Rev. December 2020
The document outlines instructions for completing Schedule J of Form 1118 for tax years beginning in 2020. It details how to calculate adjustments to separate limitation income or (losses) categories for determining numerators of limitation fractions, year-end recharacterization balances, and overall foreign and domestic loss account balances. The schedule includes sections for Section 951A income, foreign branch income, passive category income, general category income, other income, U.S. income, year-end balances of future separate limitation income that must be recharacterized, overall foreign loss account balances, and overall domestic loss account balances.
Part III is used to show the carryback and carryforward of foreign tax credits. It also allows a taxpayer to elect to apply their unused foreign tax credit against their U.S. federal income tax liability in future years.
Schedule J (Form 1118) is used by corporations and partnerships to compute their Subpart F income, global intangible low-taxed income (GILTI), and earnings and profits under the Internal Revenue Code.
Part I of Schedule J requires corporations and partnerships to report their foreign oil and gas income, foreign base company sales income, foreign branch income, and other types of foreign sources income.
Part II of Schedule J is used to recharacterize certain items of income or loss from one category to another. It is also used to recapture previously allocated losses.
To fill out Part II, you must first determine the amount of your foreign tax credit using Part I. Then, you add up any other allowable foreign tax credits and deductions to arrive at your total foreign tax credit. This is then subtracted from your U.S. federal income tax liability to determine your refund or balance due.
A separate limitation loss is an allowable loss that can offset income in a specific category, such as passive activity or resourced treaty income. It must meet certain requirements, such as being from a trade or business and not being a general loss.
The categories for separate limitation losses are: passive activity loss (PAL), general limitation of the PAL, and the overall foreign loss account. A separate limitation loss can only be applied to income in one category at a time.
Part III of Schedule J is used to report and adjust overall foreign loss accounts for each separate category. Part IV is used to report and adjust overall domestic loss accounts with respect to each separate category.
The three parts of Schedule J are Part I, Part II, and Part III. Part I calculates the foreign tax credit, while Part II is used to calculate other foreign tax credits and deductions. Part III shows the carryback and carryforward of foreign tax credits.
Schedule J, also known as the Foreign Tax Credit and Other Credits/Deductions, is used to calculate the foreign tax credit and other deductions that can reduce a taxpayer's U.S. federal income tax liability.
Form 1118, also known as the Foreign Tax Credit, is used by U.S. taxpayers to claim a credit for foreign income taxes paid on nonresident alien income. It is filed along with Form 1040.
A corporation determines the portion of general category income that is recharacterized as passive category income by dividing the remaining balance to be recharacterized from the general category income to passive category income by the total remaining balance to be recharacterized from all separate categories, and then multiplying the result by the general category income.
Form 1118 Schedule J is one of Tax forms that are documents used to report information related to taxes to the relevant tax authority. There are various types of tax forms, including federal, state, and local tax forms, which can vary depending on the taxpayer's circumstances and location.
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