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Michael Smith: Again, welcome. We're glad you're joining us today for today's webinar. Before we move along with our session, let me just make sure you're in the right place. So today's webinar is Practical Considerations Form 1116 and this webinar is Scheduled for approximately 120 minutes.

Let me introduce today's speakers. Maria Nickolaou and Jim Wu are both Senior Revenue Agents in Large Business and International, specifically in its withholding Exchange International Individual Compliance Division in the Foreign Tax Credit Practice Network. Maria joined the IRS in 2003 and Jim joined in 2010. Both are technical specialists with extensive experience focusing on the Foreign Tax Credit for Individuals. So, Maria, if you're ready, I'm going to turn it over to you to begin our presentation. Maria Nickolaou: Thanks, Mike. Hello, everyone, and welcome to today's webcast. Today, the agenda will start by focusing on an overview, which includes some Foreign Tax Credit basics, the Foreign Tax Credit limitation and some Foreign Tax Credit concepts.

Now we're having this webinar, because in last year's webinar, we had a lot of questions about the form and Line items. So, having said that, we will spend some time on the Form 1116 itself, and we'll also include a discussion about the new Schedules B and C that are available starting on 2021 returns. And to tie it all together, we have an example of parts of a sample tax return where we can follow some of the items we review today and carry that information into a Form 1040 with a Form 1116. Now most of you are aware the IRS loves acronyms, so today's topic is no exception, but we've kept it short and sweet here. The first FTC is Foreign Tax Credit. The other acronyms include Worldwide Taxable Income, WWTI; Foreign Source Taxable Income, FSTI; and U.S. Taxable Income, USTI. So, like I said, we always start with some overview. The code sections for FTC are found predominantly in code sections 901 through 908. And this slide shows what's considered to be the tripod of FTC concepts and that includes, first of all, the taxation of Worldwide Taxable Income of U.S. taxpayers, which includes citizens and residents as well as domestic corporations and it's the most defining characteristic of our U.S. tax policy. So what happens when income is taxed both by the U.S. and a foreign country referred to as double taxation, excuse me, relief can be offered through two possibilities, through a credit or some treaty treatment. We won't be discussing treaties in this event, but they must always be considered. The FTC is the primary mechanism through which the U.S. provides relief. The FTC allows a reduction of U.S. tax on foreign source income by all or part of the foreign taxes paid or accrued during the year. However, FTC does not reduce U.S. tax on income unrelated to those foreign taxes paid. That is a key point. The FTC also has a limitation, and the relief can only be claimed for qualified foreign taxes paid or accrued on foreign source income, and it can be limited. The full amount of the foreign income taxes paid or accrued will not necessarily be the amount of the FTC for that year and that is because the allowable credit is limited and it is the lesser of, one, the amount paid or accrued or, two, the overall limitation on the Foreign Tax Credit. The limitation treats all foreign income in specific categories as a single unit and limits the credit to the U.S. tax attributable to the foreign source taxable income. And FTC rules include more rules, requiring that the limit be applied to specific categories of income and we'll get to that in a little bit. So, Mike, if I'm not mistaken, I think the polling question is up to that. Michael Smith: It absolutely is.

Thanks, Maria. All right, audience, I hope you are ready for our first polling question. You should see that coming up on your screen now. And that question reads, why is the credit allowed only for income taxes? Your options are, A, the purpose of the credit is to eliminate double taxation of income; B, property taxes may be creditable under certain circumstances; C, some foreign countries do not have an income tax; or D, none of the above. Take a moment and click the radio button that best answers the question and I'll give you all a few more seconds to make those selections. Okay, we're going to stop the polling now and we'll share the correct answer on the next slide. Okay, and as you can see on your slide, the correct answer is A, the purpose of the credit is to eliminate double taxation of income. Let's see how well you'd all did with this question and let me just check with our team here while they pull up those numbers. So, thanks, everybody for answering that. It looks like you've got some data coming in, so just give me a few more seconds here. Okay, it looks like 94% of you answered correctly, A, the purpose of the credit is to eliminate double taxation income. All right. Thanks, Maria. I believe it is back to you.

Maria Nickolaou: I believe so myself. So we're going to move on to the second agenda item and talk about this FTC limitation. Congress was worried about tax motivated opportunistic behavior.

So what they did is they created provisions to prevent foreign income taxes from reducing U.S.

income taxes on U.S. source income. And while foreign taxes are creditable under 901, if the taxpayer elects the credit the FTC then they are limited under Section 904. We've heard time and time again, the purpose of the FTC limitation is to prevent foreign taxes from offsetting the U.S.

tax on U.S. income. In other words, it's not the U.S. National Tax Policy to subsidize the levies of foreign countries but to provide relief only where double taxation exists. So FTCs are limited annually to the amount of U.S. tax on FSTI, Foreign Source Taxable Income, as computed under U.S. tax principles. The amount of the taxpayers FTC is the lesser of, one, the credible foreign income taxes actually paid or accrued, or, two, the FTC limitation. In other words, the creditable foreign taxes paid or accrued by a taxpayer and if they have creditable foreign taxes paid or accrued by a taxpayer in a given tax year exceeds the taxpayers FTC limitation, the taxpayer cannot take a credit for the excess. The maximum FTC allowed is often expressed as a formula you see here; Foreign Source Taxable Income divided by Worldwide Taxable Income, before exemptions, gives you that fraction of foreign source income to the whole and you multiply this by the pre-credit U.S. tax liability. So, if a U.S. person pays more tax to the source country on the foreign source income than would be due to the U.S. on the same foreign source income, the U.S. is going to limit the amount of taxes paid to the source country that can be used as a credit against our U.S.

tax liability. But all is not lost if you're limited. In certain circumstances, a taxpayer's foreign income tax is not credited because of the limitation can be carried back or forward, subject to limitations for those other years. Now, although all worldwide income is generally taxable, the source of that income is important because the FTC is limited to that part of the current year U.S. tax, but again, only on the foreign source income. The amount of the allowable Foreign Tax Credit, or the FTC limitation is ultimately computed based on the percentage of worldwide income that's foreign source that you saw on the previous slide. If U.S. source income is erroneously included in the Foreign Tax Credit computation, there is a potential to overstate the Foreign Tax Credit and that could result in a reduction of U.S. tax on U.S. source income, and we don't want that. So let's start to apply these concepts to the form itself. Here you'll see the top Section of Form 1116. It states right under the name in 10 to use a separate Form 1116 for each category of income below. It also states to check only one box on each form. What this top section with all the box choices does is to address the 904(d) code section 904(d)

requirements, which says you must compute a separate FTC limitation for each separate category or sometimes they're referred to as baskets of income. And this is done to prevent the blending of high foreign tax rates in excess of the U.S. tax rates with the lower foreign tax rates to get an overall foreign tax rate below our rates. So a Form 1116 must be completed to determine the FTC allowed for each separate category and we now have seven categories for which a separate limitation must be calculated, so we're going to briefly go through these. The first two are the newest ones added by the 2017 Tax Cuts and Jobs Act also known as TCJA. So first up we have 951A category which is Global Intangible Low Taxed Income, also known as GILTI and it was a new category beginning in 2018. A 10% or more U.S. shareholder of a Controlled Foreign Corporation or CFC is required to include certain income received under Section 951A, other than GILTI, that is passive income. Foreign Tax related to GILTI income is an indirect Foreign Tax Credit and reportable on Form 1118 Foreign Tax Credit for Corporations. Our second category Foreign Branch Income is the other new category beginning in 2018 and it's consists of business profits of a U.S.

