Instructions For Form 1118 (Rev. December 2015) (Page 10 of 12) in pdf

Earnings accumulated in tax years

by the due date, reduce the foreign taxes

Regulations section 1.861-17(c). Enter in

beginning before August 6, 1997, will be

available for credit under sections 901,

the spaces provided the SIC Code

treated as pre-1987 accumulated profits

902, and 960 by 10%. If the failure

numbers (based upon the Standard

for section 902 purposes. See section

continues for 90 days or more after the

Industrial Classification System) of the

902(c)(6) and Regulations section

date of written notice by the IRS, reduce

product lines to which the R&D deductions

1.902-1(a)(10)(i). Foreign income taxes

the tax by an additional 5% for each

relate. See Regulations section

attributable to these pre-pooling profits

3-month period or fraction thereof during

1.861-17(a)(2)(ii) and (iii) for details on

must be reduced when the associated

which the failure continues after the

choosing SIC codes and changing a

earnings are distributed. However, such

90-day period has expired. See section

product category.

taxes are generally not eligible for the

6038(c) for limitations and special rules.

Note. If the corporation has more than

deemed paid credit. See Regulations

In addition, a $10,000 penalty is

two product lines, see

sections 1.902-1(a)(10)(iii) and 1.902-1(c)

imposed under section 6038(b) for failure

Computer-Generated Schedule

H, above.

(8).

to supply the information required under

section 6038(a) for each entity within the

Note. In completing Part III, column 5,

Columns (a)(i) and (a)(iii)

time prescribed. If the required information

note that, under section 902(b) as

is not submitted within 90 days after the

amended by the Taxpayer Relief Act of

Line 1. Enter the worldwide gross sales

IRS has mailed notice to the U.S. person,

1997, no taxes are deemed paid by a

for the product lines.

additional penalties may apply.

sixth- or lower-tier foreign corporation with

Lines 3a through 3d. Enter the gross

respect to dividends received from

Note. The reduction in foreign taxes

sales that resulted in gross income for

lower-tier foreign corporations.

available for credit is reduced by any

each statutory grouping.

dollar penalty imposed under section

6038(b).

Schedule F

Columns (a)(ii) and (a)(iv)

Line E. Enter foreign income taxes paid

Enter the gross income and definitely

Line 1. Enter the total R&D deductions

or accrued during the current tax year that

allocable deductions for each foreign

connected with the product lines.

have been suspended due to the rules of

branch (including a disregarded entity) as

section 909.

indicated. For each such foreign branch

Line 2. Reduce the line 1 totals by legally

for which Form 8858, Information Return

mandated R&D (Regulations section

of U.S. Persons With Respect To Foreign

1.861-17(a)(4)), and a 50% exclusive

Schedule H

Disregarded Entities, is not filed, attach an

apportionment amount (Regulations

income statement, balance sheet, and

section 1.861-17(b)(1)(i)) if applicable.

Computer-Generated

schedule of remittances.

The legally mandated R&D rules apply

Schedule H

to R&D undertaken solely to meet legal

A computer-generated Schedule H may

requirements imposed by a particular

Schedule G

be filed if it conforms to the IRS version. In

political entity for improvement or

some cases, Schedule H can be

Part I

marketing of specific products or

expanded to properly apportioned

processes if the corporation does not

deductions. This applies in cases such as

Line A. If the corporation claims a

reasonably expect the results of that

when the corporation:

research to generate gross income

deduction for percentage depletion under

Has more than two product lines (under

(beyond de minimis amounts) outside a

section 613 with respect to any part of its

the sales method or the gross income

foreign mineral income (as defined in

single geographic source.

method of apportioning R&D deductions),

section 901(e)(2)) for the tax year, any

Under the exclusive apportionment

Has section 901(j) income from more

foreign taxes on that income must be

rules, 50% of the R&D deductions are

than one sanctioned country, or

reduced by the smaller of:

apportioned exclusively to the statutory

Has income re-sourced by treaty for

grouping of gross income, or the residual

1. The foreign taxes minus the tax on

more than one country.

that income or

grouping of gross income, as the case

may be, from the geographic source

Part I—Research and

2. The tax on that income determined

where the R&D activities which account

without regard to the deduction for

Development Deductions

for more than 50% of the amount of such

percentage depletion minus the tax on that

Use Part I to apportion the research and

deduction were performed. If the 50% test

income.

development (R&D) deductions that

is not met, then no part of the deduction is

The reduction must be made on a

cannot be definitely allocated to some

apportioned under these rules.

item or class of gross income. Use either

country-by-country basis (Regulations

Lines 3a through 3d. To figure the

section 1.901-3(a)(1)). Attach a separate

the sales method or one of the gross

amount of R&D deductions to apportion to

schedule showing the reduction.

income methods described in Regulations

each statutory grouping, divide the gross

section 1.861-17.

Line C. If the corporation chooses to

sales apportioned to the statutory

calculate the reduction in the foreign tax

grouping by the worldwide gross sales for

Note. The line 4 totals will generally be

by identifying taxes specifically

the product line. Multiply the result by the

less than the totals on lines 1 and 2

attributable to participation in or

R&D deductions to be apportioned.

because the line 4 totals do not include

cooperation with an international boycott,

the gross income and deductions that are

Note. If the corporation had section 901(j)

enter the amount from Form 5713,

implicitly apportioned to the residual

income from more than one sanctioned

Schedule C, line 2b. See Form 5713 and

grouping.

its separate Schedule C and instructions.

country or had income re-sourced by

treaty for more than one country, see

Line D. If the corporation controls a

Column (a) Sales Method

Computer-Generated Schedule

H, above.

foreign corporation or partnership and fails

Complete these columns only if the

to furnish any return or any information in

Example 1. To determine the amount

corporation elects the sales method of

any return required under section 6038(a)

to enter on line 3a, column (a)(ii):

apportioning R&D deductions described in

Instructions for Form 1118 (2015)

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Instructions For Form 1118 (Rev. December 2015) Page 10

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