If foreign tax credits exceed the limitation in a given taxable year, these can be carried back one year and forward up to ten years.
Excess credits on general limitation income can offset only past or future excess limitations on general limitation income.
Foreign tax credits can also be used to offset alternative minimum tax (AMT)
AMT foreign tax credit is computed in the same manner as credit for regular tax purposes with one exception. For regular tax purposes, the limitation equals the pre-credit U.S tax multiplied by the ratio of foreign source taxable income to worldwide taxable income, with separate limitations computed for passive category income and general category income.
Same basic formula and separate income limitations apply for AMT purposes, except that the pre-credit U.S tax amount is now the tentative minimum tax (before any foreign tax credits) and the foreign-source and worldwide income amounts are computed on the basis of alternative minimum taxable income.
Taxpayers have a choice to use simplified AMT foreign tax credit limitation when calculating their AMT foreign tax credit. Election to do so is made in the taxpayer’s first tax year for which the taxpayer claims an AMT foreign tax credit. It then applies to all subsequent tax years. It is only revocable with consent of IRS.
Deemed foreign Tax Credit
Gross income:
If a domestic corporation receives dividends from a foreign corporation, it cannot claim dividend received deduction even if it owns the foreign corporation. Dividends received will be included in the total taxable income of the domestic corporation.
If United States has already taxed the earnings of a subsidiary corporation, the dividends received by such corporation will not be taxable to Domestic Corporation. A domestic corporation that owns 10% or more of a foreign corporation can claim dividend received deduction for the portion of dividends attributable to income derived by the foreign corporation from either the conduct a U.S trade or business or dividends received from an 80% or more owned Domestic Corporation.
Direct Foreign Tax Credit:
Under code section 903, a U.S person can claim a direct foreign tax credit for any foreign withholding taxes it incurs on a dividend from a foreign corporation.
Deemed Paid Foreign Tax Credit:
Under code section 902, a domestic corporation can also claim a deemed paid foreign tax credit if it owns 10% or more of the voting stock of the foreign corporation from which it receives a dividend distribution.
Gross up for Deemed paid Foreign Taxes:
To prevent a double tax benefit in the form of both an implicit deduction and a deemed paid credit with respect to the same foreign income taxes, a domestic corporation must gross up its dividend income by the amount of the deemed paid credit.
The taxpayer must report an amount of income (dividend plus code section 78 gross up) equal to the foreign corporation’s pre-tax earnings related to the dividend distribution. This gross up requirement prevents the double tax benefit by eliminating the implicit deduction.
Below is a video link to IRS website that educates you about foreign tax credit:
https://www.youtube.com/watch?v=gw-7FAIaP2w
Below is a text link to IRS website that explains what foreign taxes qualify for the foreign tax credits:
References:
Practical Guide to US Taxation of International transactions 9th Edition
Robert J. Misey Jr.
Michael S. Schadewald
Publishers: Wolter Kluwer, CCH Incorporated.