Form 1118: Foreign Tax Credit—Corporations (2020)
What Form 1118 Is For
Form 1118 is the tool corporations use to calculate their foreign tax credit—essentially a dollar-for-dollar reduction in U.S. tax for qualifying income, war profits, and excess profits taxes paid or accrued to foreign countries or U.S. possessions. Think of it as preventing double taxation: when your corporation earns income abroad and pays foreign taxes on that income, the U.S. government doesn't want to tax you twice on the same earnings. Instead of simply deducting foreign taxes as a business expense, the foreign tax credit subtracts those taxes directly from what you owe the IRS, which is usually much more beneficial.
The form applies to C corporations that do business internationally, but it also covers a special situation: individual taxpayers who make what's called a ""section 962 election."" These individuals choose to be taxed at corporate rates on certain foreign income from controlled foreign corporations so they can access the foreign tax credit. Without Form 1118, neither corporations nor these individuals can claim this credit. IRS.gov
Form 1118 isn't just one simple calculation. It requires detailed reporting across multiple schedules that track different types of foreign income, allocate deductions properly, and compute ""deemed paid"" taxes—foreign taxes your foreign subsidiaries paid that you can credit as if you paid them yourself. The 2020 version reflects major changes from the Tax Cuts and Jobs Act of 2017, including new income categories like ""global intangible low-taxed income"" (GILTI) and foreign branch income, plus revised rules for deemed-paid credits. IRS.gov
When You'd Use Form 1118 (Including Late and Amended Filings)
You file Form 1118 attached to your corporation's federal income tax return for the year you're claiming the foreign tax credit. The form is due when your corporate return is due—typically the 15th day of the fourth month after your tax year ends (April 15 for calendar-year corporations), including any extensions you've been granted.
The IRS gives you extraordinary flexibility in making or changing the election between claiming a foreign tax credit and taking a deduction for foreign taxes instead. You can make this choice—or switch from one to the other—any time before the end of a special 10-year period described in section 6511(d)(3), or longer if you've extended the statute of limitations by agreement. This means if you file your 2020 return in 2021, you could theoretically amend that return and file or revise Form 1118 until 2031. However, there's an important catch: while the foreign tax credit election period runs this long, the statute of limitations for claiming a refund if you took a deduction instead of a credit may expire sooner. IRS.gov
Amended returns and late filings become necessary in several situations. If you're carrying back excess foreign tax credits to an earlier year (you paid more foreign tax than the limitation allowed, so you want to apply the excess to reduce prior-year U.S. taxes), you must file an amended return for that earlier year with a revised Form 1118 and all supporting schedules. You'll also need to amend if a ""foreign tax redetermination"" occurs—situations where your actual foreign tax liability changes after you filed. Common examples include: receiving a refund of foreign taxes you paid, a foreign tax audit that changes the amount you owe, or failing to pay foreign taxes you accrued within 24 months. When any redetermination happens, you generally must file an amended return with an updated Form 1118 plus detailed statements explaining what changed, when it changed, and how it affects your U.S. tax liability. Missing these amendment requirements can trigger penalties under section 6689. IRS.gov
Key Rules or Details for 2020
Separate categories matter immensely. You can't just lump all foreign income together. Tax law requires you to compute a separate foreign tax credit limitation for each ""basket"" of income. In 2020, these categories included: section 951A category income (GILTI), foreign branch category income, passive category income, general category income, section 901(j) income (from sanctioned countries like Iran and North Korea), and certain income re-sourced by treaty. You must file a separate Form 1118 for each category that applies to you. This prevents high-taxed income from one basket from subsidizing low-taxed income in another—a manipulation Congress wanted to stop. IRS.gov
The limitation itself is crucial. Even if you paid substantial foreign taxes, your credit can't exceed a specific ceiling. The formula is: (foreign source taxable income ÷ worldwide taxable income) × U.S. tax liability. In plain terms, if 30% of your income came from foreign sources, your credit is capped at roughly 30% of your U.S. tax bill (with adjustments). This prevents the credit from reducing U.S. tax on your domestic income. Any excess can be carried back one year or carried forward ten years within the same category—but excess credits from GILTI (section 951A) income can't be carried at all. IRS.gov
Choose your method and stick with it. For any tax year, you must pick either the cash method (credit when you actually pay foreign taxes) or the accrual method (credit when the foreign tax liability accrues, even if not yet paid). You can't mix methods in the same year. If you choose accrual but don't pay within 24 months, you must go back and file an amended return removing that credit—a common trap. IRS.gov
Not all foreign taxes qualify. You can only credit income taxes, war profits taxes, and excess profits taxes—plus certain taxes paid ""in lieu of"" an income tax. Sales taxes, VAT, property taxes, and payroll taxes don't qualify. Even qualifying taxes can be denied or reduced for specific reasons: taxes on income where you claimed other U.S. exclusions, taxes to countries under U.S. sanctions (section 901(j)), taxes you don't legally owe or could get refunded, taxes paid when you didn't meet minimum stock holding periods, and taxes related to international boycotts. There's also the section 901(m) rule denying credits for certain asset acquisition transactions. IRS.gov
Step-by-Step (High Level)
Step 1: Organize your information by income category.
