Form 1118 (Rev. December 2015) Checklist
Overview and Historical Context
Form 1118 calculates and claims the foreign tax credit for U.S. corporations with foreign-source income. The Tax Cuts and Jobs Act of 2017 fundamentally restructured this form for tax years beginning after December 31, 2017, repealing section 902 and creating new income categories.
Critical Tax Law Changes Effective After 2017
The December 2017 tax reform eliminated section 902's deemed paid credit mechanism that allowed domestic corporations to claim indirect credits on dividends from foreign subsidiaries. Congress replaced this system with modified section 960 rules that apply only to subpart F inclusions under section 951(a)(1) and global intangible low-taxed income under section 951A.
Corporations can no longer track post-1986 and pre-1987 earnings pools under the former section 902 framework because that statute no longer exists for current tax years. The new section 960 structure fundamentally changed how corporations calculate deemed paid foreign tax credits for international operations.
Income Categories for Separate Limitation Calculations
Corporations must complete a separate Form 1118 for each applicable income category. The current form recognizes six distinct categories:
● Section 951A Category Income: Global intangible low-taxed income includible under section 951A, excluding passive category income
● Foreign Branch Category Income: Business profits attributable to qualified business units in foreign countries
● Passive Category Income: Foreign personal holding company income, specified passive income, and amounts includible under section 1293
● General Category Income: All income not classified in other categories, including high-taxed income
● Section 901(j) Income: Income from sanctioned countries designated by the Secretary of State
● Income Re-sourced by Treaty: U.S. source income treated as foreign source under applicable tax treaties
Section 909 Suspension Rules
Section 909 prevents taxpayers from claiming foreign tax credits before taking related income into account for U.S. tax purposes. This provision became effective for taxable years beginning after December 31, 2010, with special transition rules for certain pre-2011 taxes paid by section 902 corporations. Corporations must track previously suspended foreign taxes on Schedule G and recognize them when the related income enters U.S. taxable income.
Schedule A Income and Deduction Reporting
Schedule A requires corporations to report gross income from sources outside the United States for each applicable separate category. You must include all foreign countries' gross income by country code using the two-letter codes provided by the IRS:
- Corporations must report deemed dividends under section 951(a)(1)(A) before gross-up.
- Corporations must report actual dividends, including amounts under section 951(a)(1)(B) before gross-up.
- Corporations must report interest income from foreign sources.
- Corporations must report rents and royalties received.
- Corporations must report services income, including compensation and fees.
- Corporations must report other gross income with detailed schedules attached.
Corporations must allocate deductions that are definitely allocable and apportion deductions that are not definitely allocable using the methodology documented in supporting schedules. Foreign branch deductions require reporting on both Schedule A and Schedule F with clear documentation of the apportionment method used.
Schedule B Foreign Taxes and Credit Limitations
Schedule B Part I documents foreign taxes paid, accrued, and deemed paid for the separate category being reported. Corporations are required to consistently select either the cash method or the accrual method throughout the entire tax year, indicating their choice by checking the corresponding box.
The accrual method generally uses average exchange rates for the tax year unless taxes are paid more than two years after the year to which they relate. This exchange rate requirement ensures consistent translation of foreign currency tax payments into U.S. dollars for credit calculation purposes.
Schedule B Part II calculates the separate foreign tax credit limitation by dividing foreign source taxable income by worldwide taxable income and multiplying by U.S. tax liability. Corporations must adjust for overall domestic loss accounts, overall foreign loss accounts, and separate limitation losses using Schedule J when applicable.
The limitation may increase under section 960(c) when corporations receive distributions of previously taxed earnings and profits. This adjustment prevents double taxation of income that was previously included under subpart F or GILTI provisions.
Deemed Paid Credit Calculations
Schedule C computes taxes deemed paid by domestic corporations on inclusions under section 951(a)(1) from post-1986 undistributed earnings of controlled foreign corporations. You calculate the deemed paid amount using the ratio of the inclusion to total post-1986 undistributed earnings multiplied by the pool of post-1986 foreign income taxes.
Schedule D extends these calculations to inclusions from lower-tier foreign corporations using the same proportional methodology. This schedule captures the indirect foreign tax credit chain as income flows up through multiple tiers of foreign corporate structures.
Schedule E addresses taxes deemed paid with respect to distributions of previously taxed earnings and profits. These schedules require reference identification numbers for tracking foreign corporations consistently across tax years using alphanumeric codes limited to fifty characters.
Net Operating Loss and High-Taxed Income Adjustments
Corporations report net operating loss carryovers attributable to foreign source income in Schedule A column 11 using the code "NOL" instead of a country code. The form aggregates all net operating loss amounts on a single line because per-country reporting is unnecessary for this category.
High-taxed income reclassifications require two entries using the code "HTKO" on separate lines. Corporations enter the net amount being reclassified from passive category income as a negative number and enter the same amount as a positive number for general category income. Corresponding tax reclassifications appear on Schedule B with the related adjustment on line 4.
Foreign Tax Redeterminations and Carryovers
Corporations must redetermine U.S. tax liability when accrued foreign taxes differ from amounts paid or when refunds occur. Schedule L summarizes all foreign tax redeterminations occurring in the current year, even if they relate to prior taxable years. You must file amended returns for years where U.S. tax liability changes due to redeterminations.
Excess foreign taxes carry back one year and carry forward ten years within the same separate limitation category. Schedule K reconciles prior-year carryovers with current-year carryovers and tracks the utilization of carried amounts. Corporations cannot apply carryovers to years where they claimed deductions instead of credits for foreign taxes.
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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.
