Instructions for Form 1118 | Foreign Tax
Credit—Corporations Checklist | 2011 Tax Year
Corporations use Form 1118 to claim a foreign tax credit for foreign income taxes paid to foreign countries. The 2011 instructions reflect amendments to foreign tax credit limitation rules, including carryback and carryforward procedures specific to the statutory framework applicable during this tax year.
Understanding these requirements helps corporations avoid double taxation while complying with United States tax obligations under the Internal Revenue Code. Using IRS forms correctly helps ensure proper treatment of foreign income taxes across multiple tax years.
Determining Eligibility for the Foreign Tax Credit
A corporation must verify that it paid or accrued foreign income taxes on foreign income subject to U.S. tax liability. The 2011 instructions confirm that foreign income taxes must qualify as income taxes or as taxes instead of income tax under Section 901.
Separating Foreign-Source Income by Category
Foreign-source income must be separated into statutory groupings defined in the 2011 Form
1118 instructions. The primary categories include passive income and general income, as well as any other statutory categories that apply to specific situations.
Each category has its own foreign tax credit limitation, so proper classification determines the maximum allowable credit. Documentation of the location and nature of each foreign income source supports correct classification on IRS forms.
Computing the Foreign Tax Credit Limitation
The 2011 Form 1118 worksheets guide corporations through the limitation calculation. This process requires dividing foreign-source income within each statutory category by worldwide taxable income, then multiplying the result by U.S. tax liability.
Carryback Elections Available Under 2011 Law
Under the 2011 rules, corporations had the option to apply unused foreign income taxes to the immediately preceding tax year rather than carrying them forward. Making this election required filing an amended Form 1118 along with an amended Form 1120 for the year to which the taxes were taken back.
Corporations also had to include a separate statement specifying the applicable tax year and the amount of foreign taxes being carried back. This one-year carryback option existed under the 2011 law and was later eliminated by the Tax Cuts and Jobs Act.
Managing Carryforward of Excess Foreign Taxes
Excess foreign income taxes after applying the 2011 limitation create a carryforward amount available in future tax years. The carryforward period extends ten years for excess foreign income taxes arising in tax years ending after October 22, 2004.
Reporting Foreign Tax Information by Country
Form 1118 Part I requires corporations to list each foreign country or U.S. possession where
they earned foreign-source income and paid foreign income taxes. The form requires country-by-country reporting of foreign income and foreign tax paid or accrued, depending on the accounting method used.
Income amounts must tie to the original foreign-source income calculations and supporting documentation to withstand IRS scrutiny. Proper organization of foreign entity data streamlines the preparation process and reduces errors.
Deemed-Paid Credits from Controlled Foreign
Corporations
U.S. shareholders of a controlled foreign corporation must report foreign taxes deemed paid on distributions under Section 902. The 2011 instructions require separate reporting of deemed-paid taxes from CFC distributions on Form 1118 Part IV.
Section 902 applies to dividends received from first-tier foreign corporations, and Section 902 calculations determine the proportionate share of foreign taxes attributed to distributed earnings.
Corporations must maintain detailed Section 902 pools to track available deemed-paid credits across multiple tax years.
Coordinating Credits and Treaty Benefits
Corporations must confirm that foreign taxes claimed on Form 1118 have not been claimed as a deduction elsewhere on the tax return. The 2011 instructions prohibit claiming both a credit and a deduction for the same foreign tax in the same year under Section 901.
When corporations claim treaty benefits that reduce foreign tax liability, they must document the treaty provision and report the reduced amount on Form 1118. Maintaining clear records of treaty elections prevents complications during IRS examinations and supports proper treatment of double taxation issues.
Filing Requirements and Attachment Procedures
Corporations that elect to claim the foreign tax credit under Section 901 must complete and attach Form 1118 to their Form 1120. The 2011 instructions require any corporation electing the benefits of the foreign tax credit to attach this form to its income tax return.
Recapture Rules for Passive Category Credits
Corporations with passive foreign-source income in prior years that generated excess credits are subject to recapture requirements when they have current-year general income. Section
904(f) requires corporations to recapture passive category excess credits first before applying current general category credits.
Tracking the years and amounts of excess credits by category allows proper application of the recapture rule. This ensures that prior excess passive credits offset current general income correctly and prevent improper credit use that could distort the foreign tax credit limitation.
Year-Specific Updates for 2011 Filers
Updates to the 2011 Form 1118 instructions incorporated the CFC look-through rule under
Section 954(c)(6), first enacted by the Tax Increase Prevention and Reconciliation Act of 2005, with an effective date of January 1, 2006. Subsequent legislation, specifically the Tax Relief,
Unemployment Insurance Reauthorization, and Job Creation Act of 2010, extended the rule retroactively through the 2011 tax year.
As a result, certain dividends, interest, rents, and royalties received from controlled foreign corporations were treated as general income rather than passive income. Revisions to the worksheets also addressed changes to the foreign tax credit limitation for passive foreign investment company inclusions. They clarified the treatment of Subpart F income and foreign branch income under updated statutory guidance applicable to United States corporations.
Additional Considerations for Corporate Filers
Corporations must track carryforwards separately by statutory category because each category's excess remains segregated for limitation purposes. Detailed records showing the original year of the foreign tax and the applicable category prove essential for proper tracking across multiple tax years.
The instructions specify that U.S. tax liability means total U.S. income tax before the foreign tax credit, but after all other credits allowable under the 2011 tax law. This calculation establishes the maximum credit available for each separate category and affects the treatment of Subpart F inclusions, foreign branch income, and other specialized foreign income categories.
Gross-Up Requirements and Documentation
Corporations calculate the gross-up amount of foreign taxes deemed paid and include this amount in the total foreign tax pool for limitation purposes. This deemed-paid tax mechanism remained available under pre-2018 law but was later eliminated by subsequent tax legislation.
It is attached to the form.
Proper completion of each required schedule ensures compliance with Internal Revenue
Service reporting standards and accurate reporting of Subpart F income, Subpart F inclusions,
Section 1248 gain, and related amounts for United States shareholders across all relevant tax years.
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