A separately requires records supporting reported transactions (§6038A). To be protected from the §6662(e) penalty, documentation must exist when the return is filed and be provided within 30 days of an IRS request (§6662(e)). Year end is the time to true up management fees, cost-plus service charges and product margins against the policy. A transfer pricing specialist should review the policy. See our transfer pricing basics.
3. Capture 2026 federal changes, track California separately
- Bonus depreciation: OBBBA makes 100% bonus depreciation permanent for qualified property acquired and placed in service after January 19, 2025 (Pub. L. 119-21 §70301; Notice 2026-11; FTB summary).
- Research costs: federally, domestic research costs are deductible under §174A for tax years beginning after December 31, 2024 (§70302). California never adopted the TCJA capitalization rules and does not conform to §174A, so it continues to allow current deduction (Form 100 booklet; FTB).
- California: does not conform to bonus depreciation. SB 711 moved California's conformity date to January 1, 2025 but does not pick up OBBBA (FTB conformity). Keep separate federal and California schedules.
Example (illustrative numbers)
The subsidiary buys $250,000 of qualifying equipment and places it in service in 2026. Federally it may generally deduct $250,000 in 2026 under bonus depreciation. For California it uses regular depreciation. California's §179 limit is $25,000 and falls dollar for dollar once equipment costs exceed $200,000, so a $250,000 purchase gets $0 of California §179 (FTB 3885, 2025). The state deduction is therefore smaller in 2026 and the difference reverses over later years. For more state differences, see OBBBA 2026: federal vs California.
4. Information returns and withholding
- For payments made after December 31, 2025, the threshold for most 1099-NEC and 1099-MISC payments is $2,000. Royalties stay at $10 and attorney gross proceeds at $600 (IRS). Forms are furnished by February 1, 2027 (January 31 is a Sunday). California's separate EDD report (DE 542) is not affected and is still triggered at $600 (EDD). Collect Forms W-9 from U.S. vendors now. For more, see 2026 information reporting changes.
- Payments of U.S.-source interest, dividends, royalties and rents to a foreign parent are generally subject to 30% withholding under §1442 unless a treaty reduces it. Under the U.S.-China treaty, the IRS table shows 10% for interest, dividends and most royalties, and 7% effective on equipment-rental royalties. Hong Kong and Singapore have no U.S. income tax treaty, so 30% applies. A treaty rate requires a valid Form W-8BEN-E and confirmation that the recipient is the beneficial owner. The table is not a full eligibility guide, so check the treaty text and limitation on benefits. Forms 1042 and 1042-S are due March 15, 2027 (IRS treaty table; IRS treaty list; §1442; Form 1042-S instructions).
- Fees for services performed outside the United States are generally foreign source and not subject to §1442 withholding, so where the work is done matters (§862(a)(3)).
- Form 1042-S coding: for a treaty rate, enter the rate (for example 10.00) in box 3b and exemption code 04 (exempt or reduced withholding under tax treaty) in box 3a. Enter 00 in box 3a only when 30% is withheld under chapter 3. The 2026 instructions say a chapter 3 exemption code is required whenever the tax withheld is less than 30% (Form 1042-S instructions).
5. California entity basics
Every corporation incorporated, registered or doing business in California generally pays the $800 minimum franchise tax, with a first-year exception for newly incorporated or qualified corporations (FTB). The LLC version was narrower: the first-year exemption covered only LLCs that organized or registered in tax years beginning on or after January 1, 2021 and before January 1, 2024. A newly formed LLC owes the $800 annual tax from its first year, plus the LLC fee if its California income is $250,000 or more (FTB LLC page). Form 100 for a calendar-year corporation is due April 15, 2027 (FTB). A U.S.-formed subsidiary has no BOI filing obligation under FinCEN's August 2026 final rule. A foreign entity registered to do business in the U.S. must still report its non-U.S. beneficial owners (Federal Register; BOI guide).
Key dates
| Date | Item |
|---|---|
| February 1, 2027 | Furnish and file 2026 Forms W-2; furnish and file Form 1099-NEC (IRS) |
| March 15, 2027 | 2026 Forms 1042 and 1042-S (IRS) |
| April 15, 2027 | Form 1120 with Form 5472; California Form 100 (IRS; FTB) |
Sources and last verified: Oct 15, 2026. Instructions for Form 5472 (Rev. 12/2024); 2026 Instructions for Form 1042-S; IRS treaty Table 1; FinCEN final rule, 91 FR 52508; Reg. §1.267(a)-3; Notice 2026-11; FTB 3885; FTB federal tax changes; FTB LLC page; FTB corporations page; Instructions for Forms 1099-MISC and 1099-NEC; EDD.
Frequently asked questions
Does a U.S. subsidiary of a Chinese parent file Form 5472?
Generally yes. A U.S. corporation that is at least 25% foreign owned files a separate Form 5472 for each related party, foreign or U.S., including sister companies, with a reportable transaction; a foreign-owned single-member LLC files a pro forma Form 1120 with Form 5472 attached, by fax or mail (Form 5472 instructions, verified Oct 15, 2026).
What is the Form 5472 penalty?
$25,000 per Form 5472, per year. If the failure continues more than 90 days after IRS notice, an additional $25,000 applies for each related party for each 30-day period (or part of one) that follows (Form 5472 instructions). See our penalty relief guide, verified Oct 15, 2026.
Did the 1099 threshold change for 2026?
Yes. For payments made after December 31, 2025, the threshold for most 1099-NEC and 1099-MISC payments is $2,000; royalties stay at $10 and attorney gross proceeds at $600 (IRS). California's separate EDD independent-contractor report (DE 542) is not affected and is still triggered at $600 (EDD, verified Oct 15, 2026).
Does California follow 100% bonus depreciation or §174A?
No. The FTB states California does not conform to the OBBBA bonus depreciation changes or to §174A, and California never adopted the TCJA research capitalization rules, so current deduction continues (FTB, verified Oct 15, 2026).
Does my U.S. subsidiary file a BOI report?
No. A U.S.-formed subsidiary has no BOI filing obligation under FinCEN's August 2026 final rule. A foreign entity registered to do business in the U.S. must still report its non-U.S. beneficial owners (Federal Register, verified Oct 15, 2026).
How is a treaty rate coded on Form 1042-S?
Enter the treaty rate in box 3b and exemption code 04 in box 3a; code 00 in box 3a is for 30% chapter 3 withholding. A valid Form W-8BEN-E and beneficial owner status are required for the treaty rate. Forms 1042 and 1042-S are due March 15, 2027 (Form 1042-S instructions, verified Oct 15, 2026).
Talk it through
If your U.S. subsidiary is approaching year end, you are welcome to book a consultation. Our foreign-owned U.S. business services and audit support cover the close, Form 5472 and California filings. See also our foreign-owned entity guide.
Primary sources
General information, not tax advice or legal advice. Treatment depends on your entity, ownership and transactions.