Instructions For Form 1118 - (Rev. December 2009)

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Department of the Treasury
Instructions for Form 1118
Internal Revenue Service
(Rev. December 2009)
Foreign Tax Credit—Corporations
Part III; Schedule H; and Schedule J only
certain passive foreign investment
Section references are to the Internal
once.
companies).
Revenue Code unless otherwise noted.
Use Schedule A to compute the
Passive income does not include:
corporation’s income or loss before
Any financial services income that is
What’s New for 2009
adjustments for each applicable category
general category income (see General
of income.
Category Income on page 2),
Schedule K (Form 1118), Foreign Tax
Use Schedule B to determine the total
Any export financing interest unless it is
Carryover Reconciliation Schedule, is
foreign tax credit after certain limitations.
also related person factoring income (see
new. Use this schedule to reconcile the
Use Schedule C to compute taxes
section 904(d)(2)(G) and Temporary
corporation’s prior year foreign tax
deemed paid by the domestic corporation
Regulations section 1.904-4T(h)(3)),
carryover with its current year foreign tax
filing the return.
Any high-taxed income (see General
carryover. This new schedule replaces
Use Schedules D and E to compute
Category Income on page 2 and the
the previous attachment requirement for
taxes deemed paid by lower-tier foreign
instructions for Schedule A, on page 5),
Schedule B, line 5.
corporations.
or
Use Schedule F to report gross
Any active rents or royalties. See
income and definitely allocable
Temporary Regulations section
General Instructions
deductions from foreign branches.
1.904-4T(b)(2)(iii) for definitions and
Use Schedule G to report required
exceptions.
reductions of tax paid, accrued, or
Purpose of Form
Note. Certain income received from a
deemed paid.
CFC and certain dividends from a 10/50
Use Form 1118 to compute a
Use Schedule H to apportion
corporation that would otherwise be
corporation’s foreign tax credit for certain
deductions that cannot be definitely
passive income may be assigned to
taxes paid or accrued to foreign countries
allocated to some item or class of income.
another separate category under the
or U.S. possessions. See Taxes Eligible
Use Schedule I (a separate schedule)
look-through rules. See Look-Through
for a Credit on page 3.
to compute reductions of taxes paid,
Rules on page 2.
accrued, or deemed paid on foreign oil
Who Must File
and gas extraction income.
Specified passive category income.
Use Schedule J (a separate schedule)
Any corporation that elects the benefits of
This term includes:
to compute adjustments to separate
the foreign tax credit under section 901
Dividends from a DISC or former DISC
limitation income or losses in determining
must complete and attach Form 1118 to
(as defined in section 992(a)) to the
the numerators of limitation fractions,
its income tax return.
extent such dividends are treated as
year-end recharacterization balances,
foreign source income, and
When to Make the Election
and overall foreign and domestic loss
Distributions from a former FSC out of
account balances.
earnings and profits attributable to foreign
The election to claim the foreign tax credit
Use Schedule K (a separate schedule)
trade income or interest or carrying
(or a deduction in lieu of a credit) for any
to reconcile the corporation’s prior year
charges (as defined in section 927(d)(1),
tax year may be made or changed at any
foreign tax carryover with its current year
before its repeal) derived from a
time before the end of a special 10-year
foreign tax carryover.
transaction which results in foreign trade
period described in section 6511(d)(3) (or
income (as defined in section 932(b),
section 6511(c) if the period is extended
Categories of Income
before its repeal).
by agreement).
Compute a separate foreign tax credit for
Section 901(j) Income
Computer-Generated
each applicable separate category
No credit is allowed for foreign taxes
described below.
Form 1118
imposed by and paid or accrued to certain
Passive Category Income
sanctioned countries. However, income
The corporation may submit a
derived from each such country is subject
Passive category income includes
computer-generated Form 1118 and
to a separate foreign tax credit limitation.
passive income and specified passive
schedules if they conform to the IRS
Therefore, the corporation must use a
category income.
version. However, if a software program
separate Form 1118 for income derived
is used, it must be approved by the IRS
Passive income. Generally, passive
from each such country. On each Form
for use in filing substitute forms. This
income is:
1118, check the box for section 901(j)
ensures the proper placement of each
Any income received or accrued that
income at the top of page 1 and identify
item appearing on the IRS version. For
would be foreign personal holding
the applicable country in the space
more information, see Pub. 1167, General
company income (defined in section
provided.
Rules and Specifications for Substitute
954(c)) if the corporation were a
Forms and Schedules.
controlled foreign corporation (CFC)
Sanctioned countries are those
(defined in section 957). This includes
designated by the Secretary of State as
How To Complete
any gain on the sale or exchange of stock
countries that repeatedly provide support
that is more than the amount treated as a
for acts of international terrorism,
Form 1118
dividend under section 1248. However, in
countries with which the United States
Important. Complete a separate
determining if any income would be
does not have diplomatic relations, or
Schedule A; Schedule B, Parts I & II;
foreign personal holding company
countries whose governments are not
Schedules C through G; Schedule I; and
income, the rules of section 864(d)(6) will
recognized by the United States. As of
Schedule K for each applicable separate
apply only for income of a CFC.
the date these instructions were revised,
category of income. See Categories of
Any amount includible in gross income
section 901(j) applied to income derived
Income below. Complete Schedule B,
under section 1293 (which relates to
from Cuba, Iran, North Korea, Sudan, and
Cat. No. 10905I

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