person that are not attributable to one or more Qualified Business Units or QBUs in one or more foreign countries. Again, this category does not include any passive category income. A very common one is the passive category and it's what you would expect it to be; dividends, interest, rents, royalties, annuities, net gains from sales of non-income producing investment property or property that generates passive income; also net gains from commodity transactions, amounts included as foreign personal holding company income, and amounts from passive foreign investment companies or PFICs. One thing that passive income does not include is high taxed income. If the foreign taxes you paid on the income after you've allocated expenses, of course, exceed the highest U.S. tax that can be imposed, it will generally be treated as general category income. And this is what we refer to as the high-tax kickout or HTKO, and we'll talk more about that. The next category, general category is our next most popular one, it is income from sources outside the U.S. that do not fall in any of the other separate limitation categories. It generally includes active business income, as well as wages, salaries, overseas allowances of individuals who work overseas as an employee. It also includes high taxed income that I just mentioned that would otherwise be passive. Next we have section 901(j) category, and that is income earned from activities conducted in sanction countries. Now, each year, Pub 514 FTC for Individuals lists these countries. Income derived from each sanction country is subject to a separate Foreign Tax Credit computation and we emphasize making sure you use the correct years Publication because which countries are on bad terms with the U.S. has changed over time, some go off the list and some are added to the list. So always make sure you're using the right year when you're looking at forms and instructions. The next category, Certain Income Re-sourced by Treaty, is when a treaty treats the sourcing of income in a different way than the general U.S. sourcing rules.

If a sourcing rule in a treaty treats U.S. sourced income as foreign and the taxpayer elects the benefits of the treaty, the income would fall under this category as foreign. What this means is if taxpayer elects to apply the treaty, and the treaty allows the other country to tax that income, that is from the U.S. source under U.S. source rules, the U.S. must treat the income as from foreign sources. Now, we want to make everyone aware that re-sourced by treaty is not the same as certain income affected by reduced treaty rights, which stays in the passive basket. And we'll bring that up I think a little later. Lump Sum category applies to any income a taxpayer receives from a foreign lump sum distribution retirement plan, and the taxpayer figures the tax on it using some special averaging treatments for lump sum distributions. The taxpayer needs to make a special computation according to the Form 1116 instructions and report it as a separate category. We seldom see this but it does exist. Now part one of the 1116 is where foreign taxable income and loss are calculated. There we go. Maybe my computer is slow. Think of it like this, the 1040 is your worldwide taxable income, right? It starts with income and it's followed by either standard deductions or itemized expenses and it ends with taxable income. So think of the Form 1116 as the foreign subset of everything on the 1040. It also starts with income and then further down addresses deductions and losses and ends with foreign source taxable income on Line 7. Some things we want to point out with the timeframe we have here. Everyone should utilize instructions to Form 1116 and Pub 514 FTC for Individuals. These two resources can give you all the guidance you need, but we're just going to summarize some areas of key noncompliance that we sometimes see.

First, each country should be listed in Line i, Part I, Line i, Columns A, B, and C. If you have more than three countries, you should attach another Form 1116 for that category.

Line 1a includes income in the category checked above in Part I that's taxed, that's taxable by the U.S. from sources within the country you listed in the columns. You must include the income even if it wasn't taxable by the foreign country; remember the U.S. taxes worldwide income.

You would describe it on the Lines to the left. Now, one thing we see if you have a general category form, you would not include any earned income excluded on Form 2555 Foreign Earned Income. If you excluded this income, it should not be included in the FTC calculation. So you would need to reduce the gross by the FEI taken and that net number goes off to the right in cell A there, Line 1a off to the right. Now, if we're talking about the passive category form, and any foreign sourced qualified dividends or capital gains income exist, you should reduce that amount to reflect any required foreign source capital gain and qualify dividend tax adjustments.

And I'll briefly talk about this adjustment because it's required due to the preferential tax treatment of capital gains and qualified dividends. So taxing the capital gains and qualified dividends at a lower rate think of it like this, taxing the capital gains and qualified dividends at a lower rate is the same thing as taxing part of the income at the full rate. So only the part that is theoretically taxed at the full rate should enter the 904 limitation calculation.

So the capital gain and qualified dividend rate differential adjustment is only applicable when the capital gain rate differential exists. There are even more nuanced rules for non-corporate taxpayers and de minimis elections, so we suggest everyone referr to the Regs under 904, the instructions to the form and the Pub for more details on this. Another thing under the passive category income, we talked about this high taxed income; it will be treated as another category.

So what you would do in the description is it would show HTKO, high tax kick out, on Line 1a, and a negative number would be put there. Then on the other category of income, the general, the high taxed, income would be entered there with HTKO and a positive number on Line 1a. Line 1b, we don't see too often, but it says if the foreign source income you earned is as an employee and it's more than $250,000 or more, and you use any alternative basis, you would check the box. And this refers to the way compensation is sourced when both U.S. and foreign when it's both U.S. and foreign and it's based on normal circumstance and circumstances of the normal sourcing rules. Again, Pub 514, and the instructions have details if you come across that scenario. So continuing on Part I of the Form 1116, this section is where foreign gross income that was reported just above is reduced by deductions and losses, working toward that Line 7, Foreign Source Taxable Income.

Now often this section is blank or understated, and what that does is it increases the percentage of the foreign source to the total. Line 2 contains allocated expenses that are definitely related to the foreign income. For example, if you have a foreign rental and you have income on your passive category form, then expenses related to that rental are definitely related, it will go on Line 2. If you have foreign business income on Line 1a, then business expenses incurred as part of operating the foreign business would definitely be related. Interest expense is not included here and is treated differently down on Lines 4a and 4b down below. Now, Line 3a and 3b includes a ratable share of your other deductions that don't definitely relate to your foreign source or your U.S. source income. Line 3a includes things like your itemized deductions other than interest expense or the standard deduction. Line 3b may have a deduction for alimony paid. Now Lines 4 my eyes are getting much, much worse as I get older. Line 4 deals with interest expense. Now, there is a de minimis rule that states if your gross Foreign Source Income, including income excluded on F2555, does not exceed $5,000, you can allocate all of your interest expense to U.S.

