On December 14, 2021, the IRS Large Business and International (LB&I) issued a new Practice Unit on flow-through entities and their effect on the individual foreign tax credit. Practice Units are developed through IRS internal collaboration and serve as both job aids and training materials on tax issues. They are not official pronouncements of law or directives and cannot be used, cited or relied upon as such.
This practice unit reflects the recent finalized Treas. Reg. 1.861-9 which details the allocation and apportionment of expenses using the asset-based apportionment. Back on September 29, 2020, Treasury and the IRS released guidance that finalized foreign tax credit and expense allocation regulations proposed in 2019.
Under IRC 704(b) and IRC 1366, each U.S. partner of a partnership must report the partner’s distributive share of the partnership’s gains, income, deductions, losses, or credits on the partner’s return, and each U.S. shareholder of an S corporation must report the shareholder’s share of the S corporation’s gains, income, deductions, losses or credits on the shareholder’s return.
This practice unit gives explains and gives examples of how the character of these items flows from the business entities to the partners. The examples do not reflect the new Schedules K-1 and K-2.