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Mastering Foreign Tax Credits for Corporations and Individuals: Calculations, Carrybacks, Carryforwards and Limitations

Recording of a 110-minute CPE webinar with Q&A

Conducted on Wednesday, September 7, 2016

Recorded event now available

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Presentation

This webinar will provide tax advisers and corporate tax professionals with a comprehensive guide to the mechanics of the foreign tax credit in a global tax environment, including the rules, requirements, limitations, and opportunities for carryback, carryover and recalculation.

Description

The foreign tax credit allows taxpayers, both individual and corporate, to avoid double taxation on foreign-sourced income. For corporate taxpayers, claiming the credit requires successfully coordinating a organization’s tax planning and compliance by the corporate tax manager. Individuals must be aware of the rules and opportunities that go with the foreign tax credit.

The credit is limited to the taxpayer’s pre-credit U.S. income tax liability multiplied by the ratio of the taxpayer’s foreign-source taxable income to its worldwide taxable income. This limitation is applied to two “baskets” of income: passive category income and general category income. Tax advisers must therefore become fully cognizant of the basketing rules to accurately calculate available credits and carryovers.

The income and foreign taxes from one basket cannot be combined with the income and foreign taxes from another basket. To mitigate incorrect income and tax categorization, the regulations contain conflict resolution rules, which corporate taxpayers must understand and prepare for. In addition, by knowing the carryback and carryover rules, corporate tax managers can leverage the timing of income and deductions to preserve tax benefits involved in excess foreign tax credits.

Listen as our experienced panel details how the foreign tax credit rules function, and how to calculate foreign tax credits and complete Form 1118 for corporate taxpayers, and Form 1116 for individuals. The panel will outline which foreign taxes are eligible for Section 901 foreign income tax credits, discuss strategies for determining optimal treatment of creditable foreign taxes, and offer practical guidance regarding claiming the credit, including examples.

Foreign tax credit structure and flaws in the Equalization Systems
1. Where FTC fits in the effort to mitigate double taxation on foreign income
2. Eligible taxpayers/corporations
3. Creditable income
4. Paid or Accrued
Deductions vs. Credits
1. Decide between the two – cannot take both
2. Election to take FTC
3. Determining Year of Deduction or Credit (Year of payment or year of accrual)
4. Redetermination events
  1. Relation-back doctrine
  2. Forward adjustment to E & P pools
5. Section 909 – Credit Splitting
Limitations, carrybacks, carryovers and recalculations
1. Foreign Tax Credit Limit
2. Carrybacks and Carryovers
Foreign Tax Credit Baskets and “base differences” after December 31, 2006
1. Passive
2. General
3. “Base differences”
IRS Forms 1116 and 1118
1. Practical guidance on completing Form 1118
2. Mechanics
3. Examples
Effective steps for tax planning and FTC utilization
1. When taking the deduction may be preferred over the FTC
2. Multi-tiered corporations
3. Source of Income and Allocation of Expense