Guide to Global Payroll Management - 2020 - D-123

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Appendix D--Federal Forms and Instructions

U.S. resident as defined in section
865(g).
Special rules apply in determining the
source of income from the sale of
inventory; sale of depreciable property
used in a trade or business; sale of
intangible property such as a patent,
copyright, or trademark; and
transportation services that begin or end
in the United States or a U.S.
possession. See Pub. 514 for more
information.
Compensation for labor or personal
services as an employee. If you are
an employee and receive compensation
for labor or personal services performed
both inside and outside the United
States, special rules apply in
determining the source of the
compensation. Compensation (other
than fringe benefits) is sourced on a
time basis. Fringe benefits (such as
housing and education) are sourced on
a geographical basis. Or you may be
able to use an alternative basis to
determine the source. If you use an
alternative basis, you may have to
check the box on line 1b (discussed
later). See Pub. 514 for more
information.

Categories of Income

Use a separate Form 1116 to figure the
credit for each category of foreign
source income listed above Part I of
Form 1116. The following instructions
tell you what kind of income to include in
each category. For more information,
see Pub. 514, Code section 904, and
Regulations sections 1.904-4 and
1.904-5.

a. Section 951A Category
Income

Section 951A category income includes
any amount included in gross income
under section 951A category (other than
passive category income). Section
951A category income is otherwise
referred to as global intangible
low-taxed income (GILTI) and is
included by U.S. shareholders of certain
controlled foreign corporations. See
Pub. 514 for additional details.

b. Foreign Branch Category
Income

Foreign branch category income
consists of the business profits of U.S.
persons that are attributable to one or
more qualified business units (QBUs) in
one or more foreign countries. Foreign
branch category income doesn't include
any passive category income. See Pub.
514 for further information.

c. Passive Category Income

Passive category income consists of
passive income and specified passive
category income.
Passive category income doesn't
include gain from the sale of inventory
or property held primarily for sale to
customers in the ordinary course of your
trade or business; gain from
commodities hedging transactions; and
active business gains or losses of
producers, processors, merchants, or
handlers of commodities. It may also not
include dividends, interest, rents, or
royalties received from a controlled
foreign corporation (CFC) in which you
are a U.S. shareholder who owns 10%
or more of the total voting power or the
total value of all classes of the
corporation's stock.
Passive income. Passive income
generally includes dividends, interest,
royalties, rents, annuities, excess of
gains over losses from the sale of
property that produces such income or
of non-income-producing investment
property, and excess of gains over
losses from foreign currency or
commodities transactions. Capital gains
not related to the active conduct of a
trade or business are also generally
passive income.
Passive income doesn't include
export financing interest, active
business rents and royalties, or
high-taxed income. High-taxed income
is income if the foreign taxes you paid
on the income (after allocation of
expenses) exceed the highest U.S. tax
that can be imposed on the income.
Passive income also doesn't include
financial services income derived by a
financial services entity. You are a
financial services entity if you are
predominantly engaged in the active
conduct of a banking, insurance,
financing, or similar business for the tax
year. Financial services income of a
financial services entity generally
includes income derived in the active
conduct of a banking, financing,
insurance, or similar business. If you
qualify as a financial services entity
because you treat certain items of
income as active financing income
under Regulations section 1.904-4(e)(2)
(i)(Y), you must show the type and
amount of each item on an attachment
to Form 1116.
Specified passive category income.
Dividends from a DISC (domestic
international sales corporation) or
former DISC to the extent they are
treated as foreign source income, and
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certain distributions from a former FSC
(foreign sales corporation) are specified
passive category income.

d. General Category Income

General category income is income that
isn't section 951A category income,
foreign branch category income,
passive category income, or income
described in categories e, f, and g,
discussed later. General category
income may include the following.
* Wages, salary, and overseas
allowances of an individual as an
employee.
* Income earned in the active conduct
of a trade or business.
* Gains from the sale of inventory or
depreciable property used in a trade or
business. See Pub. 514 for additional
details.

e. Section 901(j) Income

No credit is allowed for foreign taxes
imposed by and paid or accrued to
certain sanctioned countries. However,
income derived from each sanctioned
country is subject to a separate foreign
tax credit limitation. Therefore, you must
use a separate Form 1116 for income
derived from each sanctioned country.
Note. A foreign tax credit may be
claimed for foreign taxes paid or
accrued with respect to section 901(j)
income if such tax is paid or accrued to
a country other than a sanctioned
country. For example, if a U.S. citizen
resident in a non-sanctioned country
pays a residence-based income tax in
that country on income derived from
business activities in a sanctioned
country, those foreign taxes would be
eligible for a foreign tax credit. Any
taxes imposed on that income by the
sanctioned country would not be eligible
for a foreign tax credit. If no taxes are
paid or accrued to sanctioned countries,
you would generally complete Form
1116 for this category only through
line 17.
Sanctioned countries are those
designated by the Secretary of State as
countries that repeatedly provide
support for acts of international
terrorism, countries with which the
United States doesn't have or doesn't
conduct diplomatic relations, or
countries whose governments aren't
recognized by the United States and
aren't otherwise eligible to purchase
defense articles or services under the
Arms Export Control Act. Pub. 514
contains a list of these countries.
If you paid taxes to a country that
ceased to be a sanctioned country
Instructions for Form 1116 (2019)

D-123

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