IRS Form 1118 | Foreign Tax Credit for Corporations

IRS form 1118, also known as the ‘foreign tax credit’, is intended to provide relief from a double tax burden when foreign income is taxed by both the foreign country as well as the United States. Generally if the foreign tax rates are higher than those in the U.S., there will be no U.S. taxes placed on foreign income. If the foreign tax rates are lower than those in the U.S. then U.S. taxes on foreign income will be limited to the differences between the two rates. The foreign tax credit will only reduce U.S. tax on foreign income sources; it will not reduce U.S. tax on U.S.income.

There is no specific rule covering all possibilities but generally it is better to take a credit for qualified foreign taxes than to deduct them as an itemized deduction. This credit can be used by both corporations and individuals.

How to Fill Out

Step 1 – Thoroughly Study Instructions – The steps for calculation for this form are extremely extensive and not always easy for the layman to understand. You will require multiple forms to begin.

Step 2 – Print Various Required Forms – To begin you will need to complete the following forms required to claim a foreign tax credit. You will need to complete a separate Schedule A, Schedule B, Parts I & II. You will need to complete schedules C through G, and Schedule I. You will need to complete Schedule K for every separate category of income that is applicable. You will also to complete Schedule B Part III; Schedule H; and Schedule J only will only require completion once.

Step 2 – The Following Forms For Completion of Calculations

• Schedule A to calculate the corporation’s income or loss before adjustments for each category of income that applies.
• Schedule B to determine the total foreign tax credit after specific limitations.
• Schedule C to calculate taxes that have been deemed paid by the domestic corporation who is filing the return.
• Schedules D and E to calculate tax that has been deemed paid by lower tier foreign corporations.
• Schedule F to report gross income deductions from foreign branches.
• Schedule G to report required reductions of taxes that have been paid, have been accrued, or deemed paid.
• Schedule H to apportion any deductions that may not be definitely allocated to some other item or class of income.
• Schedule I (which is a separate schedule) to calculate any reductions of taxes that have been paid, accrued, or deemed paid on income from foreign oil and gas extraction.
• Schedule J (also a separate schedule) to calculate adjustments to separate any limitation income or losses in determining the numerators of limitation fractions, year end re-characterization balances, and any overall foreign and domestic loss on account balances.
• Schedule K (also a separate schedule) to reconcile the corporation’s year prior’s foreign tax carryover, with its current year foreign tax carryover.

Step 3 – Continue Through the Complete IRS Form 1118 Instructions – The steps required to reconcile all that will be needed for these calculations are too extensive to continue here. Complete the form with the calculations as stated above and continue to complete the form. Once you have completed Form 1118 attach all of your supporting documentation and attach it to your corporation, individual and/or LLC return

Important- It’s apparent that this form is extensive and the information required may not be easy for the layman to understand. If at any point you feel that you do not understand the procedures, it would be strongly recommended that you consult a tax attorney to assist you with this form.