Final regulations applicable to foreign tax credits took effect in 2022. In the months following, the IRS received various questions about their application and, indeed, requests to modify the regs. In Notice 2023-55, the IRS recently provided temporary relief for taxpayers who need to determine whether a foreign tax they paid is eligible for a foreign tax credit.
Background on the Credits
Both the United States and foreign countries may tax the foreign source income of U.S. taxpayers. To ease this double taxation burden, the Internal Revenue Code permits most U.S. taxpayers who pay income taxes to a foreign country to either:
- Deduct the taxes from gross income for U.S. purposes, or
- Credit them dollar for dollar against their U.S. income tax liability on foreign source income.
The latter option is known as a foreign tax credit.
According to the recent guidance, the IRS continues to analyze issues related to the 2022 final foreign tax credit regs and may propose amendments to them. In the meantime, the tax agency has provided temporary relief that allows taxpayers to determine whether foreign taxes they paid during the relief period are foreign income taxes by applying one of two regulation-based rules:
1. Reg Section 1.901-2(a) and Reg Sec. 1.901-2(b) before it was amended by the final regs, or
2. Reg Sec. 1.903-1 without the attribution requirement.
Note: Taxpayers choosing the first option will be subject to a modification that’s described in the notice.
Taxpayers taking advantage of this relief must consistently apply it to all foreign taxes paid in the 2022 and 2023 tax years. They must also apply it to taxes paid in the 2022 and 2023 tax years by a person other than the taxpayer for which the taxpayer would be eligible to claim a foreign tax credit.
The notice also announces that the IRS is considering whether, and under what conditions, to extend the relief to tax years following the 2023 tax year. If your tax situation may involve the foreign tax credit, consult the international tax professionals at Sol Schwartz & Associates for further details and help determining whether you qualify for relief.