Form 1118: Foreign Tax Credit—Corporations (2022)

What Form 1118 Is For

Form 1118 is the tax form that U.S. corporations use to claim a foreign tax credit when they've paid income taxes to other countries or U.S. possessions. Think of it as a way to avoid being taxed twice on the same income—once by a foreign government and again by the United States. IRS.gov

When your corporation earns money overseas, the foreign country typically taxes that income. Without the foreign tax credit, you'd pay full U.S. taxes on that same income, effectively paying twice. Form 1118 allows you to reduce your U.S. tax bill by the amount of qualified foreign taxes you've already paid, subject to certain limitations. The form works through complex calculations that ensure you receive proper credit while complying with U.S. tax law restrictions on which foreign taxes qualify and how much credit you can claim. IRS.gov

The form handles various types of foreign taxes—including income taxes paid directly by your corporation, taxes deemed paid through foreign subsidiaries under section 960, and certain taxes paid "in lieu of" income taxes as described in section 903. However, not all foreign payments qualify. The IRS has specific rules about what counts as a creditable tax versus a fee, penalty, or other type of payment.

When You'd Use Form 1118 (Including Late and Amended Filings)

You must file Form 1118 with your corporate income tax return (typically Form 1120) if your corporation elects to claim the foreign tax credit under Internal Revenue Code section 901. The form attaches to your regular tax return for the year in which you paid or accrued the foreign taxes. IRS.gov

Interestingly, even if you decide not to claim the foreign tax credit, you may still need to file portions of Form 1118. Corporations must complete and attach Schedules A and J if they have any additions to, reductions to, or recapture of overall foreign loss, overall domestic loss, or separate limitation loss accounts—regardless of whether they're actually claiming the credit that year.

The IRS gives you considerable flexibility on timing. You can make or change your election to claim the foreign tax credit at any time before the end of a special 10-year period described in section 6511(d)(3), or longer if you've extended the period by agreement with the IRS. This means if you originally took foreign taxes as a deduction on Schedule A, you could later amend your return within this timeframe and claim the credit instead if that proves more beneficial. IRS.gov

Amended returns come into play in several situations. If you're carrying back excess foreign tax credits to an earlier year, you must file an amended tax return (Form 1120-X) with a revised Form 1118 and schedules. Similarly, if a "foreign tax redetermination" occurs—meaning the amount of foreign tax you actually paid differs from what you claimed, you received a refund of foreign taxes, or the foreign tax amount was adjusted for any reason—you generally must file an amended return to redetermine your U.S. tax liability. Failure to notify the IRS of foreign tax redeterminations can result in penalties. IRS.gov

Key Rules or Details for 2022

Separate Limitation Categories

Form 1118 operates under several fundamental rules that shape how you claim the credit. First and most important is the separate limitation requirement. You cannot simply lump all your foreign taxes together. Instead, you must prepare a separate Form 1118 for each category of foreign income defined in section 904(d). These categories include general category income, passive category income, section 951A income (also known as GILTI—Global Intangible Low-Taxed Income), foreign branch category income, and section 901(j) income. Each category has its own credit limitation calculation. IRS.gov

Qualifying vs. Non-Qualifying Foreign Taxes

The types of taxes that qualify matter enormously. Generally, only income taxes, war profits taxes, and excess profits taxes imposed by a foreign country or U.S. possession qualify for the credit. Taxes must be legally owed, actually paid or properly accrued, and imposed on you as the taxpayer. The IRS specifically excludes certain taxes from the credit: taxes on mineral income that must be reduced under section 901(e), taxes related to boycotts under section 908, taxes on income excluded from U.S. gross income, and various other categories outlined in sections 901(g), 965(g), and related provisions.

Carryback and Carryforward Rules

The carryback and carryforward rules provide important flexibility. If your allowable foreign taxes exceed the credit limitation in a given year, you don't lose that excess. You can first carry it back one year to offset taxes paid in the previous year. Any amount remaining can then be carried forward for up to ten years. However, there's an important exception: excess foreign taxes in the section 951A (GILTI) category cannot be carried back or forward at all—they must be used in the year they arise or they're lost. IRS.gov

Treaty-Based Positions

Treaty-based positions require disclosure. If you're taking a position that a U.S. tax treaty overrides or modifies any provision of the Internal Revenue Code and affects your foreign tax credit calculation, you must disclose this on Form 8833 and attach it to your return.

Step-by-Step (High Level)

Filing Form 1118 follows a logical progression, though the details can become intricate.

Determine Applicable Income Categories

Start by determining which separate categories of income apply to your situation. Remember, each category requires its own complete Form 1118 with accompanying schedules. You'll identify the category by using specific codes (for example, "901j" for section 901(j) income or "951A" for GILTI). IRS.gov

Gather Foreign Tax Documentation

Next, gather your documentation for all foreign taxes paid or accrued during the tax year. While you don't need to attach receipts or copies of foreign tax returns to Form 1118, you must maintain these records and provide them to the IRS upon request. For each foreign country where you paid taxes, you'll need to know the exact amount paid or accrued, the type of tax, and the category of income it relates to.

