Form 1118 (2013) Foreign Tax Credit Guide for Corporations

credits.

Proper completion requires precise identification of foreign tax pools, calculation of limitations, and compliance with statutory credit caps to prevent double taxation of foreign-source income.

Corporations must verify U.S. resident status before claiming the foreign tax credit under

Section 901.

Eligibility and Documentation Requirements

Nonresident foreign corporations and certain pass-through entities cannot claim credits on Form

1118. You should review your incorporation status and your principal place of business to confirm your eligibility for the requirements.

Gather all records of foreign income taxes paid or accrued during the taxable year. Include tax receipts, certificates, payment notices, and currency conversion rates used on payment dates.

Translate foreign currency amounts using IRS-approved conversion methods for accurate reporting on Schedule B. Documentation must support all claimed credits to satisfy Internal

Revenue Service verification requirements.

Income Categories and Separate Limitations

Form 1118 requires a separate computation for each applicable limitation category. For tax years beginning after December 31, 2006, the separate limitation categories were reduced to primarily two main categories: passive category income and general category income.

Financial services income falls within the general category when your corporation qualifies as a financial services entity. Passive category income includes dividends, interest income, royalties, rents, and annuities that would constitute foreign personal holding company income if earned by a controlled foreign corporation.

High-taxed passive income may be reclassified to the general category under specific circumstances outlined in the instructions. Additional separate categories apply to Section 901(j)

income from sanctioned countries and treaty-received income.

Schedule Completion and Computational Structure

You must complete separate schedules for each applicable income category. Schedule A computes your income or loss before adjustments for the appropriate category.

Schedule B determines foreign taxes paid, accrued, and deemed paid while calculating the separate foreign tax credit limitation using the statutory formula. The limitation formula divides foreign-source income by worldwide taxable income, then multiplies the result by U.S. income tax before credits. Schedule C computes taxes deemed paid by your domestic corporation from post-1986 undistributed earnings. Schedule D calculates taxes deemed paid by lower-tier foreign corporations.

Schedule E addresses fourth-, fifth-, and sixth-tier dividends from controlled foreign corporations. Schedule F reports gross income and definitely allocable deductions from foreign branches.

Complete Schedule K to reconcile prior year foreign tax carryover with current year carryover amounts. Each schedule must reflect the appropriate separate limitation category to prevent improper cross-crediting between categories.

Carryback and Carryforward Provisions

IRC Section 904(c) establishes the carryback and carryforward framework for excess foreign tax credits. Excess credits from 2012 may offset 2013 limitations through the carryback mechanism.

Your 2013 excess credits carry forward through 2023 under the applicable ten-year period. File an amended tax return with revised Form 1118 and schedules to claim carrybacks to prior years.

Include Schedule K to document the reconciliation between prior year carryover and current year amounts. The instructions contain no special election form requirement for establishing carryback treatment.

Tax Return Integration and Reporting Location

The foreign tax credit appears on Form 1120, Schedule J, Part I, line 5a for corporate filers.

Cross-reference Form 1118 line totals with corresponding tax return entries to ensure consistency. Verify that credits claimed do not exceed limitations calculated through the separate category computations. Attach Form 1118 and all schedules to your Form 1120 or

Form 1120-S filed for the tax year.

Include supporting documentation, worksheets, and foreign tax payment receipts as exhibits.

Your corporation's name and employer identification number on Form 1118 must match the primary return precisely to avoid processing delays.

Adjustments and Disclosure Requirements

Report all adjustments to foreign taxes throughout the year. Include refunds received or anticipated, tax disputes settled, and credits claimed on prior foreign returns.

Note the year and country involved for each adjustment to maintain proper tracking across taxable years. Reduce your foreign tax credit claim by expected refunds or credits from other sources. Provide separate statements when disallowed or deferred foreign taxes exist, documenting the country of origin and reason for deferral. Disclosure requirements apply specifically when foreign taxes are disallowed, suspended, or subject to contingent payment terms.

Currency Conversion and Historical Context

Currency conversion guidance clarifies the use of IRS-published exchange rates on the dates of foreign tax payments or accruals. Detailed rules address multidate transactions requiring multiple conversion calculations.

Changes to Schedule A reflect adjustments for capital gain rate differentials under the regulatory framework that applies to post-2006 tax years. The American Jobs Creation Act of 2004 implemented provisions that reorganized separate limitation categories and modified the calculations for deemed paid credits.

These changes continue to affect 2013 filings through proper deduction allocation and accurate categorization of foreign-source income. You must apply the reduced number of limitation categories now in effect when preparing returns.

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