Form 1118 - Instructions For Schedule J Sheet (Page 2 of 4) in pdf

separate limitation income of $4,000 in its

tax years (section 904(f)(1)). To do this,

same separate category as the applicable

passive category (line 1, column (ii)). In

treat a portion of the current year

overall foreign loss account and is subject

addition, the corporation has separate

separate limitation income that is of the

to recapture to the extent of the

limitation income of $1,000 in its

same category as the loss that resulted in

corporation’s foreign source taxable

resourced treaty income category (line 1,

the prior year overall foreign loss as U.S.

income in that separate category or, if

column (iii)).

source income. Recapture continues until

less, 100% of the corporation’s foreign

the applicable overall foreign loss account

source taxable income.

Since the corporation’s combined

balance (Part III) is reduced to zero. Enter

separate limitation losses for the tax year

Note. For dispositions after October 22,

the recapture amount for each category of

($2,000) do not exceed its combined

2004, the previous paragraph applies to

separate limitation income in the

separate limitation income for the tax year

certain dispositions of stock in a CFC.

appropriate column as a negative

($5,000), the entire $2,000 loss may be

See section 904(f)(3)(D) for details.

number. Enter the total amount of

allocated to other separate categories.

recapture for all categories of separate

Therefore, Corporation X enters a positive

Example 2. Corporation Y has

limitation income as a positive number in

$2,000 in the bold-outlined box on line 2a,

$1,400 of current year separate limitation

column (iv).

column (i).

income, $1,000 in its general category

Note. The numbers entered across this

(Part I, line 6, column (i)) and $400 in its

To compute the portion of the $2,000

line should “zero out.”

passive category (Part I, line 6, column

separate limitation loss that is allocable to

(ii)). The corporation has overall foreign

passive category income, Corporation X

The total amount of current year

loss accounts of $600 in its general

divides the $4,000 of income by $5,000

separate limitation income subject to

category and $800 in its passive category

(the combined separate limitation income

recapture is the smaller of the aggregate

(Part III, line 1 columns (i) and (ii)). The

from all separate categories with positive

amount of maximum potential recapture

maximum potential recapture for the

income). The result of 80% is multiplied

in all overall foreign loss accounts, or

overall foreign loss account in the general

by the separate limitation loss of $2,000.

50% of all amounts entered on Part I, line

category is $600 (the smaller of current

Corporation X enters the product of

6, columns (i) through (iii). The maximum

year income of $1,000 in that category or

$1,600 on line 2a, column (ii).

potential recapture amount for the overall

the overall foreign loss account balance

foreign loss account in any given category

To compute the portion of the $2,000

of $600). The maximum potential

separate limitation loss that is allocable to

is the smaller of the current year separate

recapture for the overall foreign loss

limitation income in that category (the

resourced treaty income, Corporation X

account in the passive category is $400

divides the $1,000 of separate limitation

applicable amount entered in Part I, line

(the smaller of current year income of

6), or the balance in the applicable overall

income by $5,000. The result of 20% is

$400 in that category or the overall

foreign loss account (the applicable line 1

multiplied by the separate limitation loss

foreign loss account balance of $800).

of $2,000. Corporation X enters the

amount in Part III). If the aggregate

The aggregate amount of maximum

amount of maximum potential recapture

product of $400 on line 2a, column (iii).

potential recapture in all overall foreign

in all overall foreign loss accounts

Corporation X enters $0 (negative

loss accounts is therefore $1,000 ($600 +

exceeds 50% of all amounts entered on

$2,000 plus positive $2,000) on line 3,

$400).

Part I, line 6, columns (i) through (iii), then

column (i); $2,400 ($4,000 minus $1,600)

the amount of current year separate

The total amount of current year

on line 3, column (ii); and $600 ($1,000

limitation income in each separate

income subject to recharacterization is

minus $400) on line 3, column (iii).

category subject to recapture is computed

$700 (the smaller of the aggregate

Line 4. In columns (i) through (iii), enter

using the following formula:

amount of maximum potential recapture,

the overall foreign losses for the tax year

$1,000, or 50% of total current year

(from line 3) as positive numbers if they

Total recapture amount x (Maximum

separate limitation income entered on line

have reduced U.S. source income for the

potential recapture amount for the overall

6, Part I (50% x $1,400, or $700)). To

tax year. Enter the total amount of overall

foreign loss account in the separate

compute the amount of current year

foreign losses that have reduced U.S.

category / Aggregate amount of maximum

separate limitation income in the general

source income for the tax year as a

potential recapture in all overall foreign

category that is treated as U.S. source

negative number in column (iv).

loss accounts)

income, Corporation Y multiplies the total

Note. The numbers entered across this

The corporation can make an annual,

recapture amount of $700 by the

line should “zero out.”

revocable election to recapture a greater

maximum recapture amount for the

portion of the balance in an overall foreign

Line 5. In columns (i) through (iii), enter

general category of $600, divided by the

loss account by attaching a statement to

U.S. source losses allocated to separate

aggregate amount of maximum potential

Form 1118 indicating:

categories with income on line 3 for the

recapture of $1,000. Corporation Y enters

current tax year. In column (iv) enter the

the result of $420 on line 7, column (i). To

1. The percentage and dollar amount

total amount of U.S. losses allocated to

compute the amount of current year

of the separate limitation income that is

the separate categories as a positive

separate limitation income in the passive

treated as U.S. source income and

number. Use the following formula:

category that is treated as U.S. source

2. The percentage and dollar amount

income, Corporation Y multiplies the total

of the balance (both before and after

U.S. source loss x (Line 3 income in a

recapture amount of $700 by the

recapture) in the overall foreign loss

given category / Combined line 3 income

maximum recapture amount for the

account that is recaptured.

of all separate categories with income on

passive category of $400, divided by the

line 3)

If the corporation disposes of property

aggregate amount of maximum potential

that was used predominantly in a foreign

U.S. source losses in excess of the

recapture of $1,000. Corporation Y enters

trade or business and that generated

combined line 3 income for a tax year is

the result of $280 on line 7, column (ii).

foreign source income in the same

treated as a net operating loss that may

Corporation Y enters the total recapture

separate category as the applicable

be carried back or forward to other tax

amount of $700 as a positive number on

overall foreign loss account, the

years using the rules of section 172.

line 7, column (iv). Note that the total

corporation generally must recognize gain

Note. The numbers entered across this

amounts entered across line 7 equal zero.

on the disposition to the extent of the

line should “zero out.”

balance in the account (after amounts are

Line 9. If a separate limitation loss was

Note. Taxpayers who choose to follow

recaptured under section 904(f)(1)),

allocated in a prior tax year and the

the principles of Notice 89-3 rather than

whether or not gain would otherwise be

corporation has income during the current

Temporary Regulations section

recognized on the disposition. See

tax year in the separate category from

1.904(g)-3T should leave line 5 blank.

section 904(f)(3) and Regulations section

which the loss was allocated, that current

Line 7. Recapture overall foreign losses

1.904(f)-2(d). Such gain is treated as

year income (if it was not previously

that reduced U.S. source income in prior

foreign source taxable income in the

recharacterized) must be recharacterized

-2-

Form 1118 - Instructions For Schedule J Sheet Page 2

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