# Foreign Tax Credit-1116



## aawasthi001 (Jan 19, 2011)

Hello,

I was self-employed in Canada in 2011

Gross biz income: $35,000
biz expense: $15,000

1. Which method is correct when completing 1116?

Method # 1:
1a: $35,000
2: $15,000

Method # 2:
1a: $20,000
2: $0

I get most benefit by method # 2 (i.e. by keeping my foreign sourced taxable income higher). And my CPA used method # 2

2. In 2013, I didn't have any self-employment but had rental income in Canada, with:

Gross rental income: $30,000
rental expense: $10,000

CPA completed 1116 by entering: 
#1a: $30,000
#2: $10,000

I am confused why different methods for completing 1116? Is it different methods depending on the nature of income (general vs passive)?

Thanks
Anupam


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## Bevdeforges (Nov 16, 2007)

I'm no expert on the 1116 form, but I do know that you are supposed to fill out a separate 1116 for each type of income. I suspect this is what the CPA is doing.

And don't forget, there is never just one "correct" way to fill out the forms. US tax law allows for any number of options, elections and interpretations. To some extent, as long as the result turns out to be roughly the same, the IRS doesn't really care.
Cheers,
Bev


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## aawasthi001 (Jan 19, 2011)

Bevdeforges said:


> I'm no expert on the 1116 form, but I do know that you are supposed to fill out a separate 1116 for each type of income. I suspect this is what the CPA is doing.
> 
> And don't forget, there is never just one "correct" way to fill out the forms. US tax law allows for any number of options, elections and interpretations. To some extent, as long as the result turns out to be roughly the same, the IRS doesn't really care.
> Cheers,
> Bev


I am talking about returns from 2 different years. Also, each method (within the same year) will give out different results.


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## BBCWatcher (Dec 28, 2012)

Before we get too far here, in tax year 2011 did you take the Foreign Earned Income Exclusion (IRS Form 2555 or 2555-EZ)?


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## aawasthi001 (Jan 19, 2011)

BBCWatcher said:


> Before we get too far here, in tax year 2011 did you take the Foreign Earned Income Exclusion (IRS Form 2555 or 2555-EZ)?


No, only 1116


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## BBCWatcher (Dec 28, 2012)

I took a few minutes (only) to see if I could find some IRS advice on how to report self-employment income on Form 1116. I haven't found much in that limited searching. I have found advice that self-employment income is _generally_ reported as net of legitimate expenses unless specifically asked (e.g. Schedule C). So from what I've been able to determine so far your accountant took a reasonable approach.


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