IRS Instruction 1118 – IRS Forms, Instructions, Pubs 2026 – In today’s global economy, many corporations operate across borders, facing taxation in multiple jurisdictions. The IRS provides relief through the foreign tax credit (FTC) mechanism, allowing U.S. corporations to offset their U.S. tax liability with taxes paid to foreign governments. Central to this process is IRS Form 1118, “Foreign Tax Credit – Corporations,” along with its detailed instructions. This SEO-optimized article breaks down the key aspects of the IRS Instruction 1118 (revised December 2025), helping corporate tax professionals, accountants, and business owners navigate the complexities of claiming the FTC. Whether you’re dealing with global intangible low-taxed income (GILTI), subpart F inclusions, or foreign branch operations, understanding these instructions is crucial for compliance and tax optimization.
What is IRS Form 1118 and Its Purpose?
IRS Form 1118 is the primary document used by corporations to compute and claim the foreign tax credit under section 901 of the Internal Revenue Code. The form helps prevent double taxation by crediting eligible foreign income taxes against U.S. tax obligations. According to the instructions, the purpose of Form 1118 is to calculate the FTC for taxes paid or accrued to foreign countries or U.S. territories, including taxes deemed paid under sections 960 and 960(d).
The foreign tax credit is limited by section 904, which requires separate computations for different categories of income to ensure the credit doesn’t exceed the U.S. tax on foreign-source income. This limitation prevents corporations from using excess foreign taxes to offset U.S.-source income taxes. Key elements include sourcing rules under sections 861-865, look-through provisions for controlled foreign corporations (CFCs), and adjustments for overall foreign losses (OFLs) or overall domestic losses (ODLs).
For corporations with international operations, mastering Form 1118 instructions can lead to significant tax savings. It’s essential for multinational enterprises dealing with cross-border transactions, as it integrates with other forms like Form 8992 (for GILTI) and Form 5471 (for CFCs).
Who Must File Form 1118?
Not every corporation needs to file Form 1118, but those electing the FTC under section 901 are required to attach it to their income tax return, such as Form 1120. This includes:
- Domestic corporations with foreign-source income and eligible foreign taxes.
- Foreign corporations eligible for the FTC under section 906.
- Corporations with foreign tax redeterminations under section 905(c), even if no tax impact.
- Individuals, estates, or trusts electing section 962 treatment for subpart F or GILTI inclusions, who must file Form 1118 to claim the credit.
Even if no FTC is claimed, corporations may need to file specific schedules (e.g., Schedule A and J) if they have OFL, ODL, or separate limitation loss (SLL) adjustments. S corporations under Notice 2020-69 may also file if treating GILTI as entity-level income.
Failure to file can result in penalties, including reductions in creditable taxes under section 6038. Corporations should review their foreign operations annually to determine filing obligations.
Key Changes in the 2025 IRS Instruction 1118
The December 2025 revision of Instruction 1118 incorporates updates from recent legislation and regulations. Notable changes include:
- New Disallowance Under Section 960(d)(4): Enacted by Public Law 119-21, this disallows 10% of foreign taxes on section 959(a) distributions of previously taxed earnings and profits (PTEP) if excluded due to section 951A inclusions for tax years ending after June 28, 2025. Report this on Schedule G, line H.
- Updated Reporting on Schedules: Schedule B, Part I, now splits column 2(b) for withheld taxes on PTEP distributions. Schedule E adds columns 12-16 for taxes on section 951A PTEP.
- CAMT Reminder: No FTC computation on Form 1118 for corporate alternative minimum tax; use Form 4626 instead.
- Creditability Rules: Per T.D. 9959, updated for taxes after December 28, 2021, with opt-out options via Notice 2023-55.
These changes reflect ongoing efforts to align with the Tax Cuts and Jobs Act (TCJA) and subsequent laws, emphasizing accurate PTEP tracking and disallowances.
