Foreign Tax Credit Carryover Utilization

[COLOCPA]

I have a taxpayer with a foreign tax credit (FTC) carryover from 2015.  They finally have foreign income in 2022, including additional foreign taxes paid.  It is General Category Income.  The allowed FTC for 2022 is being pulled from 2022 foreign taxes and not the 2015 carryover.  My understanding is that utilization should come from the oldest first (assuming it hasn't expired yet...which it hasn't).  IRS Publication 514, page 37, confirms this position.  I cannot find a place in Lacerte to force 2022 utilization to be pulled from the oldest year first.  Any help would be greatly appreciated.  

[PhoebeRoberts]

You utilize the carryovers FIFO, but the amount available to "use up" the carryover in 2022 is only the excess limit for 2022.

[COLOCPA]

Thank you for the feedback.  There is an excess amount based on the 2022 calculations.  However, Lacerte is pulling that excess from 2022 foreign taxes and not the 2015 carryforward foreign taxes.  I actually just got off the phone with Tech Support (1.5 hour phone call), and they concluded there is actually a calculation error in the software and are escalating the issue to their Investigations team.  Just my luck!  

[itonewbie · Accepted solution]

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@COLOCPA wrote:

...There is an excess amount based on the 2022 calculations.  However, Lacerte is pulling that excess from 2022 foreign taxes and not the 2015 carryforward foreign taxes.

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There is inconsistency in these statements.  If the "excess amount based on the 2022 calculations" you referred to is the excess limitation for 2022, there is nothing Lacerte could pull from "2022 foreign taxes".  I don't think you are referring to the carryback of excess credit from 2022 to 2021 either because Lacerte simply does not cater to that scenario and that would have required an override.

It would appear that you are expecting the 2022 FTC limitation (F.1116, Line 23) to be covered first by carryover from earlier years on a FIFO basis, starting with 2015 in your case, rather than the current year FTC available for credit.  If that is the case, you are have misunderstood §904(c) and Treas. Reg. §1.904-2(b).

These subsections stipulate that carryover and carryback are applied on a FIFO basis only to the extent there is excess limitation in the current year.  In other words, only to the extent 2022 FTC limitation, Form 1116, Line 23 is in excess of 2022 FTC available for credit (which is the sum of F.1116, Line 9, Line 12, and Line 13) would carryover from earlier years be utilized on a FIFO basis, starting with 2015.

The examples in Pub 514 also don't support your understanding.  If you take a look at those examples again, you will see that both have excess FTC from the current year.  Neither refers to utilizing prior year carryovers in favor of current year FTC available for credit.

Lacerte (so is ProConnect Tax) is computing the utilization of FTC carryover correctly (but is not programmed for FTC carryback).  The Support agent who spoke with you have come to a wrong conclusion.  There is nothing to escalate for or investigate.  From experience, I highly doubt anyone is actually acting on this "escalation".

@IntuitGabi @IntuitRebecca Just in case the developers have a ticket open for this, you may want to make them aware of this thread.  Thanks!

[COLOCPA]

Thank you for the detailed reply.  After reviewing your reply and Pub 514 again, I realized that I misinterpreted "excess limit".  Your assumption about my scenario is correct in that I expected a 2015 FTC carryover to be applied to the limit on Form 1116 Line 23 before applying the 2022 FTC (which was greater than the limit, therefore an excess limit did not exist).  Surprisingly, this is the first time I've encountered this scenario, and unfortunately, arrived at an incorrect interpretation of applying FIFO.  

Just in case Lacerte still has my ticket open, I will provide them an update to close the ticket. 

Thanks again!!