| Instructions for Form 1118 |
2006 Tax Year |
This is archived information that pertains only to the 2006 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
Report all amounts in U.S. dollars unless otherwise specified. If it is necessary to convert from a foreign currency, attach
a statement explaining
how the conversion rate was determined.
Separate category of income boxes.
The corporation must complete a separate Form 1118 for each applicable category of income. See Categories of Income beginning on page 1.
Report gross income or (loss) from sources outside the United States for the applicable separate category in columns 2 through
7. Gross income
equals gross receipts reduced by cost of goods sold. Report the applicable deductions to this gross income in columns 9 and
10. Be sure to include in
all columns the gross income and deductions that pertain to foreign branches.
Aggregate all section 863(b) gross income and deductions and report the totals on a single line.
Column 1.
Enter the two-letter codes (from the list beginning on page 11) of all foreign countries and U.S. possessions within
which income is sourced and/or
to which taxes were paid, accrued, or deemed paid.
For section 863(b) income, enter “ 863(b)” instead of a two-letter code.
Column 2(a).
If the corporation is a U.S. shareholder in a CFC, report all income deemed received under section 951(a)(1)(A) (before
gross-up). See section
904(d)(3) and Look-Through Rules on page 3 for more information. If the corporation is a U.S. shareholder in a passive foreign investment
company (PFIC) and receives distributions from stock in that PFIC, report all income deemed received (before gross-up) under
section 1291.
Column 3(a).
Report all other dividends (before gross-up) not included in column 2(a) from sources outside the United States for
the applicable separate
category. Other dividends include amounts included in gross income under section 951(a)(1)(B).
Note.
All dividends from a domestic corporation are of U.S. source, including dividends from a domestic corporation which has 80%
or more of its gross
income from sources outside the United States.
Columns 2(b) and 3(b).
Include taxes deemed paid by a domestic corporation under section 902 or section 960 on distributions by a foreign
corporation in income as
dividend gross-up. See Regulations section 1.960-3(b) for exceptions.
Column 4.
Enter all interest received from foreign sources. See section 861(c) for the treatment of interest from a domestic
corporation that meets the
foreign business requirement.
Column 6.
Include gross income, including compensation, commissions, fees, etc., for technical, managerial, engineering, construction,
scientific, or similar
services outside the United States. Be sure to include gross income from services performed through a foreign branch.
Column 7.
Include all other gross income from sources outside the United States for the applicable separate category, including
all other gross income of
foreign branches and pass-through entities and any exchange gain or loss recognized under sections 986(c) or 987(3) on a distribution
or remittance of
previously taxed amounts. Attach a schedule identifying the gross income by type and by the foreign country or U.S. possession
from which it was
sourced.
Column 9(d).
Include all other deductions definitely allocable to income from sources outside the United States (dividends, interest,
etc.) for the applicable
separate category. Include deductions allocable to income of foreign branches.
Include any reduction of foreign source capital gain net income. If foreign source capital gain net income from all
separate categories is more
than the capital gain net income reported on the corporation's tax return, enter a pro rata portion of the excess as a negative
number in each
separate category. See Capital Gains on page 3.
Column 10.
Enter only the apportioned share from Schedule H, Part II, column (d) that relates to gross income reported in columns
2 through 7.
Note.
If the corporation qualified as a financial services entity because it treated certain amounts as active financing income
that are not listed in
Regulations sections 1.904-4(e)(2)(i)(A) through (X), but that are described as similar items in Regulations section 1.904-4(e)(2)(i)(Y),
attach a
statement to Form 1118 showing the types and amounts of the similar items.
Part I—Foreign Taxes Paid, Accrued, and Deemed Paid
Report only foreign taxes paid, accrued, or deemed paid for the separate category for which this Form 1118 is being completed.
Report all amounts
in U.S. dollars. If the corporation must convert from foreign currency, attach a schedule showing the amounts in foreign currency
and the exchange
rate used.
