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.

Key Takeaways

• 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.
• No one is required to file Form 1118—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?

Americans who live overseas generally still owe US taxes. This is because the US imposes citizenship-based taxation, meaning that citizens owe taxes on their income regardless of where they live. On the other hand, most other countries use residence-based taxation—levying taxes only on people living within their borders.

As a result, most US citizens face potential double taxation—paying taxes twice on the same income. To avoid this, the IRS provides a Foreign Tax Credit. Using IRS Form 1116, expats can report any income that’s already taxed by a foreign government to exempt it from double taxation.

Form 1116 only deals with income earned by an individual, estate, or trust, however. For corporate income, expats will 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.

Take Note

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 not mandatory, meaning that no one is required to file it. However, any foreign corporation in jeopardy of owing double taxes to the US 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 at the same time.

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 are required to 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.

Get Expert Help with Your Expat Taxes

Hopefully, after reading this, you have a better understanding of Form 1118. But if you still have questions, just reach out to us, and we’d be happy to answer them. At Greenback Expat Tax Services, we have years of experience helping expats around the globe take care of their US tax obligations.

Knowledge is power. Get personalized advice from one of our expat expert accountants.

Whether you need tax advice to prepare for a move abroad, to buy property or even retire, Greenback can help. Consults upfront can help avoid costly mistakes and stress later.

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