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CFEPro789
CFEPro789, Accountant
Category: Tax
Satisfied Customers: 543
Experience:  Former IRS Agent, Master of Accountancy, Tax Return Preparer
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I am the sole owner/employee of an S-corp and I am doing a

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I am the sole owner/employee of an S-corp and I am doing a one-time business deal with a Mexican company. Due to Mexican tax laws, the company must withhold a mandatory 25% tax for the Mexican government, which can then be applied to my US tax liability. Since a US S-corp doesn't pay federal taxes, is it possible to have this tax credit pass through to me and my personal tax return? Thank you!

jgdarragh2285 :

Hi my name is XXXXX XXXXX I will be helping you today with your tax question. You can absolutely take a credit pass through from the S Corp to your personal return just like the income passes through from the S Corp to your personal 1040 Income Tax. If you are the sole owner then you will be entitled to 100% of the credit for income tax paid in Mexico.

Customer:

OK, this is what I was hoping. Question then is, when they pay my corporation and file it with the Mexican government (via my tax ID) what paperwork is generated in either Mexico or the US that facilitates the pass through? The question is, I suppose, what paperwork/filing is made at the time of payment that then allows for me to personally lay claim to the tax credit with my SS# XXXXX of a corp tax ID? Thank you.

jgdarragh2285 :

No it would go on the 1120S as foreign tax paid, and then on your K1 (same form that reports your income) in Box 16 it is listed as foreign tax. You then do Form 1116 to report that foreign tax paid on your 1040 to get the credit.

Customer:

A 1120S is a US form filed with my corp when paying taxes next year? (Is there anything else I should be aware of here? This is a lot of money I'm trying not to lose, so just covering all my bases). Thank you!!

jgdarragh2285 :

The foreign tax paid will be reported under the EIN of the S Corp and then the S Corp reports your share, in this case 100% of that foreign tax paid, on the K1 which you then use to report it and take the credit on your Form 1116

jgdarragh2285 :

Yes the 1120S is the S Corporation US Income Tax Return. Although the Corp is not taxable, they still file a return to report income and deductions and credits. However because there is no income tax for the S Corp and it passes through to the owner, the 1120S Income Tax Return simply leaves off the tax calculation based on the total income and then you do that on the Personal 1040 Income Tax Return. There is nothing else you need to know here. Under US Tax Code Section 1366 (a)(1)(A) you are legally entitled to this credit. If your accountant wasnt aware of that tell him to read that section of the code, then read the instructions for your 1120S US S Corporation Income Tax Return to see how to report it, then he puts it on K1 for you which is reported under your SSN and that is how the credit links back to you.

jgdarragh2285 :

The only stipulation for being able to take the foreign tax credit is that it has to be a tax you are legally required to pay in Mexico.

Customer:

Ok, great. I think this finally puts me at ease. Many thanks, XXXXX XXXXX the thorough answer.

jgdarragh2285 :

The Foreign tax paid will go on Line 16 with Code L on the K1

jgdarragh2285 :

You are very welcome!

jgdarragh2285 :

Let me know if you have any further questions here, good luck on the deal!

Customer:

Thank you. Big help here.

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