Before touching the form, separate your foreign income and taxes into the required baskets (GILTI, passive, general, branch, etc.). Each category needs its own Form 1118 package.
Step 2: Complete Schedule A for each category.
This schedule computes your income or loss before adjustments. You'll report foreign-source gross income from various sources (dividends, interest, rents, royalties, sales, services) and subtract allocable deductions—expenses directly tied to producing that income. Report everything in U.S. dollars, translating foreign currency at appropriate exchange rates.
Step 3: Work through Schedule H.
This single schedule (completed once, not per category) apportions certain deductions that benefit both U.S. and foreign operations—primarily research and development expenses and interest expense. The rules are complex, using formulas based on either gross income or asset values to split these expenses fairly between domestic and foreign income.
Step 4: Calculate Schedule J adjustments if needed.
Schedule J adjusts for special situations like overall foreign losses (when foreign deductions exceeded foreign income in past years and now must be recaptured) and separate limitation losses. Not every filer needs Schedule J, but if you had prior-year loss accounts, this schedule determines how much current foreign income must be recharacterized as U.S. source.
Step 5: Compute deemed-paid taxes.
This is often the most complex part. Use Schedule C for taxes deemed paid on section 951(a)(1) subpart F inclusions, Schedule D for GILTI inclusions, Schedule E for distributions of previously taxed earnings, and Schedules F-1 through F-3 for pre-2018 foreign corporate tax years. Each requires detailed information about foreign corporations, their earnings and profits, functional currencies, and tax pools.
Step 6: Report all foreign taxes on Schedule B, Part I.
List taxes you directly paid or accrued (with receipts or foreign returns available upon IRS request), plus all deemed-paid taxes from Schedules C through F-3. Don't forget any carryover credits from prior years (tracked on Schedule K) or suspended taxes under section 909.
Step 7: Calculate your limitation in Schedule B, Part II.
Enter your foreign source taxable income (from Schedule J or Schedule A), divide by worldwide taxable income, and multiply by your U.S. tax liability. Your allowable credit is the smaller of total foreign taxes (line 6) or this limitation (line 13).
Step 8: Complete Schedule B, Part III.
Summarize the credits from all your separate Forms 1118 (one for each category), subtract any international boycott reductions, and enter the final credit on your corporate tax return.
Step 9: Maintain supporting documentation.
Though you don't attach receipts or foreign tax returns to Form 1118, you must keep them available. The IRS can request proof at any time, and failure to provide it means losing the credit. IRS.gov
Common Mistakes and How to Avoid Them
Claiming credit for non-qualifying taxes.
Corporations sometimes try to credit taxes they don't legally owe or amounts eligible for refund from the foreign government. The rule is simple: you can only credit what you're legally required to pay after exercising all available remedies to reduce the liability. Before claiming any unusual foreign tax, verify it qualifies as an income tax or approved in-lieu-of tax under section 903. IRS.gov
Using the wrong income category or forgetting separate forms.
