stments to Separate Limitation Income (Loss) Categories for Determining

erators of Limitation Fractions, Year-End Recharacterization Balances, and

Overall Foreign Loss Account Balances

endar year , or other tax year beginning , , and ending , 

Attach to Form 1118. For Paperwork Reduction Act Notice, see the separate Instructions for Form 1118.

ate Limitation Income or (Losses) in Determining Numerators of Limitation Fractions

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

Taxable income

attributable to

foreign trade

income

Financial

services

income

High

withholding

tax interest

General

limitation

income

Dividends

from a DISC

or former DISC

Shipping

income

Passive

income

tments (see

parate limitation losses (see instructions):

mer DISC

eign trade income

SC or former FSC

n 902 corporation*

hrough 2j.

osses

m line 3.

te limitation income (see instructions):

mer DISC

eign trade income

SC or former FSC

n 902 corporation*

hrough 7j.

d Schedule J in instructions.

OMB No. 1545-0122

Employer identification number

(viii) (ix)

Dividends from

noncontrolled

section 902

corporation*

Certain

distributions

from a FSC or

former FSC

Cat. No. 10309U Schedule J (Form 1118) (Rev. 1-99)

(x)

Other

income*

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om Part I, line 8

S. source losses

on—Subtract line 10

ere and on Part II,

e B.

of Future Separate Limitation Income That Must Be Recharacterized

rmer DISC

to foreign trade

 or former FSC

d section 902

s Account Balances (section 904(f)(1))

eparate limitation income category

er than recapture)

hrough 3

 Part I, line 5)

ne 5 from line 4.

ed Schedule J in instructions.

( )

Page 2

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

Taxable income

attributable to

foreign trade

income

Financial

services

income

High

withholding

tax interest

General

limitation

income

Dividends

from a DISC

or former DISC

Shipping

income

Passive

income

(viii) (ix)

Dividends from

noncontrolled

section 902

corporation*

Certain

distributions

from a FSC or

former FSC

(x)

Other

income*

( )( )( )( )( )( )( )( ) ( )
Schedule J (Form 1118) (Rev. 1-99) 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

Important. If an overall foreign loss has

reduced U.S. source income, do not

complete the remainder of Part I for that

separate limitation income category.

However, complete Parts II and III for

that category 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

credit limitation.

4. 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 category

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)). To do this,

treat a portion of the current year

separate limitation income that is of the

same 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) 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), or 50% of all amounts entered

on line 3, Part I.

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 to get the

numerator of the limitation fraction for

each separate limitation income

category. Example 1. Corporation X has income

of $4,000 in its general limitation income

category (line 1, column (i)) and 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 income or (loss) from column 12 of

the corresponding Schedule A for that

separate limitation category of income.

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

limitation income categories. 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 be

allocated among other applicable

categories of income.

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).

1. Add all of the separate limitation

loss amounts entered across line 1.

Then add all of the income amounts

entered across line 1.

2. 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 category Separate

limitation loss

being allocated

×

Combined separate

limitation income from

all categories with

positive taxable income

3. 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 category 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).

Important: Complete Schedule J only

once. Include adjustments for each

applicable separate limitation income

category.

Computer-Generated Schedule J

A computer-generated Schedule J can

be filed if it conforms to the IRS version

of the schedule. Expand Schedule J to

properly allocate the separate limitation

losses among the categories with

positive taxable income if the

corporation owns an interest in more

than one noncontrolled section 902

corporation.

Specific Instructions

Important. Be sure to consider on this

line the possible interplay between the

Note: The numbers entered across any

given line should “zero out.”

● Part II is used to show the year-end

balances of future separate limitation

income categories that must be

recharacterized as income of other

separate income categories (as the

result of current year or prior year

separate limitation losses that were

allocated to those other separate

limitation income categories).

● Part III is used to show: (1) the

balances in the corporation’s overall

foreign loss accounts at the beginning of

the tax year; (2) any adjustments; and

(3) the balances in the overall foreign

loss accounts at the end of the tax year.

The corporation can make an annual,

revocable election to recapture a greater

portion of the balance in an overall

foreign loss account by attaching a

statement to Form 1118 indicating:

To determine each pro rata share:

Dividends received from each

noncontrolled section 902 corporation,

income from each sanctioned country

described in section 901(j), and each

item of income resourced under a treaty

are treated as a separate category of

income.

Also expand Schedule J if the

corporation had other income as follows:

● Income from more than one section

901(j) country; or

● U.S. source income that it elected

under a treaty to treat as foreign source.

separate limitation losses and any net

operating losses or net capital losses of

which they may be a part.
Schedule J (Form 1118) (Rev. 1-99) 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.

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 category to its general limitation

income or its financial services income.

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 limitation income categories.

Line 10. Enter the U.S. source losses

allocated to the separate limitation

income category 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 ×

Combined separate

limitation income

categories

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 category for the

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,

Lines 2, 3, and 5. Show any

adjustments made to the overall foreign

loss accounts for each separate

limitation income category during the tax

year. See Regulations section 1.904f-(d)

for a list of possible additions to the

accounts. See Regulations section

1.904(f)-1(e) for a list of possible

reductions (including recapture).

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.

Since there is not enough under

shipping income 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

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

income 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)).

● To compute the portion to be

recharacterized as general limitation

income, Corporation X should:

To determine the amounts to enter

into the grid:

● To compute the portion to be

recharacterized as financial services

income, Corporation X should:

If a prior year separate limitation loss

was allocated to more than one separate

limitation income 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 limitation

categories on a pro rata basis in the

following manner:

Amount remaining to

be recharacterized

as income of a given

separate limitation

category

Current year income

in separate limitation

category from which

losses were

previously allocated

×

Amounts remaining to

be recharacterized as

income of all separate

limitation categories

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.

3. Enter the result on the line (line a–j)

for the separate limitation income

category from which losses were

previously allocated, under the

appropriate column (column (i)–(x)) to

which the losses were previously

allocated.

3. Enter $1,200 as a positive number

on line 7e, column (i).

2. Multiply the result (80%) by the

$1,500 of shipping income.

1. Divide 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 limitation

income categories.

1. Divide the $400 remaining to be

recharacterized from shipping income to

financial services income by $2,000.

2. Multiply the result (20%) by the

$1,500 of shipping income.

3. Enter $300 as a positive number on

line 7e, column (iv).

Line 6. Enter the year-end balances of

the overall foreign loss accounts for

each separate limitation income

category.

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

income 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 income

categories to which the loss was

allocated in the prior year(s) (section

904(f)(5)).

2. The percentage and dollar amount of

the balance (both before and after

recapture) in the overall foreign loss

account that is recaptured.

1. The percentage and dollar amount of

the separate limitation income category

that is treated as U.S. source income,

and

in a subsequent tax year, Corporation X

has $1,500 of income in its shipping

income category (on line 6, column (v),

of its Schedule J).

current tax year according to the rules

set forth above.