How to split foreign taxes and claim foreign tax credit when there is combined foreign income? IRS issues final Regs.

IRS has issued final regs clarifying eligibility for the foreign tax credit. Specifically, they provide additional guidance for determining who is considered to pay a foreign tax for purposes of the foreign tax credit. The regs affect taxpayers claiming direct and indirect foreign tax credits.

Code Sec. 901 permits taxpayers to claim a credit for income, war profits, and excess profits taxes paid or accrued during the tax year to any foreign country or to any U.S. possession. In 2006, IRS issued proposed regs that would retain the general principle that tax is considered paid by the person who has legal liability under foreign law for the tax. However, they would further clarify application of the legal liability rule in situations where foreign law imposes tax on the income of one person but requires another person to remit the tax. The regs also provide detailed guidance on how to treat taxes paid on the combined income of two or more persons.

Code Sec. 909, which addresses concerns about the inappropriate separation of foreign income taxes and related income, was added by the Education, Jobs and Medicaid Assistance Act, effective for foreign income taxes paid or accrued in tax years beginning on or before Dec. 31, 2010.

Under Code Sec. 909, there is a foreign tax credit splitting event if a foreign income tax is paid or accrued by a taxpayer and the related income is, or will be, taken into account by a covered person with respect to such taxpayer. In such a case, the tax is suspended until the tax year in which the related income is taken into account by the payor of the tax.

Planning to attend a Convention in Panama? Rejoice! You are now in “North America” for travel expense deduction

IRS recently announced (IRB 2011-48) that Panama is now included in the North American region for the purposes of IRC 274 in order to claim the travel expenses for attending conventions. Until recently, in order to claim expenses related to travel for convention in Panama taxpayers had to meet special conditions.

IRS Publication 463 states that “You can deduct your travel expenses when you attend a convention if you can show that your attendance benefits your trade or business. You cannot deduct the travel expenses for your family.”

It further states that “You cannot deduct expenses for attending a convention, seminar, or similar meeting held outside the North American area unless:

  • The meeting is directly related to your trade or business, and
  • It is as reasonable to hold the meeting outside the North American area as in it.”

The North American area per IRS includes American Samoa, Antigua and Barbados, Aruba, Bahamas, Bermuda, Costa Rica, Canada, Dominican Republic, Honduras, Jamaica, Mexico, Puerto Rico and US Virgin Island to list only a few. The North American area also includes U.S. islands, cays, and reefs that are possessions of the United States and not part of the fifty states or the District of Columbia.

Panama is included in the list now.