For corporations claiming the credit on the accrual basis, the exchange rate for translating foreign taxes into U.S. dollars
will generally be an
average exchange rate for the tax year to which the taxes relate. However, the exchange rate on the date of payment must be
used if the foreign taxes
(a) are paid more than 2 years after the close of the tax year to which they relate or (b) are paid in a tax year prior to
which they relate. In
addition, for tax years beginning after December 31, 2004, taxpayers may elect to use the exchange rate on the date of payment.
Taxpayers may elect to
use the payment date exchange rates for all creditable foreign income taxes or only those taxes that are attributable to qualified
business units with
U.S. dollar functional currencies. The election is made by attaching a statement to a timely-filed (including extensions)
Form 1118 that indicates the
corporation is making the election under section 986(a)(1)(D). Once made, the election applies for all subsequent tax years
and is revocable only with
the consent of the IRS. See section 986(a).
Column 1.
Claim the foreign tax credit for the tax year in which the taxes were paid or accrued, depending on the method of
accounting used. If a credit for
taxes accrued is claimed, show both the date accrued and the date paid (if paid).
If the cash method of accounting is used, an election under section 905(a) may be made to claim the credit based
on accrued taxes. If this
election is made, figure the foreign tax credit for all subsequent tax years on the same basis. Also, the credits are subject
to the redetermination
provisions of section 905(c). See page 4 for details.
Column 2(d).
Include foreign taxes paid or accrued on foreign branch taxable income to which the rules of section 863(b) apply.
Note.
Do not include these overlapping amounts in column 2(e).
Part II—Separate Foreign Tax Credit
Line 4.
Enter the total amount of foreign taxes carried forward or back to the current year (see page 4 for general rules).
Include all taxes carried
forward, whether or not such taxes are used. Attach a schedule reconciling the prior year's carryover with this year's carryover,
identifying
carrybacks and any other adjustments.
Line 6.
If the corporation has, in any of its separate categories, a current year separate limitation loss, an overall domestic
loss, an overall foreign
loss, recapture of an overall foreign loss, or current year separate limitation income in a category in which it has a beginning
balance of income
that must be recharacterized, adjustments must be made. See the instructions for Schedule J to determine if that schedule must be filed.
Line 7b.
Enter taxable income that should not be taken into account in computing the foreign tax credit limitation. For example,
enter the income taken into
account in computing the possessions corporation tax credit under section 936 (without regard to sections 936(a)(4) and 936(i))
or section 30A.
Line 8.
Divide line 6 by line 7c to determine the limitation fraction. Enter the fraction on line 8 as a decimal with the
same number of places as the
number of digits to the left of the decimal in adjusted taxable income on line 7c. For example, if adjusted taxable income
on line 7c is $100,000,
compute the limitation fraction to 6 decimal places.
Line 10.
The limitation may be increased under section 960(b) for any tax year that the corporation receives a distribution
of previously taxed E&P. See
section 960(b).
Part III—Summary of Separate Credits
Complete Part III only once. Enter on lines 1 through 8 the separate foreign tax credits from Part II, line 11, for each applicable
separate
category.
Line 10.
If the corporation participates in or cooperates with an international boycott, the foreign tax credit may be reduced.
Complete Form 5713,
International Boycott Report. If the corporation chooses to apply the international boycott factor to calculate the reduction
in the credit, enter the
amount from line 2a(3) of Schedule C (Form 5713) on line 10.
If the corporation is a partner in a partnership, for taxes of foreign corporations for tax years beginning after October
22, 2004, stock owned
directly or indirectly, by or for a partnership shall be considered as being owned proportionately by its partners. See section
902(c)(7).
Part I—Dividends and Deemed Inclusions From Post-1986 Undistributed Earnings
Column 1.
Enter the name of the foreign corporation (or DISC or former DISC) whose earnings were distributed to, or included
in income by, the domestic
corporation filing the return.
Column 2.
Enter the year and month in which the foreign corporation's U.S. tax year ended.
Example.
When figuring foreign taxes deemed paid in 2005 by a calendar year domestic corporation with respect to dividends
and inclusions out of post-1986
undistributed earnings for the foreign corporation's tax year that ended June 30, 2005, enter “ 0506.”
Column 4.
