--- title: What Is the Foreign Tax Credit? | LedgerFi description: If your business earns income from international clients, the IRS Foreign Tax Credit could save you thousands. Learn how it works & how to claim it. image: https://www.ledgerfi.co/hubfs/LedgerFi-OG-Default.png --- Tax Optimization # What Is the Foreign Tax Credit? If your business earns income from international clients, the IRS Foreign Tax Credit could save you thousands. Learn how it works & how to claim it. [ Nathan Hodgens ](https://www.ledgerfi.co/resources/author/team-ledger) Jun 13, 2025 [mailto:?subject=Check%20out%20https://www.ledgerfi.co/resources/what-is-the-foreign-tax-credit&utm_medium=social&utm_source=email%20&body=Check%20out%20https://www.ledgerfi.co/resources/what-is-the-foreign-tax-credit&utm_medium=social&utm_source=email](mailto:?subject=Check%20out%20https://www.ledgerfi.co/resources/what-is-the-foreign-tax-credit&utm_medium=social&utm_source=email%20&body=Check%20out%20https://www.ledgerfi.co/resources/what-is-the-foreign-tax-credit&utm_medium=social&utm_source=email) [Tax Optimization](https://www.ledgerfi.co/resources/tag/tax-optimization) #### TABLE OF CONTENTS - [What Is the Foreign Tax Credit (FTC)?](https://www.ledgerfi.co/resources/what-is-the-foreign-tax-credit#What) - [Who Qualifies for the FTC?](https://www.ledgerfi.co/resources/what-is-the-foreign-tax-credit#Who) - [How Much Credit Can You Claim?](https://www.ledgerfi.co/resources/what-is-the-foreign-tax-credit#You) - [How to Claim the FTC?](https://www.ledgerfi.co/resources/what-is-the-foreign-tax-credit#How) - [Bottom Line](https://www.ledgerfi.co/resources/what-is-the-foreign-tax-credit#Bottom) ![What Is the Foreign Tax Credit?](https://www.ledgerfi.co/hubfs/AI-Generated%20Media/Images/A%20small%20business%20owner%20at%20a%20desk%20reviewing%20international%20tax%20documents%20with%20a%20globe%20a%20US%20tax%20form%20labeled%20Form%201116%20and%20foreign%20currency%20euros%20yen%20pounds%20on%20the%20table%20A%20digital%20tablet%20or%20laptop%20shows%20Foreign%20Tax%20Credit%20with%20international%20graphs%20or%20ch-1.jpeg) × Need Help Fast? Talk to an Expert Instantly [** Call now ** ](tel:+18886026210) [ Schedule call ](https://meetings.hubspot.com/jeremy721/web-consultation?uuid=72d6ad92-b616-4404-8180-05ac0a3a20cd) If your small business earns income from clients overseas or operates internationally, you might get taxed twice—once by the foreign country and again by the U.S. That’s where the **Foreign Tax Credit (FTC)** comes in. The FTC is a valuable IRS provision that helps U.S. taxpayers reduce their U.S. tax bill by the amount of qualifying foreign income tax already paid. In this guide, we’ll break down how it works, who qualifies, how to claim it, and how it compares to the Foreign Earned Income Exclusion (FEIE). --- ## **What Is the Foreign Tax Credit (FTC)?** The Foreign Tax Credit lets U.S. taxpayers—both individuals and businesses—offset their U.S. tax liability by the amount of income tax paid to a foreign government. It’s designed to prevent **double taxation** on the same foreign-source income. If you operate a business in another country or have investments in another country, and you pay taxes, this credit can help you avoid paying taxes twice on the same earnings. --- ## **Who Qualifies for the Foreign Tax Credit?** To be eligible for the FTC, you must: - Be a **U.S. citizen**, **resident alien**, or a **U.S.-based business**  - Have earned **foreign-source income** - Have paid or accrued a **legally required foreign income tax** - Not have received a **refund or exclusion** for that foreign tax **Example:** If your U.S. LLC pays income tax to the U.K. for services rendered there, you may qualify for the FTC. ## Still Have FTC Questions? Talk to an expert directly! Call now at (888) 602-6210 [** Call now ** ](tel:+18886026210) ### **What Types of Taxes Qualify?** Not all foreign taxes are eligible. Only foreign income taxes that meet the following criteria qualify: - Based on **net income**** ** - Legally imposed and actually paid - Paid **directly by you**, not passed through or credited elsewhere Note: **VAT, sales tax, property tax, and payroll tax** do **NOT** qualify. --- ## **How Much Credit Can You Claim?