Instructions For Form 1118 - 2007 Page 3
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inventory, depreciable property, and
Taxes paid in lieu of income taxes as
taxes may be allowed a deduction for
certain intangible property sourced under
described in section 903 and Regulations
certain taxes for which a credit was not
section 865. This gross income will
section 1.903-1.
allowed. These include:
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generally be U.S.-source and therefore
Taxes for which the credit was denied
Some foreign taxes that are otherwise
will not be reported on Form 1118.
because of the boycott provisions of
eligible for the foreign tax credit must be
section 908.
reduced. These reductions are reported
The remaining lines of the foreign tax
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Certain taxes on foreign oil related
on Schedule G.
section of the Schedule K-1 are reported
income under section 907(b).
on Form 1118 as follows:
Note. A corporation may not claim a
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Certain taxes on the purchase or sale
foreign tax credit for foreign taxes paid to
Foreign gross income sourced at
of oil or gas (section 901(f)).
a foreign country that the corporation
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partnership level. Report on Schedule
Certain taxes used to provide subsidies
does not legally owe, including amounts
A.
(section 901(i)).
eligible for refund by the foreign country.
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Taxes paid to certain foreign countries
Deductions allocated and apportioned
If the corporation does not exercise its
for which a credit was denied under
at partner level and partnership level.
available remedies to reduce the amount
section 901(j).
Report on Schedule A or Schedule H.
of foreign tax to what it legally owes, a
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Certain taxes paid on dividends if the
credit is not allowed for the excess
Total foreign taxes paid or accrued.
minimum holding period is not met with
amount.
Report on Schedule B.
respect to the underlying stock, or if the
Foreign corporations. Foreign
corporation is obligated to make related
Reduction in taxes available for credit.
corporations are allowed (under section
payments with respect to positions in
Report on Schedule G.
906) a foreign tax credit for income, war
similar or related property (section
Capital Gains
profits, and excess profits taxes paid or
901(k)).
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accrued (or deemed paid under section
Certain taxes paid on gain and income
Foreign source taxable income or (loss)
902) to any foreign country or U.S.
other than dividends if the minimum
before adjustments in all separate
possession for income effectively
holding period is not met with respect to
categories in the aggregate should
connected with the conduct of a trade or
the underlying property, or if the
include gain from the sale or exchange of
business within the United States. The
corporation is obligated to make related
capital assets only up to the amount of
credit is not applicable, however, if a
payments with respect to positions in
foreign source capital gain net income
foreign country or U.S. possession
similar or related property (see section
(which is the smaller of capital gain net
imposes the tax on income from U.S.
901(l)).
income from sources outside the United
sources solely because the foreign
States or capital gain net income).
No Credit or Deduction
corporation was created or organized
Therefore, if the corporation has capital
No foreign tax credit (or deduction) is
under the law of the foreign country or
gain net income from sources outside the
allowed for certain taxes including:
U.S. possession or is domiciled there for
United States in excess of the capital gain
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Taxes on mineral income that were
tax purposes.
net income reported on its tax return,
reduced under section 901(e).
enter a pro rata portion of the net U.S.
The credit may not be taken against
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Certain taxes paid on distributions from
source capital loss as a negative number
any tax imposed on income not effectively
possessions corporations (section
on Schedule A, column 9(d) for each
connected with a U.S. business.
901(g)).
separate category with capital gain net
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In computing the foreign tax credit
Taxes on foreign oil and gas extraction
income from sources outside the United
limitation, the foreign corporation’s
income that were reduced under section
States. To figure the pro rata portion of
taxable income includes only the taxable
907(a).
the net U.S. source capital loss
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income that is effectively connected with
Taxes attributable to income excluded
attributable to a separate category,
the conduct of a trade or business within
under section 814(a) (relating to
multiply the net U.S. source capital loss
the United States.
contiguous country branches of domestic
by the amount of capital gain net income
A foreign corporation claiming a
life insurance companies).
from sources outside the United States in
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foreign tax credit will be treated as a
Taxes paid or accrued to a foreign
the separate category divided by the
domestic corporation in computing tax
country or U.S. possession with respect
aggregate amount of capital gain net
deemed paid (section 902(a)) and
to income excluded from gross income on
income from sources outside the United
dividend gross-up (section 78).
Form 8873, Extraterritorial Income
States in all separate categories with
Exclusion. However, see section 943(d)
capital gain net income from sources
Definition of foreign corporation for
for an exception for certain withholding
outside the United States.
purposes of the deemed paid credit.
taxes.
In computing the deemed paid credit on
See section 904(b)(2)(B) for special
Schedules C, D, and E, the term “foreign
Carryback and Carryforward of
rules regarding adjustments to account
corporation” includes:
Excess Foreign Taxes
for capital gain rate differentials (as
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A DISC or former DISC, but only for
defined in section 904(b)(3)(D)) for any
If the allowable foreign taxes paid,
dividends from the DISC or former DISC
tax year. At the time these instructions
accrued, or deemed paid in a tax year in
that are treated as income from sources
went to print, there was no capital gain
a separate category exceed the foreign
outside the United States and
rate differential for corporations.
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tax credit limitation for the tax year for that
A contiguous country life insurance
separate category, the excess may be:
branch that has made an election to be
Credit Limitations
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Carried back 1 year to offset taxes
treated as a foreign corporation under
imposed in the same category. (For
section 814(g).
Taxes Eligible for a Credit
excess foreign taxes arising in tax years
Credit or Deduction
beginning before October 23, 2004, the
Domestic corporations. Generally, a
excess may be carried back 2 years.)
A corporation may choose to take either a
domestic corporation may claim a foreign
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Carried forward 10 years to offset taxes
credit or a deduction for eligible foreign
tax credit (subject to the limitation of
imposed in the same category (5 years
taxes paid or accrued. The choice is
section 904) for the following taxes:
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for excess foreign taxes which may be
made annually. Generally, if a corporation
Income, war profits, and excess profits
carried only to tax years ending before
elects the benefits of the foreign tax credit
taxes (defined in Regulations section
October 23, 2004).
for any tax year, no portion of the foreign
1.901-2(a)) paid or accrued during the tax
taxes will be allowed as a deduction in
year to any foreign country or U.S.
The excess is applied first to the
that year or any subsequent tax year.
possession;
earliest of the years to which it may be
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Taxes deemed paid under sections 902
Exceptions. However, a corporation
carried, then to the next earliest year, etc.
and 960; and
that elects the credit for eligible foreign
The corporation may not carry a credit to
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