Instructions for Form 1118 | Foreign Tax
Credit—Corporations Checklist | 2015 Tax Year
Corporations use Form 1118 to calculate the foreign tax credit for income taxes paid or accrued to foreign countries or U.S. possessions. The 2015 version maintains the foreign tax credit basket structure established by the American Jobs Creation Act of 2004, which became effective for tax years beginning after December 31, 2006. The form provides detailed guidance on controlled foreign corporation income sourcing rules and separate limitation categories applicable to the 2015 tax year.
Determining Foreign Tax Credit Eligibility
You must confirm that your corporation qualifies as a U.S. taxpayer subject to federal tax on worldwide income. Verify that you paid or accrued foreign income taxes on foreign-source income during the tax year. Only income taxes imposed by foreign countries qualify for the credit. Value-added taxes, payroll taxes, and property taxes do not meet the eligibility requirements under section 904.
Both national and subnational foreign income taxes qualify for the credit when properly documented. A domestic corporation may choose between claiming a credit or taking a deduction for eligible foreign taxes.
Identifying Separate Limitation Categories
The 2015 tax year requires you to categorize all foreign-source income into applicable limitation baskets before calculating your credit. There are two primary categories: passive category income and general category income. Each basket maintains its own credit limitation calculation, and you cannot cross-income between categories when computing your allowable credit.
Passive category income includes foreign personal holding company income, specified passive category income, and certain dividends from foreign corporations. General category income encompasses all foreign-source income not classified as passive, including high-taxed income that would otherwise fall into the passive basket.
Calculating the Foreign Tax Credit Limitation
The limitation formula divides foreign-source taxable income in each basket by worldwide taxable income, then multiplies the result by your total U.S. tax liability. This calculation determines the maximum credit available for each separate limitation category.
Foreign taxes that exceed the limitation in any category cannot reduce your U.S. tax liability for that year. These excess amounts become carryback or carryforward credits subject to specific time limits. The statutory formula prevents foreign taxes from offsetting U.S. tax on domestic-source income. Complete Form 1118 Part I with line-by-line calculations for every applicable basket.
Reporting Foreign Taxes and Required Documentation
List all foreign income taxes paid or accrued during the tax year on Form 1118 Part II. Your corporation must identify each foreign country or U.S. possession, specify the type of tax imposed, state the tax year to which the payment relates, and convert all amounts to U.S.
dollars using applicable exchange rates.
Attach all required schedules to substantiate your claimed foreign tax credit amounts
- On Schedule A, the filer reports gross income and losses from sources outside the
United States for each applicable separate category.
- The total foreign tax credit is determined on Schedule B after applying the relevant
statutory limitations.
- Under Schedule C, the domestic corporation filing the return computes the taxes it is
deemed to have paid.
- When applicable, Schedules D and E calculate the taxes deemed paid by lower-tier
foreign corporations.
Managing Carryback and Carryforward Credits
Excess foreign taxes not usable in the current year carry back one year and forward ten years under section 904. Document any carryback from 2016 or carryforward from prior years on
Form 1118 Part III.
You must track carryover amounts by separate limitation category because credits from one basket cannot satisfy limitations in another basket. Apply excess credits first to the earliest available year, then proceed chronologically through subsequent years.
Net operating losses and separate limitation losses may affect how you use carried credits in the destination year. The one-year carryback and ten-year carryforward periods remain fixed under the 2015 law without expansion or administrative relief.
Reporting Controlled Foreign Corporation Income
Corporations that own stock in a controlled foreign corporation must include CFC-related foreign-source income on Form 1118 using the 2015 sourcing rules. Only traditional subpart F inclusions applied in 2015, as global intangible low-taxed income provisions had not yet been enacted.
Section 951 governs the ownership thresholds and income categorization requirements for CFC reporting. Look-through rules under section 904 may assign dividends, interest, rents, and royalties received from a CFC to categories other than passive income.
You must apply these rules based on the earnings and profits attributable to each separate limitation category. Include all section 78 gross-up amounts when computing your foreign tax credit limitation.
Completing the Limitation Calculation and Final Steps
Enter worldwide taxable income on Form 1118 Part I, line 1a, then enter foreign-source taxable income for each applicable limitation basket on line 1b. Divide foreign-source income by worldwide income and multiply by total U.S. income tax to determine your credit limitation.
Apply the appropriate exchange rate when converting foreign currency amounts to U.S. dollars.
Cash-method corporations use the exchange rate on the date foreign taxes were paid.
Accrual-method corporations use the exchange rate on the last day of the tax year, except when taxes are paid more than two years after the year to which they relate. Transfer the calculated limitation to Form 1120 Schedule C as directed in the 2015 instructions.
Treaty-Based Positions and Special Reporting
Use Form 8833 when a foreign tax credit position depends on a tax treaty that alters or overrides provisions of the Internal Revenue Code. Although the 2015 instructions reference applicable treaty rules, they do not revise the filing thresholds for Form 8833.
Additional disclosure obligations may apply to a section 902 corporation or a noncontrolled section 902 corporation, particularly when dividend distributions or deemed-paid credit calculations are involved. Ongoing guidance for these rules is issued through Treasury
Department regulations and notices published in the Federal Register. Review the applicable tax treaty alongside the 2015 Form 8833 instructions to confirm whether disclosure is required for your specific return position.
If you’re missing tax documents or want to ensure the numbers you enter match IRS records, we can help.
- Full IRS transcript retrieval (Wage & Income + Account)
- Professional tax form review
- Preparation & filing support
- Tax relief options if you owe the IRS