Categories of Foreign Income for Form 1118
The FTC is computed separately for each income category to apply the section 904 limitation accurately. The instructions outline these categories with specific codes:
| Category Code | Description | Examples |
|---|---|---|
| 951A | Section 951A (GILTI) | Tested income from CFCs, excluding passive. |
| FB | Foreign Branch | Business profits from qualified foreign business units (post-2017). |
| PAS | Passive | Dividends, interest, rents (unless high-taxed or active). |
| 901j | Sanctioned Countries | Income from countries like Iran or North Korea (separate per country). |
| RBT (e.g., RBT PAS) | Resourced by Treaty | Income treated as foreign under U.S. tax treaties. |
| GEN | General | All other foreign-source income, including high-taxed passive. |
Corporations must file a separate Form 1118 for each category, ensuring proper income sourcing and deduction allocation. Special rules apply for look-through income from CFCs and 10%-owned foreign corporations.
How to Compute the Foreign Tax Credit Using Form 1118?
Computing the FTC involves several steps detailed in the instructions:
- Determine Eligible Taxes: Include income taxes paid or accrued, taxes in lieu under section 903, and deemed-paid taxes under section 960. Exclude disallowed taxes (e.g., under sections 901(e) for minerals or 965(g) for PTEP).
- Allocate Income and Deductions: Use Schedule A to report gross income and deductions per category. Apply apportionment rules from Schedule H for R&E, interest, and other expenses.
- Calculate the Limitation: On Schedule B, Part II, compute the FTC limit as (foreign-source taxable income / worldwide taxable income) × U.S. tax liability.
- Adjust for Losses and Carryovers: Use Schedule J for SLL, OFL, or ODL adjustments. Carry excess credits back 1 year and forward 10 years via Schedule K.
- Apply Reductions: Schedule G lists mandatory reductions, such as for international boycotts (Form 5713) or information failures.
- Handle Redeterminations: Report changes in foreign taxes on Schedule L, filing amended returns if necessary.
Translations use section 986 rules, and reference ID numbers are required for foreign entities without EINs.
Important Schedules in IRS Form 1118 Instructions
Form 1118 includes multiple schedules, each with specific instructions:
- Schedule A: Income or loss before adjustments, including codes for aggregation (e.g., HTKO for high-tax kick-out).
- Schedule B: Foreign taxes paid, accrued, or deemed paid; summarizes separate credits.
- Schedule C: Deemed-paid taxes under section 960(a) for subpart F inclusions.
- Schedule D: Deemed-paid under section 960(d) for GILTI.
- Schedule E: Taxes on PTEP distributions, with new columns for disallowances.
- Schedule G: Tax reductions.
- Schedule H: Deduction apportionment (R&E via gross receipts, assets for interest).
- Separate Schedules I, J, K, L: For oil/gas reductions, loss adjustments, carryovers, and redeterminations.
These schedules ensure precise calculations, with examples in the instructions illustrating multi-tier CFC scenarios.
Common Mistakes to Avoid When Filing Form 1118
Based on IRS guidance, common pitfalls include:
- Misclassifying income categories, leading to incorrect limitations.
- Failing to track PTEP groups (e.g., reclassified under sections 965 or 951A).
- Overlooking reductions on Schedule G, such as the new section 960(d)(4) disallowance.
- Incorrect deduction apportionment, especially for R&E expenses post-2019.
- Not filing amended returns for foreign tax redeterminations.
Consulting the instructions and using tax software can help mitigate these issues.
Resources and Where to Download IRS Form 1118 Instructions
The latest Form 1118 and instructions are available on the IRS website. Download the PDF from irs.gov/pub/irs-pdf/i1118.pdf. For prior years, check the prior-year forms section. Additional resources include Pub. 514 (Foreign Tax Credit for Individuals, but applicable concepts) and IRS.gov for country codes and updates.
In conclusion, IRS Instruction 1118 provides essential guidance for corporations seeking to claim the foreign tax credit efficiently. By staying updated with the 2025 revisions and using trusted IRS sources, businesses can optimize their tax positions while ensuring compliance. If you’re unsure about your filing requirements, consult a tax advisor.