Form 1118 Corporate Foreign Tax Credit Checklist 2012

income taxes paid to foreign countries, offsetting U.S. tax liability. The 2012 instructions reflect pre-TCJA corporate tax treatment and require corporations to compute the credit limitation separately for each income category.

Determine Eligibility and Foreign Tax Status

Establish that your corporation paid or accrued qualifying foreign income taxes to a foreign country or U.S. possession during the tax year. Foreign taxes must be imposed on income rather than on wages, payroll, or gross receipts. Document the names, jurisdictions, and tax amounts for each country where tax was paid. This foundation determines whether Form 1118 is required and which schedules you must complete.

Identify Foreign Source Income Categories

Classify all foreign-source income into the required categories listed in the 2012 instructions.

Passive category income, general category income, and section 901(j) country income must be tracked separately.

Convert Foreign Taxes to U.S. Dollars

For accrual-basis taxpayers, generally convert foreign tax payments to U.S. dollars using the average exchange rate for the tax year to which the taxes relate under section 986(a). The exchange rate on the date of payment must be used if taxes are paid more than 2 years after the close of the tax year to which they relate or if taxes are paid in a tax year before the year to which they relate. Cash-basis taxpayers use the exchange rate on the date of payment. Keep documentation showing exchange rates used and payment dates to ensure consistency when the IRS reviews credit amounts during examination or foreign tax redetermination procedures.

Complete Worksheets for Foreign Tax Credit Limitation

Use worksheets provided in the 2012 Form 1118 instructions to calculate the foreign tax credit limitation for each income category. The limitation equals the lesser of the foreign taxes paid or the U.S. tax attributable to foreign-source income.

Report Carryback and Carryforward Amounts

Identify any credits carried back one year or carried forward ten years from prior tax periods.

The 2012 instructions define how carryback and carryforward credits interact with current-year calculations under section 904(c). Document the source year for each carried-over amount to prevent duplicate claims and comply with statute-of-limitations rules under section 6511(d)(3).

Enter carry-forward amounts from Schedule K on the appropriate line of Schedule B, Part II.

Attach Required Schedules and Computations

Complete and attach all required schedules showing foreign income by country, foreign taxes paid by country, and detailed limitation calculations for each income category. Schedule C must be completed to report tax deemed paid by the domestic corporation filing the return under section 902. Schedule D must be completed to calculate tax deemed paid by first-tier and second-tier foreign corporations.

Schedule G must be completed to report reductions of taxes paid, accrued, or deemed paid under applicable provisions. Schedule H must be completed to apportion deductions not definitely allocable to specific income categories. Form 5471 must be included if Form 1118 applies to controlled foreign corporations.

Account for Adjustments and Special Rules

Apply any section 904 adjustments required by the 2012 instructions, including modifications to foreign tax credit limitations for items such as net capital losses or deductions disallowed.

Corporations must also account for section 909 foreign tax credit splitting events that may suspend foreign taxes until related income is taken into account.

If section 901(m) applies to covered asset acquisitions after December 31, 2010, report the disqualified portion of any tax determined with respect to income or gain attributable to relevant

foreign assets. Section 988 exchange gains or losses on certain foreign currency transactions may also require adjustments.

Complete Schedule B and Required Form Lines

Complete Schedule B, Part I, to report all foreign taxes paid, accrued, and deemed paid for the separate category for which the form is being filed. Schedule B, Part II, contains lines 1 through

12 for computing the separate foreign tax credit for each applicable income category.

Year-Specific 2012 Requirements and Compliance

For tax year 2012, Form 1118 instructions confirm that the foreign tax credit limitation must be calculated separately for passive category income and general category income, with no blending between categories permitted under pre-2018 law. Separate reporting is also required for income earned in countries subject to section 901(j) restrictions, which apply to jurisdictions involved in terrorism or lacking U.S. diplomatic relations. Although foreign taxes paid to these countries are not creditable, the related income remains subject to its own foreign tax credit limitation and must be reported on a separate Form 1118.

Under section 905(c), foreign tax redetermination rules require corporations to file amended returns when accrued foreign taxes differ from amounts ultimately paid or when foreign tax refunds are received. Failure to meet these redetermination reporting obligations may result in penalties under section 6689, as well as interest assessments under section 6601.

The 2012 instructions further explain that discrepancies between accrued and paid foreign taxes are common, making precise documentation of payment dates and accrual periods essential.

Under the 2012 law, foreign tax credit carryforwards are allowed for up to 10 years, and no reference is made to statutory changes that took effect after 2017. Schedule B, Part III, must be completed using lines 1 through 6 to aggregate total foreign tax credits across all applicable categories before filing.

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