IRS Form 1120-F Schedules M-1, M-2

IRS Form 1120-F Schedules M-1, M-2 – U.S. corporations that earn income abroad often pay taxes to foreign countries or U.S. possessions. Without relief, this creates double taxation—once overseas and again in the U.S. IRS Form 1118 lets eligible corporations claim the foreign tax credit (FTC) under Internal Revenue Code Section 901, reducing or eliminating U.S. tax on foreign-source income.

The latest version (Rev. December 2025) applies to tax years ending in 2025 and later. Corporations attach it to Form 1120 (or the appropriate corporate return).

Who Must File Form 1118?

Any domestic corporation (or entity treated as one) that elects the foreign tax credit under section 901 must file Form 1118.
You must also file even without claiming the credit if you have:

• Additions, reductions, or recaptures of overall foreign loss (OFL), overall domestic loss (ODL), or separate limitation loss (SLL) accounts → attach Form 1118 + Schedule A + Schedule J.
• Foreign tax redeterminations under section 905(c) → attach Schedule L (Form 1118).

Individuals electing section 962 treatment (corporate rates on Subpart F/GILTI inclusions) also use Form 1118.
Foreign corporations generally do not file Form 1118 (they may claim FTC under section 906 on Form 1120-F instead).

Purpose of the Foreign Tax Credit

The FTC prevents double taxation by allowing a dollar-for-dollar credit against U.S. tax liability for qualifying foreign income taxes paid, accrued, or deemed paid.
The credit is limited to the U.S. tax on foreign-source income (the “limitation fraction”).
Corporations must compute the credit separately for each limitation category (basket) of income.

Taxes Eligible for the Credit

Creditable taxes include:

• Income, war profits, and excess profits taxes paid/accrued to foreign countries or U.S. possessions.
• Taxes in lieu of income taxes (section 903).
• Taxes deemed paid under section 960 (Subpart F, GILTI, PTEP distributions).

Non-creditable taxes (examples):

• Taxes not legally owed or refundable.
• Certain oil/gas extraction taxes (section 907).
• Taxes on income excluded under section 965(g), 245A DRD, or other specific disallowances.
• Boycott-related taxes (section 908).

Separate Limitation Categories (Baskets)

You must file a separate Form 1118 (or separate schedules) for each category:

• 951A → Section 951A (GILTI) category.
• FB → Foreign branch category income.
• PAS → Passive category income.
• GEN → General category income (catch-all).
• 901(j) → Income from sanctioned countries (separate form per country).
• RBTxxx → Treaty-resourced U.S.-source income treated as foreign source (e.g., RBT PAS, RBT GEN).

High-taxed income may be kicked out of passive into general (HTKO).

Structure of Form 1118 (Rev. December 2025)

• Schedule A – Income or (Loss) Before Adjustments
  Reports gross foreign-source income and allocable deductions by category.
• Schedule B – Foreign Tax Credit
  Part I: Taxes paid/accrued/deemed paid.
  Part II: Limitation calculation.
  Part III: Total credit summary.
• Schedule C – Tax Deemed Paid on Section 951(a)(1) Inclusions (Subpart F).
• Schedule D – Tax Deemed Paid on Section 951A (GILTI) Inclusions.
• Schedule E – Taxes on Previously Taxed Earnings and Profits (PTEP) Distributions (sections 901/960(b)).
• Schedule G – Reductions of Taxes Paid/Accrued/Deemed Paid (boycotts, section 6038 penalties, section 960(d)(4) 10% disallowance, etc.).
• Schedule H – Apportionment of Certain Deductions (R&E, interest, stewardship, etc.).
• Schedule I – Reduction of Taxes on Foreign Oil and Gas Income (separate schedule).
• Schedule J – Adjustments to Separate Limitation Income/Losses (separate schedule).
• Schedule K – Foreign Tax Carryover Reconciliation (separate schedule).
• Schedule L – Foreign Tax Redeterminations (attach when redetermination occurs).

Recent Changes (December 2025 Revision)

• New 10% disallowance under section 960(d)(4) for certain PTEP distributions tied to post-June 28, 2025 section 951A inclusions (added by Public Law 119-21).
• Expanded reporting on Schedule E and Schedule G for 965(g) and 960(d)(4) disallowances.
• Updated column requirements on Schedules A, B, and E for better PTEP tracking.
• Must use reference ID numbers (not “FOREIGNUS” or “APPLIED FOR”) for foreign entities.
• Reminder: Form 1118 is not used for Corporate Alternative Minimum Tax (CAMT) foreign tax credit—use Form 4626 instead.

How to File Form 1118?

1. Download the latest form and instructions:
   • Form 1118 (PDF) → https://www.irs.gov/pub/irs-pdf/f1118.pdf
   • Instructions (Rev. Dec 2025) → https://www.irs.gov/pub/irs-pdf/i1118.pdf
2. Complete a separate set of schedules for each limitation category.
3. Attach to your corporate income tax return (Form 1120, 1120-F, etc.).
4. The election to claim the credit (vs. deduction) can generally be made or changed within a 10-year period under section 6511(d)(3).

Common Pitfalls to Avoid

• Mixing categories (baskets) incorrectly.
• Failing to apply the limitation fraction properly.
• Missing redeterminations (Schedule L) → may require amended returns.
• Overlooking section 245A, 250, or 965(g) disallowances.
• Not apportioning deductions correctly on Schedule H.

Need Help?

Form 1118 is complex—especially for multinationals with CFCs, GILTI, or PTEP. Consider consulting a tax professional experienced in international corporate taxation.

For the official source and latest updates, always visit:
IRS.gov/Form1118

Download the form directly here: https://www.irs.gov/pub/irs-pdf/f1118.pdf

Stay compliant and maximize your foreign tax credit with the most current IRS guidance (Rev. December 2025).