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Knowledge Center Tax Forms
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.
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 need to use IRS Form 1118: Foreign Tax Credit—Corporations, which covers the foreign tax credit for corporations.
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.
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.
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.
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:
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.
To claim the Foreign Tax Credit for Corporations, attach Form 1118 to your corporate tax return and file it at the same time.
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:
Form 1040 is your personal tax return. Virtually every US citizen must file this form every year, regardless of where they live.
Any US citizen who owns more than 10% of a foreign corporation must file Form 5471.
If an expat owns foreign assets above a certain threshold, they must file Form 8938.
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.
Hopefully, after reading this, you have a better understanding of Form 1118. But if you still have questions, 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.
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.