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Final regulations on the foreign tax credit

The IRS has issued final regulations pertaining to the foreign tax credit, which incorporates changes due to the Tax Cuts and Jobs Act (TCJA). The new regulations may be found here.

The TCJA had a major overhaul in the way U.S. taxpayers doing business overseas are taxed. As such, the foreign tax credit, which is a credit for income taxes paid to other countries, also had to change.

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Summary of changes to the foreign tax credits for U.S. corporations:

  • Two new separate categories of income under section 904(d): (i) any amount includible in gross income under section 951A (other than passive category income) (“section 951A category income”) and (ii) foreign branch income. No foreign taxes can be carried back or forward under the 951A (GILTI) basket.
  • Repeal of section 902 indirect credits with respect to dividends from foreign corporations.
  • Modified indirect credits under section 960 for inclusions under sections 951(a) (1) and 951A.
  • Modified section 78 gross up with respect to inclusions under sections 951(a)(1) and 951A.
  • Revised sourcing rule for certain income from the sale of inventory under section 863(b).
  • Repeal of the fair market value method for apportioning interest expense under 864(e).
  • New adjustments for purposes of section 904 with respect to expenses allocable to certain stock or dividends for which a dividends received deduction is allowed under section 245A.
  • Election to increase pre-2018 section 904(g) Overall Domestic Loss (ODL) recapture.
  • Limited foreign tax credits with respect to inclusions under section 965.

Summary of changes to the foreign tax credits for U.S. individuals:

  • Two new separate categories of income under section 904(d): (i) any amount includible in gross income under section 951A (other than passive category income) (“section 951A income”) and (ii) foreign branch income
  • No foreign taxes can be carried back or forward under the 951A (GILTI) basket
  • Revised sourcing rule for certain income from the sale of inventory under section 863(b)
  • Election to increase pre-2018 section 904(g) Overall Domestic Loss (ODL) recapture

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In addition to these final regulations, the IRS has also issued proposed regulations relating to the following:

  • Allocation and apportionment of deductions and creditable foreign taxes
  • Foreign tax redeterminations
  • Availability of foreign tax credits under the transition tax
  • Application of the foreign tax credit limitation to consolidated groups

Please consult with a qualified tax professional.  This information is general in nature and should not be relied on. For more information on how Henry+Horne can help you comprehend and apply this information, check out our Accounting Services page.

Jill A. Helm, CPA