Enter the distributing corporation's post-1986 undistributed earnings pool for the separate category for which the
schedule is being completed.
Generally, this amount is the corporation's E&P (computed in the corporation's functional currency according to sections 964(a)
and 986)
accumulated in tax years beginning after 1986, determined as of the close of the corporation's tax year without reduction
for any earnings distributed
or otherwise included in income (e.g., under section 304, 367(b), 951(a), 1248, or 1293) during the current tax year.
Post-1986 undistributed earnings are reduced to account for distributions or deemed distributions that reduced E&P
and inclusions that
resulted in previously taxed amounts described in section 959(c)(1) and (2) or section 1293(c) in prior tax years beginning
after 1986. See
Regulations section 1.902-1(a)(9). Also, see section 902(c)(3) and Regulations section 1.902-1(a)(13) for special rules treating
earnings accumulated
in post-1986 years as pre-1987 accumulated profits when no U.S. shareholder was eligible to claim a section 902 credit with
respect to taxes paid by
the foreign corporation.
Column 5.
Enter the opening balance in the distributing corporation's post-1986 foreign income taxes pool for the tax year indicated.
This amount is the
foreign income taxes paid, accrued, or deemed paid (in U.S. dollars) by the foreign corporation for prior tax years beginning
after 1986, reduced by
foreign taxes attributable to distributions or deemed inclusions of earnings in prior tax years. See Regulations section 1.902-1(a)(8)(i).
Column 6(a).
Enter the foreign income taxes paid or accrued by the foreign corporation for the tax year indicated, translated into
U.S. dollars using the
exchange rate specified in section 986(a).
Column 6(b).
Enter the foreign income taxes deemed paid (under section 902(b)) by the corporation for the tax year indicated (from
Schedule D, Part I, Section
A, column 10, and Section B, column 8(b)).
Column 8(a).
Report the sum (in the foreign corporation's functional currency) of all dividends paid and deemed inclusions out
of post-1986 undistributed
earnings for the tax year indicated.
Column 8(b).
Report the column 8(a) amounts, translated into U.S. dollars at the appropriate exchange rates (as defined in section
989(b)). If the foreign
corporation's functional currency is the U.S. dollar, do not complete column 8(b).
Part II—Dividends Paid Out of Pre-1987 Accumulated Profits
Use a separate line for each dividend paid. If a dividend is paid out of the accumulated profits of more than one pre-1987
tax year, figure and
show the tax deemed paid on a separate line for each tax year. In applying section 902, the IRS may determine from which tax
year's accumulated
profits the dividends were paid. See Regulations section 1.902-3(g)(4).
Important:
The formula for calculating foreign taxes deemed paid under section 902 with respect to dividends paid in a post-1986 year
out of pre-1987
accumulated profits requires that all components (dividends, accumulated profits, and taxes) be maintained in the foreign
corporation's functional
currency and translated into U.S. dollars at the exchange rate in effect on the date of the dividend distribution. See Regulations
section
1.902-1(a)(10)(ii) and (iii).
Column 1.
Enter the name of the first-tier foreign corporation (or DISC or former DISC) that paid a dividend out of pre-1987
profits to the domestic
corporation filing the return.
Column 2.
Enter the year and month in which the foreign corporation's pre-1987 tax year ended.
Column 4.
For each line, enter the pre-1987 accumulated profits for the tax year indicated in column 2, computed in functional
currency under section 902.
See Regulations section 1.902-1(a)(10)(i) and (ii).
Column 5.
Enter the foreign taxes paid and deemed paid (in functional currency) with respect to the pre-1987 accumulated profits
entered in column 4 for the
tax year indicated in column 2. See the instructions for Schedule G on page 8 for information on reduction of foreign taxes
for failure to furnish
information required under section 6038.
Column 6(a).
Enter the amount of each dividend paid by the first-tier foreign corporation (or DISC or former DISC) to the domestic
corporation (in functional
currency) out of the accumulated profits of the pre-1987 tax year indicated in column 2.
Column 6(b).
