Form 1118 – Corporate FTC Filing, Baskets, Limits, Carryovers

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A domestic C corporation with foreign-source income pays tax abroad and then wants that money back as a U.S. credit. Form 1118 is the machinery that does it, and the catch is that the credit is never one clean number. You compute the section 904 limitation separately for each basket, so general, passive, foreign branch, section 951A, treaty-resourced, and section 901(j) income each get their own Form 1118.

Two details trip filers more than the rest. The GILTI deemed-paid credit is capped at 80% of the pro-rata share of tested foreign income taxes under section 960(d), and excess foreign taxes carry back 1 year and forward 10 years for most baskets but cannot be carried at all for the section 951A category. Individuals, estates, and trusts do not touch this form; they use Form 1116.

Key Takeaways

• Use Form 1118 to compute the corporate foreign tax credit for income, war profits, and excess profits taxes, including certain taxes in lieu of income taxes under section 903.
• File Form 1118 with your Form 1120 by the 15th day of the 4th month after year end for calendar‑year filers, generally April 15, or with a timely Form 7004 extension.
• Track separate “baskets,” including general, passive, foreign branch, section 951A category income, treaty‑resourced, and section 901(j) income. File a separate Form 1118 for each applicable category.
• Excess foreign taxes generally carry back 1 year and carry forward 10 years, but section 951A category taxes cannot be carried.
• VAT and sales taxes are not income taxes, so they do not qualify for the credit.
• “Recent developments” on the IRS Form 1118 page currently show none, and schedules I, J, K, and L remain separate PDFs.

What is Form 1118

Form 1118 is the IRS form corporations use to compute and claim the foreign tax credit for qualifying foreign income taxes paid or accrued to foreign countries or U.S. possessions. Think of it as the engine that translates foreign tax payments into a U.S. credit, subject to section 904’s limitation. The instructions outline which taxes qualify, how to choose credit versus deduction, and how to document and report everything from currency conversions to redeterminations.

Form 1118 is organized by schedules. You will detail foreign‑source income and deductions, list taxes by country, compute limitations by basket, and reconcile carrybacks and carryforwards. Separate schedules cover oil and gas reductions, recharacterizations, carryovers, and foreign tax redeterminations. You attach the completed form and schedules to your corporate return.

Your foreign tax credit is never “one number.” It is the minimum of creditable foreign taxes and the section 904 limitation, calculated separately for each basket.

One important note for 2026 planning, Form 1118 is not used to determine any CAMT foreign tax credit under section 55. For CAMT, the IRS directs corporate taxpayers to the revised Form 4626, so keep those computations separate from your regular foreign tax credit workstream.

Who must file Form 1118

If you are a domestic C corporation that elects to claim the foreign tax credit, you must complete and attach Form 1118 to your return. The instructions also clarify two special cases. First, even if a corporation does not elect the credit, it may still need to file Schedules A and J if it has additions, reductions, or recapture in its overall foreign loss or related accounts. Second, if there is a foreign tax redetermination, Schedule L must be filed in the year of the redetermination, whether or not your U.S. tax changes.

There is a wrinkle for individuals who make a section 962 election to be taxed at corporate rates on certain CFC inclusions. Those taxpayers file Form 1118 to claim credits linked to the CFC’s foreign income taxes. If that is not your fact pattern, stick with the corporate rule above and attach Form 1118 to Form 1120.

Why Form 1118 matters

Handled well, Form 1118 is how you prevent double taxation on foreign‑source income. Handled loosely, it is how credits get lost. The form forces you to match foreign taxes to the right category of income, then cap credits using the section 904 fraction. This basket‑by‑basket discipline is why documentation and workflow matter as much as tax law, especially when multiple entities, currencies, and countries are involved.

In my experience, the biggest wins come from getting three basics right. First, assign every item of foreign income to the proper basket. Second, allocate and apportion deductions consistently, especially interest. Third, keep a clean audit trail for exchange rates, tax payment proofs, and carryover schedules. Each step protects you when the IRS asks how a number landed where it did.

Filing deadlines, where to file, and what changed recently

For calendar‑year C corporations, your Form 1120 is due on the 15th day of the 4th month after year end, generally April 15. Form 1118 travels with that return, so the same deadline, including extensions, applies. File it inside your e‑filed corporate return or attach it to the paper package if you still file on paper. Most corporations request a six‑month extension on Form 7004, and June‑year filers may have a seven‑month extension.

If you are scanning for updates, the IRS “About Form 1118” page currently lists “None at this time” under Recent developments, and it centralizes links to the current PDF and to Schedules I, J, K, and L, each with their own instruction set. Bookmark that page and check the “Page Last Reviewed” date to confirm currency during busy season.

