When May They Take the Credit?

Cash Basis vs. Accrual Basis Taxpayer

To determine when the taxpayer may take the foreign tax credit, you need to know whether the taxpayer is a cash basis or accrual basis taxpayer:

• A cash basis taxpayer reports income when it is actually received, and reports expenses when they are paid. The majority of people who file individual income tax returns are cash basis taxpayers.
• Accrual basis taxpayers compute income when they actually earn it or became entitled to it. Their deductions are computed based on when those debts were incurred, but not necessarily paid.

Most individual taxpayers are cash basis taxpayers. Taxpayers on a cash basis may choose to use the accrual method to determine the foreign tax credit. However, once this choice has been made, the taxpayer must use the accrual method for the foreign tax credit on all future tax returns.

Taxpayers on the accrual basis should be referred to a professional tax preparer or military legal assistance officer for assistance, unless the taxpayer is on cash basis and chooses the accrual method to determine the foreign tax credit.