US-UK · Journal
Accrued or Paid on Form 1116: The UK Tax You Then Cannot Deduct
Checking the Accrued box on Form 1116 binds every later return and closes the deduction for those UK taxes. What the statute actually says.
Checking the Accrued box on Form 1116 binds every later return and closes the deduction for those UK taxes. What the statute actually says.
Checking the "Accrued" box in Part II of Form 1116 is not a formatting preference — it is an election, and the Internal Revenue Code attaches two consequences to it that the box itself does not advertise. Once made, you must credit foreign taxes in the year they accrue on every future return, and no part of those taxes may ever be taken as a deduction instead. It can only be made on a timely filed original return, never by amending one.
That last point is why the choice deserves more thought than it usually gets. For a US citizen or green-card holder living in the UK, the question is not academic: the UK tax year and the US tax year do not line up, so the two bases genuinely put UK tax in different US years. Most guidance explains how to make the election. Very little explains what you give up by making it.
A US filer with only US-source income never sees Part II as a decision. A US filer in the UK does, because the two tax calendars are offset. The UK tax year runs 6 April to 5 April, so a single UK year straddles two US calendar years and will never map cleanly onto either.
The payment pattern widens the gap further. Under Self Assessment, HMRC collects payments on account on 31 January and 31 July, with the balance due the following 31 January. So the UK tax attributable to one UK year is physically paid across a span that reaches into the US year after next.
On the paid basis, the US return picks up UK tax in the calendar year the money actually left your account — which means a single UK liability can appear in two different US years, split by nothing more principled than HMRC's instalment dates. On the accrued basis, the whole liability sits in the US year it relates to. Put that way, accrual looks obviously tidier, and that is exactly why people check the box without reading what follows.
This area attracts confident commentary that does not match the sources, so it is worth setting out what the two authorities say and declining to go further than they do.
The statute, 26 U.S.C. §905(a), permits the credits to "be taken in the year in which the taxes of the foreign country or the possession of the United States accrued", at the taxpayer's option and "irrespective of the method of accounting employed in keeping his books". It then adds the binding language:
> "If the taxpayer elects to take such credits in the year in which the taxes of the foreign country or the possession of the United States accrued, the credits for all subsequent years shall be taken on the same basis, and no portion of any such taxes shall be allowed as a deduction in the same or any succeeding year."
The Instructions for Form 1116 set out the mechanics for Part II:
> "If you report on the cash basis, you can choose to take the credit for accrued taxes by checking the 'Accrued' box in Part II on a timely filed original return. You can't make this choice on an amended return. Once you choose to do this, you must credit foreign taxes in the year they accrue on all future returns."
Read together, that is three limbs and no fourth:
1. The vehicle is a timely filed original return. The box, Part II, on a return filed on time. Not an amendment.
2. It cannot be made by amending. The instructions say so flatly. A return already filed on the paid basis cannot be converted after the fact.
3. It binds forward. Every future return must credit foreign taxes in the year they accrue.
Notice what is not in either source: neither sets out a procedure for coming back off the accrual basis once you are on it. Plenty of advisory pages fill that silence with a confident sentence about obtaining consent from the IRS. We are not going to repeat a route neither the statute nor the instructions describes.
One further point the instructions do answer, and that trips people up: nothing restricts the election to your first Form 1116 year. The restriction is on the vehicle, not the year. A cash-basis filer who has used the paid basis for several years is not shut out of ever electing — what they cannot do is reach back and change the years already filed.
Here is the part that is missing from almost every explainer on this subject, and it is in the statute, in plain words.
Foreign income tax is ordinarily a choice: take it as a credit against US tax, or take it as an itemised deduction. The credit is usually worth more, which is why it is the default advice. But "usually" is not "always". In a year where the Form 1116 limitation bites hard — where the US tax on your foreign-source income is small relative to the UK tax you paid — a deduction can be the better outcome, and that choice is ordinarily yours to make year by year.
Electing the accrual basis removes it. The statute does not say the deduction is restricted or discouraged; it says "no portion of any such taxes shall be allowed as a deduction in the same or any succeeding year". The door closes on those taxes, in the election year and in every year after.
That changes the character of the decision. The accrual election is usually presented as a timing preference — tidier year-matching in exchange for slightly more work. It is better understood as trading a recurring annual choice for a one-way improvement in timing. For a UK filer whose income is stable and whose UK tax reliably exceeds the US tax on the same income, that trade may be entirely sensible. For someone whose circumstances swing — a year abroad, a year of low foreign income, a large one-off UK liability — giving up the deduction permanently is a real cost, and it should be priced before the box is checked, not after.
Two problems get blamed on the paid/accrued choice and are not solved by it.
It is not a category problem. Foreign tax credit is computed separately within each Form 1116 separate category, and a credit stranded in the passive category does not become usable against general-category income because you changed your accounting basis. If your difficulty is that UK salary and UK dividends land in different categories, the basis is the wrong lever — we work through that in why your Form 1116 credit cannot cross between the passive and general baskets.
It does not buy you time. Several distinct limitation periods run alongside this election and none of them is affected by it:
Those three are genuinely separate and we set them out in how a stranded foreign tax credit is carried, and for how long. The point for this article is only that checking a box in Part II does not lengthen any of them.
If you are already on the accrual basis and your circumstances have changed, this is not a question to resolve from a web page — and it is not one we will pretend has a tidy answer. The statute requires subsequent years on the same basis and bars the deduction; the Form 1116 instructions say the choice binds all future returns. Neither sets out a way back.
That makes it an escalation, not a filing decision. In our practice it goes to the licensed professional who reviews and signs the return — an IRS Enrolled Agent who is also ACCA-qualified, which matters here because the facts are usually half UK and half US — and it is resolved on the specific history of your returns, not on a general rule. If that is your position, book a consultation rather than making a change and hoping.
A short sequence that keeps the decision in the right order:
The paid-or-accrued box is one of the few places on a US return where a single tick has permanent consequences in both directions — forward into every later year, and sideways into the credit-or-deduction choice you will no longer have. It rewards being read once, carefully, rather than answered the same way every year by habit.
It also sits in the middle of a cross-border picture that rarely resolves on one provision. Which UK taxes are creditable in the first place is its own question, and we treat it separately in which UK taxes are creditable on a US return. If the whole position — UK Self Assessment, US return, credit, basis, carryovers — needs looking at together, that is what our US-UK tax specialists do, and every return is reviewed and signed by a licensed professional before it goes anywhere.
This article explains general principles and is not advice on your own facts. Rates, thresholds and deadlines change; figures here are checked against official sources on the date shown. Every return and filing we prepare is reviewed and signed by a licensed professional.