What Form 1118 Is For
Form 1118 helps corporations claim the Foreign Tax Credit for taxes paid on foreign income. The form prevents double taxation by allowing qualifying taxes paid to a foreign country to offset a corporation’s U.S. tax liability. It also organizes income into categories, such as Foreign Branch Category Income, passive income, and Section 951A income, so the credit is calculated correctly. Through schedules like Schedule A and Schedule B, the form determines the amount of credit that can be used on the current corporate income tax return.
When You’d Use Form 1118
You use Form 1118 when your corporation chooses to claim the Foreign Tax Credit instead of deducting foreign taxes on its return. This election is made annually and applies to the corporate income tax return filed with the Internal Revenue Service. You also use the form when foreign tax amounts change after filing, which may require an amended return and updated schedules.
Redeterminations occur when paid taxes differ from accrued amounts or when a foreign country issues refunds. Form 1118 is required anytime your corporation wants to apply foreign tax credits to reduce U.S. tax liability on foreign income. Review how IRS bank levy actions may occur when corporate tax debts arise from adjustments to foreign-source income or carryover corrections.
Key Rules or Details for 2018
The 2018 version of Form 1118 introduced several significant changes. These rules govern how corporations calculate the Foreign Tax Credit and how each category of foreign-source income must be reported. The Internal Revenue Service applies a Section 901 limitation, which caps the credit at the amount of U.S. tax owed on the same income. This prevents a corporation from claiming more credit than its related U.S. tax liability.
New Income Categories Added in 2018
The Tax Cuts and Jobs Act created additional reporting categories that require separate calculations:
- Section 951A income applies to specific low-taxed inclusions and must be reported separately.
- Foreign Branch Category Income separates branch-level activity from other types of foreign income.
- Other required categories include passive income, general category income, and any income received under a treaty when it applies.
Each category has its limitations and must be included in the Form 1118 package.
Key Schedules Used in 2018
Form 1118 relies on several schedules to apply these rules. Schedule C applies required reductions. Schedule I adjusts amounts for oil and gas income. Schedule J tracks loss balances and separate accounts. Schedule K records carrybacks and carryforwards from prior years.
Additional 2018 Requirements
Some foreign income taxes cannot be claimed, particularly those that are refundable or linked to restricted jurisdictions. Changes in paid tax amounts may require foreign tax redeterminations, and all carryovers must be placed on the correct schedule.
Visit our Business Tax Relief page to learn how corporations handle complex foreign income reporting and long-term credit tracking obligations.
Step-by-Step (High Level)
Form 1118 contains many schedules, but the filing process follows a clear series of steps. These steps help organize foreign income, document foreign taxes, and apply the proper limits on the Foreign Tax Credit.
Step 1—Identify Your Income Categories
Begin by identifying every income category that applies to your corporation. Common categories include passive income, general category income, Foreign Branch Category Income, and Section 951A income. Each category requires its own Form 1118 package, and the Internal Revenue Service reviews them separately.
Step 2—Gather Income and Tax Information
Collect all information related to foreign source income and any deductions connected to that income. Include details on paid or accrued foreign income taxes, along with supporting documents from each foreign country. Use consistent currency conversion methods and keep records for every rate used throughout the year.
Step 3—Complete the Required Schedules
Form 1118 relies on several schedules to calculate the credit. Schedule A reports foreign income before adjustments, while Schedule B applies the limitation tied to U.S. tax liability. Schedule C applies required reductions, Schedule I adjusts oil and gas income, Schedule J tracks loss balances, and Schedule K records carrybacks and carryforwards.
Step 4—Attach the Forms and Keep Records
Attach Form 1118 to your corporate income tax return after completing all schedules. Keep receipts, statements from each foreign corporation, and records supporting all exchange rates, as the Internal Revenue Service may request them later.
Common Mistakes and How to Avoid Them
Corporations often encounter recurring issues when preparing Form 1118, and understanding these problems can help improve accuracy and reduce the need for follow-up corrections.
- Combining Income Categories on One Form: Each income category, including passive income and Foreign Branch Category Income, requires a separate Form 1118 package. Create a dedicated folder for each category before starting the return preparation.
- Missing or Incomplete Schedules: Important schedules such as Schedule A, Schedule B, and Schedule C are sometimes overlooked. Use a checklist to confirm that all required schedules are complete before filing.
- Incorrect Currency Exchange Methods: Inconsistent exchange rates or missing documentation frequently lead to errors when reporting foreign taxes. Apply the same conversion method throughout the return and save all supporting exchange rate records.
- Ignoring Foreign Tax Redeterminations: Changes in paid or accrued taxes may require an updated filing. Track all post-filing adjustments and file an amended return when a change affects an earlier reporting period.
- Poor Tracking of Carryovers: Carrybacks and carryforwards must be reported accurately on Schedule K. Review all prior-year carryover balances and update your records before preparing the current Form 1118.
Review how IRS enforcement actions, including garnishment, can affect corporate officers when unresolved tax issues stem from foreign tax reporting.
What Happens After You File
Once Form 1118 is filed with your corporate income tax return, the Internal Revenue Service may request documents to support reported foreign taxes, including statements, payment records, or currency conversion details. If the paid amount later changes, you may need to request a foreign tax redetermination and file an amended return.
Interest can apply when adjustments affect your U.S. tax liability, and penalties may apply if required information returns were missed. Ongoing tracking is essential because Schedule K must reflect updated carrybacks and carryforwards each year.
FAQs
What does Form 1118 allow my corporation to claim?
Form 1118 enables a corporation to claim the Foreign Tax Credit for qualified foreign income taxes paid to a foreign country, thereby reducing U.S. tax liability on related foreign income.
Can we choose between claiming a credit or a deduction each year?
Yes, you can choose the Foreign Tax Credit or a deduction each year when filing your corporate income tax return, and the better option depends on your corporation’s income and expenses.
Do we need to attach foreign tax receipts or statements to our submission?
No, these documents are not attached to Form 1118, but you should keep them in case the Internal Revenue Service requests proof during an audit or review.
What if paid taxes differ from the amount we originally accrued?
You may need to complete a foreign tax redetermination and file an amended return if the paid amount differs from the accrued amount reported earlier.
Can credits be carried to other years?
Yes, excess credits can be carried back one year and forward ten years, and all tracking must be recorded on Schedule K.
