Form 1118: Your Guide to The Foreign Tax Credit for Corporations

For American taxpayers with ownership in corporations that pay taxes abroad, Form 1118 is often one of the most valuable tools to minimize taxes.

By claiming the Foreign Tax Credit (FTC), corporations receive dollar-for-dollar US tax credits on any foreign income taxes the entity has paid.

Essentially, this allows a deduction of what they’ve paid in foreign income taxes from the US tax bill. To claim the FTC as an individual filer, you’ll file Form 1116. But to claim it on foreign corporate taxes, you’ll file Form 1118.

Form 1118 is notoriously complex.

In fact, the IRS estimates that it takes about 25 hours to complete. Fortunately, as a US expat-specific tax firm, we’re familiar with Form 1118 and here to walk you through it: what it is, who should file it, how to complete it, and more.

What is Form 1118?

Form 1118 is the form corporations that report income to the IRS and pay foreign corporate taxes can file to receive dollar-for-dollar US corporate tax credits. By filing Form 1118, you can often significantly reduce or eliminate the US corporate tax burden. 

If you live in one of the many countries with a higher corporate tax rate than the US, you can even receive surplus credits to use on past or future tax bills.

Remember that Form 1118 is voluntary, not compulsory — so there are no penalties for not filing it. Still, for many US expats who hold shares in corporations subject to US tax, it can be a very valuable tax strategy.

Who should file Form 1118?

To be eligible for Form 1118’s benefits, you must:

• Be subject to US corporate taxes
• Have corporate income taxes paid or accrued to foreign countries or US possessions
  • Note: In some cases, taxes related to corporate income (such as certain foreign withholding taxes) may qualify for the FTC. However, you may not claim VAT and other foreign sales taxes on Form 1118
• Be able to provide official documentation of foreign income taxes paid

Types of businesses that can typically benefit from Form 1118 include:

• Corporations registered in both the US and a foreign country (multinational companies)
• US-registered corporations that operate in a foreign country
• Foreign subsidiaries or branches of US corporations

A few situations in which it may not make sense to file Form 1118 include:

• Holding shares in a US-registered corporation that isn’t registered abroad and doesn’t incur foreign corporate taxes
• Holding shares in a foreign-registered corporation that isn’t registered in the US and doesn’t attract US corporate taxes
• Not having official documentation of foreign taxes paid
• Having foreign income exempted from US taxation through a different tax treaty or break
• Paying so little in foreign corporate income taxes that the administrative burden of filing Form 1118 outweighs the potential benefits of it
  • This may occur if you operate or incur taxes in a country with no (or an extremely low) corporate income tax rate

How to complete Form 1118

The latest version of Form 1118 comes in at a whopping 12 pages, with various sections:

General information

For inputting basic information like the date, name of your corporation, and Employer Identification Number (EIN). 

Keep in mind that you will need to fill out a different Form 1118 for each category of income:

• Section 951A Category Income (951A)
• Foreign Branch Category Income (FB)
• Passive Category Income (PAS)
• Section 901(j) Income (901j)
• U.S. Source Passive Category Income Resourced by Treaty as Foreign Source Passive Category Income (RBT PAS)
• U.S. Source General Category Income Resourced by Treaty as Foreign Source General Category Income (RBT GEN)
• U.S. Source Foreign Branch Income Resourced by Treaty as Foreign Source Foreign Branch Category Income (RBT FB)
• U.S. Source Section 951A Category Income Resourced by Treaty as Foreign Source Section 951A Category Income (RBT 951A)
• General Category Income (GEN)

Schedule A: Income or (Loss) Before Adjustments

Report and total your gross foreign income or losses across different sources and your allocable deductions and expenses. This helps determine total corporate foreign income, against which you’ll claim foreign tax credits.

Schedule B: Foreign Tax Credit

Part I—Foreign Taxes Paid, Accrued, and Deemed Paid

Report and total the foreign taxes your corporation has paid or accrued across different categories.

Part II—Separate Foreign Tax Credit

 

Total the foreign taxes your corporation has paid or accrued for each income category.

Part III—Summary of Separate Credits

Add all of the allowable tax credits for each category of income to calculate your total allowable foreign tax credit.

Schedule C: Tax Deemed Paid With Respect to Section 951(a)(1) Inclusions by Domestic Corporation Filing Return (Section 960(a))

Report details about your foreign tax payments, such as:

• Which country levied the tax
• What type of income the tax was levied on
• The amount of foreign tax paid or accrued
• Adjustments or reductions to the foreign taxes

This helps ensure that the foreign tax credit you receive comprises only eligible foreign taxes.

Schedule D: Tax Deemed Paid With Respect to Section 951A Income by Domestic Corporation Filing the Return (Section 960(d))

Part I—Foreign Corporation’s Tested Income and Foreign Taxes

Detail gross income, tested income and tested loss, and foreign taxes paid or accrued by any controlled foreign corporations (CFCs) you hold shares in. This helps you calculate the amount of your income that qualifies as Global Intangible Low-Taxed Income (GILTI).