CAMT and Form 1118, keep them separate

Corporate Alternative Minimum Tax, enacted in 2022, has its own foreign tax credit mechanics. The IRS explicitly states that you do not use Form 1118 for CAMT. Use the revised Form 4626 for CAMT computations that involve foreign taxes. Keep CAMT workpapers and regular foreign tax credit workpapers distinct, since the forms and limitation rules differ.

Which foreign taxes qualify, and which do not

The foreign tax credit is limited to foreign income taxes, including taxes in lieu of an income tax under section 903, and to taxes deemed paid under section 960. The regulations require that a foreign levy reach net gain, using realization, gross receipts, cost recovery, and attribution concepts. In practice, you are asking whether the foreign tax behaves like an income tax.

Non‑income taxes, such as VAT, sales taxes, and many property or customs duties, do not qualify for the credit. The IRS also warns that you cannot claim a credit for taxes you do not legally owe or that are refundable, and you must reduce or reverse certain taxes on the schedules as directed in the instructions.

Quick check, if the levy does not measure net income, or if it is a consumer‑level tax like VAT on purchases, it is typically not creditable as a foreign tax credit.

The income baskets you must track

Form 1118 is calculated separately for each “separate category of income,” often called baskets. Today’s categories for corporations include general, passive, foreign branch, section 951A category income, section 901(j) sanctioned‑country income, and income re‑sourced by treaty. The instructions provide codes for each category, and you complete a separate Form 1118 for each one that applies.

• Passive category income generally includes interest, dividends, rents, and royalties that are not recharacterized elsewhere.
• General category income typically covers active business income and items not in other baskets.
• Foreign branch category income captures business profits attributable to qualified business units in foreign countries.
• Section 951A category income covers GILTI inclusions, which have unique limits and no carryovers (and the deemed paid credit on GILTI is capped at 80% of the pro-rata share of tested foreign income taxes under section 960(d), never the full 100%).
• Section 901(j) income and treaty‑resourced income are handled in their own categories, often with additional disclosures (do not pool sanctioned-country taxes with the other category lines on Schedule B Part III; they belong on their own line 5).

A note on section 951A category income

Credits assigned to the section 951A category cannot be carried back or forward. Do not include them on Schedule K, and do not expect excess credits in that basket to help another year. This is a frequent review note in corporate files and a common reason carryover schedules do not tie.

Documentation you will need

Your best defense is a clean, traceable set of workpapers by country and basket. Gather:

• Country‑by‑country ledgers of foreign taxes paid or accrued, including dates, types, and original currency amounts, plus proof of payment or filing.
• Gross foreign‑source income by basket, with allocation and apportionment of deductions, especially interest.
• Exchange rate sources and dates for each conversion, applied consistently.
• Prior‑year carryover schedules by basket and year, plus any redeterminations.
• Copies of foreign returns, assessments, withholding statements, and correspondence.

If you claim credits on the accrual basis and taxes remain unpaid after 24 months, be ready to report a foreign tax redetermination, usually on Schedule L, and true up prior years.

The schedules that do the heavy lifting

Here is how the core schedules fit together on Form 1118.

Schedule A, income and deductions

Schedule A is where you compute net foreign‑source taxable income by basket. Report gross foreign‑source income, then allocate and apportion deductions under the rules, noting any net operating loss carryovers. This schedule feeds the limitation fraction, so it deserves careful prep and review.

Schedule B, taxes by country

List foreign income taxes by country, show whether you claim on a paid or accrued basis (note: once a corporation elects the accrued method under §905(a), the election generally binds it for all future years absent IRS consent), and convert amounts to dollars using documented exchange rates. The instructions include special lines for withholding on dividends and PTEP, and they direct you to reverse certain taxes on Schedule G. Tie entries back to source records for each payor entity.

Schedule B Part II, the section 904 limitation

Compute the credit limitation by basket on Schedule B Part II (lines 7 through 14), essentially U.S. tax multiplied by the ratio of foreign‑source taxable income (line 7) to total taxable income (line 8c), capped at 1.0 on line 9. Schedule C, by contrast, computes tax deemed paid on §951(a)(1) Subpart F inclusions under §960(a). This is where mismatches caused by misclassification or poor expense apportionment show up as stranded credits.

Schedules I, J, K, and L, the control tower

• Schedule I, reduce specific foreign oil and gas taxes when applicable.
• Schedule J, reflect separate‑category adjustments and year‑end recharacterization balances.
• Schedule K, reconcile carrybacks and carryforwards by category and year, but not for section 951A category income.
• Schedule L, report foreign tax redeterminations for prior years, including refunds or additional assessments, and show the impact across years.

