Instructions For Form 1118 - (Rev. December 2009) (Page 9 of 13) in pdf

Part I—Research and

each statutory grouping, divide the gross

because the line 4 totals do not include

sales apportioned to the statutory

the gross income and deductions that are

Development Deductions

grouping by the worldwide gross sales for

implicitly apportioned to the residual

Use Part I to apportion the research and

the product line. Multiply the result by the

grouping.

development (R&D) deductions that

R&D deductions to be apportioned.

cannot be definitely allocated to some

Columns (a)(i) through (b)(iv)

Note. If the corporation had section

item or class of gross income. Use either

Use these columns to apportion interest

901(j) income from more than one

the sales method or one of the gross

deductions. See Temporary Regulations

sanctioned country or had income

income methods described in Regulations

sections 1.861-8T through 1.861-13T for

re-sourced by treaty for more than one

section 1.861-17.

rules on the apportionment of interest

country, see Computer-Generated

Note. The line 4 totals will generally be

deductions based on the fair market

Schedule H on page 8.

less than the totals on lines 1 and 2

value, tax book value, or adjusted tax

Example 1. To determine the amount

because the line 4 totals do not include

book value of assets.

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

the gross income and deductions that are

If the corporation elected to use the

implicitly apportioned to the residual

1. Divide the amount on line 3a,

fair market value method to apportion

grouping.

column (a)(i) by the amount on line 1,

interest expense, see Temporary

column (a)(i).

Regulations section 1.861-9T(h). Also see

Column (a) Sales Method

2. Multiply the result by the amount on

Rev. Proc. 2003-37, 2003-1 C.B. 950, for

Complete these columns only if the

line 2, column (a)(ii).

procedures for supplying certain

corporation elects the sales method of

documentation and information.

Example 2. To determine the amount

apportioning R&D deductions described

For tax years beginning on or after

to enter on line 3b, column (a)(iv):

in Regulations section 1.861-17(c). Enter

March 26, 2004, a corporation may elect

in the spaces provided the SIC Code

1. Divide the amount on line 3b,

to use the alternative tax book value

numbers (based upon the Standard

column (a)(iii) by the amount on line 1,

method. See Regulations section

Industrial Classification System) of the

column (a)(iii).

1.861-9(i).

product lines to which the R&D

2. Multiply the result by the amount on

deductions relate. See Regulations

line 2, column (a)(iv).

Columns (a) and (b) are subdivided

section 1.861-17(a)(2)(ii) and (iii) for

into “Nonfinancial Corporations” and

details on choosing SIC codes and

Column (b) Gross Income Methods

“Financial Corporations.” In allocating

changing a product category.

interest deductions, members of an

Complete these columns only if the

affiliated group that are financial

Note. If the corporation has more than

corporation elects one of the gross

corporations must be treated as a

two product lines, see

income methods of apportioning R&D

separate affiliated group. Complete

Computer-Generated Schedule H on

deductions described in Regulations

columns (a)(ii) and (b)(iv) for members of

page 8.

section 1.861-17(d)(2) and (3). Check the

the corporation’s affiliated group that are

box for the option used. Use Option 1

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

financial corporations and columns (a)(i)

only if certain conditions are met. See

and (b)(iii) for members that are

Line 1. Enter the worldwide gross sales

Regulations section 1.861-17(d)(2).

nonfinancial corporations.

for the product lines.

Note. If the corporation has more than

See Regulations section 1.861-11 for

Lines 3a through 3d. Enter the gross

one product line, separately determine for

the definition of an affiliated group.

sales that resulted in gross income for

each product line the apportionment of

each statutory grouping.

R&D deductions relating to such product

Columns (a)(i) and (a)(ii)

line and enter the total amounts

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

Line 1a. Enter the average of the total

apportioned to each statutory grouping in

assets of the affiliated group. See

Line 1. Enter the total R&D deductions

the appropriate line of column (b)(vii).

Temporary Regulations section

connected with the product lines.

Column (b)(vi)

1.861-9T(g)(2) for the definition of

Line 2. Reduce the line 1 totals by

average for these purposes.

legally mandated R&D (Regulations

Line 1. Enter the total gross income

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

(excluding exempt income according to

Line 1b. Enter the assets included on

exclusive apportionment amount

Temporary Regulations section

line 1a that are characterized as excess

(Regulations section 1.861-17(b)(1)(i)) if

1.861-8T(d)(2)).

related party indebtedness. See

applicable.

Temporary Regulations section

Lines 3a through 3d. Enter the gross

1.861-10T(e) for an exception to the

income within each statutory grouping.

The legally mandated R&D rules apply

general rule of fungibility for excess

to R&D undertaken solely to meet legal

Column (b)(vii)

related party indebtedness.

requirements imposed by a particular

Line 1. Enter the total R&D deductions.

Line 1c. Enter all other assets that

political entity for improvement or

attract specifically allocable interest

marketing of specific products or

Line 2. Reduce the line 1 totals by

deductions. See Temporary Regulations

processes if the corporation does not

legally mandated R&D (Regulations

section 1.861-10T for other exceptions to

reasonably expect the results of that

section 1.861-17(a)(4)), and a 25%

the general rule of fungibility (such as

research to generate gross income

exclusive apportionment amount

qualified nonrecourse indebtedness and

(beyond de minimis amounts) outside a

(Regulations section 1.861-17(b)(1)(ii)).

integrated financial transactions).

single geographic source.

Lines 3a through 3d. If Option 1 is

Under the exclusive apportionment

Line 1d. Enter the total of the exempt

checked, divide the gross income

rules, 50% of the R&D deductions are

assets and assets without directly

apportioned to the statutory grouping by

apportioned exclusively to the statutory

identifiable yield that are to be excluded

the total gross income and multiply the

grouping of gross income, or the residual

from the interest apportionment formula

result by the R&D deductions to be

grouping of gross income, as the case

(Temporary Regulations sections

apportioned. If Option 2 is checked, enter

may be, from the geographic source

1.861-8T(d)(2) and 1.861-9T(g)(3)).

the appropriate amount as described in

where the R&D activities which account

Regulations section 1.861-17(d)(3).

Lines 3a through 3d. The assets on line

for more than 50% of the amount of such

2 are characterized as assets in one of

Part II—Interest Deductions, All

deduction were performed. If the 50% test

the statutory groupings or as belonging to

Other Deductions, and Total

is not met, then no part of the deduction

the residual grouping. Enter the value of

Deductions

is apportioned under these rules.

the assets in each of the statutory

Lines 3a through 3d. To figure the

Note. The line 4 totals will generally be

groupings on line 3a through 3d. See

amount of R&D deductions to apportion to

less than the totals on lines 1 and 2

Temporary Regulations sections

-9-

Instructions For Form 1118 - (Rev. December 2009) Page 9

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