IRS Form 1118 (2022): Foreign Tax Credit for Corporations

What Form 1118 Is For

Form 1118 helps corporations claim the Foreign Tax Credit for income taxes paid to a foreign government. It prevents double taxation by allowing a credit against U.S. tax on foreign-source income. It applies when a corporation earns international income and pays foreign taxes that qualify under Section 901 of the Internal Revenue Code. The Internal Revenue Service limits the credit to specific tax types, so fees, penalties, and non-creditable payments are not eligible for claims.

When You’d Use Form 1118

Corporations use Form 1118 when they choose to claim the Foreign Tax Credit for foreign taxes paid on foreign income. It is required when a corporation earns international income through direct operations or through a foreign corporation, including situations involving controlled foreign corporations, Subpart F income, or Section 951A inclusions. It is attached to the corporate tax return, most often Form 1120, for the tax year in which the foreign taxes were paid or accrued.

Some schedules must be filed even when the credit is not claimed, especially if there were changes to loss accounts. Corporations may also need Form 1118 when filing an amended return after foreign tax redeterminations, such as refunds or adjustments from a foreign government. Visit the IRS Form Help Center for guidance on schedules, supporting documents, and procedural rules related to Form 1118.

Key Rules or Details for 2022

Form 1118 follows specific rules set by the Internal Revenue Service to determine how a corporation calculates the Foreign Tax Credit for the year. Key requirements include:

• Separate income categories: Corporations must report each type of foreign-source income on its own form. Categories include general category income, passive category income, foreign branch category income, Section 901(j) income, Section 951A income, and Subpart F income.
  
  
• Creditable tax rules: Only foreign income taxes that qualify under Section 901 may be claimed. Payments treated as fees, voluntary contributions, or disallowed under IRS rules are not eligible for use.
  
  
• Carrybacks and carryforwards: Excess credit may be carried back one year or forward ten years. Taxes tied to Section 951A income cannot be taken to other periods.
  
  
• Additional filing requirements:
  
  
  • Treaty-based positions must be disclosed on Form 8833.
    
    
  • Corporations involved in reorganizations must update reference ID numbers to track prior-year activity.

These rules guide how corporations document, categorize, and apply credits for foreign taxes during the 2022 tax year. Review available IRS payment plan options for corporations that face balances after the foreign tax credit is recalculated.

Step-by-Step (High Level)

Step 1—Identify Applicable Categories

Begin by reviewing your corporate income and identifying which portions qualify as foreign-source income. Form 1118 categorizes foreign income into several distinct categories. These include general category income, passive category income, foreign branch category income, Section 901(j) income, Section 951A income, and Subpart F income from controlled foreign corporations. Each category requires its own copy of the form and separate calculations.

Step 2—Gather Documentation

Next, assemble records that show foreign income, foreign income taxes, and payments made to each foreign government. Keep documents organized by foreign country, income category, and tax year. This helps ensure accurate entry when preparing schedules and reduces errors when responding to Internal Revenue Service questions.

Step 3—Complete Key Schedules

Form 1118 relies on several schedules:

• Schedule A reports gross income and related deductions.
  
  
• Schedule B lists foreign taxes by country.
  
  
• Schedule C calculates the Foreign Tax Credit limitation and resulting tax liability.
  
  
• Schedules J and K address loss accounts, carrybacks, carryforwards, and any foreign tax redeterminations affecting the credit.

Step 4—Attach to Your Corporate Return

After completing all forms and schedules, attach Form 1118 to your corporate tax return, typically Form 1120, and file it with the Internal Revenue Service.

Common Mistakes and How to Avoid Them

Corporations often face recurring issues when preparing Form 1118. Key mistakes and ways to avoid them include:

• Combining income categories: Each category of foreign-source income needs its own Form 1118. Avoid this by setting up separate files for each category before preparing schedules.
  
  
• Missing schedules: Forms such as Schedule A and Schedule J are required when loss accounts change. Review all activity for the year to ensure the appropriate schedules are applied.
  
  
• Claiming non-creditable payments: Not all payments qualify as foreign income taxes under Section 901. Refer to the Instructions for Form 1118 to confirm eligibility before entering amounts.
  
  
• Ignoring foreign tax changes: Refunds or adjustments from a foreign government trigger foreign tax redeterminations. Track foreign tax activity through the year and file an amended return when needed.
  
  
• Incorrect expense allocation: Misallocating expenses reduces the allowable Foreign Tax Credit. Use consistent allocation worksheets and verify deductions before submitting your return.
  
  
• Mismanaging reference ID numbers: Errors during reorganizations affect tracking. Maintain a master list of IDs and update it after structural changes.

Visit our Unfiled Federal Returns page to learn how corporations can correct missed filings, especially when foreign tax changes require updated Form 1118 submissions.

What Happens After You File

Once Form 1118 is filed with your corporate tax return, the Internal Revenue Service reviews the information as part of your overall tax liability calculation. The foreign tax credit is applied to reduce U.S. tax on foreign-source income, which may change your balance due or refund amount. The IRS may request documentation, especially when hefty foreign taxes or complex structures are involved. If a foreign government later adjusts your tax, you may need to report a foreign tax redetermination or file an amended return.

FAQs

Do I need to file Form 1118 if I deduct foreign taxes instead of claiming the credit?

You only need to file Form 1118 when claiming the foreign tax credit, unless activity affecting loss accounts requires schedules such as Schedule A or Schedule J.

Can I claim the credit for taxes paid by a foreign subsidiary?

You may claim the credit when income from a controlled foreign corporation is included through subpart F income or Section 951A rules.

What happens if the foreign government refunds part of the taxes I claimed?

A refund results in a foreign tax redetermination, which may require filing an amended return with updated schedules.

Are there foreign taxes that don’t qualify for the credit?

Only taxes treated as foreign income taxes under Section 901 qualify, while fees and voluntary payments do not.

How do I handle foreign taxes paid in a different year than the year in which the income is reported?

You claim the credit based on your accounting method, using either the payment date or the accrual date.