Form 1118 (Rev. December 2013) — Foreign Tax Credit—Corporations
Purpose
Form 1118 for the 2013 tax year computes the foreign tax credit limit for U.S. corporations using separate limitations for passive, general, and treaty-resourced income categories. Section 909 became effective for foreign income taxes paid or accrued in tax years beginning after December 31, 2010.
The 2013 form revision added Schedule B, Part II, line 1b for reporting previously suspended foreign taxes when related income is taken into account. Schedule G, Part I, line E reports taxes suspended under section 909 in the current year.
Filing Steps
Step 1: Determine Income Categories and Identify Section 909 Carryovers
Complete a separate Form 1118 for each applicable category: Passive, General, Section 901(j) (sanctioned country), and Income Re-sourced by Treaty. The 2013 form added Schedule B, Part II, line 1b for reporting foreign taxes that were suspended in prior years under section 909.
When the current tax year takes into account the related income, you must report these previously suspended taxes on line 1b. Attach supporting documentation showing the original suspension year and amount when claiming these previously suspended taxes.
Step 2: Complete Schedule A—Income and Deductions by Source Country
Report all foreign-source income in U.S. dollars on Schedule A (Lines 1–13, columns A–F, by country). For each country, list deemed dividends (section 78 gross-up separate from exclusion), other dividends, interest, rents and royalties, services income, and other income.
Allocate definitely allocable deductions (depreciation, rental and royalty expenses, services expenses) and apportion non-allocable deductions using Schedule H. The 2013 revision clarifies that foreign branch gross income and deductions must be included here and separately reported on Schedule F.
This checklist is for educational purposes only and does not constitute tax or legal advice. Always review official IRS instructions and consult a qualified professional for guidance.
Step 3: Reconcile Foreign Branch Income on Schedule F
Schedule F (Gross Income and Definitely Allocable Deductions for Foreign Branches) requires listing each foreign country using two-letter codes. You must report gross income and definitely allocable deductions for each country listed.
The 2013 instructions emphasize that Schedule F totals are not carried to other schedules because they are already included in Schedule A totals. This dual-reporting structure is mandatory for accurate branch-level tracking.
Step 4: Calculate Tax Deemed Paid Using Schedules B, C, D, and E
For post-1986 undistributed earnings of first-tier CFCs, use Schedule B, Part I for dividends and deemed inclusions under sections 902(a) and 960(a). Convert functional currency earnings and taxes to U.S. dollars, then multiply the tax rate by deemed inclusions to yield tax deemed paid.
For pre-1987 accumulated profits, use Schedule B, Part II with the same ratio method. Repeat this three-tier structure on Schedule C for first-tier corporations and Schedules D and E for second- through sixth-tier corporations.
Schedule E covers fourth-, fifth-, and sixth-tier controlled foreign corporations for dividends from post-1986 undistributed earnings accumulated in tax years beginning after August 5, 1997. All three parts of Schedule E apply only the post-1986 earnings ratio formula and contain no pre-1987 accumulated profits sections for any tier.
The 2013 revision added columns 1b (employer identification number) and 1c (reference ID number) to Schedules C, D, and E. These columns improve tracking of foreign corporations across all tiers.
Step 5: Report Foreign Taxes Paid or Accrued on Schedule B, Part I
List the total foreign taxes paid or accrued in Part I, column 2(h), which includes withholdings on dividends, interest, rents, royalties, section 863(b) income, foreign branch income, services income, and other foreign taxes. Enter line 1a for total paid or accrued, and line 1b for section 909 carryover from prior years when related income is taken into account.
Enter line 2 for tax deemed paid from all schedules and line 3 for reductions from Schedule G. Sum lines 1a through 5 to determine total foreign taxes available for credit on line 6.
Step 6: Apply Reductions to Foreign Taxes Using Schedule G
Complete Schedule G, Part I, to reduce foreign taxes for the following categories:
- Section 901(e) disqualifications apply.
- Reduction of foreign oil and gas taxes (Schedule I, Part II, line 4) applies.
- Reduction of taxes for international boycott provisions (Form 5713, Schedule C, line 2b) applies.
- Reduction for section 6038(c) penalty applies.
- Taxes suspended under section 909 in the current year apply.
- Other reductions of taxes apply.
Schedule G, Part I, line E is a new line added in the 2013 revision to account for foreign income taxes paid or accrued during the current tax year that have been suspended due to the rules of section 909. These suspended taxes will be reported on Schedule B, Part II, line 1b in a future year when the related income is taken into account.
Section 909 Suspended Tax Mechanism
Section 909 applies to foreign income taxes paid or accrued in tax years beginning after December 31, 2010. When a foreign tax credit splitting event occurs, the foreign income tax is suspended until the related income is taken into account.
In the year of suspension, corporations report newly suspended taxes on Schedule G, Part I, line E. In subsequent years, corporations report the previously suspended taxes on Schedule B, Part II, line 1b when the related income is recognized.
Key 2013 Form Revisions
- Schedule B, Part II, line 1b was added for section 909 carryover reporting when related income is taken into account.
- Schedule G, Part I, line E was added to report taxes suspended under section 909 in the current year.
- Schedule C, Part I, columns 11 and 12 were added to account for taxes limited by section 960(c).
- Columns 1b (EIN) and 1c (reference ID number) were added to Schedules C, D, and E for improved foreign corporation tracking.
This checklist is for educational purposes only and does not constitute tax or legal advice. Always review official IRS instructions and consult a qualified professional for guidance.
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This checklist is for educational purposes only and does not constitute tax or legal advice. Always review official IRS instructions and consult a qualified professional for guidance.
