Instructions For Form 1118 - 2004 (Page 9 of 12) in pdf

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

Temporary Regulations section

related party indebtedness. See

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

Temporary Regulations section

Line 1. Enter the total R&D deductions

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

Lines 3a through 3h. Enter the gross

connected with the product lines.

general rule of fungibility for excess

income within each statutory grouping.

Line 2. Reduce the line 1 totals by legally

related party indebtedness.

Column (b)(vii)

mandated R&D (Regulations section

Line 1c. Enter all other assets that attract

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

specifically allocable interest deductions.

Line 1. Enter the total R&D deductions.

apportionment amount (Regulations

See Temporary Regulations section

Line 2. Reduce the line 1 totals by legally

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

1.861-10T for other exceptions to the

mandated R&D (Regulations section

general rule of fungibility (such as

The legally mandated R&D rules apply

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

qualified nonrecourse indebtedness and

to R&D undertaken solely to meet legal

apportionment amount (Regulations

integrated financial transactions).

requirements imposed by a particular

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

political entity for improvement or

Line 1d. Enter the total of the exempt

Lines 3a through 3h. If Option 1 is

marketing of specific products or

assets and assets without directly

checked, divide the gross income

processes if the corporation does not

identifiable yield that are to be excluded

apportioned to the statutory grouping by

reasonably expect the results of that

from the interest apportionment formula

the total gross income and multiply the

research to generate gross income

(Temporary Regulations sections

result by the R&D deductions to be

(beyond de minimis amounts) outside a

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

apportioned. If Option 2 is checked, enter

single geographic source.

Lines 3a through 3j. The assets on line

the appropriate amount as described in

2 are characterized as assets in one of

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

Under the exclusive apportionment

the statutory groupings or as belonging to

rules, 50% of the R&D deductions are

Part II—Interest Deductions, All

the residual grouping. Enter the value of

apportioned exclusively to the statutory

Other Deductions, and Total

the assets in each of the statutory

grouping of gross income, or the residual

Deductions

groupings on line 3a through 3j. See

grouping of gross income, as the case

Temporary Regulations sections

Note. The line 4 totals will generally be

may be, from the geographic source

1.861-9T(g)(3), 1.861-12T(g)(2), and

less than the totals on lines 1 and 2

where the R&D activities which account

1.861-12T(h)(2) for the rules for

because the line 4 totals do not include

for more than 50% of the amount of such

characterizing the assets.

the gross income and deductions that are

deduction were performed. If the 50% test

implicitly apportioned to the residual

is not met, then no part of the deduction

Columns (b)(iii) and (b)(iv)

grouping.

is apportioned under these rules.

Line 1a. Enter the total interest

Lines 3a through 3h. To figure the

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

deductions for the members of the

amount of R&D deductions to apportion to

corporation’s affiliated group. These

Use these columns to apportion interest

each statutory grouping, divide the gross

include any expense that is currently

deductions. See Temporary Regulations

sales apportioned to the statutory

deductible under section 163 (including

sections 1.861-8T through 1.861-13T for

grouping by the worldwide gross sales for

original issue discount), and interest

rules on the apportionment of interest

the product line. Multiply the result by the

equivalents. See Temporary Regulations

deductions.

R&D deductions to be apportioned.

section 1.861-9T for the definition of

If the corporation elected to use the

interest equivalents and a list of the

Note. If the corporation had section

fair market value method to apportion

sections that disallow or suspend interest

901(j) income from more than one

interest expense, see Temporary

deductions or require the capitalization of

sanctioned country or had income

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

interest deductions.

re-sourced by treaty for more than one

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

country, see Computer-Generated

Line 1b. Enter the interest deductions

procedures for supplying certain

Schedule H on page 8.

associated with the assets on line 1b of

documentation and information.

columns (a)(i) and (a)(ii), respectively,

Example 1. To determine the amount

For tax years beginning on or after

that attract specifically allocable interest

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

March 26, 2004, a corporation may elect

deductions under Temporary Regulations

to use the alternative tax book value

1. Divide the amount on line 3a,

section 1.861-10T(e).

method. See Temporary Regulations

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

Note. These interest deductions will be

section 1.861-9T(i).

column (a)(i).

divided among the statutory groupings

2. Multiply the result by the amount on

Columns (a) and (b) are subdivided

and will appear as a definitely allocable

line 2, column (a)(ii).

into “Nonfinancial Corporations” and

deduction in Schedule A, column 9(d).

“Financial Corporations.” In allocating

Example 2. To determine the amount

Line 1c. Enter the interest deductions

interest deductions, members of an

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

associated with the assets on line 1c of

affiliated group that are financial

columns (a)(i) and (a)(ii), respectively,

1. Divide the amount on line 3b,

corporations must be treated as a

that attract specifically allocable interest

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

separate affiliated group. Complete

deductions.

column (a)(iii).

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

2. Multiply the result by the amount on

the corporation’s affiliated group that are

Lines 3a through 3j. To figure the

line 2, column (a)(iv).

financial corporations and columns (a)(i)

amount of interest deductions to

and (b)(iii) for members that are

apportion to each statutory grouping,

Column (b) Gross Income Methods

nonfinancial corporations.

divide the assets apportioned to the

grouping by the total assets apportioned

See Regulations section 1.861-11 for

Complete these columns only if the

and multiply the result by the interest

the definition of an affiliated group and

corporation elects one of the gross

deductions to be apportioned.

special rules for section 936 corporations.

income methods of apportioning R&D

deductions described in Regulations

Example 1. To figure the amount to

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

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

enter on line 3a, column (b)(iii): (a) divide

box for the option used. Use Option 1

Line 1a. Enter the average of the total

the amount entered on line 3a, column

only if certain conditions are met. See

assets of the affiliated group. See

(a)(i), by the amount on line 2, column

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

Temporary Regulations section

(a)(i); and (b) multiply the result by the

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

amount on line 2, column (b)(iii).

Column (b)(vi)

average for these purposes.

Example 2. To figure the amount to

Line 1. Enter the total gross income

Line 1b. Enter the assets included on

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

(excluding exempt income according to

line 1a that are characterized as excess

the amount on line 3b, column (a)(ii) by

-9-

Instructions For Form 1118 - 2004 Page 9

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