SCHEDULE-J Adjustments to Separate Limitation Incoem (Loss) Categor

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Schedule J
(Form 1118)
(Rev. December 2004)

I.R.S. SPECIFICATIONS
TO BE REMOVED BEFORE PRINTING
INSTRUCTIONS TO PRINTERS
Sch J (Form 1118), PAGE 1 of 4
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1
FLAT SIZE: 279 mm (11")
216 mm (8 ⁄2 ")
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Date

O.K. to print
Revised proofs
requested

䊳

, and ending

, 20

, or other tax year beginning

Attach to Form 1118. For Paperwork Reduction Act Notice, see the Instructions for Form 1118.
Employer identification number

Adjustments to Separate Limitation Income or (Losses) in Determining Numerators of Limitation Fractions (See instructions.)
(i)
General
limitation
income

1
2
a
b
c
d
e
f
g
h
i
3
4
5
6
7
a
b
c
d
e
f
g
h
i
8

OMB No. 1545-0122

, 20

Name of corporation

Part I

Signature

Adjustments to Separate Limitation Income (Loss) Categories for Determining
Numerators of Limitation Fractions, Year-End Recharacterization Balances, and
Overall Foreign Loss Account Balances
For calendar year 20

Department of the Treasury
Internal Revenue Service

Action

Income or (loss) before adjustments (see
instructions).
Allocation of current year separate limitation losses:
General limitation income
(
Passive income
(
High withholding tax interest
(
Financial services income
(
Shipping income
(
Dividends from a DISC or former DISC
Taxable income attributable to foreign trade income (
Certain distributions from a FSC or former FSC (
(
Other Income*
Subtotal—Combine lines 1 through 2i.
Overall foreign losses
Recapture of overall foreign losses
Subtotal—Subtract line 5 from line 3.
Recharacterization of separate limitation income:
General limitation income
(
Passive income
High withholding tax interest
Financial services income
Shipping income
Dividends from a DISC or former DISC
Taxable income attributable to foreign trade income
Certain distributions from a FSC or former FSC
Other Income*
Subtotal—Combine lines 6 through 7i.

* Important: See Computer-Generated Schedule J in instructions.

(ii)
Passive
income

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(iii)
High
withholding
tax interest

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(vii)
(viii)
Certain
Taxable income
distributions
attributable to
foreign trade from a FSC or
former FSC
income

(vi)

(v)
Shipping
income

(iv)
Financial
services
income

Dividends
from a DISC
or former
DISC

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(ix)
Other
income*

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Cat. No. 10309U

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Schedule J (Form 1118) (Rev. 12-2004)

4
I.R.S. SPECIFICATIONS
TO BE REMOVED BEFORE PRINTING
INSTRUCTIONS TO PRINTERS
Sch J (Form 1118), PAGE 2 of 4
PRINTS: HEAD TO HEAD
MARGINS: TOP 13 mm (1⁄2 "), CENTER SIDES.
PAPER: WHITE WRITING, SUB. 20.
INK: BLACK
1
FLAT SIZE: 279 mm (11")
216 mm (8 ⁄2 ")
PERFORATE: (NONE)
DO NOT PRINT — DO NOT PRINT — DO NOT PRINT — DO NOT PRINT

Schedule J (Form 1118) (Rev. 12-2004)

Page

(i)
General
limitation
income
9

Subtotal—Enter amounts from Part I, line 8

10

Allocation of current year U.S. source losses
(see instructions)

11

Numerator of Limitation Fraction—Subtract line 10
from line 9. Enter each result here and on Part II,
line 6, of corresponding Schedule B.

(ii)
Passive
income

(iii)
High
withholding
tax interest

(v)
Shipping
income

(iv)
Financial
services
income

(viii)

(vii)

(vi)
Dividends from
a DISC or
former DISC

2

(ix)
Other
income*

Taxable income
Certain
attributable to
distributions
foreign trade
from a FSC or
income
former FSC

Part II Year-End Balances of Future Separate Limitation Income That Must Be Recharacterized
a
b
c
d
e
f

General limitation income
Passive income
High withholding tax interest
Financial services income
Shipping income
Dividends from a DISC or former DISC

g Taxable income attributable to foreign trade
income
h Certain distributions from a FSC or former FSC
i Other income*

Part III Overall Foreign Loss Account Balances (section 904(f)(1))
Complete for each separate limitation income category
1
2
3
4
5

Beginning balance
Current year additions
Current year reductions (other than recapture) (
Subtotal—Combine lines 1 through 3
Current year recapture (from Part I, line 5)

6

Ending balance—Subtract line 5 from line 4.

