IRS Updates Practice Unit on Expense Allocation/Apportionment in Calculation of the IRC 904 FTC Limitation (September 30, 2021)

The IRS has updated its practice unit discussing expense Allocation/Apportionment in Calculation of the IRC 904 FTC Limitation. The overview is as follows:

The United States taxes a U.S. corporation’s income on a worldwide basis. To prevent double taxation, U.S. taxpayers are allowed a credit for foreign income taxes paid/accrued. However, the amount of Foreign Tax Credit (FTC) a taxpayer can utilize each year is based upon the ratio of foreign source taxable income (FSTI) to worldwide taxable income (WWTI). Thus, the FTC is limited to the U.S. tax on FSTI.

A taxpayer who is in an excess credit position (i.e., unable to use all their foreign tax credits), or close to the FTC limitation, would like to increase the IRC 904 FTC Limitation by maximizing the portion of their worldwide income that is FSTI. One way to maximize net FSTI is by minimizing expenses allocated/apportioned to FSTI. The Regulations provide numerous rules for allocating and apportioning expenses. This Concept Unit will provide an overview of the rules for the allocation and apportionment of expenses, losses, and other deductions (referred to collectively as “deductions”) of the taxpayer in calculation of the FTC limitation. Deductions that have specific treatment under the Regulations are not covered in this Practice Unit and may be found in separate Practice Units, e.g., Asset Valuation using the FMV Method for Interest Expense Allocation to calculate FTC Limitation and How to Allocate and Apportion Research and Experimental (R&E) Expenses.

Learning the Lingo
The rules related to the allocation and apportionment of deductions are found at Treas. Reg. 1.861-8 et. seq. A person reading these Regulations for the first time will be confronted with a number of words that are used repeatedly throughout the Regulations as terms of art. A working knowledge of the Regulations is possible only after a comfort level with this terminology is achieved. To better explain both the Regulations and the general concepts of this Concept Unit, the following terms used in the Regulations will be discussed:
– Operative sections;
– Statutory grouping;
– Residual grouping;
– Allocation;
– Apportionment.

See the full practice unit by clicking IRS Updates Practice Unit on Expense Allocation/Apportionment in Calculation of the IRC 904 FTC Limitation (September 30, 2021).

Posted by Jessica Ji, Associate Editor, Wealth Strategies Journal.