Enter the amount from column 6(a) translated into U.S. dollars using the spot exchange rate in effect on the date
of distribution. See Regulations
sections 1.902-1(a)(10)(ii) and 1.902-3(g)(1).
Column 8(a).
Multiply column 5 by column 7. Enter this amount in column 8(a) in functional currency.
Column 8(b).
Enter the amount from column 8(a) translated into U.S. dollars at the spot exchange rate in effect on the date of
distribution. See Regulations
section 1.902-1(a)(10)(iii).
Part III—Deemed Inclusions From Pre-1987 Earnings and Profits
Important:
The formula for calculating foreign taxes deemed paid under section 960 with respect to deemed inclusions (e.g., under section
956 or 1248) in a
post-1986 year out of pre-1987 E&P requires that earnings and profits and foreign taxes be calculated in U.S. dollars under
the rules of
Regulations section 1.964-1(a) through (e), and then translated into the foreign corporation's functional currency at the
exchange rate in effect on
the first day of the foreign corporation's first post-1986 tax year. See Notice 88-70, 1988-2 C.B. 369. The deemed inclusion
is then translated into
U.S. dollars at the appropriate exchange rate specified in section 989(b). Foreign income taxes paid in pre-1987 tax years
are translated into U.S.
dollars for purposes of section 960 at the exchange rate in effect when the foreign taxes were paid. See Regulations section
1.964-1(d) and Temporary
Regulations section 1.905-5T(b)(1).
Column 1.
Enter the name of the first- or lower-tier foreign corporation whose earnings were deemed included in the income of
the domestic corporation filing
the return.
Column 2.
Enter the year and month in which the corporation's pre-1987 tax year ended. If the deemed inclusion is from the accumulated
E&P of more than 1
tax year, figure and show the tax deemed paid on a separate line for each year.
Column 4.
For each line, enter the E&P calculated in U.S. dollars under Regulations sections 1.964-1(a) through (e), translated
into functional currency
under Notice 88-70 for the tax year indicated in column 2.
Column 5.
Enter foreign taxes paid and deemed paid (in U.S. dollars) with respect to the E&P entered in column 4. See the instructions
for Schedule G on
page 8 for information on reduction of foreign taxes for failure to furnish information required under section 6038.
Column 6(b).
Enter the amount from column 6(a) translated into U.S. dollars at the appropriate exchange rate specified in section
989(b).
Part I—Tax Deemed Paid by First-Tier Foreign Corporations
Section A—Dividends Paid Out of Post-1986 Undistributed Earnings
Column 1.
Enter the name of the second-tier foreign corporation and the name of the first-tier foreign corporation to which
it paid a dividend out of
post-1986 undistributed earnings.
Example.
The U.S. corporation filing the return owns all of the stock of CFC1 and CFC2. CFC1 and CFC2 each own 50% of the stock
of CFC3. In 2005, CFC3 pays
a dividend to CFC1 and CFC2. Use one line to report dividends from CFC3 to CFC1 and another line to report dividends from
CFC3 to CFC2.
Column 2.
Enter the year and month in which the distributing second-tier foreign corporation's tax year ended.
Example.
If a first-tier foreign corporation that uses the calendar year 2005 as its tax year receives dividends out of post-1986
undistributed earnings of
a second-tier foreign corporation for a tax year that ended June 30, 2005, enter “ 0506.”
Column 3.
Enter the second-tier foreign corporation's applicable two-digit foreign country or U.S. possession code from the
list beginning on page 11.
Column 4.
Enter the second-tier foreign corporation's post-1986 undistributed earnings pool (in functional currency) for the
separate category for which the
schedule is being completed. See the instructions for Schedule C, Part I, column 4.
Column 5.
Enter the opening balance in the second-tier foreign corporation's post-1986 foreign income taxes pool for the tax
year indicated. See the
instructions for Schedule C, Part I, column 5.
Column 6(a).
Enter the foreign income taxes paid or accrued by the second-tier foreign corporation for the tax year indicated,
translated from foreign currency
into U.S. dollars using the exchange rate specified in section 986(a).
Column 6(b).
