Instructions For Form 1118 - Foreign Tax Credit-Corporations (Page 9 of 13) in pdf

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

time prescribed. If the required

line and enter the total amounts

information is not submitted within 90

apportioned to each statutory grouping in

Line 1. Enter the total R&D deductions

days after the IRS has mailed notice to

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

connected with the product lines.

the U.S. person, additional penalties may

Column (b)(vi)

Line 2. Reduce the line 1 totals by

apply.

legally mandated R&D (Regulations

Line 1. Enter the total gross income

Note. The reduction in foreign taxes

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

(excluding exempt income according to

available for credit is reduced by any

exclusive apportionment amount

Temporary Regulations section

dollar penalty imposed under section

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

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

6038(b).

applicable.

Lines 3a through 3d. Enter the gross

The legally mandated R&D rules apply

Line E. Include the reduction described

income within each statutory grouping.

to R&D undertaken solely to meet legal

under section 960(c), as applicable.

requirements imposed by a particular

Column (b)(vii)

political entity for improvement or

Line 1. Enter the total R&D deductions.

marketing of specific products or

Schedule H

Line 2. Reduce the line 1 totals by

processes if the corporation does not

legally mandated R&D (Regulations

reasonably expect the results of that

Computer-Generated

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

research to generate gross income

Schedule H

exclusive apportionment amount

(beyond de minimis amounts) outside a

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

single geographic source.

A computer-generated Schedule H may

be filed if it conforms to the IRS version.

Lines 3a through 3d. If Option 1 is

Under the exclusive apportionment

In some cases, Schedule H can be

rules, 50% of the R&D deductions are

checked, divide the gross income

expanded to properly apportioned

apportioned exclusively to the statutory

apportioned to the statutory grouping by

deductions. This applies in cases such as

the total gross income and multiply the

grouping of gross income, or the residual

when the corporation:

result by the R&D deductions to be

grouping of gross income, as the case

•

Has more than two product lines (under

apportioned. If Option 2 is checked, enter

may be, from the geographic source

the sales method of apportioning R&D

the appropriate amount as described in

where the R&D activities which account

deductions),

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

for more than 50% of the amount of such

•

Has section 901(j) income from more

deduction were performed. If the 50% test

Part II—Interest Deductions, All

than one sanctioned country, or

is not met, then no part of the deduction

•

Other Deductions, and Total

Has income re-sourced by treaty for

is apportioned under these rules.

more than one country.

Deductions

Lines 3a through 3d. To figure the

Note. The line 4 totals will generally be

amount of R&D deductions to apportion to

Part I—Research and

less than the totals on lines 1 and 2

each statutory grouping, divide the gross

Development Deductions

because the line 4 totals do not include

sales apportioned to the statutory

Use Part I to apportion the research and

the gross income and deductions that are

grouping by the worldwide gross sales for

development (R&D) deductions that

implicitly apportioned to the residual

the product line. Multiply the result by the

cannot be definitely allocated to some

grouping.

R&D deductions to be apportioned.

item or class of gross income. Use either

Note. If the corporation had section

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

the sales method or one of the gross

901(j) income from more than one

income methods described in Regulations

Use these columns to apportion interest

sanctioned country or had income

section 1.861-17.

deductions. See Temporary Regulations

re-sourced by treaty for more than one

sections 1.861-8T through 1.861-13T for

country, see Computer-Generated

Note. The line 4 totals will generally be

rules on the apportionment of interest

Schedule H above.

less than the totals on lines 1 and 2

deductions based on the fair market

because the line 4 totals do not include

Example 1. To determine the amount

value, tax book value, or adjusted tax

the gross income and deductions that are

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

book value of assets.

implicitly apportioned to the residual

1. Divide the amount on line 3a,

If the corporation elected to use the

grouping.

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

fair market value method to apportion

column (a)(i).

interest expense, see Temporary

Column (a) Sales Method

2. Multiply the result by the amount on

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

Complete these columns only if the

line 2, column (a)(ii).

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

corporation elects the sales method of

procedures for supplying certain

Example 2. To determine the amount

apportioning R&D deductions described

documentation and information.

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

in Regulations section 1.861-17(c). Enter

For tax years beginning on or after

in the spaces provided the SIC Code

1. Divide the amount on line 3b,

March 26, 2004, a corporation may elect

numbers (based upon the Standard

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

to use the alternative tax book value

Industrial Classification System) of the

column (a)(iii).

method. See Regulations section

product lines to which the R&D

2. Multiply the result by the amount on

1.861-9(i).

deductions relate. See Regulations

line 2, column (a)(iv).

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

Columns (a) and (b) are subdivided

details on choosing SIC codes and

Column (b) Gross Income Methods

into “Nonfinancial Corporations” and

changing a product category.

“Financial Corporations.” In allocating

Complete these columns only if the

interest deductions, members of an

corporation elects one of the gross

Note. If the corporation has more than

affiliated group that are financial

income methods of apportioning R&D

two product lines, see

corporations must be treated as a

deductions described in Regulations

Computer-Generated Schedule H above.

separate affiliated group. Complete

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

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

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

box for the option used. Use Option 1

the corporation’s affiliated group that are

only if certain conditions are met. See

Line 1. Enter the worldwide gross sales

financial corporations and columns (a)(i)

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

for the product lines.

and (b)(iii) for members that are

Note. If the corporation has more than

nonfinancial corporations.

Lines 3a through 3d. Enter the gross

one product line, separately determine for

sales that resulted in gross income for

each product line the apportionment of

See Regulations section 1.861-11 for

each statutory grouping.

R&D deductions relating to such product

the definition of an affiliated group.

-9-

Instructions For Form 1118 - Foreign Tax Credit-Corporations Page 9

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