Complete Schedule A: Foreign Source Income

Complete Schedule A for each separate category. This schedule breaks down your gross income by country and category, applies the proper deductions and expenses to determine net foreign source income, and calculates your U.S. tax on that foreign income before applying the credit. The allocation and apportionment of deductions between U.S. and foreign source income follows complex rules—interest expense, for instance, must be properly apportioned using methods described in the regulations.

Complete Schedule B: Foreign Taxes Paid or Accrued

Schedule B tracks the actual foreign taxes you paid or accrued, organized by country and category. You'll list each foreign country, the type and amount of tax in both foreign currency and U.S. dollars (using the appropriate exchange rate), and identify whether you paid the tax directly or it's deemed paid through foreign subsidiaries.

Calculate the Credit Limitation (Schedule C)

Calculate your foreign tax credit limitation using Schedule C. This limitation ensures you don't claim more credit than the U.S. tax attributable to your foreign income. The basic formula compares your foreign source taxable income to your total taxable income and applies this ratio to your total U.S. tax liability.

Handle Carryovers and Loss Adjustments (Schedules K, J, L)

If you have carryovers from prior years or expect to carry excess credits to future years, complete Schedule K to reconcile your foreign tax carryovers. Schedule J handles adjustments to separate limitation income for loss recapture and recharacterization. Schedule L reports foreign tax redeterminations from prior years that affect the current return.

Attach Form 1118 to Your Corporate Return

Finally, attach all completed Form 1118s and schedules to your corporate tax return before the filing deadline. IRS.gov

Common Mistakes and How to Avoid Them

Failing to File Required Schedules

One of the most frequent errors is failing to file required schedules even when not claiming the credit. Corporations often overlook that Schedules A and J must be attached if there are any loss account additions, reductions, or recaptures—regardless of whether they're actually claiming the foreign tax credit that year. Double-check whether you have loss account activity before assuming you don't need to file anything. IRS.gov

Mixing Income Categories

Mixing income categories together causes problems. Each separate category of income demands its own Form 1118 with complete schedules. Corporations sometimes try to prepare one form covering multiple categories, which violates the separate limitation rules and will be rejected or corrected by the IRS. Set up your filing system to maintain separate calculations from the start.

Claiming Credits for Ineligible Taxes

Claiming credits for ineligible taxes creates audit exposure. Not every payment to a foreign government qualifies as a creditable income tax. Carefully review whether the foreign levy meets the IRS definition of a tax versus a fee or compulsory payment. Taxes not legally owed, refunded amounts, and payments subject to specific statutory disallowances under sections 901(e), 901(g), 965(g), and similar provisions cannot support a credit. When in doubt, review the detailed guidance in Regulations sections 1.901-2 and 1.903-1.

Not Reporting Foreign Tax Redeterminations

Neglecting to report foreign tax redeterminations leads to penalties. If the foreign tax amount changes after you file—whether through a payment different from your accrual, a refund, an adjustment by the foreign country, or settlement of a contested liability—you must notify the IRS and generally file an amended return. Taxpayers often forget this requirement, especially when changes occur years after the original return. Set up a tracking system for foreign tax adjustments and contested liabilities. IRS.gov

Improper Expense Allocation

Improper allocation of expenses reduces your credit unnecessarily. The apportionment of interest expense, research and development costs, and other deductions between U.S. and foreign income follows specific regulatory methods. Misapplying these rules can artificially reduce your foreign source income, thereby lowering your credit limitation. Schedule H in the 2022 revision was specifically revamped to improve this calculation—make sure you understand the proper apportionment methodology.

Mismanaging Reference ID Numbers

Reference ID numbers cause confusion after corporate reorganizations. Form 1118 uses Reference ID numbers to track income and loss accounts across multiple years. After mergers, acquisitions, or reorganizations, corporations sometimes reuse ID numbers inappropriately or fail to properly correlate them, creating inconsistencies the IRS will question. Maintain a master list of Reference IDs and their meanings throughout corporate structure changes. IRS.gov

What Happens After You File

Once you file Form 1118 with your corporate tax return, the IRS processes it as part of your overall return. The foreign tax credit directly reduces your U.S. tax liability dollar-for-dollar (subject to the limitation), which typically results in a lower tax payment or larger refund than if you had taken foreign taxes as a deduction. IRS.gov

The IRS may select your return for examination, particularly if you're claiming significant foreign tax credits or have complex international transactions. During an audit, the IRS will request documentation proving you paid the foreign taxes and that they qualify as creditable taxes under U.S. law. This is why maintaining foreign tax receipts, foreign tax returns, and supporting calculations is crucial even though you don't attach them to Form 1118 initially.

If you claimed more credit than the limitation allows, any excess amount appears on Schedule K as a carryover. You can carry this excess back one year to offset prior-year taxes—which would require filing an amended return for that earlier year—or carry it forward for up to ten years (except for GILTI category taxes, which cannot be carried). Schedule K tracks these carryovers from year to year, and you'll reference it in future years when applying the carried amounts. IRS.gov

Foreign tax redeterminations trigger additional obligations. If anything changes about your foreign taxes—you pay a different amount than accrued, receive a refund, or the foreign country adjusts your tax—you must redetermine your U.S. tax liability. File Form 1120-X (Amended U.S. Corporation Income Tax Return) with a revised Form 1118 and the detailed supporting statement described in the instructions. The timing depends on when the redetermination occurs, but generally you must notify the IRS by filing the amended return within certain deadlines to avoid penalties.