Enter the foreign income taxes deemed paid (under section 902(b)) by the second-tier foreign corporation for the tax
year indicated (from Schedule
D, Part II, Section A, column 10, and Part II, Section B, column 8(b).
Column 8(a).
Report the sum (in the second-tier foreign corporation's functional currency) of all dividends paid out of its post-1986
undistributed earnings for
the tax year indicated.
Column 8(b).
Report the sum of the column 8(a) amounts translated into the functional currency of the first-tier foreign corporation
at the spot rate in effect
on the date of each distribution.
Section B—Dividends Paid Out of Pre-1987 Accumulated Profits
Use a separate line for each dividend paid. If a dividend is paid out of the accumulated profits of more than one pre-1987
tax year, figure and
show the tax deemed paid on a separate line for each tax year. In applying section 902, the IRS may determine from which tax
year's accumulated
profits the dividends were paid. See Regulations section 1.902-3(g)(4).
Important:
The formula for calculating foreign taxes deemed paid by a first-tier foreign corporation under section 902(b) with respect
to dividends paid by a
second-tier foreign corporation in a post-1986 year out of pre-1987 accumulated profits requires that all components (dividends,
accumulated profits,
and taxes) be maintained in the second-tier foreign corporation's functional currency. Dividends are translated into the first-tier
foreign
corporation's functional currency and added to its post-1986 undistributed earnings at the exchange rate in effect on the
date of the dividend
distribution. See Regulations section 1.902-1(a)(9)(ii). Foreign taxes are translated into U.S. dollars, and added to the
first-tier foreign
corporation's post-1986 foreign income taxes, at the exchange rate in effect on the date of the dividend distribution. See
Regulations section
1.902-1(a)(8)(ii).
Column 1.
Enter the name of the second-tier foreign corporation and the name of the first-tier foreign corporation to which
it paid a dividend out of
pre-1987 accumulated profits.
Column 2.
For each pre-1987 tax year, enter the year and month in which the second-tier foreign corporation's tax year ended.
Column 4.
For each line, enter the pre-1987 accumulated profits for the tax year indicated in column 2, computed in the second-tier
corporation's functional
currency under section 902. See Regulations sections 1.902-1(a)(10)(i) and (ii).
Column 5.
Enter the foreign taxes paid and deemed paid under section 902(b) (in functional currency) with respect to the accumulated
profits entered in
column 4 for the pre-1987 tax year indicated in column 2. See the instructions for Schedule G below for information on reduction
of foreign taxes for
failure to furnish information required under section 6038.
Column 6(a).
Enter each dividend paid by the second-tier foreign corporation (in functional currency) to the first-tier foreign
corporation out of the
accumulated profits of the pre-1987 tax year indicated in column 2.
Column 6(b).
Enter the amount from column 6(a), translated into the first-tier foreign corporation's functional currency using
the spot exchange rate in effect
on the date of distribution. See Regulations sections 1.902-1(a)(10)(ii) and 1.902-3(g)(1).
Column 8(a).
Multiply column 5 by column 7. Enter this amount in column 8(a).
Column 8(b).
Enter the amount from column 8(a), translated in U.S. dollars at the spot exchange rate in effect on the date of distribution.
See Regulations
section 1.902-1(a)(10)(iii).
Part II—Tax Deemed Paid by Second-Tier Foreign Corporations
Follow the instructions for the corresponding columns of Schedule D, Part I, substituting “second-tier foreign corporation” for references to
the “first-tier foreign corporation” and “third-tier foreign corporation” for references to the “second-tier foreign corporation.”
Note.
In completing Section A, column 5, note that section 902(b) as in effect prior to the Taxpayer Relief Act of 1997 did not
treat any foreign taxes
as deemed paid by a third- or lower-tier foreign corporation with respect to dividends received from lower-tier foreign corporations.
Use Schedule E to report foreign taxes deemed paid with respect to dividends from certain fourth-, fifth-, and sixth-tier
controlled foreign
corporations out of earnings accumulated in tax years beginning after August 5, 1997. Follow the instructions for the corresponding
columns of
Schedule D, Part I, Section A, substituting references to the next lower-tier foreign corporation as appropriate.
