Form 1118 - Instructions For Schedule J Sheet (Page 3 of 4) in pdf

as income of the separate category(ies)

$2,000 remaining to be recharacterized

income of a given separate category /

to which the loss was allocated in the

from general category income to all

Amounts remaining to be recharacterized

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

separate categories.

as income of all separate categories)

2. Multiply the result (80%) by the

Note. The amount of current year

Note. For the 2007 tax year, there is no

$1,500 of general category income.

income in a category subject to

recapture of overall domestic losses.

3. Enter $1,200 as a positive number

recharacterization is limited to the

on line 9a, column (ii).

year-end balance in Part II for that

•

Note. Corporations that choose to follow

To compute the portion to be

category as reported on the prior tax year

the principles of Notice 89-3 rather than

recharacterized as resourced treaty

Schedule J, reduced by any netting of

Temporary Regulations section

income, Corporation X should:

offsetting separate limitation loss

1.904(g)-3T should make the following

1. Divide the $400 remaining to be

accounts as provided for in the

notation at the top of Schedule J: “U.S.

recharacterized from general category

instructions for Part I, line 2.

Loss Allocation Under Notice 89-3.” In

income to resourced treaty income by

If a prior year separate limitation loss

addition, the corporation should cross out

$2,000.

was allocated to more than one separate

the line description for line 10 and write in

2. Multiply the result (20%) by the

category and there is not enough current

“Allocation of domestic losses.” Enter

$1,500 of general category income.

year income in the separate category

U.S. source losses allocated to separate

3. Enter $300 as a positive number on

from which the loss was allocated to

categories with income as explained in

line 9a, column (iii).

recharacterize all remaining balances,

the line 5 instructions, except that

then the current year income must be

potential U.S. source loss to be allocated

Corporation X enters the $1,500 of

recharacterized as income of the other

is the amount in column (iv), line 8. In

general category income that was

separate categories on a pro rata basis in

addition, rather than referring to the line 3

recharacterized in the bold-outlined box at

the following manner:

amounts in the separate income

line 9a, column (i). Note that the total

categories, the potential income to be

amounts entered across line 9a equal

Current year income in separate

offset in each category is equal to a

zero.

category from which losses were

subtotal amount calculated by combining

previously allocated x (Amount remaining

Finally, Corporation X completes the

lines 8 through 9c for each separate

to be recharacterized as income of a

Part II recharacterization balances grid by

category. The amounts in columns (i)

given separate category / Amounts

entering $400 ($1,600 minus $1,200) on

through (iii) should be entered as

remaining to be recharacterized as

line a, column (ii), and $100 ($400 minus

negative numbers and the amount in

income of all separate categories)

$300) on line a, column (iii).

column (iv) should be entered as a

Any amount that is not recharacterized

positive number.

Line 10. Recapture overall domestic

during the tax year (i.e., the excess of

losses that reduced separate limitation

separate limitation losses previously

Part II

income in prior tax years (section

allocated over current year income in that

904(g)(1)). To do this, treat a portion of

same separate category) must be entered

If a separate limitation loss was allocated

the current year U.S. source income as

into the grid at Part II.

in a prior tax year and the corporation has

separate limitation income in the same

income during the current tax year in the

Note. Recharacterization of separate

category(ies) as the separate limitation

separate category from which the loss

limitation income does not result in

income that was reduced by the prior year

was allocated, that current year income (if

recharacterizing any tax. The rules of

overall domestic loss. Recapture

it was not previously recharacterized)

Regulations section 1.904-6 apply on an

continues until the applicable overall

must be recharacterized as income of the

annual basis for allocating taxes to

domestic loss account balance (Part IV) is

category to which the loss was allocated

separate categories before any income is

reduced to zero. Enter the total overall

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

recharacterized.

domestic loss recapture amount as a

negative number in column (iv). Enter the

If prior year separate limitation losses

To determine the amounts to enter into

amount recharacterized as separate

can be recaptured, the total amounts

the grid:

limitation income in each category, as

recharacterized should be entered into

1. Add the current year separate

appropriate, as positive numbers in

the bold-outlined boxes as negative

limitation loss allocations (adjusted as

columns (i) through (iii).

numbers. Each prior-year separate

required by Regulations section

limitation loss recaptured should be

Note. The numbers entered across this

1.904(b)-1(h)(1) relating to capital gains)

entered as a positive number on the

line should “zero out.”

to last year’s year-end balances.

same line under the appropriate column

2. Net any offsetting separate

heading to which income was

The total amount of any current year

limitation loss accounts as described in

recharacterized.

U.S. income subject to recapture is the

the instructions for Part I, line 2.

smaller of the total balance in the

Note. The numbers entered across any

3. Subtract the amounts

applicable overall domestic loss accounts

given line should “zero out.”

recharacterized during the current tax

(the applicable column(s) in Part IV, line

Example 3. Assume the same facts

year.

1) or 50% of the amount entered on Part

as in Example 1 on page 1. Also assume

4. Enter the result on the line (line a,

I, line 6.

that, in a subsequent tax year,

b, or c) for the separate category from

Corporation X has $1,500 of income in its

If a prior year overall domestic loss or

which losses were previously allocated,

general category (on line 8, column (i), of

losses were allocated to more than one

under the appropriate column (column (i),

its Schedule J).

separate category and there is not

(ii), or (iii)) to which the losses were

enough income in the current year subject

previously allocated.

Since there is not enough general

to recharacterization to recapture all

category income to recapture the entire

remaining overall domestic loss account

$2,000 prior-year balance remaining to be

Example 4. Assume the same facts

balances, then the current year U.S.

recaptured, Corporation X will prorate the

as in Example 1 on page 1. Also assume

source income subject to

$1,500 of general category income in that

that Corporation X does not have any

recharacterization must be

subsequent year as follows.

remaining balances from any prior

•

recharacterized as income of the

To compute the portion to be

allocations of losses from its general

separate categories on a pro rata basis in

recharacterized as passive category

category to its passive category or its

the following manner:

income, Corporation X should:

resourced treaty income category. The

1. Divide the $1,600 remaining to be

Current year U.S. source income

corporation should enter $1,600 on line a,

recharacterized from general category

subject to recharacterization x (Amount

column (ii), and $400 on line a, column

income to passive category income by the

remaining to be recharacterized as

(iii).

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Form 1118 - Instructions For Schedule J Sheet Page 3

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