Schedule J

Determine Numerators of Limitation Fractions, Year-End Recharacterization

Separate Limitation Loss Allocations and Other Adjustments Necessary to

Balances, and Overall Foreign Loss Account Balances (Rev. November 1991)

(Form 1118)

For calendar year 19 , or other tax year beginning , 19 and ending , 19

Internal Revenue ServiceDepartment of the Treasury © Attach to Form 1118. For Paperwork Reduction Act Notice, see page 1 of Instructions for Form 1118.Name

Adjustments to Separate Limitation Income or (Losses) in Determining Numerators of Limitation Fractions

(ii) (i) (iii) (iv) (v) (vi) (vii)

Taxable income

foreign trade

attributable to

income

services

Financial

income

High

tax interest

withholding

General

limitation

income

Dividends

from a DISC

or former DISC

Shipping

income income

Passive

1

Allocation of current year separate limitation losses (see instructions):

adjustments (see instructions).Separate limitation income or (loss) before

2

a

Passive income

General limitation income

b

High withholding tax interest cFinancial services income dShipping income eDividends from a DISC or former DISC fTaxable income attributable to foreign trade income gCertain distributions from a FSC or former FSC hDividends from noncontrolled section 902 corporation* i

3 Subtotal—Combine lines 1 through 2i.4

Recapture of overall foreign losses

Overall foreign losses

6 Subtotal—

5

Subtract line 5 from line 3.

7 Recharacterization of separate limitation income (see instructions):

a

Passive income

General limitation income

b

High withholding tax interest cFinancial services income dShipping income eDividends from a DISC or former DISC fTaxable income attributable to foreign trade income gCertain distributions from a FSC or former FSC h

i Dividends from noncontrolled section 902 corporation*

8 Subtotal—Combine lines 6 through 7i.

* Important: If you received dividends from more than one noncontrolled section 902 corporation, see last paragraph of Schedule J instructions.

Expires 11-30-94OMB No. 1545-0122

Employer identification number

(viii) (ix)

noncontrolled

Dividends from

corporation*

section 902

Certain

distributions

from a FSC or

former FSC

Schedule J (Form 1118) (Rev. 11-91) Cat. No. 10309U

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Part I
Schedule J (Form 1118) (Rev. 11-91)

Subtotal—Enter amounts from line 8, Part I(see instructions)Allocation of current year U.S. source losses 10Numerator of Limitation Fraction—Subtract line 10Part II, of corresponding Schedule B.from line 9. Enter each result here and on line 6,

Year-End Balances of Future Separate Limitation Income That Must Be Recharacterized

a

Passive incomeGeneral limitation income

cb

High withholding tax interest

d Financial services incomee Shipping income

f Dividends from a DISC or former DISC

g

incomeTaxable income attributable to foreign trade

h

corporation*Dividends from noncontrolled section 902Certain distributions from a FSC or former FSC

i

Overall Foreign Loss Account Balances (section 904(f)(1))

1

Current year additionsBeginning balance

32

Subtotal—Current year reductions (other than recapture)

Combine lines 1 through 3

54

Current year recapture

6 Ending balance—Subtract line 5 from line 4.

* Important: If you received dividends from more than one noncontrolled section 902 corporation, see last paragraph of Schedule J instructions.

(ii) (i) (iii) (iv) (v) (vi) (vii)

Taxable income

foreign trade

attributable to

income

services

Financial

income

High

tax interest

withholding

General

limitation

income

Dividends

from a DISC

or former DISC

Shipping

income income

Passive

(viii) (ix)

noncontrolled

Dividends from

corporation*

section 902

Certain

distributions

from a FSC or

former FSC

( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( )

Page 2

Part IIIPart II

9

11
Schedule J (Form 1118) (Rev. 11-91) Page 3

Separate limitation loss

being allocated

Line 4.—Enter your overall foreign

losses for the tax year (from line 3) to

the extent they have reduced U.S.

source income for the tax year.

Instructions

Separate limitation

income in a given

category

×

(Section references are to the Internal

Revenue Code unless otherwise noted.)

