How FTCs are prorated when the tax year of the foreign country is different from the calendar year in US?

Prorating Foreign Tax Credits for Mismatched Tax Years

When a taxpayer is dealing with foreign tax credits (FTCs) and the tax year in the foreign country does not align with the United States' calendar tax year, the IRS provides guidance on how to prorate the foreign taxes paid. The method for prorating FTCs involves allocating foreign taxes to the U.S. tax year in which the foreign taxes were actually paid or accrued, depending on the taxpayer's method of accounting.

Here is a general approach to prorating FTCs:

1. Determine the Period Covered by the Foreign Tax Year

- Identify the start and end dates of the foreign tax year.

2. Identify the Overlapping U.S. Tax Years

- Determine which U.S. tax years overlap with the foreign tax year.

3. Allocate Foreign Taxes to U.S. Tax Years

- If using the cash method, allocate taxes to the U.S. tax year in which they were paid.

- If using the accrual method, allocate taxes to the U.S. tax year in which the taxes accrued according to the foreign country's laws.

4. Calculate the Prorated Amount

- Prorate the foreign taxes based on the number of days in the foreign tax year that fall within the U.S. tax year.

- Use a daily rate calculation to allocate the taxes to the respective U.S. tax year.

5. Report on U.S. Tax Return

- Report the prorated foreign taxes on Form 1116, Foreign Tax Credit, for the corresponding U.S. tax year.

6. Keep Adequate Records

- Maintain records of the foreign tax payments, including the dates and amounts, to support the proration and credit claimed.

The specific guidelines and legal references for this process can be found in the Internal Revenue Code (U.S.C.) and the Treasury Regulations. Taxpayers should refer to the most recent IRS publications and bulletins for any updates or changes to the procedures. The Internal Revenue Bulletins, such as those listed in the provided information, may contain relevant notices, revenue rulings, or procedures that update or clarify the rules regarding the proration of FTCs.

It is important to review the latest IRS guidance to ensure compliance with current tax laws and regulations when prorating foreign tax credits.

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Sources:

Internal Revenue Bulletin: 2023-40 2023-10-01

Internal Revenue Bulletin: 2023-32 2023-08-06

Internal Revenue Bulletin: 2023-16 2023-04-16

Internal Revenue Bulletin: 2020-49 2020-11-29

Internal Revenue Bulletin: 2016-52 2016-12-26