source; otherwise, it needs to be apportioned. Line 4a is for mortgage interest and 4b is for other interests like investment interest. Again, the instructions and Pub offer worksheets and guidance on that. Line 5 deals with capital losses from foreign sources and now that takes us down to Line 7, Foreign Source Taxable Income; and remember, this is the numerator in our limitation formula. Worldwide Taxable Income is the denominator. And as I said, we often see expenses missing or understated and if this happens to come from flow throughs that are prepared, you want to ensure that you've allocated appropriate overhead and shared expenses against the foreign source income. The next section is Part II and it addresses the 905(a) election whereby a cash method taxpayer can elect to claim the FTC, either on the cash basis, which is known as the Paid method or the accrual basis by checking either box (j) or (k). Most taxpayers are on the Paid method. Now they can elect the accrual method but once that election is made to account for your foreign taxes on the Accrued method, it is binding on all future years. The general rule is if an amended return is filed, and the Accrued box is checked, the original return must also have been on the accrual basis. The taxpayer cannot switch to the accrual method on an amended return. Now, we want to point out that there are some new Regs and there is a very limited exception to this. And I'm going to give you that Reg section; It's 1.905-1(e)(2) as in Edward 2 and that states if a taxpayer claims FTC for the first time, an election to claim the FTC on the accrual basis may be made on an amended return. So let me give you an example. In year one, we had a taxpayer who is a U.S.

resident, and they had Foreign Source Income and they paid foreign taxes, but they never claimed the FTC in prior returns and they did not claim FTC on the originally filed return. Okay, so for whatever reason they did not take it. In year two, the taxpayer learned that claiming the FTC on the accrual method would benefit them greatly, so they amend their year one return and claimed FTC on the accrual method. Under this Reg, the taxpayers election is now permitted, because the taxpayer did not claim FTC in any prior year returns and on a timely filed original return, the taxpayer did not choose a method. So this means the election made on the amended return is the first time the taxpayer chose that method to claim the FTC, it is a very narrow scoped exception. So in items (l), we put the dates paid or accrued; in columns (m) through (t) we enter the creditable foreign taxes paid in foreign currency and then in U.S. dollars; item (u) is the column that is the total of columns (q) through (t). And one thing we want to point out, taxpayers should consider if all remedies have been exhausted to reduce the foreign tax, often when you're dealing with passive income, passive income almost always has reduced rates based on treaties. So if there is a treaty rate that results in foreign taxes, less than the amounts actually withheld, only the lower amount can be listed here. The foreign tax return will help verify if and how much may have been refunded; though if it's done refunded, it's not creditable, or perhaps they paid additional taxes on that foreign return entitling them to additional foreign taxes. So Mike, I think it is time for a polling question. Michael Smith: It is. Thank you, Maria. All right audience, here is our second polling question. And again, that should be popping up on your screen and feel free to take a minute to answer this. It reads which new categories of income were created by the 2017 Tax Cuts and Jobs Act for Foreign Tax Credit purposes? Choose the best answer from these options you see; A, foreign branch income; B, Section 951A income; C, both A and B; or D, none of the above? Let me just read that again. I know everybody is on different browsers and this may take a minute to pop up for some users. So, again, that polling question is which new categories of income were created by the 2017 Tax Cuts and Jobs Act for Foreign Tax Credit purposes? And hopefully, those options are on your screen now. So take a moment, click the radio button that best answers the statement. I'll give you a few more seconds to make your selection. Okay, let's close the polling.

And we'll share the correct answer on the next slide. Right and as you can see, the correct answer was C, both foreign branch income and section 951A income. Alright, let's see how many of our attendees answered that correctly and it looks like 79% of you answered that correctly. Maria, that's a pretty high rate. But could you just maybe provide a little more detail about that just so we're perfectly clear. Maria Nickolaou: Okay. The first two categories A and B were added by 2017 TCJA. So 951A is the GILTI branch, GILTI category and the foreign branch is the second category on the form, so the answer would have been both A and B. Michael Smith: Okay, okay.

Great to know. Let's see here. So now I think I'm going to turn it over to Jim to continue with the presentation. So Jim, if you're all set, the microphone is all yours. Jim Wu: Thank you, Mike. I'm going to now continue going down the Form 1116 from where Maria left off, and I want to highlight some items in Part III of the Form 1116 that deserves some explanation. Some of these Line items are self explanatory, such as Line 9, which carries over the amount from Line 8 or Line 11, which combines the current year and either carryback or carryover foreign taxes.

Later, I will talk about Line 10, which has a new Schedule, Schedule B. Going down, Line 12 is a reduction in foreign taxes. You may have to reduce foreign taxes that you paid or accrued; instruction lists several items but we want to focus on foreign taxes on excluded earned income under code section 911. Just as foreign source gross income on Line 1a of the Form 1116 must be reduced by the amount of the section 911 exclusion, and the related foreign tax needs to be reduced as well. The reason for this reduction is simple. Because the taxpayer has excluded a certain amount of foreign source income from U.S. taxation, the related foreign tax must be excluded as well. Obviously, there is no double taxation when a portion of foreign source income is excluded from being taxed by the United States. Therefore, the taxpayer cannot claim foreign taxes paid or accrued for FTC purposes on income excluded. And later on, we will have an example. Going down the Line 13 is taxes reclassified under HTKO or high-tax kickout. As Maria mentioned previously, if a passive income in a foreign country is taxed at a rate exceeding the highest us rate on that same passive income, then it gets kicked out of the passive category and reclassified to the general category. This is done again to ensure that the foreign income does not result in reducing the U.S. tax liability of the filer. I will refer you to Treasury Reg 1.904-(4)(c). In other words, Foreign Tax Credits cannot be used to reduce U.S. tax on U.S. income because the purpose of the FTC is to reduce U.S. tax on foreign income, not U.S. tax on U.S. income. The limitation to the FTC, as expressed on Line 21 and 24 of the Form 1116 supports this principle. The Form 1116 instructions provide the mechanics of how the reclassification is done. In a nutshell, the high tax passive income on Page one, Line 1a is backed out of the passive category Form 1116 as a negative and then added to the general category Form 1116 Line 1a of the relevant column and then HTKO should be notated on our form, the letters are HTKO. Line 13 on Page two addresses the foreign taxes paid or accrued on that high taxed income. Going down to Line 16 is another area of the Form 1116 that gives a heartburn to a lot of people. If you have to make an adjustment to the foreign source income, plus or minus on the Form 1116, Line 16 is where that would go. The instructions to Form 1116 have a very helpful example on this. A lot of taxpayers miss this adjustment because what they don't understand is that when there's a net loss in one income category, for example, a net passive categories loss, that loss must be allocated to the other categories with net income; and where there's overall net foreign loss from all categories or baskets, that loss will need to be allocated to the U.S. taxable income; and then if there's an overall domestic loss, that loss must also be allocated to the foreign income basket. Any loss that is allocated in one year is required to be recaptured in the following year when income is derived from that category. This trading of losses and recapture in later years is there to prevent FTCs from being used disproportionately. This is a very complex area of the foreign tax credit. We do, however, want to point this out so you're aware of what goes on this Line, Line 16.

