When filing Form 1116, the filer must state how to regard their income, whether on cash or accrued basis. This is the second part of Form 1116. You’ll state whether it’s paid or accrued. The filer must report when the foreign taxes paid or accrued, dividends, rents and royalties, and interest, in both foreign currency and US dollars.
In the rest of the sections of Form 1116, the filer needs to figure out the total credit amount by entering a wide variety of metrics including carryback or carryover, reduction in foreign taxes, and increase in limitations. Before getting to the foreign taxes paid or accrued, you’ll report taxable income or loss from sources outside of the United States. These overall helps you figure out foreign tax credit which helps you reduce tax liability on foreign-sourced income. Make sure to fill out Form 1116 to get the full benefits, or you’ll pay a heft tax bill.