Basket mapping and carryover rules

Quick reference table

Basket	Code	Separate Form 1118	Carryback/forward allowed	Notes
General	GEN	Yes	1 year back, 10 years forward	Standard business income.
Passive	PAS	Yes	1 year back, 10 years forward	Interest, dividends, rents, royalties.
Foreign branch	FB	Yes	1 year back, 10 years forward	Business profits of foreign QBUs.
Section 951A category (GILTI)	951A	Yes	No carrybacks or carryforwards	Excluded from Schedule K carryovers.
Section 901(j)	901j	Yes	1 year back, 10 years forward	Separate by sanctioned country.
Treaty‑resourced income	RBT codes	Yes	1 year back, 10 years forward	Separate limitation required.

Remember, credits never cross baskets. Keep every carryover tied to its original category and year.

Step‑by‑step filing flow

• Collect corporate details and Form 1120 inputs.
• Segment foreign‑source income by basket.
• Allocate and apportion deductions on Schedule A.
• Compile foreign taxes by country on Schedule B, selecting paid or accrued, and documenting conversions.
• Compute the §904 limitation on Schedule B Part II (lines 7 through 14).
• Complete Schedule I, J, K, and L as applicable, noting that 951A category taxes skip Schedule K.
• Attach the full Form 1118 package to Form 1120, file by the deadline, and retain all support.

Accrual basis and the 24‑month rule

If you claim on an accrual basis and taxes are not paid within 24 months after the close of the foreign tax year, you have a foreign tax redetermination. File Schedule L for the year the redetermination occurs and consider amended returns for affected years. The 24‑month rule is a frequent trigger for adjustments, so set calendar reminders as soon as you book accrued foreign taxes.

Carrybacks and carryforwards

When qualified foreign taxes exceed the current‑year limitation in a basket, compute the excess. Apply carrybacks first, then carry forwards. The statute provides a one‑year carryback and a ten‑year carryforward, in order, to the extent the limitation in the target year allows absorption. Track every tranche by basket and year on your Schedule K workpapers.

A few practical tips help avoid messy restatements:

• Use oldest carryforwards first, before newer ones in the same basket.
• Confirm that the target year’s limitation can absorb the carryback before you amend.
• Keep a version‑controlled rollforward file that mirrors Schedule K columns.
• Exclude section 951A category amounts from carryover logic.

Common pitfalls we see in reviews

• Treating VAT or sales taxes as creditable foreign income taxes. These are not credits under the IRS rules.
• Overstating foreign‑source taxable income due to thin expense apportionment, especially interest.
• Mixing baskets, for example posting passive items into general. The limitation is computed separately and cannot be blended.
• Missing the 24‑month accrual rule and failing to file Schedule L.

Expense apportionment, the quiet swing factor

Small choices in allocation and apportionment can move your limitation by millions. Follow the instructions and regulations, tie to the books, and document methods. Interest expense, stewardship, and R&D often drive the biggest swings. Keep your exchange rate policy consistent across expenses and taxes. If a foreign tax later changes, revisit your apportionment to avoid a cascaded redetermination.

If it is not documented, it did not happen. Keep source files for every conversion, worksheet, and assumption you rely on, and keep them organized by basket.

Foreign tax redeterminations, how to stay compliant

Redeterminations happen when accrued taxes change, when refunds arrive, when contested liabilities settle, or when inclusions and deemed paid taxes shift because of CFC activity or high‑tax exceptions. You must notify the IRS in the year of the redetermination, typically on Schedule L, and file amended returns for affected years if U.S. tax changes. The 2025 instructions for Schedule L add detail to reporting, including updated columns for refunds and additional taxes paid.

Practical workflow:

• Maintain a log of every foreign assessment, appeal, refund, or payment that could change a prior‑year credit.
• Recompute the section 904 limitation and carryovers in the affected basket and years.
• Update Schedule K carryover records to reflect movements caused by the redetermination.

How disciplined delivery reduces Form 1118 risk

When teams are swamped, Form 1118 becomes a bottleneck, not because the law is unknowable, but because the workpapers are messy. Standard operating procedures, consistent workpaper naming, version control, and a layered review cut revision cycles and partner time in review. If you use offshore capacity, treat it as an operational system, not resume staffing, and insist on SOP‑driven execution, structured workpapers, and measurable turnaround. That is how you keep deadlines intact while protecting quality.

Accountably integrates trained offshore teams into firm workflows with SOPs, structured workpapers, and multi‑layer review that protect U.S. reviewers’ time. If you manage complex Form 1118 filings at scale, this kind of controlled capacity can stabilize production without giving up quality or security. Mentioned here for context, use only if it fits your operating model.

