When May They Take the Credit? (continued)

Cash Basis Taxpayers

Cash basis taxpayers may choose to take the foreign tax credit for their Puerto Rico taxes in the year those taxes were paid or accrued. If they take the foreign tax credit the year the taxes are:

• Paid, the taxpayers can claim payments and withholdings of taxes paid in the tax year to the Puerto Rico government for their foreign tax credit. Additional taxes owed to the Puerto Rico government for that tax year are not included.
• Accrued, the taxpayers can claim their entire Puerto Rico tax liability as of December 31 for their foreign tax credit, regardless of whether they have paid the taxes.

Most U.S. government employees who live in Puerto Rico use the accrual method to determine their foreign tax credit because Puerto Rico taxes are paid after the end of the year.