Congress votes to limit use of foreign tax credits.

• Author: Nevius, Alistair M.

On August 10, the House of Representatives interrupted its summer recess to pass a bill to increase funding for Medicaid and education (P.L. 111-226), which President Obama signed the same evening. As a revenue raiser, the law makes changes to how corporations can use the foreign tax credit. The act also terminates the advance refundability of the earned income credit (under Sec. 3507), effective for tax years beginning after December 31, 2010.

Under new Sec. 909, corporations will no longer be able to split creditable foreign taxes from the foreign income they are associated with; taxpayers will have to take that income into account in order to take the associated foreign tax credit. This provision will be effective for foreign taxes paid or accrued in tax years beginning after December 31, 2010.

The act also prevents corporations from claiming foreign tax credits where they engage in covered asset acquisitions (as defined in the act), such as qualified stock purchases under Sec. 338(d)(3). This provision is effective for covered asset acquisitions after December 31, 2010.

The act limits the amount of foreign taxes deemed paid with respect to Sec. 956...