Internal Revenue Service United States Department of the Treasury
Level Basic Advanced Military International

Foreign Tax Credit and Completing Form 1116

Who and When

Topic Summary

This topic described the following:

  • To qualify for the foreign tax credit, taxpayers must have foreign or Puerto Rico source income that is liable for taxes in both that foreign country and the U.S.
  • Cash basis and accrual basis are the two accounting methods used when computing the foreign tax credit:
    • Cash basis taxpayers report income when it is received and expenses when they are paid
    • Accrual basis taxpayers compute income when they earn it and deductions when they are incurred
  • Cash basis taxpayers may choose to take the foreign tax credit for their Puerto Rico taxes in the year those taxes were paid or accrued