Combined separate

limitation losses from all

categories with taxable

losses

If an overall foreign loss has reduced

U.S. source income, do not complete

the remainder of Part I with respect to

that separate limitation. (However, you

must complete Parts II and III with

respect to that separate limitation to

show the year-end balance in the

separate limitation loss and overall

foreign loss accounts.)

Purpose of Schedule

Part I is used to show adjustments to

separate limitation income or (losses) in

determining the numerator of the

limitation fraction for each separate

limitation. Part II is used to show the

year-end balances of future separate

limitation income that must be

recharacterized as income of other

separate limitation categories (as the

result of current year or prior year

separate limitation losses that were

allocated to those other separate

limitation categories). Part III is used to

show the balances in your overall foreign

loss accounts at the beginning of the tax

year, any adjustments, and the balances

in your overall foreign loss accounts at

the end of the tax year. Note: Schedule

J (like Schedule B, Part III and Schedule

H) is completed only once (unlike all

other Form 1118 schedules, which are

completed for each applicable separate

limitation).

To the extent separate limitation

losses are able to be allocated, the total

amounts allocated should be entered in

the bold-outlined boxes as positive

numbers. Each separate amount

allocated to a given separate limitation

should be entered across the same line

under the appropriate column heading to

which it was allocated. Note: The

numbers entered across any given line

should “zero out.”

Line 5.—Section 904(f)(1) requires you to

recapture overall foreign losses that

reduced U.S. source income in prior tax

years. Recapture is accomplished by

treating as U.S. source income a portion

of the current year separate limitation

income that is of the same limitation as

the loss that resulted in the prior year

overall foreign loss. Recapture continues

until the applicable overall foreign loss

account (Part III of this schedule) is

reduced to zero.

Your combined separate limitation

losses for the tax year in excess of your

combined separate limitation income for

the tax year reduces your U.S. source

income (if any) for the tax year. If you

have no U.S. source income for the tax

year, or if the excess of your combined

separate limitation losses for the tax

year over your combined separate

limitation income for the tax year

exceeds your U.S. source income for the

tax year, the excess is treated as a net

operating loss, which may be carried

over or back to other tax years in

accordance with the rules under

section 172.

The amount of any current year

separate limitation income subject to

recapture is the lesser of the balance in

the applicable overall foreign loss

account (the applicable line 1 amount of

Part III of this schedule) or 50% of all

amounts entered across line 3, Part I of

this schedule. You may make an annual,

revocable election to recapture a greater

portion of the balance in an overall

foreign loss account. You may make the

election by attaching a statement to

Form 1118 indicating the percentage

and dollar amount of the separate

limitation income that is being treated as

U.S. source income and the percentage

and dollar amount of the balance (both

before and after recapture) in the overall

foreign loss account that is being

recaptured.

Part I

The following instructions reflect the

official position of the IRS (as set forth in

Notice 89-3, 1989-1 C.B. 623) regarding

the ordering of adjustments to each

separate limitation income or (loss) in

arriving at the numerator of the limitation

fraction for each separate limitation. (See

also Regulations section 1.904(f)-12.)

Example 1: Corporation X has separate

limitation income of $4,000 in its

“general limitation income” separate

limitation (line 1, column (i)) and separate

limitation income of $1,000 in its

“financial services income” separate

limitation (line 1, column (iv)). In addition,

the corporation has a separate limitation

loss of $2,000 in its “shipping income”

separate limitation (line 1, column (v)).

Corporation X completes line 2, Part I,

Schedule J, as follows:

Line 1.—Enter under each of the

applicable columns listed across the top

of the schedule the separate limitation

income or (loss) from column 12 of the

corresponding Schedule A you

completed for that separate limitation.

(Be sure to consider on this line the

possible interplay between the separate

limitation losses and any net operating

losses or net capital losses of which

they may be a part.)

Since the corporation’s combined

separate limitation losses for the tax

year ($2,000) do not exceed its

combined separate limitation income for

the tax year ($5,000), the entire $2,000

may be allocated to other separate

limitations. Therefore, Corporation X

enters a positive $2,000 in the

bold-outlined box on line 2e, column (v).

