Form 1118 (Rev. December 2020)
Purpose and Overview
Form 1118 calculates foreign tax credits for U.S. corporations with foreign-source income, applying separate category limitations per the Tax Cuts and Jobs Act structure. For 2020, the form incorporates Section 951A Global Intangible Low-Taxed Income calculations and reflects post-2017 foreign corporation tax year treatment under Section 960 regimes.
Filing Requirements and Category Identification
You must identify the applicable income category code and country classification before beginning the filing process. Enter the separate category code on line a of the income section header.
For 2020, corporations claiming credits on sanctioned country income under section 901(j) must report these separately using code “901j” and the applicable country code. No credit is allowed for foreign taxes paid or accrued to sanctioned countries, so you should not include these taxes in the total foreign tax credit calculation.
Schedule A: Reporting Foreign Corporations and Earnings
List each foreign corporation's name, EIN or reference ID, tax year end, country code, and functional currency on Schedule A. For branches that are qualified business units, use a separate Schedule A line for each such branch to report each branch's gross income and deductions. The 2020 instructions emphasize this distinction to align with section 987 tracking rules for proper foreign currency gain recognition.
Gross Foreign-Source Income Categories
Report gross foreign-source income by type on Schedule B, Part I, categorizing income into the following lines:
- Line 3: Inclusions under section 951(a)(1)
- Line 4: Dividends
- Line 5: Interest
- Line 6: Rents, royalties, and license fees
- Line 7: Sales income
- Line 8: Services income
- Line 9: Section 986(c) gain
- Line 10: Section 987 gain
- Line 11: Section 988 gain
- Line 12: Other income
For 2020, sections 986(c), 987, and 988 gains are separately reportable following the Tax Cuts and Jobs Act mechanics. You must enter gross-up amounts under section 78 in the designated column to properly account for deemed paid foreign taxes.
Schedule H: Deduction Allocation and Apportionment
Complete Schedule H, Part I, for research and experimental deductions using either the sales method or gross income method. You must allocate these deductions according to the regulations governing research expenses.
In 2020, the instructions require separate reporting for section 245A dividends in the apportionment process. Section 245A provides a dividends received deduction for qualifying foreign dividends from specified 10-percent-owned foreign corporations and is distinct from foreign-derived intangible income under section 250.
Schedule H Part II: Interest and Other Allocable Deductions
Select the asset valuation method on Schedule H, Part II, choosing between tax book value or alternative tax book value. Specify whether you classify as a nonfinancial corporation or a financial corporation for apportionment purposes. For 2020, Schedule H computations directly feed into Schedule B allocable deduction lines 14(a) through 14(h).
The form requires section 904(b)(4) adjustments on lines 5 and 6 of Schedule H. You must report these adjustments as negative amounts on Schedule B, Part II, line 8b to eliminate expenses allocated to section 245A dividends from the foreign tax credit limitation calculation.
These adjustments prevent double-deduction of expenses related to dividends eligible for the section 245A deduction.
Foreign Taxes Paid or Accrued
Report foreign taxes paid or accrued in Part I of Schedule B and attach a schedule showing foreign currency amounts and conversion rates used. For 2020, if you accrue taxes rather than use the cash-paid method, ensure the accrual date and payment date are clearly distinguished in the appropriate columns. You must enter deemed paid taxes under section 960 regimes from Schedules C, D, or E separately on line 2 of Part I, column 3.
Foreign Tax Credit Limitation Calculation
Calculate the separate foreign tax credit limitation per income category in Schedule B, Part II. Divide foreign-source income by total taxable income to obtain the limitation ratio, then multiply by U.S. income tax liability.
For 2020, line 12 applies to previously taxed earnings and profits distributions with attributable foreign taxes. The increase in limitation under section 960(c)(1) applies to distributions from foreign corporations with tax years beginning after December 31, 2017.
The increase in limitation under section 960(b)(1) applies to distributions from foreign corporations with tax years ending before January 1, 2018. Both pre-2018 and post-2017 tax years are eligible for this increase when a domestic corporation receives a previously taxed earnings and profits distribution.
Deemed Paid Credit Schedules
Complete the applicable deemed paid schedules if you hold stock in a controlled foreign corporation and received section 951(a)(1) inclusions or distributions:
- Schedule C: Section 951(a)(1) inclusions from post-2017 foreign corporate tax years
- Schedule D: Section 951A inclusions from post-2017 foreign corporate tax years
- Schedule E: Previously taxed earnings and profits distributions
- Schedule F-1: Dividends and inclusions from pre-2018 foreign corporate tax years
- Schedule F-2 and Schedule F-3: Deemed paid taxes for first-tier and lower-tier foreign corporations from pre-2018 tax years
Income Categorization and Separate Limitations
You must compute a separate foreign tax credit using a separate Form 1118 for each applicable separate category. The 2020 categories include Section 951A category income, foreign branch category income, passive category income, Section 901(j) income for each sanctioned country, income received by treaty, and general category income. Each category requires its own limitation calculation and cannot be combined with other categories.
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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.
