Instructions For Form 1118 - 2007 (Page 6 of 12) in pdf

certain amounts as active financing

subsequent tax years on the same basis.

Line 5. If the corporation participates in

income that are not listed in Regulations

Also, the credits are subject to the

or cooperates with an international

sections 1.904-4(e)(2)(i)(A) through (X),

redetermination provisions of section

boycott, the foreign tax credit may be

but that are described as similar items in

905(c). See page 4 for details.

reduced. Complete Form 5713,

Regulations section 1.904-4(e)(2)(i)(Y),

International Boycott Report. If the

Column 2(d). Include foreign taxes paid

attach a statement to Form 1118 showing

corporation chooses to apply the

or accrued on foreign branch taxable

the types and amounts of the similar

international boycott factor to calculate

income to which the rules of section

items.

the reduction in the credit, enter the

863(b) apply.

amount from line 2a(3) of Schedule C

Column 11. Enter the corporation’s net

Note. Do not include these overlapping

(Form 5713) on line 5.

operating loss as defined in section 172

amounts in column 2(e).

that is attributable to foreign source

Part II—Separate Foreign Tax

income in the separate limitation

Schedules C, D, and E

category. If the net operating loss is part

Credit

If the corporation is a partner in a

of an overall foreign loss, see Temporary

Line 4. Enter the total amount of foreign

partnership, for taxes of foreign

Regulations section 1.904(g)-3T for

taxes carried forward or back to the

corporations for tax years beginning after

allocation rules that apply in determining

current year (see page 3 for general

October 22, 2004, stock owned directly or

the amount to enter in column 11.

rules). Include all taxes carried forward,

indirectly, by or for a partnership shall be

It is not necessary to report the NOL

whether or not such taxes are used.

considered as being owned

adjustment on a per-country basis. See

Attach a schedule reconciling the prior

proportionately by its partners. See

the instructions for Schedule A on page 5.

year’s carryover with this year’s

section 902(c)(7).

carryover, identifying carrybacks and any

other adjustments.

Schedule C

Schedule B

Line 5. If the corporation is reclassifying

Part I—Dividends and Deemed

high-taxed income from passive category

Part I—Foreign Taxes Paid,

Inclusions From Post-1986

income to general category income,

Accrued, and Deemed Paid

include the related tax adjustment in the

Undistributed Earnings

Report only foreign taxes paid, accrued,

line 5 total. Enter on the dotted line to the

Column 1. Enter the name of the foreign

or deemed paid for the separate category

left of the entry space for line 5 “HTKO”

corporation (or DISC or former DISC)

for which this Form 1118 is being

and the amount of the tax adjustment.

whose earnings were distributed to, or

completed. Report all amounts in U.S.

Indicate whether adjustment is positive or

included in income by, the domestic

dollars. If the corporation must convert

(negative). See General Category Income

corporation filing the return.

from foreign currency, attach a schedule

on page 2 for additional information.

showing the amounts in foreign currency

Column 2. Enter the year and month in

Line 6. If the corporation has a current

and the exchange rate used.

which the foreign corporation’s U.S. tax

year overall domestic loss or, in any of its

year ended.

For corporations claiming the credit on

separate categories, a current year

the accrual basis, the exchange rate for

Example. When figuring foreign taxes

separate limitation loss, an overall

translating foreign taxes into U.S. dollars

deemed paid in 2007 by a calendar year

domestic loss or an overall foreign loss,

will generally be an average exchange

domestic corporation with respect to

recapture of an overall foreign loss, or

rate for the tax year to which the taxes

dividends and inclusions out of post-1986

current year separate limitation income in

relate. However, the exchange rate on the

undistributed earnings for the foreign

a category in which it has a beginning

date of payment must be used if the

corporation’s tax year that ended June

balance of income that must be

foreign taxes (a) are paid more than 2

30, 2007, enter “0706.”

recharacterized, adjustments must be

years after the close of the tax year to

made. See the separate instructions for

Column 4. Enter the distributing

which they relate or (b) are paid in a tax

Schedule J to determine if that schedule

corporation’s post-1986 undistributed

year prior to which they relate. In addition,

must be filed.

earnings pool for the separate category

for tax years beginning after December

for which the schedule is being

Line 7b. Enter taxable income that

31, 2004, taxpayers may elect to use the

completed. Generally, this amount is the

should not be taken into account in

exchange rate on the date of payment.

corporation’s E&P (computed in the

computing the foreign tax credit limitation.

Taxpayers may elect to use the payment

corporation’s functional currency

Line 8. Divide line 6 by line 7c to

date exchange rates for all creditable

according to sections 964(a) and 986)

determine the limitation fraction. Enter the

foreign income taxes or only those taxes

accumulated in tax years beginning after

fraction on line 8 as a decimal with the

that are attributable to qualified business

1986, determined as of the close of the

same number of places as the number of

units with U.S. dollar functional

corporation’s tax year without reduction

digits to the left of the decimal in adjusted

currencies. The election is made by

for any earnings distributed or otherwise

taxable income on line 7c. For example, if

attaching a statement to a timely-filed

included in income (that is, under section

adjusted taxable income on line 7c is

(including extensions) Form 1118 that

304, 367(b), 951(a), 1248, or 1293)

$100,000, compute the limitation fraction

indicates the corporation is making the

during the current tax year.

to 6 decimal places.

election under section 986(a)(1)(D). Once

Post-1986 undistributed earnings are

made, the election applies for all

Line 10. The limitation may be increased

reduced to account for distributions or

subsequent tax years and is revocable

under section 960(b) for any tax year that

deemed distributions that reduced E&P

only with the consent of the IRS. See

the corporation receives a distribution of

and inclusions that resulted in previously

section 986(a).

previously taxed E&P. See section

taxed amounts described in section

960(b).

Column 1. Claim the foreign tax credit

959(c)(1) and (2) or section 1293(c) in

for the tax year in which the taxes were

prior tax years beginning after 1986. See

Part III—Summary of Separate

paid or accrued, depending on the

Regulations section 1.902-1(a)(9). Also,

Credits

method of accounting used. If a credit for

see section 902(c)(3) and Regulations

taxes accrued is claimed, show both the

Complete Part III only once. Enter on

section 1.902-1(a)(13) for special rules

date accrued and the date paid (if paid).

lines 1 through 3 the separate foreign tax

treating earnings accumulated in

credits from Part II, line 11, for each

If the cash method of accounting is

post-1986 years as pre-1987

applicable separate category.

used, an election under section 905(a)

accumulated profits when no U.S.

may be made to claim the credit based on

Note. Complete Part III only on the Form

shareholder was eligible to claim a

accrued taxes. If this election is made,

1118 with the largest amount entered on

section 902 credit with respect to taxes

figure the foreign tax credit for all

Part II, line 11.

paid by the foreign corporation.

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Instructions For Form 1118 - 2007 Page 6

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