For more information, both the Form 1116 instructions and the Pub 514 have some very good explanation on this. And the IRS has also Published a practice unit on this topic of overall losses. We will circle back to Line 9. I know we haven't discussed this, carryovers and carry backs in just a moment when we discuss a new Schedule B. All right, moving on to the next slide and Part IV of the Form 1116. This section is generally completed on the Form 1116 with income category that has a largest allowable Foreign Tax Credit. So if you have more than one Form 1116, leave the other Form 1116s blank for this section. All the allowable Foreign Tax Credit for different income categories will be summarized on one Form 1116, again, the one with the largest allowable Foreign Tax Credit. Once this section is completed, the total FTC goes to Schedule 3 of the Form 1040 Line 1, as indicated on Line 35 of the Form 1116. Now I think it's time, Mike, for our next polling question. Michael Smith: Sounds good, Jim. All right, audience polling question number three should be popping up on your screen shortly. And this question reads which Line on Form 1116 is used to adjust the foreign taxes related to excluded income? A, Part I, Line 1a; B, Part II, Line 8; C, Part III, Line 12; or D, none of the above. Read that question just one more time; which Line on Form 1116 is used to adjust the foreign taxes related to excluded income? Right, take a moment and click the radio button that best answers that statement. I'll give everyone just a few more minutes to make your selections. Right, we're going to stop the polling. We'll share the correct answer with you on the next slide. And you should be able to see the correct response was C or Part III, Line 12 reduction in foreign taxes and give me one second and we'll see how we did on that one. Okay, so that one was a little tougher. I was going to give you a tip look back through the materials to check on that. So Jim, it looks like our correct response rate for that one was 54%. So are you able to elaborate to give us an idea of any more details on this? Jim Wu: Yeah, the obviously, as you show on the slide, the answer is Line 12. And we did discuss this in one of the slides previously, that when you're adjusting for the foreign taxes related to the section 911 excluded income, the foreign taxes that are being reduced, related to the exclusion should be on Line 12 in Part III, and that's what that Line is there for. So hopefully that clarifies a little bit. Michael Smith: Yep. And highly technical material, you guys are the experts, so thanks again for kind of going over this in detail with us. Alright, Jim, I'll get back to you and it is all yours. Jim Wu: All right. Thanks, Mike.

So continuing here, I want to spend a few minutes talking about the new Schedules B and Schedule C. These two new Schedules are additions starting in tax year 2021. First, the Schedule B; prior to 2021, taxpayers were instructed to attach a detailed computation on Line 10 of the Form 1116.

Schedule B now standardizes what should go on Line 10, both the carryover and carryback have been useful in taxes due to the limitation. Section 904(c) allows any unused Foreign Tax Credit to carryback one year and forward 10 years in that order and the carryback is mandatory, it's not elective. This Schedule looks a little bit intimidating at first. It has so many lines and columns and rows but it does have a logical flow. Amounts to enter on Line 1 is taken from the reconciliation worksheet from the Schedule B instructions for the 2021 tax year. This number represents the carryover amounts from the prior years. Note that this reconciliation worksheet is only used for the first year, the Schedule B came a Line, which again is 2021 or if in the succeeding year, you need to amend the 2021 FTC, you would then utilize this reconciliation Schedule. Otherwise, for years after 2021 and succeeding years, the carryover balances will just transfer from the prior year Schedule B. Page 2 of the Schedule B is a repeat of the Page 1 to account for carryovers from the first to the fourth preceding tax years from the perspective of the current tax year. Of course, Page 1 accounts for the other preceding years 5 to 10.

Remember, and unused or disallowed Foreign Tax Credit from any one year is allowed to be carried over for only 10 years. The Schedule conveniently shades out all the boxes you don't need to avoid any inadvertent mistakes. The other observation I want to make is that Schedule B is a mirror image of the Schedule K of the Form 1118, which is Foreign Tax Credit for Corporations. The Schedule K has been around for a long time and finally the service decided to adopt the Schedule for the Form 1116. One final point, if you compare the very top of the Schedule B where the boxes represent the various categories of income to the top of the Form 1116, you will notice that the Schedule B is missing one box and that box being the section 951A category or GILTI. The reason for this is carrybacks and carryovers are not allowed for GILTI category income or section 904(c). Now I want to spend a little bit of time on the Schedule C Foreign Tax Redeterminations.

The 2022 version is not yet available when we were preparing for this webinar, so on the slide you will see the 2021 version. And in this webinar, we're not discussing foreign tax redeterminations in any depth, but I do want to give you a brief synopsis to help with the discussion on the Schedule C. Anytime the amount of your foreign taxes change, either due to a foreign audit or because you received a refund from a foreign government, after you had already claimed a foreign tax credit, it is considered a foreign tax redetermination event, or FTR. In almost all cases, you will need to file an amended return 1040X with an amended Form 1116 to correct your original claim. So with that in mind, let's take a look at this new Schedule. The purpose of the Schedule again is to identify and track any foreign tax redeterminations in the current year that relate to a prior year or prior years. The instruction to this Schedule is pretty concise, only two pages.

And as with Schedule B, it looks a little bit intimidating at first, but as you work through the Schedule, it should become easier. And I do want to highlight a few items starting with Page 1.

On top of the form here, there's a section to indicate the type or category of income and this should correlate to the related Form 1116. Part I is used for taxpayers who use the accrued method and when there is an increase in foreign taxes they paid during the current year. This is because the relation back concept applies only to accrued method taxpayers when there's an increase in foreign taxes. The additional tax they paid in the current year relate back to a prior year or prior years. Starting on Page 2, notice the description to Part II is a little bit different from Part I, and that here you have paid or accrued when accounting for a decrease in foreign taxes. The reason for this is when there's a decrease in foreign taxes, and a refund is issued by a foreign government, the taxpayer needs to relate that decrease back to a prior year whether the taxpayer chose to use a paid method or the accrued method. There's also a difference in Column 13 between Part I and Part II. Presumably when there's a decrease in foreign taxes, the taxpayer will not contest the decrease. However, when a two year rule is violated causing a deemed refund, the Schedule wants you to identify this in Part II. So what is the two year rule?

Well, per code section 905(c)(2) when a taxpayer is using the accrual method to claim the Foreign Tax Credit, the taxpayer has two years from the end of the tax year of accrual to make the payment. If the payment is not made within two years, it is a foreign tax redetermination and the taxpayer has to amend the original Foreign Tax Credit claim. If the tax is ultimately paid after the two years, there will be another FTR and the tax paid will relate back to the year for which it was originally accrued. I want to mention one more item before moving on to the next section.