The post-1986 undistributed earnings and taxes pools for the eligible CFCs begin on the first day of the CFC's first tax
year beginning after
August 5, 1997. Earnings accumulated in tax years beginning before August 6, 1997, will be treated as pre-1987 accumulated
profits for section 902
purposes. See section 902(c)(6) and Regulations section 1.902-1(a)(10)(i). Foreign income taxes attributable to these pre-pooling
profits must be
reduced when the associated earnings are distributed. However, such taxes are not eligible for the deemed paid credit. See
Regulations section
1.902-1(a)(10)(iii) and section 1113(c)(2) of the Taxpayer Relief Act of 1997.
Note.
In completing Part III, column 5, note that, under section 902(b) as amended by the Taxpayer Relief Act of 1997, no taxes
are deemed paid by a
sixth- or lower-tier foreign corporation with respect to dividends received from lower-tier foreign corporations.
Enter the gross income and definitely allocable deductions for each foreign branch (including a disregarded entity) as indicated.
For each such
foreign branch for which Form 8858, Information Return of U.S. Persons With Respect To Foreign Disregarded Entities, is not
filed, attach an income
statement, balance sheet, and schedule of remittances.
Line A.
If the corporation claims a deduction for percentage depletion under section 613 with respect to any part of its foreign
mineral income (as defined
in section 901(e)(2)) for the tax year, any foreign taxes on that income must be reduced by the smaller of:
-
The foreign taxes minus the tax on that income or
-
The tax on that income determined without regard to the deduction for percentage depletion minus the tax on that income.
The reduction must be made on a country-by-country basis (Regulations section 1.901-3(a)(1)). Attach a separate schedule
showing the reduction.
Line C.
If the corporation chooses to calculate the reduction in the foreign tax by identifying taxes specifically attributable
to participation in or
cooperation with an international boycott, enter the amount from Form 5713, Schedule C, line 2b. See Form 5713 and its separate
Schedule C and
instructions.
Line D.
If the corporation controls a foreign corporation or partnership and fails to furnish any return or any information
in any return required under
section 6038(a) by the due date, reduce the foreign taxes available for credit under sections 901, 902, and 960 by 10%. If
the failure continues for
90 days or more after the date of written notice by the IRS, reduce the tax by an additional 5% for each 3-month period or
fraction thereof during
which the failure continues after the 90-day period has expired. See section 6038(c) for limitations and special rules.
In addition, a $10,000 penalty is imposed under section 6038(b) for failure to supply the information required under
section 6038(a) for each
entity within the time prescribed. If the required information is not submitted within 90 days after the IRS has mailed notice
to the U.S. person,
additional penalties apply.
Note.
The reduction in foreign taxes available for credit is reduced by any dollar penalty imposed under section 6038(b).
Line E.
Include the reduction for foreign taxes on foreign oil related income under section 907(b) and taxes attributable
to the deductible portion of any
cash dividend described in section 965(a).
Computer-Generated Schedule H
A computer-generated Schedule H may be filed if it conforms to the IRS version. In some cases, Schedule H can be expanded
to properly apportion
deductions. This applies in cases such as when the corporation:
-
Has more than two product lines (under the sales method of apportioning R&D deductions),
-
Has section 901(j) income from more than one sanctioned country, or
-
Has income re-sourced by treaty for more than one country.
Part I—Research and Development Deductions
Use Part I to apportion the research and development (R&D) deductions that cannot be definitely allocated to some item or
class of gross
income. Use either the sales method or one of the gross income methods described in Regulations section 1.861-17.
Note.
The line 4 totals will generally be less than the totals on lines 1 and 2 because the line 4 totals do not include the gross
income and deductions
that are implicitly apportioned to the residual grouping.
Complete these columns only if the corporation elects the sales method of apportioning R&D deductions described in Regulations
section
1.861-17(c). Enter in the spaces provided the SIC Code numbers (based upon the Standard Industrial Classification System)
of the product lines to
which the R&D deductions relate. See Regulations section 1.861-17(a)(2)(ii) and (iii) for details on choosing SIC codes and
changing a product
category.