* Important: See Computer-Generated Schedule J in instructions.

)(

)(

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)(

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)(

)

4
I.R.S. SPECIFICATIONS
TO BE REMOVED BEFORE PRINTING
INSTRUCTIONS TO PRINTERS
Sch J (1118), PAGE 3 OF 4
MARGINS; TOP 13mm (1/2"), CENTER SIDES. PRINTS: HEAD TO HEAD
PAPER: WHITE WRITING, SUB. 20.
INK: BLACK
FLAT SIZE: 216mm (8-1/2") x 279mm (11")
PERFORATE: None
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Schedule J (Form 1118) (Rev. 12-2004)

General Instructions
Section references are to the Internal
Revenue Code unless otherwise noted.

Purpose of Schedule
● Use Part I to show adjustments to
separate limitation income or (losses) in
determining the numerator of the
limitation fraction for each separate
category.
● Use Part II to show the year-end
balances of future separate limitation
income that must be recharacterized as
income of other separate categories (as
the result of current year or prior year
separate limitation losses that were
allocated to those other separate
categories).
● Use Part III to show: (a) the balances
in the corporation’s overall foreign loss
accounts at the beginning of the tax
year, (b) any current year adjustments,
and (c) the balances in the overall
foreign loss accounts at the end of the
tax year.
Important: Complete Schedule J only
once. Include adjustments for each
applicable separate category.

Computer-Generated Schedule J
A computer-generated Schedule J can
be filed if it conforms to the IRS version
of the schedule. Expand Schedule J to
properly complete Parts I, II, and III of
the Schedule if the corporation has more
than one separate category of “other
income.” Income from each sanctioned
country to which section 901(j) applies
and each item of income resourced
under a tax treaty are treated as a
separate category of “other income.”

Specific Instructions
Part I
Note: See Notice 89-3, 1989-1 C.B.
623, and Regulations section 1.904(f)-12
for more information on the ordering of
adjustments in Part I.
Line 1. Enter in each applicable column
the income or (loss) from column 12 of
the corresponding Schedule A for that
separate category.
Important: Be sure to consider on this
line the possible interplay between
separate limitation losses and any net
operating losses or net capital losses of
which they may be a part.
Line 2. This allocation grid must be
completed to show the pro rata share of
each separate limitation loss to allocate
among other applicable separate
categories.
To determine each pro rata share:
1. Add all of the separate limitation
loss amounts entered across line 1.
Then add all of the separate limitation
income amounts entered across line 1.

Page

2. If the combined separate limitation
losses for the tax year do not exceed
the combined separate limitation income
for the tax year, the pro rata share of
each separate limitation loss to allocate
to each category with positive income is
as follows:
Separate limitation
income
Combined separate
limitation income from
all categories with
positive income

Separate

× limitation loss

being allocated

3. If the combined separate limitation
losses for the tax year exceed the
combined separate limitation income for
the tax year, the pro rata share of each
separate limitation loss to allocate to
each category having income is as
follows:
Separate limitation loss
being allocated
Combined separate
limitation losses from all
categories with losses

Separate limitation

× income in a given
category

If separate limitation losses can be
allocated, enter the total amounts
allocated in the bold-outlined boxes as
positive numbers. Enter each separate
amount allocated to a given category
across the same line under the
appropriate column heading to which it
was allocated.
Note: The numbers entered across any
given line should “zero out.”
The combined separate limitation
losses for the tax year that are more
than the combined separate limitation
income for the tax year reduce the U.S.
source income (if any) for the tax year. If
the corporation has no U.S. source
income for the tax year, or if the excess
of its combined separate limitation
losses for the tax year over combined
separate limitation income for the tax
year exceeds its U.S. source income for
the tax year, the excess is treated as a
net operating loss. This loss may be
carried over or back to other tax years
according to the rules of section 172.
Example 1. Corporation X has separate
limitation income of $4,000 in its general
limitation income category (line 1,
column (i)) and separate limitation
income of $1,000 in its financial services
income category (line 1, column (iv)). In
addition, the corporation has a separate
limitation loss of $2,000 in its shipping
income category (line 1, column (v)).
Since the corporation’s combined
separate limitation losses for the tax
year ($2,000) do not exceed its
combined separate limitation income for
the tax year ($5,000), the entire $2,000
may be allocated to other separate
categories. Therefore, Corporation X
enters a positive $2,000
in the bold-outlined box on line 2e,
column (v).

