FTC Question

Hi,

Last year I sold the rights to my debut novel, so I'm earning again after a few years off work/making no money.

I've always done my own taxes, and I don't remember getting tripped up by the difference between UK's April-April year and the US's calendar year, but this year it's pretzeling me.

So basically, for UK 2019/2020 Tax Year (April to April), I didn't earn any money.
But then in the back half of 2020, I received my advances.

On the FTC (Form 1116), when it asks for foreign taxes paid, do I put 0, which is what I owed to the HMRC for their 19/20 April-April tax year? (and is indeed what I physically paid to the HMRC in the 2020 calendar year)

Or do I do my 20/21 UK taxes ASAP, pay what I owe, and then put that amount into the 1116?

Thanks in advance for any help!

If you did not actually pay any UK income taxes during the calendar year 2020 and you did not have a UK tax liability at all for the year ended April 2020, you have not paid or accrued any foreign income taxes during 2020.  Thus, you would include zero on the Form 1116.

You can pay or accrue the taxes in 2021.  If you have “excess” foreign tax credits in 2021 (calculated on the Form 1116), you can carry the excess back one year, by amending your 2020 US tax return.

Ah, okay. So does that mean I need to pay the US a bunch of money this year, but next year I can go back and amend my 2020 return, and I'll essentially just get that money back from the US?

In this particular case/year, would it be better for me to take the FEIE instead?

Thank you for your help discly!

Sorry @discly but I'm not sure I agree here.

On from 1116, you can elect to treat foreign taxes as paid or accrued - but if you elect accrued then you must continue to use that method in future tax years.

Based on receiving the income in the back end of 202, you will have a UK tax liability for 2020/21 - you should be able to now file your 2020/21 self assessment, know what the tax will be nd accrue on 1116 the UK tax that is attributable to calendar year 2020 (you should pro-rata the amount of income if you had further earnings in early 2021.

I know that @durhamlad is an avid contributor to this forum and on a separate post he has recently confirmed to using the accrual method on form 1116 for his FTC.

Sorry @discly but I'm not sure I agree here.

On from 1116, you can elect to treat foreign taxes as paid or accrued - but if you elect accrued then you must continue to use that method in future tax years.

Based on receiving the income in the back end of 202, you will have a UK tax liability for 2020/21 - you should be able to now file your 2020/21 self assessment, know what the tax will be nd accrue on 1116 the UK tax that is attributable to calendar year 2020 (you should pro-rata the amount of income if you had further earnings in early 2021.

I know that @durhamlad is an avid contributor to this forum and on a separate post he has recently confirmed to using the accrual method on form 1116 for his FTC.

I do indeed use the accrual method every year and ensure that I file my UK self assessment well before Dec 31 each year rather than wait until Jan 31 when it is due by.

Thank you, Smitch and durhamlad, that's really helpful.

For pro-rating, do you just figure out what percent rate you're being taxed on your April-April income, then apply that percentage rate to only the calendar year income amount? (There's probably a better way to say that but I'm not a mathematician.)

In terms of pro-rata, I think it's a question of accruing that portion of UK tax that you will pay on your UK 2020/21 tax return that is attributable to the US income you are declaring on your 2020 return.

Unfortunately you don’t prorate accrued taxes.  Taxes accrue on the last day of the foreign year (April 5th in the case of the UK).  The IRS addressed this issue with respect to the UK in IRS Memorandum 2008-005 (see Situation 2).  TP was a US citizen who lived in Country A (almost certainly the UK, as “Country A's tax year runs from April 6 to the following April 5.”).  In the memo, the IRS stated:

It is well established that under the all events test, TP’s liability for Country A income tax  accrues on the last day of TP’s Country A tax year, or April 5 of each year. * * * If TP elects * * * to take foreign tax credits on the accrual basis, TP’s entire Country A tax liability for the Country A tax year ending April 5, 2007, is creditable in 2007, TP’s U.S. tax year with or within which her  foreign tax year ends, regardless of the year or years in which the taxes are paid.

The taxpayer’s “entire [UK] tax liability” accrued on a single day (April 5, 2007).  There was no ability to prorate the tax between the years.  Cases and rulings are consistent with this interpretation.  See, for example, Santa Fe Drilling Co. v. Riddel, 217 F.Supp. 630 (S.D. Cal. 1963) (regarding Australia’s June 30 year-end) and Rev. Rul. 61-93 (regarding Hong Kong’s March 31st year-end).

Rev. Rul. 61-93 specifically stated proration of the taxes was not allowed (“[a prior ruling] is hereby modified to eliminate therefrom the conclusion that a taxpayer who files his Federal income tax returns for the calendar year under the cash receipts and disbursements method of accounting and who elects to take credit for the Hong Kong tax for the year in which it accrues, may prorate the amount of creditable Hong Kong tax.”).

Also, relatively recently (2019) the IRS in publishing some new regulations stated:

if there is a difference between the U.S. and foreign taxable years, the foreign tax may accrue, for U.S. tax purposes, in a U.S. taxable year that does not include all the income to which the tax relates.

I take your point on pro-rata of income & taxes, even if it does go against the basic accounting principle of matching for income & expenses 

I guess the only other option is to file F1116 with no FTC for 2020, but ensure UK tax is paid in calendar year 2021 (against the UK tax year 2020/21)and the carryback the unused credit one year when filing 2021 US taxes and re-open the 2020 filing?

As @durhamlad has correctly pointed out, getting the timing right on paying UK taxes at the right time can be critical and does require some planning.

I had a sizeable capital gain a few years ago on a company exit and I deliberately forced my fellow (UK only citizens) shareholders   to delay the sale from December 29 to January 4 so that I can ensure the gain fell in a matching period for UK and US tax purposes.

That's great information, Discly.

The https://www.irs.gov/pub/irs-utl/am2008005.pdf is a dense read - can you confirm that I'm reading it right?

If I tick the box 'paid' on my 1116 I report foreign taxes paid in 2020 (0 GBP), but if I tick the box 'accrued' I report the foreign taxes accrued (the positive number I just received yesterday after filing UK 20/21 taxes)?

I do understand now that I can't pro-rate or split the amounts so that it pertains to the actual calendar year income, but is it true do you think that depending on whether I say 'paid' or 'accrued' I have a choice of which UK Return bottom line I can use?

I did see that durhamlad changed his HMRC accounting period to calendar year to match US, I'll think about if I can/should do that this year or in the future. Looks complicated.

Thank you all for being so knowledgeable and helpful with this, UKYankee always has my back.

I did see that durhamlad changed his HMRC accounting period to calendar year to match US, I'll think about if I can/should do that this year or in the future. Looks complicated.

Thank you all for being so knowledgeable and helpful with this, UKYankee always has my back.

Just to be clear, my HMRC accounting period is still April 6 - April 5 for all UK source income.  It is my US source income where the calendar year is considered concurrent with the HMRC tax year. This means when filing HMRC taxes I can use the figures declared on my 1099s. (I have 1099-R, 1099-INT, 1099-DIV,  1099-B plus a W-2, and next year SSB forms).  It makes things so much easier when doing my HMRC Self Assessment.