Note.
If the corporation has more than two product lines, see Computer-Generated Schedule H above.
Columns (a)(i) and (a)(iii)
Line 1.
Enter the worldwide gross sales for the product lines.
Lines 3a through 3h.
Enter the gross sales that resulted in gross income for each statutory grouping.
Columns (a)(ii) and (a)(iv)
Line 1.
Enter the total R&D deductions connected with the product lines.
Line 2.
Reduce the line 1 totals by legally mandated R&D (Regulations section 1.861-17(a)(4), and a 50% exclusive apportionment
amount (Regulations
section 1.861-17(b)(1)(i)).
The legally mandated R&D rules apply to R&D undertaken solely to meet legal requirements imposed by a particular political
entity for
improvement or marketing of specific products or processes if the corporation does not reasonably expect the results of that research to
generate gross income (beyond de minimis amounts) outside a single geographic source.
Under the exclusive apportionment rules, 50% of the R&D deductions are apportioned exclusively to the statutory grouping
of gross income, or
the residual grouping of gross income, as the case may be, from the geographic source where the R&D activities which account
for more than 50% of
the amount of such deduction were performed. If the 50% test is not met, then no part of the deduction is apportioned under these rules.
Lines 3a through 3h.
To figure the amount of R&D deductions to apportion to each statutory grouping, divide the gross sales apportioned
to the statutory grouping by
the worldwide gross sales for the product line. Multiply the result by the R&D deductions to be apportioned.
Note.
If the corporation had section 901(j) income from more than one sanctioned country or had income re-sourced by treaty for
more than one
country, see Computer-Generated Schedule H above.
Example 1.
To determine the amount to enter on line 3a, column (a)(ii):
-
Divide the amount on line 3a, column (a)(i) by the amount on line 1, column (a)(i).
-
Multiply the result by the amount on line 2, column (a)(ii).
Example 2.
To determine the amount to enter on line 3b, column (a)(iv):
-
Divide the amount on line 3b, column (a)(iii) by the amount on line 1, column (a)(iii).
-
Multiply the result by the amount on line 2, column (a)(iv).
Column (b) Gross Income Methods
Complete these columns only if the corporation elects one of the gross income methods of apportioning R&D deductions described
in Regulations
section 1.861-17(d)(2) and (3). Check the box for the option used. Use Option 1 only if certain conditions are met. See Regulations
section
1.861-17(d)(2).
Line 1.
Enter the total gross income (excluding exempt income according to Temporary Regulations section 1.861-8T(d)(2)).
Lines 3a through 3h.
Enter the gross income within each statutory grouping.
Line 1.
Enter the total R&D deductions.
Line 2.
Reduce the line 1 totals by legally mandated R&D (Regulations section 1.861-17(a)(4)), and a 25% exclusive apportionment
amount (Regulations
section 1.861-17(b)(1)(ii)).
Lines 3a through 3h.
If Option 1 is checked, divide the gross income apportioned to the statutory grouping by the total gross income and
multiply the result by the
R&D deductions to be apportioned. If Option 2 is checked, enter the appropriate amount as described in Regulations section
1.861-17(d)(3).
Part II—Interest Deductions, All Other Deductions, and Total Deductions
Note.
The line 4 totals will generally be less than the totals on lines 1 and 2 because the line 4 totals do not include the gross
income and deductions
that are implicitly apportioned to the residual grouping.
Columns (a)(i) through (b)(iv)
Use these columns to apportion interest deductions. See Temporary Regulations sections 1.861-8T through 1.861-13T for rules
on the apportionment of
interest deductions based on the fair market value, tax book value, or adjusted tax book value of assets.
If the corporation elected to use the fair market value method to apportion interest expense, see Temporary Regulations section
1.861-9T(h). Also
see Rev. Proc. 2003-37, 2003-1 C.B. 950, for procedures for supplying certain documentation and information.
For tax years beginning on or after March 26, 2004, a corporation may elect to use the alternative tax book value method.
See Regulations section
1.861-9(i).
