Instructions For Form 1118 (Rev. December 2015) (Page 3 of 12) in pdf

information, use the rules below to report

tax credit (subject to the limitation of

A contiguous country life insurance

that information on Form 1118.

section 904) for the following taxes:

branch that has made an election to be

Income, war profits, and excess profits

treated as a foreign corporation under

Gross income sourced at partner level.

taxes (defined in Regulations section

section 814(g).

This includes income from the sale of

1.901-2(a)) paid or accrued during the tax

Credit or Deduction

most personal property other than

year to any foreign country or U.S.

inventory, depreciable property, and

A corporation may choose to take either a

possession;

certain intangible property sourced under

credit or a deduction for eligible foreign

Taxes deemed paid under sections 902

section 865. This gross income will

taxes paid or accrued. The choice is made

and 960; and

generally be U.S.-source and therefore

annually. Generally, if a corporation elects

Taxes paid in lieu of income taxes as

will not be reported on Form 1118.

the benefits of the foreign tax credit for any

described in section 903 and Regulations

The remaining lines of the foreign tax

tax year, no portion of the foreign taxes

section 1.903-1.

section of the Schedule K-1 are reported

will be allowed as a deduction in that year

Some foreign taxes that are otherwise

on Form 1118 as follows:

or any subsequent tax year.

eligible for the foreign tax credit must be

Foreign gross income sourced at part-

reduced. These reductions are reported

Exceptions. However, a corporation that

nership level. Report on Schedule A.

on Schedule G.

elects the credit for eligible foreign taxes

may be allowed a deduction for certain

Deductions allocated and apportioned

Note. A corporation may not claim a

taxes for which a credit was not allowed.

at partner level and partnership level.

foreign tax credit for foreign taxes paid to a

These include:

Report on Schedule A or Schedule H.

foreign country that the corporation does

Taxes for which the credit was denied

Total foreign taxes paid or accrued.

not legally owe, including amounts eligible

because of the boycott provisions of

Report on Schedule B.

for refund by the foreign country. If the

section 908.

corporation does not exercise its available

Certain taxes on the purchase or sale of

Reduction in taxes available for credit.

remedies to reduce the amount of foreign

oil or gas (section 901(f)).

Report on Schedule G.

tax to what it legally owes, a credit is not

Certain taxes used to provide subsidies

Capital Gains

allowed for the excess amount.

(section 901(i)).

Foreign source taxable income or (loss)

Taxes paid to certain foreign countries

Foreign corporations. Foreign

before adjustments in all separate

for which a credit was denied under

corporations are allowed (under section

categories in the aggregate should include

section 901(j).

906) a foreign tax credit for income, war

gain from the sale or exchange of capital

Certain taxes paid on dividends if the

profits, and excess profits taxes paid or

assets only up to the amount of foreign

minimum holding period is not met with

accrued (or deemed paid under section

source capital gain net income (which is

respect to the underlying stock, or if the

902) to any foreign country or U.S.

the smaller of capital gain net income from

corporation is obligated to make related

possession for income effectively

sources outside the United States or

payments with respect to positions in

connected with the conduct of a trade or

capital gain net income). Therefore, if the

similar or related property (section 901(k)).

business within the United States. The

corporation has capital gain net income

Certain taxes paid on gain and income

credit is not applicable, however, if a

from sources outside the United States in

other than dividends if the minimum

foreign country or U.S. possession

excess of the capital gain net income

holding period is not met with respect to

imposes the tax on income from U.S.

reported on its tax return, enter a pro rata

the underlying property, or if the

sources solely because the foreign

portion of the net U.S. source capital loss

corporation is obligated to make related

corporation was created or organized

as a negative number on Schedule A,

payments with respect to positions in

under the law of the foreign country or

column 9(d) for each separate category

similar or related property (see section

U.S. possession or is domiciled there for

with capital gain net income from sources

901(l)).

tax purposes.

outside the United States. To figure the

In the case of a covered asset

The credit may not be taken against

pro rata portion of the net U.S. source

acquisition (as defined in section 901(m)

any tax imposed on income not effectively

capital loss attributable to a separate

(2)), the disqualified portion of any tax

connected with a U.S. business.

category, multiply the net U.S. source

determined with respect to the income or

In computing the foreign tax credit

capital loss by the amount of capital gain

gain attributable to the relevant foreign

limitation, the foreign corporation's taxable

net income from sources outside the

assets (section 901(m)). Note. This rule

income includes only the taxable income

United States in the separate category

generally applies to covered asset

that is effectively connected with the

divided by the aggregate amount of capital

acquisitions after December 31, 2010.

conduct of a trade or business within the

gain net income from sources outside the

No Credit or Deduction

United States.

United States in all separate categories

with capital gain net income from sources

A foreign corporation claiming a foreign

No foreign tax credit (or deduction) is

outside the United States.

tax credit will be treated as a domestic

allowed for certain taxes including:

corporation in computing tax deemed paid

Taxes on mineral income that were

See section 904(b)(2)(B) for special

(section 902(a)) and dividend gross-up

reduced under section 901(e).

rules regarding adjustments to account for

(section 78).

Certain taxes paid on distributions from

capital gain rate differentials (as defined in

possessions corporations (section

Definition of foreign corporation for

section 904(b)(3)(D)) for any tax year. At

901(g)).

purposes of the deemed paid credit. In

the time these instructions went to print,

Taxes on combined foreign oil and gas

computing the deemed paid credit on

there was no capital gain rate differential

income that were reduced under section

Schedules C, D, and E, the term “foreign

for corporations.

907(a).

corporation” includes:

Taxes attributable to income excluded

Credit Limitations

A DISC or former DISC, but only for

under section 814(a) (relating to

dividends from the DISC or former DISC

contiguous country branches of domestic

Taxes Eligible for a Credit

that are treated as income from sources

life insurance companies).

outside the United States and

Domestic corporations. Generally, a

Taxes paid or accrued to a foreign

domestic corporation may claim a foreign

country or U.S. possession with respect to

Instructions for Form 1118 (2015)

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Instructions For Form 1118 (Rev. December 2015) Page 3

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