The U.S. allows domestic corporations, U.S. citizens and resident individuals that pay foreign taxes on their foreign source income a foreign tax-credit (FTC) against the U.S. federal income tax paid on such income. Due to various limitations, most U.S. companies (and some individuals) cannot fully utilize available FTCs. The inability to fully utilize FTCs creates additional cash tax cost for these companies and individuals and, in the case of companies, may increase their effective tax rate.
The ability to utilize FTCs is generally limited each year to an amount equal to the company or individual's U.S. federal income tax, multiplied by a fraction, which is the net foreign source income over the net worldwide income. As a result of the way the limitation is calculated, the more net foreign source income a company or individual has, the more FTCs it can utilize. The net foreign source income is the gross foreign source income, less the allocable foreign source deductions.
As an example, we can assist you with strategies to both increase gross foreign source income as well as reduce the allocation of deductions against foreign source income, which, in both cases, should allow you to utilize more FTCs.