Instructions For Form 1118 - 2004 Page 3
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12Certain amounts paid by a U.S.
for capital gain rate differentials (as
A foreign corporation claiming a
corporation to a related corporation.
defined in section 904(b)(3)(D)) for any
foreign tax credit will be treated as a
Look-through rules also apply to foreign
tax year. At the time these instructions
domestic corporation in computing tax
source interest, rents, and royalties paid
went to print, there was no capital gain
deemed paid (section 902(a)) and
by a U.S. corporation to a related
rate differential for corporations.
dividend gross-up (section 78).
corporation. See Regulations section
Definition of foreign corporation for
Coordination with Section 936
1.904-5(g).
purposes of the deemed paid credit. In
In computing the foreign tax credit
Certain transfers of intangible
computing the deemed paid credit on
limitation, exclude from taxable income
property. See section 367(d)(2)(C) for a
Schedules C, D, and E, the term “foreign
any income taken into account in
rule that clarifies the treatment of certain
corporation” includes:
•
computing the possessions corporation
transfers of intangible property.
A DISC or former DISC, but only for
tax credit under section 936 (without
dividends from the DISC or former DISC
Reporting Foreign Tax
regard to sections 936(a)(4) and 936(i)) or
that are treated as income from sources
Information From Partnerships
section 30A.
outside the United States and
•
If you received a Schedule K-1 from a
A contiguous country life insurance
Credit Limitations
partnership that includes foreign tax
branch that has made an election to be
information, use the rules below to report
treated as a foreign corporation under
Taxes Eligible for a Credit
that information on Form 1118.
section 814(g).
Gross income sourced at partner level.
Credit or Deduction
Domestic corporations. Generally, a
This includes income from the sale of
domestic corporation can claim a foreign
A corporation may choose to take either a
most personal property other than
tax credit (subject to the limitation of
credit or a deduction for eligible foreign
inventory, depreciable property, and
section 904) for the following taxes:
taxes paid or accrued. The choice is
•
certain intangible property sourced under
Income, war profits, and excess profits
made annually. Generally, if a corporation
section 865. This gross income will
taxes (defined in Regulations section
elects the benefits of the foreign tax credit
generally be U.S.-source and therefore
1.901-2(a)) paid or accrued during the tax
for any tax year, no portion of the foreign
will not be reported on Form 1118.
year to any foreign country or U.S.
taxes will be allowed as a deduction in
possession;
The remaining lines of the foreign tax
that year or any subsequent tax year.
•
Taxes deemed paid under sections 902
section of the Schedule K-1 are reported
Exceptions. However, a corporation
and 960; and
on Form 1118 as follows:
•
that elects the credit for eligible foreign
Taxes paid in lieu of income taxes as
Foreign gross income sourced at
taxes may be allowed a deduction for
described in section 903 and Regulations
partnership level.
certain taxes for which a credit was not
section 1.903-1.
Report on Schedule A.
allowed. These include:
•
Some foreign taxes that are otherwise
Taxes for which the credit was denied
Deductions allocated and apportioned
eligible for the foreign tax credit must be
because of the boycott provisions of
at partner level and partnership level.
reduced. These reductions are reported
section 908.
Report on Schedule A or Schedule H.
•
on Schedule G.
Certain taxes on foreign oil related
Total foreign taxes paid or accrued.
income under section 907(b).
Report on Schedule B.
Note. A corporation may not claim a
•
Certain taxes on the purchase or sale
foreign tax credit for foreign taxes paid to
Reduction in taxes available for credit.
of oil or gas (section 901(f)).
a foreign country that the corporation
•
Report on Schedule G.
Certain taxes used to provide subsidies
does not legally owe, including amounts
(section 901(i)).
Capital Gains
eligible for refund by the foreign country.
•
Taxes paid to certain foreign countries
If the corporation does not exercise its
Foreign source taxable income or (loss)
for which a credit was denied under
available remedies to reduce the amount
before adjustments in all separate
section 901(j).
of foreign tax to what it legally owes, a
categories in the aggregate should
•
Certain taxes paid on dividends if the
credit is not allowed for the excess
include gain from the sale or exchange of
minimum holding period is not met with
amount.
capital assets only up to the amount of
respect to the underlying stock, or if the
foreign source capital gain net income
Foreign corporations. Foreign
corporation is obligated to make related
(which is the smaller of capital gain net
corporations are allowed (under section
payments with respect to positions in
income from sources outside the United
906) a foreign tax credit for income, war
similar or related property (section
States or capital gain net income).
profits, and excess profits taxes paid or
901(k)).
Therefore, if the corporation has capital
•
accrued (or deemed paid under section
Certain taxes paid on gain and income
gain net income from sources outside the
902) to any foreign country or U.S.
other than dividends if the minimum
United States in excess of the capital gain
possession for income effectively
holding period is not met with respect to
net income reported on its tax return,
connected with the conduct of a trade or
the underlying property, or if the
enter a pro rata portion of the net U.S.
business within the United States. The
corporation is obligated to make related
source capital loss as a negative number
credit is not applicable, however, if a
payments with respect to positions in
on Schedule A, column 9(d) for each
foreign country or U.S. possession
similar or related property (see section
separate category with capital gain net
imposes the tax on income from U.S.
901(l)).
income from sources outside the United
sources solely because the foreign
No Credit or Deduction
States. To figure the pro rata portion of
corporation was created or organized
the net U.S. source capital loss
under the law of the foreign country or
No foreign tax credit (or deduction) is
attributable to a separate category,
U.S. possession or is domiciled there for
allowed for certain taxes including:
•
multiply the net U.S. source capital loss
tax purposes.
Taxes on mineral income that were
by the amount of capital gain net income
reduced under section 901(e).
The credit cannot be taken against any
•
from sources outside the United States in
Certain taxes paid on distributions from
tax imposed on income not effectively
the separate category divided by the
possessions corporations (section
connected with a U.S. business.
aggregate amount of capital gain net
901(g)).
•
income from sources outside the United
In computing the foreign tax credit
Taxes attributable to foreign trade
States in all separate categories with
limitation, the foreign corporation’s
income (other than section 923(a)(2)
capital gain net income from sources
taxable income includes only the taxable
non-exempt income) distributed to a
outside the United States.
income that is effectively connected with
shareholder of a FSC (section 901(h)).
•
See section 904(b)(2)(B) for special
the conduct of a trade or business within
Taxes of a FSC on foreign trade
rules regarding adjustments to account
the United States.
income (section 906(b)(5)).
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