Hello. So, when using accrued taxes on foreign income to calculate the US foreign tax credit, the fiscal year seems to be important. In general, it sounds like sole proprietorships in the US are supposed to report on a calendar year basis unless receiving permission from the US in their initial year of operation to use a different fiscal year.
What about a sole proprietorship initially set up in another country where the taxpayer could choose and consistently use a different fiscal year? When that business activity is later reported to the US for the first time, does the taxpayer get to keep using the same fiscal year as in the country of origin? Or does the business have to have two sets of books including differing as to tax period?
Where this gets confusing is in trying to figure out how to relate components of the foreign sole proprietorship profit to the calendar year reporting period used in the 1040 and the foreign tax credit calculation.
Would it suffice, if the fiscal year is kept the same in both countries, to allocate taxes on a pro-rata basis from the portions of succeeding fiscal years that fall into a given calendar year? The accrual would still have to take place within the two years following the calendar year in question, right?
I appreciate any insight anyone might have on this. The IRS publications on point do not seem to touch this issue at all.
Foreign tax credits and fiscal years
Moderator: Mark T Serbinski CA CPA