Form 1118 (Rev. December 2014) Checklist
Overview and Purpose
Form 1118 enables U.S. corporations to claim credits for foreign income taxes paid or accrued during 2014 under Internal Revenue Code Section 901. The foreign tax credit operates within separate limitation categories that include passive category income, general category income, section 901(j) income for each sanctioned country, and income sourced by treaty for each applicable treaty country.
Separate Limitation Categories and Filing Requirements
The 2014 Form 1118 instructions specify four types of separate limitation categories for foreign tax credit purposes. Passive category income includes dividends, interest, rents, royalties, and annuities that would constitute foreign personal holding company income. General category income encompasses all foreign source income not classified within other categories.
This category includes high-taxed passive income that exceeds the highest corporate tax rate under Section 11. Section 901(j) income requires a separate Form 1118 for each sanctioned country. Cuba, Iran, North Korea, Sudan, and Syria were designated as sanctioned countries as of December 2014.
Income sourced by treaty requires a separate Form 1118 for each treaty country when an applicable income tax treaty treats U.S. source income as foreign source, and the corporation elects treaty benefits. Each Form 1118 requires separate schedules, including Schedule A, Schedule B Parts I and II, and Schedules C through K, while Schedule B Part III, Schedule H, and Schedule J are completed only once across all Forms 1118.
Section 909 Suspended Taxes
Section 909 handles foreign tax credit splitting events, suspending foreign taxes until the related income is considered for U.S. tax purposes. You must report taxes suspended under Section 909 from prior years on Schedule G, line E.
You must enter previously suspended taxes attributable to current-year related income on Schedule B, Part II, line 1b. The regulations under Section 909 provide rules for determining when related income is recognized and the amount of previously suspended taxes attributable to it.
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.
Excess Foreign Tax Carryover Treatment
Section 904(c) governs the carryback and carryforward treatment of excess foreign taxes when allowable foreign taxes paid, accrued, or deemed paid exceed the foreign tax credit limitation for the tax year in a separate category. The corporation may carry back excess foreign taxes one year to offset taxes imposed in the same category.
The corporation may carry forward excess foreign taxes for ten years to offset taxes imposed in the same category. A five-year carryforward period applies to excess foreign taxes that may be carried only to tax years ending before October 23, 2004.
Schedule A Completion Requirements
- Report all gross income or loss from foreign sources in U.S. dollars on Schedule A.
- Include foreign branch gross income and deemed dividends in the appropriate columns.
- Distinguish between excluded gross-up amounts in column 2(a) and section 78 gross-up amounts in column 2(b) for deemed dividends and other dividends.
- Allocate definitely allocable deductions by source, including rental expenses, royalty costs, licensing fees, performance-of-services expenses, depreciation, depletion, and amortization.
- Report foreign branch deductions in the appropriate columns, corresponding to foreign branch income.
- Apportion non-definitely allocable deductions using Schedule H, with research and development deductions allocated using either the sales method or the gross income method.
- Compute net income or loss before adjustments by subtracting total deductions from total income.
Part I: Foreign Taxes Reporting
You must elect whether to claim the credit for taxes paid or taxes accrued during 2014. The election between the cash method and the accrual method is binding for the tax year. You must attach a schedule showing all foreign taxes in functional currency with the exchange rates used for conversion to U.S. dollars.
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.
Report tax withheld at source on the following income types as separate line items:
- Dividends received from foreign corporations
- Interest income from foreign sources
- Rents and royalties paid by foreign entities
- License fees and similar payments
Report other foreign taxes on section 863(b) income, foreign branch income, services income, and other categories as separate line items. Total all foreign taxes paid or accrued and include taxes deemed paid per Schedules B, C, and D on the appropriate summary lines.
Schedules B Through D Deemed Paid Calculations
Schedule B Part I addresses post-1986 undistributed earnings dividends. You compute tax deemed paid by dividing functional currency dividends by post-1986 undistributed earnings, then multiplying the result by post-1986 foreign income taxes.
Include opening balance amounts and current-year taxes paid or deemed paid in the calculation. Schedule B Part II covers pre-1987 accumulated profits. You compute deemed paid tax using the earnings and profits ratio method and report amounts in both functional currency and U.S. dollars.
Schedule B Part III addresses pre-1987 deemed inclusions. You apply section 964 earnings and profits translation rules and calculate deemed paid tax using the prescribed methodology.
Schedule C addresses first-tier and second-tier controlled foreign corporations.
Schedule D addresses third-tier, fourth-tier, and fifth-tier controlled foreign corporations. Both schedules apply identical post-1986 and pre-1987 calculation structures to ensure tax deemed paid flows upward through the foreign corporation hierarchy. All schedule reference identification numbers and country codes must match the supporting documentation exactly.
Schedule F Foreign Branch Reporting
List each foreign branch using the two-letter country code from the IRS country code list. Use separate lines for each country or U.S. possession where the corporation maintains a foreign branch. Report gross income attributable to each foreign branch and all definitely allocable deductions for each branch location.
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.
