This form is not mandatory. It is used to claim a credit for income taxes paid to a foreign country on which U.S. taxes are also paid on the same income. Form 1118 is to be used by any corporation subject to U.S. tax on its income where the same income is subject to an income tax in another country.
Whereas the Form 1116 for individuals is only two pages in length, the Form 1118 for corporations is seven pages. The form requires extensive details about the income for which the foreign taxes were paid (or accrued), any applicable deductions or credits, the classification of the credit into nine separate categories, the multiple limitations on the amount of the credit that can be claimed, the tax on dividends paid or deemed paid by multiple levels of subsidiary corporations or branches, offsets for other credits claimed and similar calculations under the alternative minimum tax.
The form is due with the corporate tax return.
The IRS estimate for the time required to prepare this form is about 25 hours and their estimate of the required record keeping time is over 200 hours. Their estimate of the time required to learn about the applicable law and instructions is about 20 hours. The actual time can vary from less than an hour ( assuming the tax preparer is using a computer program to prepare the return ) to much more than the IRS estimate.
The only penalty for not filing this form is the amount of the foreign taxes that can be claimed as a direct credit against the U.S. taxes that must be paid by the corporation.
A credit may only be claimed for income taxes paid to foreign countries. Taxes such as the value added tax (VAT) are not deemed to be income taxes, even though many countries rely on the VAT as a substitute for income taxes.
A corporation may claim a foreign tax credit paid by a subsidiary controlled foreign corporation. A U.S. shareholder of a foreign corporation that has paid income taxes to a foreign country is not permitted to claim a credit for the shareholder's portion of the tax, even though the shareholder may be required to pay taxes on the subpart F income of the foreign corporation.