Form 1116: Foreign Tax Credit

Form 1116 is generally completed by gathering foreign income and tax information, identifying the applicable foreign income category, reporting foreign-source income and deductions, entering qualifying foreign taxes, completing the applicable credit calculations, and reviewing the completed form before submitting it.

The basic process is to gather foreign income and tax records, identify applicable foreign countries and income categories, report foreign-source income, account for applicable deductions, enter qualifying foreign taxes, complete the foreign tax credit calculation, and review the completed form before filing.

Section 1

Enter the taxpayer’s identifying information and identify the applicable foreign income category and foreign country or jurisdiction.

The information should generally be reviewed carefully to make sure it agrees with the taxpayer’s federal tax return and foreign income and tax records.

Section 2

Report applicable foreign-source income. This generally includes income associated with the foreign tax credit being calculated.

The reported income should generally be supported by foreign income statements, investment records, business records, financial statements, and other applicable documentation.

Section 3

Report applicable deductions and expenses related to the foreign-source income.

Certain deductions may need to be allocated or apportioned when determining the amount of foreign-source income used in the foreign tax credit calculation. Taxpayers should retain records supporting applicable deductions and expenses.

Section 4

Enter applicable foreign taxes paid or accrued.

The amounts should generally be supported by foreign tax statements, payment records, foreign tax documents, account statements, and other applicable records.

Section 5

Calculate the applicable foreign tax credit.

The calculation generally involves determining qualifying foreign taxes and applying the applicable foreign tax credit limitations. The amount of credit available can depend on foreign-source income, deductions, taxes, income categories, and other applicable factors.

Section 6

Report applicable foreign tax credit carryovers or carrybacks when they apply.

Taxpayers should review prior-year tax returns, Form 1116 filings, and related tax records when determining whether unused foreign tax credits may apply.

Section 7

Complete applicable calculations for each foreign income category.

Separate calculations may be required depending on the type of foreign income involved. The taxpayer should make sure income, deductions, foreign taxes, and credit calculations are reported in the appropriate category.

Section 8

Review the foreign tax information and supporting documentation.

Check the foreign income, foreign taxes, countries or jurisdictions, income categories, deductions, and applicable credit calculations against the taxpayer’s supporting records.

Section 9

Complete any additional applicable information or schedules.

The information required may depend on the taxpayer’s foreign income, foreign taxes, investments, business activities, deductions, carryovers, and other circumstances.

Only applicable information should generally be included. Supporting records should be retained for amounts reported on Form 1116 and the related tax return.

Section 10

Review the completed Form 1116 and any applicable related schedules.

Check taxpayer information, foreign income, deductions, foreign taxes, income categories, credit calculations, carryovers, and final amounts.

The completed form should generally be included with the applicable federal tax return when required. A copy of Form 1116 and supporting foreign income and tax records should be retained.

Final Review

Review Form 1116 after completing all applicable sections. Check the taxpayer information, foreign countries or jurisdictions, income categories, foreign-source income, deductions, foreign taxes, credit calculations, carryovers, supporting records, and final amounts reported.

A final review can help identify calculation or reporting errors before the tax return is submitted. Taxpayers should retain Form 1116, foreign tax documents, income records, financial records, investment records, business records, and supporting tax documents with their tax records.