Form 1118 (Rev. 12-2021)
Purpose and Overview
Form 1118 (Rev. 12-2021) computes the foreign tax credit for corporations by categorizing foreign-source income, calculating tax limitations per category, and determining deemed-paid tax under Section 960. The 2021 revision introduced expanded Section 951A (Global Intangible Low-Taxed Income) reporting and modified Section 960(d) deemed-paid calculations for tested foreign income taxes paid by controlled foreign corporations.
Filing Steps
Step 1: Identify and Separate Income Categories
You must identify and separate each income category using codes from the 2021 instructions. Categories include the section 951A category, foreign branch category, passive category, general category, and sanctioned-country category. Prepare one complete Schedule A and corresponding Part II for each applicable category. Do not combine categories on a single form.
Step 2: Complete Schedule A, Columns 1–17
Report gross foreign-source income by type in Schedule A. Include inclusions under sections 951(a)(1) and 951A, dividends, interest with and without gross-up under Section 78, rents, royalties, license fees, sales, services income, currency gains and losses, and other income.
Subtract allocable deductions in column 13, which include the dividends-received deduction, Section 250(a)(1)(A) FDII deduction, Section 250(a)(1)(B) GILTI deduction, depreciation, and other expenses. Calculate net income or loss after subtracting these deductions.
Step 3: Report Section 960(d) Deemed-Paid Tax
Use Schedule D, Part I and Part II to report Section 960(d) deemed-paid tax if the corporation received Section 951A inclusions from controlled foreign corporations. Calculate the pro rata share of the CFC's tested foreign income taxes. Apply the 80 percent limitation under Section 960(d)(1) before entering the deemed-paid amount on Schedule A, column 3, for the 951A category.
Step 4: Complete Schedule B, Part I
Enter total foreign taxes paid or accrued and taxes deemed paid by category in Schedule B, Part I. Include suspended taxes under Section 909 relating to income taken into account in the current year on line 1b. Verify that the sum of column 2(j), which shows total foreign taxes, equals the total of line 6.
Step 5: Compute Credit Limitation on Schedule B, Part II, Line 13
Multiply the U.S. tax liability by the ratio of foreign-source taxable income to worldwide taxable income. The U.S. tax liability consists of the regular tax minus the American Samoa economic development credit. Include any Section 960(c) increase in limitations on line 12. Reflect exclusions and adjustments under section 904(b) on line 8b.
Step 6: Complete Schedule H for Research and Experimental Deductions
Complete Schedule H when applicable to apportion research and experimental deductions among statutory groupings. Allocate 50 percent of R&E deductions exclusively to the residual grouping of U.S. source gross income if more than 50 percent of the R&E was performed in the United States.
Apportion the remaining 50 percent using the gross receipts method by dividing gross receipts related to foreign source gross intangible income by worldwide gross receipts for the product line, then multiplying the result by the remaining R&E deductions. Enter the resulting foreign R&E deductions in Schedule A, column 14.
Step 7: Complete Schedule I, Part II
Complete Schedule I, Part II if the corporation paid or accrued foreign oil and gas taxes. Calculate the disallowance amount under Section 907(a) and carry the reduction forward to Schedule G, Part I, line B. Schedule I addresses foreign oil and gas extraction income and related income. Section 901(e) provides for a reduction in the amount of foreign taxes on foreign mineral income and remains in current law.
Step 8: Complete Schedule G, Part I
Aggregate all reductions to foreign taxes in Schedule G, Part I. Include Section 901(e) reductions with attached schedule, foreign oil and gas tax reductions, Section 6038(c) penalty reductions, Section 909 suspensions, Section 965(g) disallowed taxes, Section 245A disallowed taxes, and other reductions. Enter total reductions on Schedule B, Part II, line 3 as a negative number in parentheses.
Year-Specific 2021 Updates
Section 951A Category Expansion
Schedule D, Part II, requires computation of tax deemed paid under Section 960(d) with an 80 percent limitation for 2021. This calculation applies to any corporation reporting Section 951A inclusions. You must complete this calculation before entering deemed-paid amounts on Schedule A.
Section 960(c) Increase in Limitation
Line 12 of Schedule B, Part II reflects the Section 960(c) increase in limitation. This provision addresses excess limitation accounts and affects the overall foreign tax credit computation.
Schedule A Column Changes
The 2021 revision deleted former columns for section 986(c) gain, section 987 gain, and section 988 gain. New columns 9 and 10 report currency gain and currency gain code. New columns 13(h) and 13(i) report currency loss and currency loss code. Column 4(b) for section 78 dividend gross-up was removed because TCJA repealed section 902.
Schedule H Part I Restructuring
Schedule H, Part I, was extensively revised to reflect Regulations section 1.861-17. The Gross Income Method was eliminated for tax years beginning after 2019. The exclusive apportionment rules allocate 50 percent of R&E deductions based on where the majority of R&E was performed. The gross receipts method apportions the remaining 50 percent to statutory groupings based on gross intangible income ratios.
New Schedule L for Foreign Tax Redeterminations
A new separate Schedule L reports current-year foreign tax redeterminations that relate to prior taxable years. This schedule provides comprehensive tracking of adjustments and their impact on U.S. tax liability across multiple years.
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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.