Columns (a) and (b) are subdivided into “Nonfinancial Corporations” and “Financial Corporations.” In allocating interest deductions,
members of an affiliated group that are financial corporations must be treated as a separate affiliated group. Complete columns
(a)(ii) and (b)(iv)
for members of the corporation's affiliated group that are financial corporations and columns (a)(i) and (b)(iii) for members
that are nonfinancial
corporations.
See Regulations section 1.861-11 for the definition of an affiliated group and special rules for section 936 corporations.
Columns (a)(i) and (a)(ii)
Line 1a.
Enter the average of the total assets of the affiliated group. See Temporary Regulations section 1.861-9T(g)(2) for
the definition of average for
these purposes.
Line 1b.
Enter the assets included on line 1a that are characterized as excess related party indebtedness. See Temporary Regulations
section 1.861-10T(e)
for an exception to the general rule of fungibility for excess related party indebtedness.
Line 1c.
Enter all other assets that attract specifically allocable interest deductions. See Temporary Regulations section
1.861-10T for other exceptions to
the general rule of fungibility (such as qualified nonrecourse indebtedness and integrated financial transactions).
Line 1d.
Enter the total of the exempt assets and assets without directly identifiable yield that are to be excluded from the
interest apportionment formula
(Temporary Regulations sections 1.861-8T(d)(2) and 1.861-9T(g)(3)).
Lines 3a through 3j.
The assets on line 2 are characterized as assets in one of the statutory groupings or as belonging to the residual
grouping. Enter the value of the
assets in each of the statutory groupings on line 3a through 3j. See Temporary Regulations sections 1.861-9T(g)(3), 1.861-12T(g)(2),
and
1.861-12T(h)(2) for the rules for characterizing the assets.
Columns (b)(iii) and (b)(iv)
Line 1a.
Enter the total interest deductions for the members of the corporation's affiliated group. These include any expense
that is currently deductible
under section 163 (including original issue discount), and interest equivalents. See Temporary Regulations section 1.861-9T
for the definition of
interest equivalents and a list of the sections that disallow or suspend interest deductions or require the capitalization
of interest deductions.
Line 1b.
Enter the interest deductions associated with the assets on line 1b of columns (a)(i) and (a)(ii), respectively, that
attract specifically
allocable interest deductions under Temporary Regulations section 1.861-10T(e).
Note.
These interest deductions will be divided among the statutory groupings and will appear as a definitely allocable deduction
in Schedule A, column
9(d).
Line 1c.
Enter the interest deductions associated with the assets on line 1c of columns (a)(i) and (a)(ii), respectively, that
attract specifically
allocable interest deductions.
Lines 3a through 3j.
To figure the amount of interest deductions to apportion to each statutory grouping, divide the assets apportioned
to the grouping by the total
assets apportioned and multiply the result by the interest deductions to be apportioned.
Example 1.
To figure the amount to enter on line 3a, column (b)(iii): (a) divide the amount entered on line 3a, column (a)(i),
by the amount on line 2, column
(a)(i); and (b) multiply the result by the amount on line 2, column (b)(iii).
Example 2.
To figure the amount to enter on line 3b, column (b)(iv): (a) divide the amount on line 3b, column (a)(ii) by the
amount on line 2, column (a)(ii);
and (b) multiply the result by the amount on line 2, column (b)(iv).
Complete this column to apportion all other deductions not definitely allocable (other than interest deductions and R&D deductions).
See
Regulations sections 1.861-8 and 1.861-14 and Temporary Regulations sections 1.861-8T and 1.861-14T.
Line 1a.
Enter the total other deductions. Examples include: stewardship expenses; legal and accounting expenses; and other
expenses related to certain
supportive functions such as overhead, general and administrative, advertising, and marketing. Deductions for charitable contributions
made on or
after July 28, 2004, generally are definitely related and allocable to all gross income and apportioned solely to domestic
source income.
Lines 3a through 3j.
Enter the amounts apportioned to each statutory grouping.
See the separate instructions for Schedule I and Schedule J to see if the corporation must file these schedules.
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