Filing one Form 1118 with mixed income types is a significant error. The law requires absolute separation—one form per category. Also, within sanctioned countries and treaty re-sourced income, you need separate forms for each country. Use the correct category codes at the top of page one, and double-check country codes from the IRS list.
Mixing cash and accrual methods.
Pick one method per year and be consistent. If you choose accrual, mark the date taxes accrued and when paid. Remember the 24-month rule: taxes you accrue but never pay (or don't pay within 24 months) must be removed via amended return. Many corporations run into trouble by accruing taxes optimistically, then finding they can't pay or get refunds later.
Failing to track and report foreign tax redeterminations.
Any time foreign taxes change after filing—whether through refunds, foreign audits, or exchange rate adjustments—you must file an amended U.S. return within the specified period. The penalty for ignoring this requirement is harsh: section 6689 imposes penalties, and the IRS can collect interest on any resulting deficiency. Keep a system to monitor foreign tax matters for at least two years after filing. IRS.gov
Inadequate documentation.
While receipts and foreign returns aren't filed with Form 1118, you must produce them upon IRS request. If you can't substantiate the foreign taxes claimed, the IRS will disallow the credit. Maintain organized files with: foreign tax return copies, payment receipts, wire transfer records, currency conversion documentation, withholding certificates, and detailed calculations showing how foreign taxes tie to specific income categories. IRS.gov
Incorrect currency translation.
Every foreign currency amount must be translated to U.S. dollars using appropriate exchange rates. For taxes paid, generally use the rate on the payment date; for accrued taxes, use the average rate for the tax year unless you can show the actual accrual date. Keep records showing exactly which exchange rates you used and their source (usually Federal Reserve rates or other verifiable sources).
Ignoring carryover rules.
Excess foreign tax credits generally carry back one year and forward ten years—but only within the same limitation category, and GILTI category credits don't carry over at all. Use Schedule K to track these carryovers carefully. Forgetting to claim a carryover means losing it forever once the carryover period expires.
What Happens After You File
The IRS examines the credit like any other tax position.
While you don't attach supporting documents to Form 1118, the IRS routinely requests substantiation during audits. Information Document Requests (IDRs) may ask for foreign tax returns, payment proof, contemporaneous records of how expenses were allocated and apportioned, and detailed calculations backing up deemed-paid tax computations. Respond completely and timely—failure to substantiate means the credit disappears. IRS.gov
Watch for redetermination events.
You have ongoing obligations even after filing. If you receive foreign tax refunds, foreign authorities adjust your liability, exchange rates shift significantly, or you don't pay accrued taxes within 24 months, you must notify the IRS and file an amended return. The IRS will then recalculate your U.S. tax liability—potentially with interest charges going back to the original filing date. Most redeterminations must be reported within specific timeframes, and missing these deadlines triggers section 6689 penalties (up to $10,000 or more depending on circumstances). IRS.gov
Carryovers impact future years.
If your foreign taxes exceed the limitation, Schedule K documents the carryover available for future years. You'll use this schedule every year to track unused credits—reporting beginning balances, amounts used in the current year, amounts expired, and ending balances. Keep these schedules organized because they create a multi-year chain: this year's Schedule K becomes next year's starting point.
Records must be retained indefinitely until no longer material.
The IRS instructions emphasize that books and records related to Form 1118 must be kept ""as long as their contents may become material in the administration of any Internal Revenue law."" Given the 10-year election period, foreign tax redetermination obligations, and carryover periods, practical retention is often 10 to 15 years. Return information is confidential under section 6103, but you must produce it to the IRS upon proper request. IRS.gov
Penalties and interest apply to errors.
Underpaying U.S. tax because of incorrect Form 1118 calculations results in interest charges computed from the original due date, plus potential accuracy-related penalties if the IRS determines negligence or substantial understatement. Conversely, if you discover you overclaimed the credit and file an amended return, the IRS may owe you a refund with interest—but only if you file within the refund statute of limitations (generally three years, though the special 10-year period for changing the credit election extends longer). IRS.gov
FAQs
Can I take both a foreign tax credit and a deduction for the same foreign taxes?
