Instructions For Schedule H (Form 1120-F) - 2007 (Page 2 of 6) in pdf

1120-F, Schedule L (“Schedule L

currency even if the audited

of deductible expenses (determined

books”). Schedule L books are the

third-country GAAP statements are in

under U.S. tax principles before

set or sets of books of the

another non-dollar functional

apportionment between ECI and

corporation’s U.S. trade or business

currency.

non-ECI) of the foreign corporation

or books of its U.S. branch (whether

that files Form 1120-F, other than

Line 2. Enter on line 2 the total of

maintained within or outside the

those that are included on the

the adjustments necessary to

United States) as defined in

corporation’s Schedule L books.

conform the amounts on line 1 to the

Regulations section 1.882-5(d)(2).

amounts that are deductible for U.S.

Line 4. Enter on line 4 the total

tax purposes. These adjustments

amount of interest expense (including

Part I may be completed in U.S.

include temporary and permanent

interbranch interest), if any, recorded

dollars or in the foreign corporation’s

differences of the type applicable in

on the home office books that is

functional currency. If the corporation

determining the deductions of U.S.

included on line 3.

completes Part I in U.S. dollars,

corporations that file their income tax

check the box in the Part I heading. If

Line 5. Enter on line 5 the bad debt

returns on Form 1120 (e.g.,

the corporation completes Part I in its

expense, if any, that is included on

adjustments eliminating any line 1

foreign functional currency, specify

line 3. Any portion of the amount

expenses of entities whose expenses

the currency in the space provided in

included on line 5 that is allocable to

are includible in the corporation’s

the Part I heading.

ECI is reported directly on Form

expenses for book purposes but not

1120-F, Section II, line 15.

Line 1. Enter on line 1 the total

for U.S. tax purposes). In addition,

expenses recorded on the

Line 7. Subtract line 6 from line 3

include adjustments to loan losses

non-Schedule L books and records of

and enter the difference on line 7.

and loss reserves included in line 1

the home office (including books and

This is the total amount of the

expenses to reflect the amount of bad

records maintained in locations

corporation’s home office deductions

debt expense that is deductible for

outside the United States other than

which are allocated and apportioned

U.S. tax purposes. Such adjustments

in the corporation’s home country).

between ECI and non-ECI in Parts I

include any amount of bad debt

The books and records may be home

and II of Schedule H.

expense included in line 1 that is

office records (e.g., management cost

treated as an involuntary charge-off

accounting reports) that identify only

under Regulations section

Lines 8 Through 10. Direct

the expenses included in the

1.166-2(d)(2). The deductible amount

Allocation and Apportionment

corporation’s financial statements for

of bad debt expense remaining after

of Home Office Deductions to

the tax year. It is not necessary that

any adjustments on line 2 is

Non-Effectively Connected

the home office records or reports

eliminated from Schedule H

Income

used also include items of income,

expenses on line 5.

gain or loss (including bad debt

Note. The amounts reported on

Do not allocate and apportion

charge-offs), or financial transaction

lines 8 through 10 are deductions that

expenses to ECI and non-ECI on

expenses such as interest expense

are definitely related to non-ECI

line 2. In addition, do not make

and periodic notional principal

under Regulations sections 1.861-8

adjustments on line 2 to reflect

contract expense. Alternatively, the

and 1.861-17 and Temporary

book-to-tax adjustments for any home

expenses reported on line 1 may be

Regulations section 1.861-8T. If the

office interest expense (including

derived from audited or unaudited

corporation has deductions included

interbranch interest expense)

financial statements. The home office

in line 7 that are definitely related and

included on line 1. Interest expense

books may be books recorded under

allocable to ECI that is exempt from

included on line 1 is adjusted on line

the Generally Accepted Accounting

tax under the Code or an income tax

4. The allocation of deductible

Principles (“GAAP”) applicable to the

treaty, the deductions should be

interest expense to ECI is reported on

corporation’s local accounting

treated as allocable to non-ECI for

Schedule I (Form 1120-F). Attach a

practices or under U.S. GAAP, at the

purposes of Schedule H and included

schedule listing the amount of the

corporation’s choosing. Expenses of

in the amounts reported on lines 8

adjustment for each of the following

other includible entities (i.e.,

through 10.

categories:

disregarded entities) are included in

Line 8. Enter on line 8 deductions

home office expenses reported on

1. Expenses included on line 1 of

included on line 7 that are definitely

line 1 only if the expenses of such

entities whose expenses are not

related to non-ECI received from

other entities are recorded on the

includable in the corporation’s

subsidiaries (other than disregarded

home office’s books. Expenses

expenses for U.S. tax purposes.

entities whose income and

recorded on non-Schedule L books of

2. Temporary differences (e.g.,

deductions are treated as income and

disregarded entities (and not on the

costs capitalized under section 263A,

deductions of the corporation filing

home office books) that are allocated

carrying charges under section

Form 1120-F). See, for example,

and apportioned to ECI are reported

263(g), depreciation and

Temporary Regulations section

on line 20. If the corporation uses

amortization, general loan loss

1.861-8T(e)(4)(ii) and Regulations

management cost accounting

reserves).

section 1.861-17 (relating to

statements for its home office books

3. Permanent differences (e.g.,

treatment of stewardship expenses

that include expenses of one or more

interbranch transactions other than

attributable to dividends and research

disregarded entities, and also

interest, non-deductible meals and

and experimentation expenses).

maintains certified audited

entertainment and executive salary

third-country GAAP statements for a

Line 9. Enter on line 9, deductions

compensation).

disregarded entity, the expenses of

included on line 7 (other than

the disregarded entity must be

Line 3. Combine lines 1 and 2 and

amounts included on line 8) that are

included in line 1 in either U.S. dollars

enter the result on line 3. The amount

definitely related under Regulations

or the home office’s functional

reported on line 3 is the total amount

sections 1.861-8 and 1.861-17 and

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Instructions for Schedule H (Form 1120-F)

Instructions For Schedule H (Form 1120-F) - 2007 Page 2

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