Instructions For Form 1118 - (Rev. December 2009) (Page 3 of 13) in pdf

foreign source capital gain net income

credit is not applicable, however, if a

similar or related property (see section

(which is the smaller of capital gain net

foreign country or U.S. possession

901(l)).

income from sources outside the United

imposes the tax on income from U.S.

No Credit or Deduction

States or capital gain net income).

sources solely because the foreign

No foreign tax credit (or deduction) is

Therefore, if the corporation has capital

corporation was created or organized

allowed for certain taxes including:

gain net income from sources outside the

under the law of the foreign country or

•

Taxes on mineral income that were

United States in excess of the capital gain

U.S. possession or is domiciled there for

reduced under section 901(e).

net income reported on its tax return,

tax purposes.

•

Certain taxes paid on distributions from

enter a pro rata portion of the net U.S.

The credit may not be taken against

possessions corporations (section

source capital loss as a negative number

any tax imposed on income not effectively

901(g)).

on Schedule A, column 9(d) for each

connected with a U.S. business.

•

Taxes on combined foreign oil and gas

separate category with capital gain net

In computing the foreign tax credit

income that were reduced under section

income from sources outside the United

limitation, the foreign corporation’s

907(a).

States. To figure the pro rata portion of

•

taxable income includes only the taxable

Taxes attributable to income excluded

the net U.S. source capital loss

income that is effectively connected with

under section 814(a) (relating to

attributable to a separate category,

the conduct of a trade or business within

contiguous country branches of domestic

multiply the net U.S. source capital loss

the United States.

life insurance companies).

by the amount of capital gain net income

•

Taxes paid or accrued to a foreign

from sources outside the United States in

A foreign corporation claiming a

country or U.S. possession with respect

the separate category divided by the

foreign tax credit will be treated as a

to income excluded from gross income on

aggregate amount of capital gain net

domestic corporation in computing tax

Form 8873, Extraterritorial Income

income from sources outside the United

deemed paid (section 902(a)) and

Exclusion. However, see section 943(d)

States in all separate categories with

dividend gross-up (section 78).

for an exception for certain withholding

capital gain net income from sources

Definition of foreign corporation for

taxes.

outside the United States.

purposes of the deemed paid credit.

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

Carryback and Carryforward of

In computing the deemed paid credit on

rules regarding adjustments to account

Excess Foreign Taxes

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

for capital gain rate differentials (as

corporation” includes:

If the allowable foreign taxes paid,

defined in section 904(b)(3)(D)) for any

•

A DISC or former DISC, but only for

accrued, or deemed paid in a tax year in

tax year. At the time these instructions

dividends from the DISC or former DISC

a separate category exceed the foreign

went to print, there was no capital gain

that are treated as income from sources

tax credit limitation for the tax year for that

rate differential for corporations.

outside the United States and

separate category, the excess may be:

•

A contiguous country life insurance

Carried back 1 year to offset taxes

Credit Limitations

branch that has made an election to be

imposed in the same category.

•

treated as a foreign corporation under

Carried forward 10 years to offset taxes

Taxes Eligible for a Credit

section 814(g).

imposed in the same category (5 years

for excess foreign taxes which may be

Domestic corporations. Generally, a

Credit or Deduction

carried only to tax years ending before

domestic corporation may claim a foreign

A corporation may choose to take either a

October 23, 2004).

tax credit (subject to the limitation of

credit or a deduction for eligible foreign

section 904) for the following taxes:

The excess is applied first to the

•

taxes paid or accrued. The choice is

Income, war profits, and excess profits

earliest of the years to which it may be

made annually. Generally, if a corporation

taxes (defined in Regulations section

carried, then to the next earliest year, etc.

elects the benefits of the foreign tax credit

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

The corporation may not carry a credit to

for any tax year, no portion of the foreign

year to any foreign country or U.S.

a tax year for which it claimed a

taxes will be allowed as a deduction in

possession;

deduction, rather than a credit, for foreign

•

that year or any subsequent tax year.

Taxes deemed paid under sections 902

taxes paid or accrued. Furthermore, the

and 960; and

Exceptions. However, a corporation

corporation must reduce the amount of

•

Taxes paid in lieu of income taxes as

that elects the credit for eligible foreign

any carryback or carryforward by the

described in section 903 and Regulations

taxes may be allowed a deduction for

amount it would have used if it had

section 1.903-1.

certain taxes for which a credit was not

chosen to claim a credit rather than a

allowed. These include:

deduction in that tax year. See section

Some foreign taxes that are otherwise

•

Taxes for which the credit was denied

904(c) and Regulations section 1.904-2

eligible for the foreign tax credit must be

because of the boycott provisions of

for more details.

reduced. These reductions are reported

section 908.

on Schedule G.

How to claim the excess credit. If the

•

Certain taxes on the purchase or sale

corporation is carrying back the excess

Note. A corporation may not claim a

of oil or gas (section 901(f)).

credit to an earlier year, file an amended

foreign tax credit for foreign taxes paid to

•

Certain taxes used to provide subsidies

tax return with a revised Form 1118 and

a foreign country that the corporation

(section 901(i)).

schedules (including a revised Schedule

does not legally owe, including amounts

•

Taxes paid to certain foreign countries

K (Form 1118)).

eligible for refund by the foreign country.

for which a credit was denied under

If the corporation does not exercise its

Special rules apply to:

section 901(j).

•

available remedies to reduce the amount

•

The carryback and carryover of foreign

Certain taxes paid on dividends if the

of foreign tax to what it legally owes, a

taxes paid or accrued on combined

minimum holding period is not met with

credit is not allowed for the excess

foreign oil and gas income or related

respect to the underlying stock, or if the

amount.

taxes (see section 907(f)) and

corporation is obligated to make related

•

An excess foreign tax credit for which

Foreign corporations. Foreign

payments with respect to positions in

an excess limitation account was

corporations are allowed (under section

similar or related property (section

established under section 960(b)(2).

906) a foreign tax credit for income, war

901(k)).

•

profits, and excess profits taxes paid or

Certain taxes paid on gain and income

Special rules for carryforwards of

accrued (or deemed paid under section

other than dividends if the minimum

pre-2007 unused foreign taxes. The

902) to any foreign country or U.S.

holding period is not met with respect to

foreign taxes carried forward generally

possession for income effectively

the underlying property, or if the

are allocated to the post-2006 separate

connected with the conduct of a trade or

corporation is obligated to make related

categories to which those taxes would

business within the United States. The

payments with respect to positions in

have been allocated if the taxes were

-3-

Instructions For Form 1118 - (Rev. December 2009) Page 3

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