** You can only claim a credit equal to the portion of your **U.S. tax liability attributable to foreign income**. Here’s the formula: ![Untitled Project (37)-1](https://www.ledgerfi.co/hs-fs/hubfs/Untitled%20Project%20(37)-1.png?width=324&height=142&name=Untitled%20Project%20(37)-1.png) You cannot use the FTC to get a refund that exceeds your total U.S. tax owed. However, any unused credit can: - Be **carried back** 1 year, and - Be **carried forward** for up to **10 years**** ** --- ## **How to Claim the Foreign Tax Credit** ### **For Individuals:** - File **IRS Form 1116** with your **Form 1040**** ** - Report: - The type of foreign income (e.g., general, passive) - The country the tax was paid to - The exact amount paid or accrued - Attach any **supporting documentation**, such as foreign tax returns or proof of payment ### **For Businesses:** - Corporations file **Form 1118**** ** - Pass-through entities (LLCs, partnerships, S-corps) may report it differently, depending on structure - In some cases, businesses may opt for a **foreign tax deduction** instead, though it typically provides less benefit than the credit --- ## Still Have Questions? Talk to an expert directly! Call now at (888) 602-6210 [** Call now ](tel:+18886026210) [ Schedule a call ** ](https://meetings.hubspot.com/jeremy721/web-consultation?uuid=27a565c2-a1b5-4aab-857e-4f61ccf3f514) ## **Bottom Line** If you or your business earns income overseas and are required to pay Foreign Income Tax, the Foreign Tax Credit can help reduce your U.S. tax bill significantly. While the rules are detailed, the savings can be substantial—especially for small businesses expanding globally. **Need help claiming the Foreign Tax Credit? **[Contact LedgerFi today](https://meetings.hubspot.com/jeremy721/web-consultation?uuid=ca861878-cb0c-4847-bcce-aac584da8203) for international tax support tailored to small business owners. Let’s make sure you don’t pay more than you have to. ## Similar posts Business Growth ### [Key Deductions and Credits Explained for Small Business Taxes](https://www.ledgerfi.co/resources/key-deductions-and-credits-explained-for-small-business-taxes) Maximize your tax savings with key small business deductions & tax credits. Learn how to reduce taxable income, claim clean energy & EV credits, &... Nathan Hodgens Mar 3, 2025 Tax Optimization ### [California Wildfire Tax Relief: What You Need to Know](https://www.ledgerfi.co/resources/california-wildfire-tax-relief-what-you-need-to-know) Was your business impacted by the California wildfires, you may be eligible for federal & state tax relief. Discover how to claim wildfire casualty... Nathan Hodgens Feb 11, 2025 Business Growth ### [Top 5 IRS Red Flags For Small Businesses](https://www.ledgerfi.co/resources/top-5-irs-red-flags-for-small-businesses) Worried about an IRS audit? Discover the 5 most common triggers for small businesses and actionable tips to minimize your risk and protect your... Nathan Hodgens Jan 27, 2025 ## Talk to a Small Business Advisor Today ```json { "@context" : "https://schema.org", "@type" : "BlogPosting", "author" : { "@type" : "Person", "name" : "Nathan Hodgens", "url" : "https://www.ledgerfi.co/resources/author/team-ledger" }, "dateModified" : "2026-04-13T19:05:57.037Z", "datePublished" : "2025-06-13T19:00:00.000Z", "headline" : "What Is the Foreign Tax Credit?", "image" : [ "https://www.ledgerfi.co/hubfs/AI-Generated%20Media/Images/A%20small%20business%20owner%20at%20a%20desk%20reviewing%20international%20tax%20documents%20with%20a%20globe%20a%20US%20tax%20form%20labeled%20Form%201116%20and%20foreign%20currency%20euros%20yen%20pounds%20on%20the%20table%20A%20digital%20tablet%20or%20laptop%20shows%20Foreign%20Tax%20Credit%20with%20international%20graphs%20or%20ch-1.jpeg" ], "mainEntityOfPage" : { "@id" : "https://www.ledgerfi.co/resources/what-is-the-foreign-tax-credit", "@type" : "WebPage" }, "publisher" : { "@type" : "Organization", "logo" : { "@type" : "ImageObject", "url" : "https://www.ledgerfi.co/hubfs/ledger-logo-green%20(3).svg" }, "name" : "Ledger Fi" } } ``` ```json { "@context" : "https://schema.org", "@id" : "https://www.ledgerfi.co/#organization", "@type" : [ "AccountingService", "LocalBusiness" ], "address" : { "@type" : "PostalAddress", "addressCountry" : "US", "addressLocality" : "Cupertino", "addressRegion" : "CA", "postalCode" : "95014", "streetAddress" : "20065 Stevens Creek Blvd. Ste.B-1B" }, "areaServed" : [ { "@type" : "City", "containedInPlace" : { "@type" : "State", "name" : "California" }, "name" : "San Jose" }, { "@type" : "City", "containedInPlace" : { "@type" : "State", "name" : "California" }, "name" : "San Francisco" }, { "@type" : "City", "containedInPlace" : { "@type" : "State", "name" : "Illinois" }, "name" : "Chicago" }, { "@type" : "City", "containedInPlace" : { "@type" : "State", "name" : "California" }, "name" : "Irvine" }, { "@type" : "City", "containedInPlace" : { "@type" : "State", "name" : "Texas" }, "name" : "Austin" }, { "@type" : "City", "containedInPlace" : { "@type" : "State", "name" : "Arizona" }, "name" : "Phoenix" }, { "@type" : "City", "containedInPlace" : { "@type" : "State", "name" : "Florida" }, "name" : "Orlando" } ], "description" : "LedgerFi provides bookkeeping, payroll, and expert tax strategy coaching for small businesses. 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