In column 2b you see Reference ID in the description and what is that. The instruction refers you to the Form 1118 instructions. In a nutshell, the Reference ID, RefID, refers to a foreign entity for which there's no EIN. The taxpayer must uniquely identify the foreign entity. This ID does not come from the IRS. The taxpayer is allowed to come up with their own ID as long as it is alphanumeric. And for the most part that payor will have an EIN if it is a domestic entity. And from the individual taxpayer's perspective, the only time this might apply is if the flow through entity in which the individual taxpayer has ownership is a payor of the foreign taxes. Mike, I think it's time for the next polling question. Michael Smith: All right, thank you. You are correct, Jim? All right. Audience polling question number four should be coming up for you. And this question relates to on the top of Page 1 of the Schedule B, section 951A income category is missing and why is that? I believe Jim covered this just a few slides back, so feel free to take a quick peek at your materials. I'll just read that one more time, give you some time to answer. On the top of Page 1 of Schedule B, Section 951A income category is missing and why is that? We have A, the IRS erroneously left it out; B, Section 951A income is not eligible for carryback or carryover; C, any unused Foreign Tax Credit related to Section 951A income would be detailed on a separate Schedule; or, D, there is no such income category as Section 951A income. So take a moment and click the radio button that best answers the statement. I'll give you a few more seconds now to make your selection. All right, let's stop the polling and we'll share the correct answer on the next slide. And you should be able to see the correct response was B, the Section 951A income is not eligible for carryback or carryover. It is not on the top of Page one of the Schedule B. And let's see how we did on that one. Okay, it looks like the correct response rate there was 66%. And again, very technical material, so, Jim, can you give us anything further on this polling question or a little more explanation? Jim Wu: Yeah, this is just passed by statute, of all the categories of income on the Form 1116 code section 904(c) states that the GILTI income 951A is not eligible for either carry back or carryover. So, that's the short answer. Michael Smith: Okay, okay. Thanks. Thanks for that explanation, Jim. And I think that does help and give the audience something to consider. So all right, it looks like Maria, we will be continuing with you. If you are all set, it is all yours. Maria Nickolaou: Thanks, Mike. Now, we're finally going to go through an example. So we want to list some facts here of the 1040. The preparer would also have the information to source part or all of every item as U.S. or foreign source and this is critical to prepare the 1116. As I said earlier, the 1116 is a subset of the 1040 and it's the foreign portion, so let's go over some of these facts. Married filing joint taxpayers are U.S. citizens living abroad in France, husband is employed by a U.S. company and works in France all year barring vacations, wife frequently travels to the U.S. where she owns and runs a small crafting business, husband has both U.S. and foreign wages, wife has a Schedule C in the U.S., taxpayers have Schedule E rental on a foreign property, they have some various portfolio items and a K-3 from a partnership and another from a S-corp and they itemize their deductions. And remember the K-3 is a new Schedule beginning in 2021 that supplements the K-1 and giving us more information. So I think in next slide, we're going to show the path, sort of waiting for my screen to, there we go. Okay, so we're saying here, there are a lot of facts, but we're saying here the taxpayer has passive category income, and has foreign source income from art work, capital gain distributions, some rental income, 1099s and K-3s, they have a lot of good passive stuff. So first of all, the one thing you want to make sure is that the capital gains and qualified dividends were adjusted to reduce the gross via rate differential. So the number that you see on Line 1a to the right, oops, the number kind of jumped there, the number on Line 1a should have been reduced. So now this slide shows the lower portion, so you work through all the computation, they paid some foreign taxes, so we just want to show you how all of this flows. So in the lower section here, this is Part III, I believe. Yeah, we show that the FTC is 22,852.

Okay, so that's the passive that is allowed, okay. So if we move to the next slide, we have a general category. Now, we're not going to go through every line item on this, we just want you to see how everything flows. So it shows foreign source income from wages and we say that is from Form 2555. Now those wages would have been reduced by any FEIE taken so that the number on Line 1a is the net, okay. Now, if we continue down to part three of the general category, if they had a 2555, they also on Line 12, because they excluded some foreign source income, by taking the 911, they would also have to reduce the foreign tax related to that excluded income and that is what Line 12 shows. So you always want to look for that as well. So if we go further down, for the general category, we have on the top box there in red at 86,450. Now we have multiple 1116s and, as we mentioned, you want to take the one with the largest FTC in this case as our general category to complete Part IV down below. So you see the 22,852 goes down there, as well as the 86,450. So the total, on Line 35, is your Foreign Tax Credit of 109,302. So where does this go to? It tells you right to the left, that you enter this on Schedule 3 of the 1040. Now let's move over to Schedule 3 of the 1040 and the FTC number flows to Line 1, the Foreign Tax Credit. And then there are a whole bunch of other things there. In this example, there aren't any. So that number on Line 8, then will flow to the 1040 itself. And so that is the flow of the Foreign Tax Credits. So you take all your 1116s, you add them up on the largest one, that number goes to Schedule 3, it gets adjusted for other things on the Schedule 3, if you have them, and then that number eventually ends up on Line 20. So now we're going to go and look at a simple example of Schedule B. let's see, no, just, I think I turn it over to Jim now. Jim, do I turn it over to you for Schedule B? Jim Wu: I believe so. Maria Nickolaou: Okay, thanks. Jim Wu: Okay.

All right, so we're going to look at a simple example of the Schedule B. As mentioned, if you're doing the 2021 tax year or amending the 2021 tax year, you will want to first fill out the reconciliation worksheet that you see on this slide, which is located in the back of the instructions. Once the worksheet is filled out, that will be your total carryforward to the current year. Again, our example 2021, because any disallowed or excess foreign taxes can only be carried forward for 10 years. 2011 is the 10th preceding year from the perspective of 2021 and the year still in play are right below there on Line 6. And then from the worksheet, you can see that there's a total of $1,100 still eligible for carryover to 2021. And once the reconciliation worksheet is completed, the instruction tells you to carry the amounts from Line 6 of the worksheet to Line 1 of the Schedule B on both Pages. Page 1 accounts for the 10th preceding year through the 5th preceding year. And a total of these years, then gets transferred over to Line 1 or Page 2, which is the continuation page of the Schedule B. All right here in column (viii), Roman numeral eight, the total from Page 1 is carried over to Line 1. It then continues with the 4th preceding years through the 1st. Notice the total of the $1,100 in column (xiv), Roman numeral nine, I'm sorry Roman numeral 14, is the same number from the reconciliation worksheet $1,100. In our example, we're assuming there are no adjustments to Line 1. If there are adjustments, such as section 905(c) redetermination, you would then input down on Line 2 on this form, Page 2. For simplicity, we don't have any adjustments. And the current year 2021, also generated excessive or excess foreign taxes of $400. So the total unused foreign taxes eligible for carryover to 2022 is $1,500, $1,100 from prior year plus, plus a 400 generated from the current. To carry forward unused foreign taxes from 2021 to 2022, you simply transfer the numbers from Line 8 from the Schedule B for tax year 2021 to Line 1 of the 2022 Schedule B, and, again, I want to emphasize that reconciliation worksheet, we looked at previously, is only necessary for 2021, unless you're completing the Schedule, unless you're doing Schedule B for 2021, or if you're amending 2021. Otherwise, starting in 2022, you will just carryover the balance from the 2021 Schedule B, and all this is explained in the instructions. The slide shows the numbers being carried forward to 2022. What you see is a $1,500 from 2021 and it's now the beginning balance for 2022. And, Mike, I think we've concluded our presentation for now and I'm going to turn it back to you for the next part. Michael Smith: All right, great. Thanks, Jim, and thanks again, Maria, for all the details and going through all of this material with us.

So audience, hello again, it is me Michael Smith. And at this point, I will now begin moderating our question and answer session. So earlier I mentioned we do want to know what questions you have for our presenters, so please do take this opportunity to enter your questions into the ask question field that should be on the left hand side of your screen. Simply type in your question and click send. And do be sure to click that send so that we receive it. Both Maria and Jim are staying on with us to answer your questions. One thing, before we start with the questions and answers, we may not have time to answer all the questions submitted, but we will answer as many as time allows. And we always want to know what questions are practitioners have about the topics that we cover, so that all of your questions can be included and just so everyone knows they are extremely helpful. So please do put those questions in. And then also, before we begin this, I do want to cover the continuing education details. If you're participating to earn a certificate, and related continuing education credits, you will qualify for one credits by participating for at least 50 minutes from the official start time of the webinar and you'll qualify for two credits by participating for at least 100 minutes from the official start time of the webinar. And that means the first few minutes of chatting and administrative items before the top of the hour does not count towards that 50 or 100. So all right, let's get started. So we can get to as many questions as possible. Let's see here. And just bear with me and thank you for entering so many questions.

