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. July 1994)

(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

i

h

Dividends from noncontrolled section 902 corporation*

8 Subtotal—Combine lines 6 through 7i.

* Important: If the corporation received dividends from more than one noncontrolled section 902 corporation, see General Instructions.

OMB 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. 7-94) Cat. No. 10309U

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Part I
Schedule J (Form 1118) (Rev. 7-94)

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

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 the corporation received dividends from more than one noncontrolled section 902 corporation, see General 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 III

Part II

9

11
Schedule J (Form 1118) (Rev. 7-94) Page 3

Separate limitation loss

being allocated

Line 4.—Enter the overall foreign losses

for the tax year (from line 3) if they have

reduced U.S. source income for the tax

year.

General 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 for that separate

limitation. However, complete Parts II

and III for 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 the corporation’s

overall foreign loss accounts at the

beginning of the tax year, any

adjustments, and the balances in the

overall foreign loss accounts at the end

of the tax year.

If separate limitation losses can be

allocated, enter the total amounts

allocated in the bold-outlined boxes as

positive numbers. Enter each separate

amount allocated to a given separate

limitation across the same line under the

appropriate column heading to which it

was allocated.

Line 5.—Recapture overall foreign

losses that reduced U.S. source income

in prior tax years (section 904(f)(1). Do

this by treating a portion of the current

year separate limitation income that is of

the same limitation category as the loss

that resulted in the prior year overall

foreign loss as U.S. source income.

Recapture continues until the applicable

overall foreign loss account balance

(Part III of this schedule) is reduced to

zero.

The combined separate limitation

losses for the tax year that are more

than the combined separate limitation

income for the tax year reduce the U.S.

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

the corporation has no U.S. source

income for the tax year, or if the excess

of its combined separate limitation

losses for the tax year over combined

separate limitation income for the tax

year exceeds its U.S. source income for

the tax year, the excess is treated as a

net operating loss. This loss may be

carried over or back to other 

tax years according to the rules of

section 172. The amount of any current year

separate limitation income subject to

recapture is the smaller 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 on line 3, Part I of this

schedule. The corporation can make an

annual, revocable election to recapture a

greater portion of the balance in an

overall foreign loss account. Make the

election by attaching a statement to

Form 1118 indicating the percentage

and dollar amount of the separate

limitation income that is 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 recaptured.

Part I

Note: See Notice 89-3, 1989-1 C.B.

623, and Regulations section 1.904(f)-12

for more information on the ordering of

adjustments to each separate limitation

income or (loss) category in arriving at

the numerator of the limitation fraction

for each separate limitation.

Example 1. Corporation X has separate

limitation income of $4,000 in its general

limitation income category (line 1,

column (i)) and separate limitation

income of $1,000 in its financial services

income category (line 1, column (iv)). In

addition, the corporation has a separate

limitation loss of $2,000 in its shipping

income category (line 1, column (v)).

Line 1.—Enter in each applicable

column the separate limitation income or

(loss) from column 12 of the

corresponding Schedule A for that

separate limitation.

Because 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 2.—This allocation grid must be

completed to show the pro rata share of

each separate limitation loss to allocate

among other applicable separate

limitations. To determine each pro rata

share:

To compute the portion of the $2,000

separate limitation loss that is allocable

to general limitation income, 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 of 80% 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 entered across line 1.

Then, add all of the separate limitation

income amounts entered across line 1.

b. If the combined separate limitation

losses for the tax year do not exceed

the combined separate limitation income

for the tax year, the pro rata share of

each separate limitation loss to allocate

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 financial services income, Corporation

X divides the $1,000 of separate

limitation income by $5,000. The result

of 20% 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 the combined separate limitation

losses for the tax year exceed the

combined separate limitation income for

the tax year, the pro rata share of each

separate limitation loss to allocate to

each separate limitation having income

is as follows:

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). Note: Schedule J is completed only

once, not again for each applicable

separate limitation.

Computer Generated Schedule J

A computer generated Schedule J can

be filed if it conforms to the IRS version

of the schedule. For example, if the

corporation received dividends from

more than one noncontrolled section

902 corporation, expand Schedule J to

properly allocate the separate limitation

losses among categories with positive

taxable income. Dividends received from

each noncontrolled section 902

corporation is a separate limitation.

Specific Instructions

Important. 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.

Note: The numbers entered across any

given line should “zero out.”
Schedule J (Form 1118) (Rev. 7-94) 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 category)

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

equal zero.

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 income or its financial services

income separate limitations. The

corporation should 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 allocating taxes to

separate limitations.

Line 10.—Enter the U.S. source losses

allocated to separate limitation income

during the tax year. Use the following

formula:

If prior year separate limitation losses

can 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 as a positive number

on the same line under the appropriate

column heading to which it was

recharacterized.

Income in the separate

limitation category

Part III

U.S. source loss

Show the balances in the corporation’s

overall foreign loss accounts at the

beginning of the tax year, any

adjustments, and the balances in the

overall foreign loss accounts at the end

of the tax year for each separate

limitation (Regulations section 1.904).

×

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 (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

according to 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 category (on

line 6, column (v), of its Schedule J).

Lines 2, 3, and 5.—Use these lines to

show any adjustments made to the

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 the

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 using the rules of 

section 172. Because there is not enough under

shipping income to recharacterize the

Part II

Line 5.—Enter the applicable amount(s)

from Part I, line 5.

If a separate limitation loss was

allocated in a prior tax year and the

corporation has income during the

current tax year in the separate limitation

category from which the loss was

allocated, that current year income (if it

was not previously recharacterized) must

be recharacterized as income of the

category to which the loss was allocated

in the prior year(s) (section 904(f)(5)).

Line 6.—Enter the year-end balances of

the 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 of 80% is

multiplied by the $1,500 of shipping

income. Corporation X enters $1,200 as

a positive number on line 7e, column (i).

To determine the amounts to enter

into the grid:

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 of 20% is

multiplied by the $1,500 of shipping

income. Corporation X enters $300 as a

positive number on line 7e, column (iv).

If a prior year separate limitation loss

was allocated to more than one separate

limitation category and there is not

enough current year income in the

separate limitation category 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

category from 

which losses were

previously allocated

×

Amounts remaining to

be recharacterized as

income of all separate

limitations

Line 7.—If a separate limitation loss was

allocated in a prior tax year, and the

corporation has income during the

current tax year in the separate limitation

category from which the loss was

allocated, that current year income (if it

was not previously recharacterized) must

be recharacterized as income of the

separate limitation(s) to which the loss

was allocated in the prior year(s) (section

904(f)(5)).

Note: The numbers entered across any

given line should “zero out.”

1. 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.

2. Subtract the amounts

recharacterized during the current tax

year.

Enter the result on the line (line a–i) for

the separate limitation category from

which losses were previously allocated,

under the appropriate column (column 

i–ix) to which the losses were previously

allocated.

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: