Do I have to use a certain accounting method (cash vs. accrual)?

The foreign tax credit is allowed for foreign income taxes that are “paid or accrued.” IRC §901(b). IRC § 905(a) allows a taxpayer to claim the foreign tax credit in the year in which foreign income taxes are accrued—no matter what method of accounting the taxpayer uses for other purposes.

However, once a taxpayer decides to credit accrued foreign income taxes, he must continue to do so in subsequent years using the accrual method. Typically, it is more advantageous for someone to elect the foreign tax credit (for foreign income taxes) on an accrual basis—rather than when it is actually paid. This is because taxes tend to accrue earlier than when they are actually paid.