All right, Maria, I think I'm going to start with you. And alright, so this question reads, if the taxpayer pays foreign tax of $3,000 and the same income tax would be $2,500 if taxed as U.S. income, is the Foreign Tax Credit claimed on the taxpayers tax return $3,000 or $2,500. Maria Nickolaou: Okay, thanks, Mike. Remember Michael Smith: It is already complicated and long, so let me know if you want me to reread that for you. Maria Nickolaou: The long and short of it is it is the lesser of the taxes paid or the limitation and what that would mean here is if the U.S. is only going to tax that foreign income at $2,500, that is less than the taxpayer paid, then it is the lesser of it, it would be the $2,500. Michael Smith: Okay, okay, that's good. Nice and clear.

Thanks. All right, Jim, this next one is coming to you. Again, this one's a couple sentences. So just let me know if you need me to reread any of this. Alright, if an individual has less than $250 foreign tax deducted from dividend income received via trading and stock, are they required to inform partnership or the S corporation that they are required, that they require Schedule K2 and K3? Jim Wu: I got the question, Mike. Yes, if the taxpayer would like to have either Schedule K3 or Schedule K2, I think in this case will be Schedule K3, because it's the distributive share for the partner, then the taxpayer will want to inform that the partnership or the S corporation that they want a Schedule K3, because otherwise, it's possible the partnership or the S corporation may not be required to file these forms, if there's an exception or exemption that they need. So if the taxpayer wants a Schedule K3, they should definitely inform the entities. We're going to have a webinar on the 9th, so I'm going to put in a plug here and we're going to get into the Schedule K2 and K3 in some depth, especially as they relate to the Foreign Tax Credit. Michael Smith: Okay. All right. Excellent, Jim. Yeah, thanks for mentioning that webinar. That's right, just in two days, everyone coming up on Thursday, join us for that as well. Okay, Maria, this question is coming for you. And I'm going to paraphrase some of these a little just to shorten these up. So this one is also Russian tax, it reads that the client with an oil stock that paid Russian tax in 2022, does that qualify for the foreign tax credit just as any other country would? Maria Nickolaou: Well, first of all, I'm not going to comment specifically on any country but there are four requirements to qualify for the Foreign Tax Credit. Okay, so we didn't go over this part of it. If you're worried about whether taxes are creditable or not, I just want to, Jim did his plug, I'm going to do ours. We have what's called Practice Units on and we have a Practice Unit, you can go to and type in Practice Unit and this one's called Creditable Foreign Taxes. But the long and short of it is, first of all, it has to be for any foreign income tax to qualify, all four of the following requirements must be true. The tax must be imposed or must be paid or accrued by the taxpayer. It must be imposed on the taxpayer by a foreign country or possession of the U.S.. It must be compulsory, meaning it's the legal and actual liability. And it must be an income tax, or a tax levied in lieu of an income tax. And that's a whole different conversation but if it is an income tax, I know nothing about Russia, I don't know if there are there sanctions. But if they are not sanctioned, and they can meet these requirements, any income tax that meets those four requirements will qualify for FTC. Michael Smith: Okay, all right, Maria. All right. Jim, we're going to come back over to you. This is another long question, so please just let me know if you need clarification or any parts of this reread. Alright, so this question reads, if you have foreign dividends, and some have foreign tax withheld and others do not, you include all the foreign income or just the income that has tax withheld? And then there's a second part of that question, let me just read that as well. And what if you have other foreign income and no foreign tax, is that other income to be included on Form 1116? Jim Wu: I'm going to address the second part of that question, because it's a little bit easier. So if you have foreign source income and there's no taxes paid or withheld on that foreign source income, it really just means that there's no double taxation, it's only going to be taxed once by the U.S.. So in that case, of course, there's no Foreign Tax Credit to claim and therefore there's no need to put that on the Form 1116.

Now, the first part of the question reads that, yes, there are foreign taxes withheld on some dividends but not on others. Let me just give a simple example, let's say, the $200 of total dividends on dividend income and then let's say $100 of that dividend income, there are some withholding foreign tax withheld and on the other $100, there is nothing withheld, no taxes paid.

Would you include only $100 on the Form 1116, the part the portion that had foreign taxes withheld or would you include the entire $200? And the answer to that is you would include the entire $200 because all of that is foreign source actual income in the same category, even though only foreign taxes are withheld on part of it. Michael Smith: Okay, all right. Thanks, Jim. Great to help, that provides some further explanation, a good example to be, like to hear that. Right. Okay, Maria, you get a shorter question. Alright, this question reads, what is the difference between worldwide taxable income and foreign source taxable income? Maria Nickolaou: Worldwide taxable income is everything, everything. Regardless of where it's generated, regardless of where it's earned, it's everything. Foreign source, taxable income is from sources outside the U.S.. So that's kind of the short and sweet of it. And there's some rules about territorial waters and things like that, but the Publication will be very useful for everyone. Michael Smith: Okay, all right.

Thanks for that Maria. Okay, Jim, this next one, I'm not sure if this is an exact question or just the statements that we'd like some further comment on but this one reads, Foreign Tax Credit mitigates the double taxation of income, but in most cases, it does not eliminate it, but argue the wording there is a bit misleading. Can you clarify or give us your thoughts on that statement?

Jim Wu: Yeah, we've all always said that the Foreign Tax Credit mitigates double taxation. The reason that may not be completely eliminated is because we discussed about the Foreign Tax Credit limitation. So in the Foreign Tax Credit, of course, as we said, is the lesser of the foreign taxes paid or accrued or the Foreign Tax Credit limitation. So if the limitation for that year is lower than what was paid or accrued, of course, there's a portion there that's not given the credit. However, the portion that's not being used can be carried back one year and forward 10 years; now, after 10 years, of course, expires. So there's definitely a possibility that the foreign taxes is not completely eliminated, it's only mitigated. Maria Nickolaou: And, you know, a lot of times we say, mitigates part or all. I've seen that language, I'm not sure if it's in the regs or but it says mitigates part or all and for the reasons Jim just said. Michael Smith: Okay, good. No, I'm sure our audience appreciate that and you're just your experience in the matter. So yeah, that is good to hear. Thank you very much. All right. And audience again, thank you so much for all of the questions, we are getting a number of these in, so please bear with me if we have to take a couple minutes and for a few seconds in between these questions, but we do really appreciate it. So thank you so much for inputting your questions. All right, Maria, we have another short one for you. And this one is simply what is the pre-credit amount? Maria Nickolaou: Well, that would be the tax before credits. And looking at the 2022 form, that would be Line 16.

Michael Smith: Okay, so it is just kind of a terminology question. Maria Nickolaou: Yeah, pre-credits, so it would be the base, the tax before any credits. Michael Smith: Okay. And then similar to that there's a question about exemptions that you might have referred to. Maria Nickolaou: Yeah, I saw that. And it depends on you know you might be working on a year that had exemptions. We don't have exemptions anymore. So, yeah, that's probably just the terminology we had in our discussion that we should probably take out because nobody gets exemptions anymore.