No. Each year you must choose: either credit or deduction for all foreign taxes. You can't split them or use both for the same tax. The good news is you can change your choice later—even years later—by filing an amended return during the 10-year election period. However, once you elect the credit for a year, no foreign taxes from that year can be deducted in that year or any future year. Most corporations prefer the credit because it reduces tax dollar-for-dollar rather than just reducing taxable income. IRS.gov
What if my foreign taxes are higher than the limitation allows me to credit?
The excess doesn't disappear immediately. You can carry the excess back one year to reduce that year's U.S. tax (by filing an amended return for the prior year) and then forward up to ten years. However, this carryback and carryforward only works within the same limitation category—you can't use excess passive category taxes to offset general category income. Also, section 951A (GILTI) category excess credits can't be carried at all; they're lost if not used in the current year. Track carryovers carefully on Schedule K, as corporations often forget to claim them before they expire. IRS.gov
Do I attach receipts or foreign tax returns to Form 1118 when I file?
No. The instructions specifically state that documentation isn't required with the initial filing. However—and this is critical—you must maintain proof and present it to the IRS upon request. ""Proof upon request"" means complete foreign tax returns, payment receipts, withholding statements, wire confirmations, and calculations showing foreign currency translations. If you can't produce these documents during an audit, the IRS will disallow the credit entirely, potentially going back multiple years if they suspect a pattern. IRS.gov
What happens if I get a refund of foreign taxes after I've already claimed the credit?
This is a foreign tax redetermination, and you have a legal obligation to file an amended U.S. return. The refund reduces the foreign taxes you're entitled to credit, which increases your U.S. tax liability for that year. You must notify the IRS by filing an amended return with a revised Form 1118, including a statement showing the original foreign tax paid, the refund received (with dates and amounts), and the revised U.S. tax calculation. Interest will run from the original return due date on any additional U.S. tax owed. Failure to report redeterminations can result in penalties up to $10,000 under section 6689. IRS.gov
If I have multiple foreign subsidiaries, do I file a separate Form 1118 for each company?
Not exactly. You file a separate Form 1118 for each applicable income category (passive, general, branch, GILTI, etc.), not for each foreign corporation. Within each Form 1118, you'll report all foreign corporations that generated that type of income. For example, if three controlled foreign corporations paid you general category dividends, all three appear on the same Form 1118 for general category income—but each gets its own line on the relevant schedules showing the corporation's name, reference ID number, country, and tax calculations. The key is separating by income basket, not by entity. IRS.gov
Are there any foreign taxes I definitely cannot credit?
Yes, several categories are explicitly non-creditable: taxes you don't legally owe; taxes related to income where you claimed other exclusions (like the extraterritorial income exclusion on old Form 8873); taxes to sanctioned countries under section 901(j) (currently Iran, North Korea, Sudan, and Syria, though presidential waivers can apply); taxes when you didn't hold the underlying stock or property for minimum required periods; taxes connected to international boycotts; certain taxes on oil and gas income; and taxes related to asset acquisitions subject to section 901(m). Before claiming a credit for any unusual foreign levy, verify it qualifies under section 901 as an income tax or approved in-lieu-of tax. IRS.gov
How long can the IRS audit my foreign tax credit, and what records should I keep?
Generally, the IRS can audit your return within three years of filing, but this period extends to six years if you omitted substantial income (more than 25% of gross income). For foreign tax credits specifically, the 10-year election period means the IRS has at least that long to question whether you properly elected the credit versus deduction. Additionally, carryovers create continuing obligations—if you're carrying forward excess credits, those amounts remain subject to examination for years. Keep all supporting records (foreign returns, receipts, allocation calculations, currency conversion documentation, earnings and profits computations) for at least 10 years, and potentially longer if you have ongoing carryover situations or international structures with complex deemed-paid tax calculations. IRS.gov
Sources: All information in this guide comes from official IRS publications available at IRS.gov, specifically the Instructions for Form 1118 (Rev. December 2020) and related IRS guidance. No third-party sources were used.
