You can claim the credit for a qualified foreign
tax in the tax year in which you pay it or accrue
it, depending on your method of accounting.
“Tax year” refers to the tax year for which your
U.S. return is filed, not the tax year for which
your foreign return is filed.
Accrual method of accounting. If you use an
accrual method of accounting, you can claim
the credit only in the year in which you accrue
the tax. You are using an accrual method of accounting
if you report income when you earn it,
rather than when you receive it, and you deduct
your expenses when you incur them, rather
than when you pay them.
In most cases, foreign taxes accrue when all
the events have taken place that fix the amount
of the tax and your liability to pay it. Generally,
this occurs on the last day of the tax year for
which your foreign return is filed.
From this I understand that the accrued method would mean that if you in the US tax year of 2016, made a gain in the UK let's say in November 2016, you have not paid, but have accrued CGT on that gain which is due to be paid sometime after April 2017.
Now if you made this gain in 2016 in the UK but paid no tax, you could not offset the tax paid on your US tax return if you used the "paid" method, surely? As it has not been paid in 2016 for which you are filing the US Tax return.
Therefore, if this gain was significant and you were using the paid basis, you would have to pay the IRS for your 2016 return a large sum of tax, and then claim that as a refund in 2017, which is the year you actually paid the UK CGT.
However my understanding of the above is that the accrued method means that because you received the gain in 2016, you have a known accrued amount (assuming you calculate it correctly) of tax that has not yet been paid, but will be in 2017. So to avoid paying this tax to the US, you would file using the accrued method on your 1116 Part II and use that as a FTC to remove the liability for US tax. You would then pay your UK CGT in 2017, but you couldn't then claim that tax for FTCs on your 2017 US Tax return. However, that is not a problem as the gain was not made in 2017.
So why is the accrual method a poor choice? I do not understand your example where you say that the accrual method could not be claimed until 2017 - this sounds like the scenario that you would find yourself in with the "paid" method and exactly what the "accrued" method is trying to avoid.
As quoted from the IRS publication you stated:
You are using an accrual method of accounting
if you report income when you earn it,
rather than when you receive it, and you deduct
your expenses when you incur them, rather
than when you pay them.
So if you earn a gain in 2016, you report that gain. However you have incurred a tax, so using the accrual method you account that for 2016 US tax return, even if not paid. It sounds from your previous post as you are suggesting the opposite?
Thanks,
J