Line 7.—Section 904(f)(5) states that if

you allocated a separate limitation loss

in a prior tax year, and you have income

during the current tax year in the

separate limitation from which the loss

was allocated, that current year income

(to the extent it has not previously been

recharacterized) must be recharacterized

as income of the separate limitation(s) to

Line 2.—This allocation grid must be

completed to show the “pro rata share”

of each separate limitation loss to be

allocated among other applicable

separate limitations. To determine each

“pro rata share” you must:

To compute the portion of the $2,000

separate limitation loss that is allocable

to the “general limitation income”

separate limitation, Corporation X

divides the $4,000 of separate limitation

income by $5,000 (the combined

separate limitation income from all

categories with positive taxable income).

The result is 80%, which is multiplied by

the separate limitation loss of $2,000.

Corporation X enters the product of

$1,600 on line 2e, column (i).

(a) Add all of the separate limitation

loss amounts you entered across line 1

and then add all of the separate

limitation income amounts you entered

across line 1.

(b) If your combined separate

limitation losses for the tax year do not

exceed your combined separate

limitation income for the tax year, your

pro rata share of each separate

limitation loss to be allocated to each

category with positive taxable income is

as follows:

To compute the portion of the $2,000

separate limitation loss that is allocable

to the “financial services income”

separate limitation, Corporation X

divides the $1,000 of separate limitation

income by $5,000 (the combined

separate limitation income from all

categories with positive taxable income).

The result is 20%, which is multiplied by

the separate limitation loss of $2,000.

Corporation X enters the product of

$400 on line 2e, column (iv).

Separate limitation

income Separate

limitation loss

being allocated

×

Combined separate

limitation income from

all categories with

positive taxable income

(c) If your combined separate

limitation losses for the tax year exceed

your combined separate limitation

income for the tax year, the pro rata

share of each separate limitation loss to

be allocated to each separate limitation

having income is as follows:

The final step is to compute the line 3

subtotals. Corporation X enters $2,400

($4,000 minus $1,600) on line 3, column

(i); $600 ($1,000 minus $400) on line 3,

column (iv); and $0 (negative $2,000

plus positive $2,000) on line 3,

column (v).
Schedule J (Form 1118) (Rev. 11-91) Page 4

Any amount that is not recharacterized

during the tax year (i.e., the excess of

separate limitation losses previously

allocated over current year income in

that same separate limitation) must be

entered into the grid at Part II of this

schedule.

Corporation X enters the $1,500 of

“shipping income” that was

recharacterized in the bold-outlined box

at line 7e, column (v). Note that the total

amounts entered across line 7e now

“zero out.”

(3) Enter the amounts (as determined

above) in the space where the row and

column intersect.

Example 3.—Assume the same facts in

Example 1 on page 3. Also assume that

Corporation X does not have any

remaining balances from any prior

allocations of losses from its “shipping

income” separate limitation to its

“general limitation” or its “financial

services income” separate limitations. As

such, the corporation would enter

$1,600 on line (e), column (i), and $400

on line (e), column (iv).

Finally, Corporation X completes the

Part II recharacterization balances grid

by entering $400 ($1,600 minus $1,200)

on line (e), column (i), and $100 ($400

minus $300) on line (e), column (iv).

Note: Recharacterization of separate

limitation income does not result in

recharacterizing any tax. The rules of

Regulations section 1.904-6 apply on an

annual basis for purposes of allocating

taxes to separate limitations.

Line 10.—Enter the U.S. source losses

you allocated to separate limitation

income during the tax year. Such

allocations should be performed using

the following formula:

To the extent prior year separate

limitation losses are able to be

recharacterized, the total amounts

recharacterized should be entered into

the bold-outlined boxes as negative

numbers. Each prior-year separate

limitation loss recharacterized should be

entered across the same line under the

appropriate column heading to which it

was recharacterized as a positive

number. Note: The numbers entered

across any given line should “zero out.”

Income in the separate

limitation category

Part III

U.S. source loss

Overall foreign loss account

balances.—For each separate limitation,

you are required (by Regulations section

1.904(f)-1(b)) to show the balances in

your overall foreign loss accounts at the

beginning of the tax year, any

adjustments, and the balances in your

overall foreign loss accounts at the end

of the tax year.