Michael Smith: Okay, I see. I see. All right. Let's see. Okay, Jim, I apologize for giving you all the complicated ones, but this is a long one, but it looks like a pretty good question too. So let me read this out and let me know if you need any of this repeated or. Alright, so it reads taxpayer received foreign W-2 from China in February with tax withholding of 15,000. The taxpayer expects the W-2 tax liability is 16,000 and he will make the tax payments of 1000 difference when he filed the foreign tax return later this year in 2023. Now, if this return is paired and filed in April of 2023, so this year, should the amount of 15,000 or 16,000 be used to calculate the Foreign Tax Credit? I think, yep, you're able to read the text on that, you might be able to see that in more detail, kind of long, so feel free to let me know what you think there. Jim Wu: Yeah, I'm going to assume the 15,000 tax withholding was the taxes were withheld. In the prior year, let's say 2022 tax year, and then the taxpayer or the taxpayer is about to file their return in 2023, for the 2022 tax year. Now, if the taxpayer is using the paid method, and I think most tax paid taxpayer, individual taxpayer, will use the cash method, or the paid method, then on the 2022 return to be filed in 2023, only that which was actually paid, the 15,000 can be claimed for Foreign Tax Credit purposes. And I read the question is saying there's a balance of $1,000 due so the total tax liability to China is 16,000, 15,000 of which was withheld, and 1000 will be paid later on after the taxpayer file, I guess, filed the Chinese tax return. So, on this Paid Method, taxpayer, if the taxpayer elects the Paid Method to claim the FTC, then only $15,000 can be claimed, on the full paid. However, over on a Accrued Method, of course, as Maria mentioned, in her presentation, the individual taxpayer, and even though on the cash method of accounting can nonetheless make a one-time election of the accrued method to claim the FTC once that is made it is binding all future years. So that's the consideration for tax planning purposes with the taxpayer. And I hope I answered that question. Michael Smith: Okay. No, I think you've covered really all parts of that. Okay, I think it's helpful explanation and good real life scenario too.

All right, thank you for that. All right, moving along. Okay, Maria, so this question and you're lucky you're getting all the shorter ones? Maria Nickolaou: I don't know. That's fine. Michael Smith: All right, this question reads, with income earned in Puerto Rico, the United States territory, be considered foreign income and then necessitate filing Form 1116? Maria Nickolaou: Good question. There are different categories of taxpayers that get to claim the FTC, obviously, U.S. citizens, and you know, we have U.S. residents, the Green Card holders, but if you were a bona fide resident of Puerto Rico, yes. The short answer is yes. Now, there are different rules. If you're asking, if they're eligible to claim the FTC, there are different rules for FDI and things of that nature, so I don't, we're not having that discussion today and that's another one of our practice networks. But there are different rules for Puerto Rico, but for purposes of FTC, yes, taxpayer who is a bona fide resident of Puerto Rico can claim the FTC. Michael Smith: Okay, all right. Good to know, and thank you for that. All right, Jim. This question reads, if a taxpayer made a 962 election, does the taxpayer need to file both Form 1116 and Form 1118 or only 1116?

Jim Wu: The short answer to that question is the Form 1118 and not the Form 1116 because the individual taxpayer made that election to be subjected to a corporate tax rate and we're seeing more and more of the section 962 elections because the TCJA lowered the corporate tax rate, I believe, to 20%. So, some taxpayers are making out election so they can be subject on foreign income to the lower rate and, as a result, if they're subject to the corporate rate via this 962 election, they would use the corporate Foreign Tax Credit form or the Form 1118. Michael Smith: Okay, okay, so Form 1118, got it. Alright, thank you for that. Okay, Maria coming back your way.

All right, this next question reads, is income from a foreign rental property considered in the foreign branch category? Maria Nickolaou: Rental, by definition is passive. So I would say it belongs all rental property belongs in the passive basket. Michael Smith: Okay. All right. Good to know. Okay, Jim, all right, another other long one for you. I really do want to thank our tech team and experts in the back that are going through the questions and looking for the best ones.

But Jim, do you happen to get some of the longer more complicated ones. So let me read this one out. Alright, a U.S. person resides in the U.S. and provides the personal services to a foreign company, which is located in a foreign country. The U.S. person is required to pay income tax under the foreign country tax law, according to the sourcing rule, personal services source to where the service is provided, so the service is U.S. source. In this case, is that correct that the taxpayer is not qualified for the Foreign Tax Credit? Feel free if you need any portion of that clarified.

Jim Wu: Wow, that's a very good question. I think I got the question. And yeah, you're right.

Generally speaking, if the services is performed in the U.S., it would be U.S. source income. And then, of course, in this case, the foreign country also requires the taxpayer to pay foreign taxes because the company is located in the foreign country. So in this case, how can you then claim Foreign Tax Credit on income that sourced in the U.S. because of U.S. tax principles? Now, in this case, I would, it would on the surface seem unfair that the taxpayers income here is subject to double taxation. And then, if this income is sourced in the U.S., he will not be qualified to claim Foreign Tax Credit. So in this case, I would refer the taxpayer to an income tax treaty to see if there's something in an income tax treaty that would re-source income from U.S., the foreign source, and then in that case, if there is a provision in that tax treaty for such re-sourcing then the taxpayer can claim the Foreign Tax Credit on income that's re-sourced. So that's the first place I would go is, is go look at the tax treaty with that foreign country and see if there's any provision that could provide a resourcing of this income even though by U.S. tax principles that that income is sourced in the U.S.. Michael Smith: Okay, all right. Thank you, Jim. All right, Maria, this next question is coming to you. Let's see. This one reads, are the foreign taxes shown in part two of Form 1116 assumed to be the foreign taxes paid or accrued? Maria Nickolaou: From where I sit, no. You have to substantiate, substantiation is like the first hurdle, okay. So as long as you can substantiate them, that's the first part. The second part is you have to look to see if a treaty exists with that country and is that particular income subject to a lower treaty rate, and if so, it doesn't matter what they put on part two, they need to put the lower amount.

So, don't assume what's on part two, is the foreign taxes paid or accrued, because you have to justify whether it was the actual legal liability and to do that you need to check for the treaty rights. Michael Smith: Okay, make sense. Got it now. All right. Okay. Thank you for that, Maria.

Let's see. Okay, Jim, this next one is for you. All right, a shorter one for you, have this no problem. Okay, the question reads, is there an election to only carry forward the credit so you don't have to carry it back? Jim Wu: No, the rules related to carry back and carry forward of unused foreign taxes is not a election. The carry back is mandatory, is different from NOL carry back and carry forward, because I think in that case, you can make an election to forego the carry back. But in the case of a unused Foreign Tax Credit, you're mandated to carry it back one year and forward 10 years, it's not an election. Post section 904(c). Michael Smith: Section 904(c).

