Identify a PFIC — and the filing trigger

Before you can report a PFIC, you have to recognize one — and that is exactly where most returns go wrong. A foreign corporation is a PFIC if it meets either of two tests in any year:

• Income test: 75% or more of its gross income is passive — dividends, interest, rents, royalties, and capital gains.
• Asset test: 50% or more of its assets produce, or are held to produce, passive income.

You’ll learn where PFICs hide in a real portfolio — foreign mutual funds and ETFs, money-market funds, certain insurance and pension wrappers, and many non-U.S. holding companies — and exactly when a Form 8621 obligation is triggered: receiving a distribution, disposing of shares, making or maintaining an election, or meeting the annual reporting threshold.

Why it matters: a missing Form 8621 can hold the statute of limitations open on the entire return — not just the PFIC.

The §1291 excess-distribution regime

If no election is in place, §1291 applies by default — and it is deliberately punitive. The course works through the mechanics step by step:

• Split distributions into non-excess (taxed normally in the current year) and excess — the portion exceeding 125% of the average distribution over the prior three years.
• Allocate the excess distribution (and any gain on sale) ratably across the entire holding period.
• Tax the amounts allocated to prior years at the highest ordinary rate for each year, then add an interest charge for the deferral.

You’ll compute the deferred tax amount and interest charge, complete Form 8621 under §1291, and carry the results cleanly onto the tax return.

The Qualified Electing Fund (QEF) election

A QEF election is usually the most favorable path — when the information is available. It treats the fund like a flow-through entity:

• Each year you include your pro-rata share of the fund’s ordinary earnings and net capital gain — preserving capital-gain character.
• It avoids the §1291 interest charge entirely, giving the cleanest ongoing treatment.
• It requires a PFIC Annual Information Statement from the fund, and timing matters — a first-year election keeps the fund “pedigreed,” otherwise purging elections may be needed.

You’ll learn when a QEF makes sense, how to make and maintain the election, and how to report it on Form 8621 and the return.

The Mark-to-Market (MTM) election

For marketable PFIC stock, mark-to-market is often the practical choice — especially when a QEF statement isn’t available.

• Under §1296, you recognize the change in fair market value each year: increases are ordinary income.
• Decreases are deductible only to the extent of prior MTM inclusions — an important limit to track.
• Available for marketable stock, it sidesteps the need for a PFIC Annual Information Statement.

You’ll weigh MTM against QEF and §1291, complete Form 8621 under the MTM regime, and carry the annual inclusion through to the return.