×

Combined separate

limitation income

U.S. source losses that are part of a

net operating or net capital loss that are

carried back or forward to another tax

year in accordance with section 172 or

Regulations sections 1.1502-21(b) and

1.1502-79(a) are allocated first to U.S.

source income for the tax year to which

the losses are carried, and then to the

separate limitation income for the

current tax year in accordance with the

rules set forth above.

Line 1.—Enter the ending balances from

last year’s schedule.

Example 2.—Assume the same facts in

Example 1 on page 3. Also assume that,

in a subsequent tax year, Corporation X

has $1,500 of income in its “shipping

income” separate limitation (on line 6,

column (v), of its Schedule J).

Lines 2, 3, and 5.—These lines are used

to show any adjustments made to your

overall foreign loss accounts for each

separate limitation during the tax year. A

list of possible additions to the accounts

is shown in Regulations section

1.904(f)-1(d) and a list of possible

reductions (including recapture) is shown

in Regulations section 1.904(f)-1(e).

U.S. source losses in excess of your

separate limitation losses for a tax year

must be treated as net operating losses

that may be carried back or forward to

other tax years in accordance with

section 172.

Since there is not enough income in

the “shipping income” separate

limitation to recharacterize the entire

$2,000 prior-year balance remaining to

be recharacterized, Corporation X will

prorate the $1,500 of income in that

subsequent year as follows:

Part II

Line 5.—Enter the applicable amount(s)

from line 5, Part I, Schedule J.

Section 904(f)(5) states that if you

allocated a separate limitation loss in a

prior tax year, and you have income

during the current tax year in the

separate limitation from which the loss

was allocated, that current year income

(to the extent it has not previously been

recharacterized) must be recharacterized

as income of the category to which the

loss was allocated in the prior year(s).

Line 6.—Enter the year-end balances of

your overall foreign loss accounts for

each separate limitation.

To compute the portion to be

recharacterized as “general limitation

income,” Corporation X divides the

$1,600 remaining to be recharacterized

from “shipping income” to “general

limitation income” by the $2,000

remaining to be recharacterized from

“shipping income” to all separate

limitations. The result is 80%, which is

multiplied by the $1,500 of “shipping

income.” Corporation X enters the

product of $1,200 as a positive number

on line 7e, column (i).

Computer Generated

Schedule J

You may submit computer generated

Schedules J if they are in conformity

with the IRS version of the schedule. For

example, if you received dividends from

more than one noncontrolled section

902 corporation, you will have to expand

the Schedule J to properly allocate the

separate limitation losses among

categories with positive taxable income

(since dividends received from each

noncontrolled section 902 corporation is

a separate limitation).

To determine the amounts to be

entered into the grid: Add the current

year separate limitation loss allocations

(subject to Regulations section

1.904(f)-1(d) capital gains adjustments)

to last year’s year-end balances and

subtract the amounts recharacterized

during the current tax year. Enter the

amounts into the grid as follows:

To compute the portion to be

recharacterized as “financial services

income,” Corporation X divides the $400

remaining to be recharacterized from

“shipping income” to “financial services

income” by $2,000. The result is 20%,

which is multiplied by the $1,500 of

“shipping income.” Corporation X enters

the product of $300 as a positive

number on line 7e, column (iv).

(1) Go down the left side of the

schedule to find the separate limitation

from which losses were previously

allocated.

(2) Go across that line until you reach

the column(s) of the separate

limitation(s) to which the losses were

previously allocated.

If you allocated a prior year separate

limitation loss to more than one separate

limitation and there is not enough

current year income in the separate

limitation from which the loss was

allocated to recharacterize all remaining

balances, then the current year income

must be recharacterized as income of

the other separate limitations on a pro

rata basis in the following manner:

Amount remaining to

be recharacterized

as income of a given

separate limitation Current year income

in separate limitation

from which losses

were previously

allocated

×

Amounts remaining to

be recharacterized as

income of all separate

limitations

which the loss was allocated in the prior

year(s).