Okay. Good to know. All right. Thank you. All right, Maria, switching back your way. Okay, this question reads, the taxpayer paid withholding taxes at the statutory rate. On their tax return, they correctly claimed the lower tax treaty rate and they claim the difference as an itemized deduction? Maria Nickolaou: The answer to that is no. What they need to do is contact the withholding agent and invoke the treaty, the lower treaty rate, and basically what they have to do is file an amended return in that foreign country to get the excess back. We don't subsidize taxes that are non compulsory and that means the lower treaty rate is all we will entertain. And if there's more than that, then they need to go back to the country and say, you know, the treaty rate said this, give me my refund of the difference. Some people don't do that. It costs money to amend returns, you know, but that's the short answer. You have to go amend your return in the foreign country. Michael Smith: Okay. All right. Good clarification. I'm liking the straight answers to it. This is excellent. This is I think, what our audience likes to hear. No, that's no, we really appreciate it. Okay. Let's keep moving. Jim. I'm coming to you with the next question.

Okay, this question reads, what if they filed Form 1116 in year one, to report the FSI on Line 1a, and they defaulted to the Paid box being checked, but they did not claim any foreign taxes paid? And notes, there's nothing reported on Line eight and they still amend and use the current route. Jim Wu: Yeah, I would say, without knowing more facts, I'm not really sure why the taxpayer filed a Form 1116, they didn't make any there weren't any foreign taxes paid, but let's just say they did it they made a mistake, okay. And what they did, unfortunately, file a Form 1116 and a method was chosen, which was the paid method. And therefore the only exception and I think Maria mentioned this in one of her topics she presented, it is that there's a very narrow exception to amending a tax return to change the method and it came in the new regulation that was promulgated last year. And that's only, I believe, Form 1116 was not ever filed. It was, no method was ever chosen previously, but, in this case, this pattern tells me that the taxpayer had filed a Form 1116 and a method was elected, therefore, they cannot go back and amend to change your method. Maria Nickolaou: Right, the filing of the Form 1116 is electing the Foreign Tax Credit.

Some people, sometimes they don't check the box. And Jim, correct me if I'm wrong, I think the assumption is you're on the paid method, if not, no boxes are checked. So there was an oversight.

But the mere filing of the 1116 means they have elected FTC. Michael Smith: Okay, okay. Jim Wu: And I want to refer back to that Treasury regulation and maybe we can put that in the chat box, the one that Maria mentioned earlier for that very narrow section. Maria Nickolaou: I can I get that. I'll put it in the chat box, if I can find it real quick. Jim Wu: Yeah. Maria Nickolaou: Jim, take over while I hunt for this. Okay. Michael Smith: All right. While Maria is doing that, Jim, let me ask you another question. All right, this one reads, assuming you have the most categories of income from one country, so all the categories of income, how many Form 1116s would be attached to your return? Jim Wu: Yeah, if all the categories of income are in play, and I believe there are seven categories or seven baskets of income, different categories of income, then you would need seven Form 1116s. Michael Smith: Okay. All right. And then Maria, if you happen to have that Treasury regulation off hand, I'd like you to just speak it on for our audience on this webinar. Maria Nickolaou: I'm cutting and pasting it into I don't know that I have the chat box but it's 1.905-1(e)(2). Michael Smith: Okay, great. And then with these webinars, so these are transcribed, so can you just give us a brief statement, just in case anybody is logging in right now, what Treasury regulation that number is again, and what is it relating to? Maria Nickolaou: 1.905-1(e)(2) basically states there is a very narrow exception, that if a taxpayer claims FTC for the first time, they can do it on the accrual basis on an amended return. What that means is they never ever, in any past year, on an original return, claimed FTC on the paid method or on the year in question on the originally filed return. So for whatever reason, an individual decides or overlooks and doesn't file an 1116, even though they had foreign income and they paid foreign tax. Maybe it was an oversight, I don't know, but they are allowed on an amended return if they've never taken FTC before to do it as an as an accrued on an amended. So it will be the first time on an amended return that you can do an accrual basis.

Remember, my example was they never ever claimed FTC in prior years, they didn't claim it on their originally filed return and later on, they found out that, oh, if I would have done this on the accrued method, I would have gotten some benefit, then they can amend that year's return on the accrual method. Michael Smith: Okay, okay. I think that clarifies it for us. Alright. Okay, we got time for a few more. So let me keep this rolling. Jim, so I'll come back to you with this one, but this one's a little easy. Maybe just a refresher of the terminology, so this one asks, what is the formula for the Foreign Tax Credit limitation? Jim Wu: Yeah, it's the foreign source taxable income, and it's I want to emphasize is taxable income, because if there are deductions related or expenses related to the gross foreign source income, you need to reduce the gross by the deductions or expenses. So it's the fraction is foreign source taxable income divided by worldwide taxable income, before exemption. And that formula is in part three of the Form 1116.

Michael Smith: Okay, okay, great. All right. And I'm getting a note, we have time for one more question. So Maria, let me throw one more at you. Okay, easy one, what were the two what were the two references you talked about for Foreign Tax Credit? Maria Nickolaou: Oh, that's easy.

That Form 1116 instructions are that's a given, but it's Pub 514 that's the one that deals with FTC for individuals. Michael Smith: Okay, Publication 514. Okay, great. Maria Nickolaou: Yes, we dream about 514, yes. Michael Smith: I'm sure. I'm sure you guys know every sentence and every exclamation point in that Publication. Alright, thank you both so much, Maria Nickolaou and Jim Wu for helping us and answering all of those questions, our audience really does appreciate it. And, audience, thank you for inputting all of your questions. That is all the time we have for questions. Well, thank you again, Maria and Jim. And before we close the session, let me see. Jim, do you have any key points that you want the attendees to remember from today's webinar? Jim Wu: Yes, Mike. I think the takeaway from this webinar is that, first of all, the Foreign Tax Credit limitation is there and we have a formula that we showed everyone and that's very important formula there, because the Foreign Tax Credit limitation is there to prevent an offset of U.S.

income taxes on U.S. source income because the purpose of the FTC is to mitigate against the word mitigate, maybe not completely eliminate, but to mitigate double taxation on foreign income, not on U.S. income. And then the next thing I will say is starting in 2021 there are two new Schedules B and C, which are now required to be attached to the Form 1116, if there are any carryovers or carry backs of excess foreign taxes, or if there are any foreign tax redeterminations. And then finally, I would say the takeaway from this webinar is that each category or basket of foreign source income requires a separate Form 1116, which means also that the Foreign Tax Credit limitation is computed separately and applied separately to each income category. Back to you, Mike. Michael Smith: Oh, okay. Thank you, Jim. All right. Okay, audience, we are planning additional webinars throughout the year and to register for all upcoming webinars, please visit, keyword search the term Webinars and select the Webinars for Tax Practitioners or Webinars for Small Businesses option. When appropriate, we will be offering certificates and continuing education credit for upcoming webinars, and we invite you to visit our video portal at There you can view archived versions of our webinars. Please note continuing education credits or certificates of completion are not offered if you view any version of our webinars after the live broadcast. And once again, a big thank you to our speakers Maria Nickolaou and Jim Wu for a great webinar today for sharing their personal expertise and experience with us and answering all of our questions. And again, thank you our attendees for attending today's webinar Practical Considerations Form 1116. If you attended today's webinar for at least 100 minutes after the official start time, you qualify for two possible continuing education credits.

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