3

To compute the portion of the $2,000
separate limitation loss that is allocable
to general limitation income, Corporation
X divides the $4,000 of income by
$5,000 (the combined separate limitation
income from all separate categories with
positive income). The result of 80% is
multiplied by the separate limitation loss
of $2,000. Corporation X enters the
product of $1,600 on line 2e, column (i).
To compute the portion of the $2,000
separate limitation loss that is allocable
to financial services income, Corporation
X divides the $1,000 of separate
limitation income by $5,000. The result
of 20% is multiplied by the separate
limitation loss of $2,000. Corporation X
enters the product of $400 on line 2e,
column (iv).
Corporation X enters $2,400 ($4,000
minus $1,600) on line 3, column (i); $600
($1,000 minus $400) on line 3, column
(iv); and $0 (negative $2,000 plus
positive $2,000) on line 3, column (v).
Line 4. Enter the overall foreign losses
for the tax year (from line 3) if they have
reduced U.S. source income for the tax
year.
Important: If an overall foreign loss has
reduced U.S. source income, do not
complete the remainder of Part I for that
separate category. However, complete
Parts II and III for that category to show
the year-end balance in the separate
limitation loss and overall foreign loss
accounts.
Line 5. Recapture overall foreign losses
that reduced U.S. source income in prior
tax years (section 904(f)(1)). To do this,
treat a portion of the current year
separate limitation income that is of the
same category as the loss that resulted
in the prior year overall foreign loss as
U.S. source income. Recapture
continues until the applicable overall
foreign loss account balance (Part III) is
reduced to zero.
The amount of any current year
separate limitation income subject to
recapture is the smaller of the balance in
the applicable overall foreign loss
account (the applicable line 1 amount of
Part III), or 50% of all amounts entered
on line 3, Part I.
The corporation can make an annual,
revocable election to recapture a greater
portion of the balance in an overall
foreign loss account by attaching a
statement to Form 1118 indicating:
1. The percentage and dollar amount
of the separate limitation income that is
treated as U.S. source income and
2. The percentage and dollar amount
of the balance (both before and after
recapture) in the overall foreign loss
account that is recaptured.

4
I.R.S. SPECIFICATIONS
TO BE REMOVED BEFORE PRINTING
INSTRUCTIONS TO PRINTERS
Sch J (1118), PAGE 4 OF 4
MARGINS; TOP 13mm (1/2"), CENTER SIDES. PRINTS: HEAD TO HEAD
PAPER: WHITE WRITING, SUB. 20.
INK: BLACK
FLAT SIZE: 216mm (8-1/2") x 279mm (11")
PERFORATE: None
DO NOT PRINT — DO NOT PRINT — DO NOT PRINT — DO NOT PRINT

Schedule J (Form 1118) (Rev. 12-2004)

If the corporation disposes of property
that was used predominantly in a foreign
trade or business and that generated
foreign source income in the same
separate category as the applicable
overall foreign loss account, the
corporation generally must recognize
gain on the disposition to the extent of
the balance in the account (after
amounts are recaptured under section
904(f)(1)), whether or not gain would
otherwise be recognized on the
disposition. See section 904(f)(3) and
Regulations section 1.904(f)-2(d). Such
gain is treated as foreign source taxable
income in the same separate category
as the applicable overall foreign loss
account and is subject to recapture to
the extent of the corporation’s foreign
source taxable income in that separate
category or, if less, 100% of the
corporation’s foreign source taxable
income.
Note: For dispositions after October 22,
2004, the previous paragraph applies to
certain dispositions of stock in a CFC.
See section 904(f)(3)(D) for details.
Line 7. If a separate limitation loss was
allocated in a prior tax year and the
corporation has income during the
current tax year in the separate category
from which the loss was allocated, that
current year income (if it was not
previously recharacterized) must be
recharacterized as income of the
separate category(ies) to which the loss
was allocated in the prior year(s) (section
904(f)(5)).
If a prior year separate limitation loss
was allocated to more than one separate
category and there is not enough
current year income in the separate
category from which the loss was
allocated to recharacterize all remaining
balances, then the current year income
must be recharacterized as income of
the other separate categories on a pro
rata basis in the following manner:
Current year income
in separate category
from which losses
were previously
allocated

×

Amount remaining to
be recharacterized
as income of a given
separate category
Amounts remaining to
be recharacterized as
income of all separate
categories

