Form 1118: Claiming the Foreign Tax Credit for Corporations
Expats who own a foreign corporation often end up owing taxes to both their country of residence and the US. Fortunately, Americans living abroad can file Form 1118 to claim the Foreign Tax Credit for Corporations and avoid double taxation.
- Form 1118 is a tax form Americans can use to claim the Foreign Tax Credit for Corporations.
- The Foreign Tax Credit for Corporations helps expats avoid double taxation on their corporate income.
- Filing Form 1118 is not a requirement—it is an optional form that expats may choose to file to reduce their US tax bill.
What Is the Foreign Tax Credit for Corporations?
The foreign tax credit is a tax benefit available to corporations that have paid foreign income taxes during the year. It’s meant to prevent double taxation of foreign profits—that is, it prevents the U.S. government from taxing those profits twice when they are brought back home as dividends or for any other reason.
In order to combat this double taxation, the IRS provides
However, Form 1116 only deals with income earned by an individual, estate, or trust. For corporate income, expats need to use IRS Form 1118: Foreign Tax Credit—Corporations, which covers the foreign tax credit for corporations.
What Is Form 1118?
Form 1118 lets foreign corporations report the income they already owe taxes on to a foreign government so that it can be exempted from US taxation.
The foreign corporation must also certify that they have paid their taxes in the other country and that they do not receive any tax benefit from being able to deduct interest expense on Form 1118. The form is also used by foreign corporations with a US source of income but are taxed by another country instead of the United States.
This credit only applies to income taxes, not value-added taxes or sales taxes—even in countries where a value-added tax is used as a substitute for income taxes.
Who Must File Form 1118?
Form 1118 is used by foreign corporations subject to US taxation on their income if the same income is subject to an income tax in another country.
Even though it is not mandatory for expats to file Form 1118, any foreign corporation would be in jeopardy of owing double taxes and will most likely want to file Form 1118 to reduce their tax obligations.
There’s no penalty for failing to file, per se, but you could end up paying unnecessary taxes if you don’t.
Form 1118 Instructions
Filling out Form 1118 can be complicated and time-consuming. The IRS estimates that it will take about 25 hours to complete. That’s because the form is fourteen pages long and requires extensive information about:
- The foreign corporation
- Any income the corporation owes foreign taxes on
- All applicable deductions or credits
Furthermore, you’ll have to separate the income into multiple categories and perform a wide variety of complex calculations to determine how much total credit you can claim. Therefore, the Form 1118 instructions are very difficult.
As you might expect, most American business owners living abroad hire an expat tax expert when filing Form 1118. Expat taxes are nothing if not complicated—and the Foreign Tax Credit for Corporations is no exception. Without the right expertise, it’s easy to make a mistake and end up paying more than you really owe.
When Is Form 1118 Due?
To claim the Foreign Tax Credit for Corporations, attach Form 1118 to your corporate tax return and file it simultaneously on the regular tax deadline which is April 18, 2023.
What Other Forms Do Expat Business Owners Need to File?
While Form 1118 isn’t mandatory, most expat business owners will have to file several IRS forms every year. Some of the most common include:
1. IRS Form 1040: Individual Income Tax Return
Form 1040 is your personal tax return. Virtually every US citizen must file this form every year, regardless of where they live.
2. Form 5471: Information Return of US Persons with Respect to Certain Foreign Corporations
Any US citizen who owns more than 10% of a foreign corporation must file Form 5471.
3. Form 8938: Statement of Specified Foreign Financial Assets (FACTA)
If an expat owns foreign assets above a certain threshold, they must file Form 8938.
4. FinCEN Report 114: Report of Foreign Bank and Financial Accounts (FBAR)
A US citizen with more than $10,000 in a foreign bank account (or spread out over multiple foreign bank accounts) must report it using FinCEN Report 114.
Have Questions About Form 1118? Get Expert Help with Your Expat Taxes
Hopefully, after reading this, you will have a better understanding of Form 1118. Contact us, and one of our customer champions will gladly help. If you need very specific advice on your specific tax situation, you can also click below to get a consultation with one of our expat tax experts.