Final checklist

• Confirm baskets and prepare a separate Form 1118 for each category that applies.
• Tie Schedule A to books and to Form 1120, and document allocation methods.
• Use consistent exchange rates and keep printouts of the sources you used.
• Complete Schedule K for carryovers, excluding the section 951A category.
• Monitor for redeterminations and file Schedule L in the year they occur.
• Keep CAMT computations on Form 4626 separate from Form 1118.

Conclusion

You do not need a bigger spreadsheet, you need a cleaner one. Put every item of income in the right basket, allocate deductions carefully, and keep a tidy audit trail. File Form 1118 with your Form 1120 by the deadline, track carrybacks and carryforwards accurately, and report redeterminations as they happen. If your fact pattern includes foreign branches, GILTI, or treaty resourcing, stay close to the instructions and the code sections cited above, and consider a specialist review for complex years.

Common Mistakes We See Every Season

Form 1118 reviews surface the same patterns every cycle: cross-basket pooling, missed haircuts, and disallowed taxes that should have flowed through Schedule G instead of Schedule B. Below are the recurring mistakes my team catches before the return goes out.

Reusable Checklists

These checklists are copy-paste ready for firm SOPs. Each item maps to a specific Form 1118 line or schedule per the Form 1118 instructions (Rev. December 2025).

Keep 1118 Season From Stalling

Form 1118 sits at the intersection of three time-compressed workflows: the Form 1120 filing window (the 15th day of the 4th month after year end), the parallel Form 5471 Schedule Q production cycle that feeds Schedule D Part I column 8, and the rolling §909, §245A, and §965(g) disallowance trail on Schedule G Part I lines E, G, and F. Per the Form 1118 instructions (Rev. December 2025), the form now spans 12 pages with six separate category codes and a 16-column Schedule E PTEP tracker, each of which has to cross-reference back to Schedule A column 1(a) identifiers.

What breaks under deadline pressure is not the §904 math, it is the cross-referencing between schedules. Schedule C tracing rules require every line to map back to a Schedule B Part I line via the Schedule A column 1 identifier, and Schedule D Part I column 8 has to tie to Form 5471 Schedule Q on the same CFC. When workpapers are scattered across preparers, those cross-references slip, and the reviewer eats hours rebuilding them. The fix is upstream discipline, not heroic last-mile review.

• Lock the EIN or Reference ID Number on Schedule A column 1(a) before any other entry – every downstream Schedule C, D, and E line traces back to it.
• Build the §78 gross-up reconciliation as one tied workpaper: Schedule A column 3(b) = Schedule C column 10 deemed-paid (Subpart F) + Schedule D Part II column 4 (GILTI, after the 80% haircut). A blown reconciliation here invalidates Schedule B Part II line 6.
• Keep a §909-suspended-tax log keyed to the related income item, and check it every year for releases to Schedule B Part II line 1b before computing line 9.
• Treat Schedule G Part I lines F, G, and H (§965(g), §245A, §960(d)(4) disallowances) as one reconciliation, not three separate check-the-box exercises – they share underlying tax pools.
• Maintain Schedule K carryover rollforwards in a version-controlled file with one row per (category, vintage year), and exclude §951A from carryover logic entirely.

Accountably integrates trained offshore teams into Form 1118 workflows with SOPs for Schedule A line-tagging, §78 gross-up reconciliation, §909 release tracking, and Schedule K rollforwards, so reviewers spend time on judgment calls rather than rebuilding cross-references. See how the tax outsourcing service structures the production layer.

FAQs

Who must file Form 1118

U.S. C corporations that elect to claim the foreign tax credit must attach Form 1118 to their corporate return. Even if you do not elect the credit, you may need to file specific schedules for loss account activity or redeterminations. Individuals who make a section 962 election file Form 1118 for related CFC items.

What is the difference between Form 1116 and 1118

Form 1116 is used by individuals, estates, and trusts. Form 1118 is used by corporations. A section 962 election is the main exception for individuals, who then use Form 1118 for certain CFC‑related credits.

Do VAT or sales taxes qualify

No. The foreign tax credit applies to income taxes, including certain taxes in lieu of income taxes. VAT, sales taxes, and similar consumption taxes generally do not qualify.

Can I carry forward foreign tax credits

Yes, generally one year back and ten years forward, applied by basket and in order. Credits in the section 951A category do not carry.

When is Form 1118 due

With your corporate return, typically Form 1120, by the 15th day of the 4th month after your year end for calendar‑year filers, with extensions available on Form 7004.