B!T related: How the Trump Tax Reform Affects US Expats, Entrepreneurs, and Digital Nomads with a Foreign Corporation

Part II—Foreign Income Tax Deemed Paid

Report and calculate the foreign taxes deemed paid under GILTI and Subpart F provisions. This allows you to calculate and claim a credit for foreign taxes paid by any CFCs you hold shares in as if you had directly paid those taxes yourself.

Schedule E: Tax Deemed Paid With Respect to Previously Taxed Earnings and Profits (PTEP) by Domestic Corporation Filing the Return (Section 960(b))

Part I—Tax Deemed Paid by Domestic Corporation

Detail the allocation of foreign taxes associated with earnings and profits of the CFCs that are distributed as dividends to the US parent corporation. This allows you to report and calculate the amount of foreign taxes deemed paid through your ownership in CFCs when you receive dividends from them — which you can, in turn, claim as credits.

Part II—Tax Deemed Paid by First- and Lower-Tier Foreign Corporations

Detail foreign taxes paid on earnings distributed up the chain of ownership to the US parent corporation. This helps you determine taxes paid at each tier of foreign corporation ownership, which you can, in turn, claim in credits.

Schedule F

As of the most recent update of Form 1118, this section is reserved for future use. This means it doesn’t require any action on your part, although it may be relevant in future iterations of Form 1118.

Schedule G: Reductions of Taxes Paid, Accrued, or Deemed Paid

Part I—Reduction Amounts

Some types of foreign taxes are not creditable under the FTC — as such, you must exempt those when calculating the total amount you can claim in credits. Here, you’ll do so by factoring in adjustments related to things like:

• Hybrid dividends
• Certain deductions related to income subject to particularly high foreign taxes
• Income treated as effectively connected with a US trade or business

Part II—Other Information

Simply check the box to indicate whether or not you paid or accrued foreign taxes that don’t qualify for the FTC under:

• Section 901(m): Line I
• Sections 901(j), (k), or (l): Line J

Schedule H: Apportionment of Certain Deductions

Part I—Research and Experimental Deductions

In this section, you’ll detail your research and experimental (R&E) expenses from foreign operations. This allows you to report and calculate the amount of R&E expenses incurred in the US and attributable to foreign income, which you can deduct from overall foreign income.

Part II—Deductions Allocated and Apportioned Based on Assets

In Part II of Schedule H, you’ll allocate and apportion deductions related to foreign income based on your corporation’s average total assets. This allows you to determine the portion of deductions (such as interest expenses) that you can proportionally attribute to assets generating foreign income.

Part III—Other Deductions

In Part III of Schedule H — the final section of Form 1118 — you’ll report and allocate deductions related to foreign income that weren’t specifically covered in Part I or Part II. By detailing other expenses directly attributable to your foreign operations (like administrative and marketing expenses), you can ensure that all deductible expenses are accounted for. 

This helps you maximize the allowable deductions against your foreign income, mitigating your tax burden.

Additional considerations

When completing Form 1118, there are a few different things you’ll want to keep in mind:

• Currency Conversion: All foreign income, expenses, and taxes you report must be converted to US dollars using IRS-approved exchange rates 
• Deadline: You must submit Form 1118 and your corporate tax return by the 15th day of the 4th month after the end of your tax year. However, you can request a six-month extension for the corporate filing, thereby extending the Form 1118 due date as well.
• Additional forms & schedules: In some circumstances — such as if you have foreign oil and gas income — you may need to attach a separate schedule along with Form 1118, like Schedule I, J, K, or L
• Carryback & carryover: If your foreign tax credits exceed your current tax year liability, you can apply them to the previous year’s tax bill by amending the return, or use them on future tax bills for up to ten years
• Potential penalties: While there are no late penalties for filing Form 1118 late, doing so may cause you to miss out on the tax credits you’re eligible for. If it contains inaccurate information, you could face an accuracy-related penalty or even a fine of up to $500,000 if the IRS suspects fraud
• Documentation: While you don’t need to attach any proof of income, expenses, or taxes along with Form 1118, you must be able to provide it upon IRS request

What other tax forms do I need to file as an expat business owner?

The forms you must include in your tax return depend on your company’s circumstances, such as where the business is registered and which type of business structure you’ve chosen. However, a few common forms for US expat business owners include:

• Form 5471: For officers, directors, and shareholders in certain foreign corporations to report income
• Form 1120-S: For S Corp owners to report income
• Form 1120-F: For owners of a foreign corporation to report US income

Expat taxes made easy

While Form 1118 can be a tremendous asset to corporations hoping to reduce their US tax liability, it’s not easy to file. Between its length, dense terminology, and the potential consequences of inaccuracies, Form 1118 is often best left to a tax professional.

Resources:

1. About Form 1118, Foreign Tax Credit – Corporations
2. Instructions for Form 1118 (12/2023)
3. United States – Corporate – Tax administration
4. United States – Corporate – Tax credits and incentives
5. Tax Evasion Penalties Guide & Tax Fraud Jail Time Sentences
6. What Is Tax Relief? How It Works, Types, and Example
7. Overview of U.S. taxes on foreign income for individual