Keep in mind that your foreign tax credit election remains in effect for subsequent years unless you affirmatively change it. If you elect the credit this year, you're generally locked into that choice going forward, though you retain the right to change to a deduction within the applicable statute of limitations period. IRS.gov

FAQs

Can I claim the foreign tax credit for taxes paid by my foreign subsidiary?

Yes, but only under specific circumstances. If your corporation owns shares in a controlled foreign corporation (CFC) and you have income inclusions under sections 951(a) (Subpart F income) or 951A (GILTI), you can claim a deemed paid credit under section 960 for your proportionate share of foreign taxes paid by the CFC. This requires careful calculation and additional schedules showing the deemed paid amounts. The taxes don't have to be actually distributed to you—the "deemed paid" mechanism allows the credit based on your ownership percentage and the income inclusion amount. IRS.gov

What if I originally deducted foreign taxes on my return instead of claiming the credit?

You can change your mind. The IRS allows you to switch from deduction to credit (or vice versa) within the special 10-year period described in section 6511(d)(3). To make the change, file an amended return (Form 1120-X) with Form 1118 attached. This flexibility is valuable because you might not know which method is more beneficial until later, or tax law changes might make the credit more attractive than when you originally filed. The reverse is also true—if you claimed the credit but a deduction would be better, you can amend within the section 6511(a) or (c) period to switch to a deduction. IRS.gov

Do I need to file Form 1118 even if my foreign taxes are less than the limitation?

Yes, if you're electing the credit. Any corporation electing the foreign tax credit under section 901 must complete and attach Form 1118, regardless of whether you have excess credits or how large your foreign tax amount is. Additionally, even if you're not claiming any credit at all, you must still file Schedules A and J if you have loss account activity (additions to, reductions of, or recapture of overall foreign losses, overall domestic losses, or separate limitation losses). Many corporations miss this requirement and incorrectly assume they don't need to file anything when they're not actively claiming a credit. IRS.gov

What happens if the foreign government refunds part of the taxes I claimed?

A foreign tax refund triggers a foreign tax redetermination. You must redetermine your U.S. tax liability for the year you claimed the original credit. This typically means filing an amended return (Form 1120-X) with a revised Form 1118 and Schedule L showing the redetermination. However, if the redetermination doesn't change your U.S. tax liability for any year—perhaps because you had excess credits you weren't using anyway—you don't need to file an amended return, though you must still report the redetermination on Schedule L in a later year. The key is to track these adjustments carefully because failing to notify the IRS of foreign tax redeterminations can result in penalties. IRS.gov

Are there foreign taxes that don't qualify for the credit?

Many types of foreign payments don't qualify. The credit generally applies only to income taxes, war profits taxes, and excess profits taxes. Beyond that, several categories are specifically excluded: taxes on mineral income subject to section 901(e) reduction; taxes related to boycott activities under section 908; taxes on income you exclude from U.S. gross income; taxes eligible for refund or credit by the foreign country but which you haven't pursued; soak-up taxes (designed solely to take advantage of the foreign tax credit); taxes on distributions from certain corporations with accumulated earnings covered by sections 959 and 960; and taxes disallowed under sections 901(g), 965(g), 245A, and other provisions. Additionally, the foreign levy must be a "tax" under U.S. standards—compulsory, not a payment for a specific economic benefit, and generally applicable. IRS.gov

How do I handle foreign taxes paid in a different year than when I report the income?

This depends on your accounting method. If you use the cash method, you claim the credit in the year you actually pay the tax. If you use the accrual method, you claim the credit when the foreign tax liability accrues under the all events test—generally when all events have occurred that fix your liability and you can determine the amount with reasonable accuracy. For accrued taxes, there's an important rule: if you don't pay the accrued amount within 24 months after the close of the tax year, you may lose the credit unless you meet certain exceptions. Also, if the amount you eventually pay differs from what you accrued, that's a foreign tax redetermination requiring an amended return in most cases. IRS.gov

Can I carry excess foreign tax credits to other years, and for how long?

Yes, with limitations. If your creditable foreign taxes exceed the foreign tax credit limitation for a year, you can carry the excess back one year and forward ten years within the same separate category. The carryback happens first—you'd file an amended return for the prior year to use the excess. Any amount that can't be absorbed in the carryback year carries forward. However, there's a critical exception: excess foreign taxes in the section 951A (GILTI) category cannot be carried back or carried forward at all. They must be used in the year they arise or you lose them forever. This makes tax planning particularly important for GILTI income. IRS.gov

This summary is based on the 2022 revision of Form 1118 and its instructions. For the most current information and detailed technical guidance, always refer to the latest Form 1118 instructions and related IRS publications available at IRS.gov.

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