June 2023 / United States

29 Giugno 2023

IRS Updates Practice Unit on Categorization of Foreign Income and Taxes for Foreign Tax Credit Purposes

The Internal Revenue Service (IRS) has updated its International Practice Unit, which covers the appropriate identification of the types of foreign sourced income and taxes to determine assignment into their proper categories, to address changes from the implementation of the Tax Cuts and Jobs Act (TCJA).

The IRS released the updated Practice Unit, entitled "Categorization of Income and Taxes Into Proper Basket" on 26 June 2023 (INT-C-054 (formerly FTC/C/10_02-01), revised 15 May 2023).

According to the updated Practice Unit, the Foreign Tax Credit (FTC) calculation must be applied separately to each category of income, sometimes referred to as income baskets. To prevent averaging low-taxed income in one category with high-taxed income in another category, which could overstate the FTC, the foreign income and related taxes from one category cannot be combined with another category. The FTC limitation must be calculated separately for different categories of foreign source income according to section 904(d) of the Internal Revenue Code (IRC).

The Practice Unit discusses the current seven categories of income, including:

  • IRC section 951A category income, which was added by the TCJA;
  • foreign branch category income, which was added by the TCJA;
  • passive category income;
  • general category income;
  • IRC 901(j) income;
  • certain income resourced by treaty; and
  • lump-sum distributions.