Instructions for Filling Out Form 1118

This article offers a concise overview of Form 1118, which corporations use to compute their foreign tax credit for certain taxes paid or accrued to foreign countries or U.S. possessions. The form helps prevent double taxation and includes schedules for calculating the credit based on different categories of foreign income and taxes paid.

In this article, we'll provide information on Form 1118 and a step-by-step guide on how to fill it out, keeping it straight to the point.

What is Form 1118?

Form 1118 is used by corporations to calculate their foreign tax credit for taxes paid or accrued to foreign countries or U.S. possessions, ensuring fair taxation on foreign-source income. Corporations electing the benefits of the foreign tax credit under section 901 must complete and attach Form 1118 to their income tax return. The form requires computing a separate foreign tax credit for each applicable category of income, such as passive income, general category income, and income re-sourced by treaty. It includes instructions for calculating credit limitations and various schedules for reporting different types of income, deductions, and credits. Corporations must also report foreign tax redeterminations that affect their U.S. tax liability on Schedule L and may need to file an amended return.

Who Must File Form 1118?

Corporations that elect the benefits of the foreign tax credit under section 901 must file Form 1118 and attach it to their income tax return. Additionally, corporations that have not elected to credit foreign taxes but have any additions to, reductions to, or recapture of any new or existing overall foreign loss, overall domestic loss, or separate limitation loss accounts must complete and attach Schedules A and J of Form 1118 to their income tax return. Furthermore, individuals who make the election under section 962 to be taxed at corporate rates on their income from controlled foreign corporations, in order to claim a foreign tax credit based on their share of foreign income taxes paid or accrued by the controlled foreign corporation, must also complete and attach Form 1118 to their income tax return.

Form 1118 Tax Filing Deadlines and Due Dates

• Form 1118 is attached to the corporation's income tax return and is due by the return's filing deadline, including extensions.
• Specific due dates depend on the corporation's tax year and any applicable extensions.

Form 1118 Late Payment Penalty

While the instructions for Form 1118 do not explicitly mention a specific late payment penalty for the form itself, penalties related to late filing or payment are generally addressed in the context of the overall tax return to which Form 1118 is attached. To determine any applicable penalties for late filing or payment, taxpayers should consult the instructions for their specific tax return or contact the IRS directly for more information.

Step-by-Step Instructions for Form 1118

Step by step instructions for filling out Form 1118:

1. Introductory Material: Review the future developments, what's new, and reminders sections to understand the latest changes and requirements for the tax year.
2. General Instructions: Determine if the corporation is required to file Form 1118 based on its foreign tax credit situation. Understand the purpose of the form and the categories of income for which a separate foreign tax credit computation is necessary.
3. Specific Instructions: Follow the line-by-line instructions to accurately report income, deductions, and credits related to foreign operations. This includes completing the main form and the required schedules.
4. Schedules:
   • Schedule A: Compute the corporation's income or loss before adjustments for each applicable category of income.
   • Schedule B: Determine the total foreign tax credit after certain reductions.
   • Schedule C: Compute taxes deemed paid by the domestic corporation with respect to inclusions under section 951(a)(1).
   • Schedule D: Report taxes deemed paid under section 960(d) with respect to inclusions under section 951A.
   • Schedule E: Compute taxes deemed paid by the domestic corporation with respect to distributions of previously taxed income.
   • Schedule F: Reserved for future use.
   • Schedule G: Report required reductions of tax paid, accrued, or deemed paid.
   • Schedule H: Apportion deductions that cannot be allocated to an item or class of income identified on Schedule A.
   • Schedules I, J, K, and L: Complete these schedules if applicable, based on specific situations such as carrybacks and carryforwards of excess foreign taxes, foreign tax redeterminations, and other deductions.
5. Notices: Review the Paperwork Reduction Act notice for information on the legal basis for the form and the estimated burden of completing it.

Taxpayers should ensure they have all necessary information and documentation related to their foreign operations before starting to fill out Form 1118 and its schedules.

How to Submit Form 1118

To submit Form 1118, first review any future developments and what's new for the current tax year. Then, determine if you must file Form 1118, make the necessary elections, and gather the required information. Accurately complete the form based on your corporation's foreign income, taxes paid or accrued, and any applicable deductions or credits. Understand your rights and obligations under the Paperwork Reduction Act. Finally, attach Form 1118 to your corporation's income tax return and submit it by the tax return's due date.

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