Any amount that is not recharacterized
during the tax year (i.e., the excess of
separate limitation losses previously
allocated over current year income in
that same separate category) must be
entered into the grid at Part II.
Note: Recharacterization of separate
limitation income does not result in
recharacterizing any tax. The rules of
Regulations section 1.904-6 apply on an
annual basis for allocating taxes to
separate categories.
If prior year separate limitation losses
can be recharacterized, the total
amounts recharacterized should be
entered into the bold-outlined boxes as
negative numbers. Each prior-year

Page

separate limitation loss recharacterized
should be entered as a positive number
on the same line under the appropriate
column heading to which it was
recharacterized.
Note: The numbers entered across any
given line should “zero out.”
Example 2. Assume the same facts in
Example 1 on page 3. Also assume that,
in a subsequent tax year, Corporation X
has $1,500 of income in its shipping
income category (on line 6, column (v),
of its Schedule J).
Since there is not enough under
shipping income to recharacterize the
entire $2,000 prior-year balance
remaining to be recharacterized,
Corporation X will prorate the $1,500 of
income in that subsequent year as
follows.
● To compute the portion to be
recharacterized as general limitation
income, Corporation X should:
1. Divide the $1,600 remaining to be
recharacterized from shipping income to
general limitation income by the $2,000
remaining to be recharacterized from
shipping income to all separate
categories.
2. Multiply the result (80%) by the
$1,500 of shipping income.
3. Enter $1,200 as a positive number
on line 7e, column (i).
● To compute the portion to be
recharacterized as financial services
income, Corporation X should:
1. Divide the $400 remaining to be
recharacterized from shipping income to
financial services income by $2,000.
2. Multiply the result (20%) by the
$1,500 of shipping income.
3. Enter $300 as a positive number on
line 7e, column (iv).
Corporation X enters the $1,500 of
shipping income that was
recharacterized in the bold-outlined box
at line 7e, column (v). Note that the total
amounts entered across line 7e now
equal zero.
Finally, Corporation X completes the
Part II recharacterization balances grid
by entering $400 ($1,600 minus $1,200)
on line e, column (i), and $100 ($400
minus $300) on line e, column (iv).
Line 10. Enter U.S. source losses
allocated to separate categories with
income on line 9 for the current tax year.
Use the following formula:
U.S. source loss

×

Line 9 income in a given
category
Combined line 9 income
of all categories with
income on line 9

U.S. source losses that are part of a
net operating or net capital loss that are
carried back or forward to the current
tax year (section 172 or Regulations
sections 1.1502-21(b) and 1.1502-79(a))
are allocated first to U.S. source income
for the current tax year, and then to the
Printed on recycled paper

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separate category(ies) with income on
line 9 for the current tax year using the
rules set forth above.
U.S. source losses in excess of the
combined line 9 income for a tax year
must be treated as a net operating loss
that may be carried back or forward to
other tax years using the rules of section
172.

Part II
If a separate limitation loss was
allocated in a prior tax year and the
corporation has income during the
current tax year in the separate category
from which the loss was allocated, that
current year income (if it was not
previously recharacterized) must be
recharacterized as income of the
category to which the loss was allocated
in the prior year(s) (section 904(f)(5)).
To determine the amounts to enter
into the grid:
1. Add the current year separate
limitation loss allocations (subject to
Regulations section 1.904(f)-1(d) capital
gains adjustments) to last year’s
year-end balances.
2. Subtract the amounts
recharacterized during the current tax
year.
3. Enter the result on the line (line a–i)
for the separate category from which
losses were previously allocated, under
the appropriate column (column (i)–(ix))
to which the losses were previously
allocated.
Example 3. Assume the same facts in
Example 1 on page 3. Also assume that
Corporation X does not have any
remaining balances from any prior
allocations of losses from its shipping
income category to its general limitation
income or its financial services income.
The corporation should enter $1,600 on
line e, column (i), and $400 on line e,
column (iv).

Part III
Line 1. Enter the ending balances from
last year’s schedule.
Lines 2, 3, and 5. Show any
adjustments made to the overall foreign
loss accounts for each separate
category during the tax year. See
Regulations section 1.904(f)-1(d) for a list
of possible additions to the accounts.
See Regulations section 1.904(f)-1(e) for
a list of possible reductions (including
recapture).
Line 6. Enter the year-end balances of
the overall foreign loss accounts for
each separate category.