stments to Separate Limitation Income (Loss) Categories for Determining

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

Overall Foreign Loss Account Balances

alendar year 20

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

te Limitation Income or (Losses) in Determining Numerators of Limitation Fractions (See instructions.)

(ii)

Passive

income

(i) 

General

limitation

income

(iii) 

High

withholding

tax interest

(iv)

Financial

services

income

(v)

Shipping

income

(vi) 

Dividends

from a DISC

or former

DISC

(vii)

Taxable income

attributable to

foreign trade

income

ments (see

arate limitation losses:

mer DISC

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C or former FSC

corporations

rough 2j.

sses

m line 3.

 limitation income:

mer DISC

gn trade income

C or former FSC

corporations

rough 7j.

 Schedule J in instructions.

OMB No. 1545-0122

Employer identification number

(viii) (ix)

Certain

dividends 

from 10/50

corporations

Certain

distributions

from a FSC or

former FSC

Cat. No. 10309U Schedule J (Form 1118) (Rev. 12-2003)

(x) 

Other

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, or other tax year beginning , 20 , and ending , 20
m Part I, line 8

 source losses

n—Subtract line 10

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e B.

f Future Separate Limitation Income That Must Be Recharacterized

mer DISC

o foreign trade

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

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Part I, line 5)

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Page 2

(ii) 

Passive 

income

(i) 

General

limitation 

income

(iii) 

High 

withholding 

tax interest

(iv) 

Financial 

services 

income

(vi)

Dividends 

from a DISC

or former DISC

(vii)

Taxable income

attributable to

foreign trade

income

(v)

Shipping

income

(viii) (ix)

Certain

dividends 

from 10/50

corporations

Certain

distributions

from a FSC or

former FSC

(x) 

Other 

income*

( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( )
Schedule J (Form 1118) (Rev. 12-2003) 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 losses

Important. If an overall foreign loss has

reduced U.S. source income, do not

complete the remainder of Part I for that

separate 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

● Use Part I to show adjustments to

separate limitation income or (losses) in

determining the numerator of the

limitation fraction for each separate

category.

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 in Part I. 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 income or (loss) from column 12 of

the corresponding Schedule A for that

separate category.

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

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 allocate

among other applicable separate

categories.

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 income by

$5,000 (the combined separate limitation

income from all separate categories with

positive 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.

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 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 loss

being allocated

×

Combined separate

limitation income from

all categories with

positive 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 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 complete Parts I, II, and III of

the Schedule if the corporation has more

than one separate category of “other

income.” Dividends received from each

10/50 PFIC out of pre-2003 E&P, income

from each sanctioned country described

in section 901(j), and each item of

income resourced under a tax treaty are

treated as a separate category of “other

income.”

Specific Instructions

Important. Be sure to consider on this

line the possible interplay between

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.”

● Use Part II to show the year-end

balances of future separate limitation

income that must be recharacterized as

income of other separate categories (as

the result of current year or prior year

separate limitation losses that were

allocated to those other separate

categories).

● Use Part III to show: (a) the balances

in the corporation’s overall foreign loss

accounts at the beginning of the tax

year, (b) any current year adjustments,

and (c) 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:

Then add all of the separate limitation

income amounts entered across line 1.

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 that is

treated as U.S. source income and

Separate limitation

income
Schedule J (Form 1118) (Rev. 12-2003) 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 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 categories.

Line 10. Enter U.S. source losses

allocated to separate categories with

income on line 9 for the current 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

Line 9 income in a given

category

Part III

U.S. source loss ×

Combined line 9 income

of all categories with

income on line 9

U.S. source losses that are part of a

net operating or net capital loss that are

carried back or forward to the current

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 current tax year, and then to the

separate category(ies) with income on

line 9 for the current tax year using 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 category (on line 6, column (v),

of its Schedule J).

Lines 2, 3, and 5. Show any

adjustments made to the overall foreign

loss accounts for each separate

category during the tax year. See

Regulations section 1.904(f)-1(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

combined line 9 income for a tax year

must be treated as a net operating loss

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 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

category and there is not enough

current year income in the separate

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 categories on a pro

rata basis in the following manner:

Amount remaining to

be recharacterized

as income of a given

separate category

Current year income

in separate category

from which losses

were previously

allocated

×

Amounts remaining to

be recharacterized as

income of all separate

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 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

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 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 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 category(ies) to which the loss

was allocated in the prior year(s) (section

904(f)(5)).

If the corporation disposes of property

that was used predominantly in a foreign

trade or business and that generated

foreign source income in the same

separate category as the applicable

overall foreign loss account, the

corporation generally must recognize

gain on the disposition to the extent of

the balance in the account (after

amounts are recaptured under section

904(f)(1)), whether or not gain would

otherwise be recognized on the

disposition. See section 904(f)(3) and

Regulations section 1.904(f)-2(d). Such

gain is treated as foreign source taxable

income in the same separate category

as the applicable overall foreign loss

account and is subject to recapture to

the extent of the corporation’s foreign

source taxable income in that separate

category or, if less, 100% of the

corporation’s foreign source taxable

income.

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.