Expenses Allocated to Effectively Connected Income under Regulations

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Instructions for Form 1120-L

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(Init. & date)

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14:25 - 31-JAN-2008

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2007

Key
Cumulative Changes N/A - new product
Reference checks = green shading/boxing

Department of the Treasury
Internal Revenue Service

Instructions for Schedule H
(Form 1120-F)
Deductions Allocated to Effectively Connected Income Under Regulations Section
1.861-8
Section references are to the Internal
Revenue Code unless otherwise noted.

directly on Form 1120-F, Section II,
line 15.

of Schedule
General Instructions Purpose
Schedule H (Form 1120-F) is used by
Regulations section 1.861-8.
Under section 882(c), a foreign
corporation’s expenses are
deductible against its U.S. taxable
income only if they are connected
with income effectively connected
with the conduct of a trade or
business in the United States (“ECI”).
The proper allocation and
apportionment of deductions for this
purpose is generally determined
under the provisions of Regulations
section 1.861-8 and Temporary
Regulations section 1.861-8T, with
special rules for the allocation and
apportionment of research and
experimentation expenses at
Regulations section 1.861-17. Under
these regulations, a taxpayer must
allocate deductions to the class of
gross income to which the deduction
is definitely related and then, if
necessary, apportion deductions
among the groups of income included
in the class. Generally, deductions
are allocated and apportioned on the
basis of the factual relationship
between the deduction and gross
income. (Under section 882(c)(1)(B),
charitable contributions that are
deductible under section 170 reduce
ECI whether or not connected with
such income.) Use Schedule H (Form
1120-F) to report expenses, other
than interest expense and bad debt
expense, allocated and apportioned
to ECI and non-ECI. Interest expense
of a foreign corporation is allocated to
ECI exclusively (except to the extent
provided in certain tax treaties) under
the rules provided in Regulations
section 1.882-5 and Temporary
Regulations section 1.882-5T and is
reported on Schedule I (Form
1120-F). See Temporary Regulations
section 1.882-5T(a)(2). Bad debt
expense allocated to ECI is reported

a foreign corporation that files Form
1120-F to report the amount of the
foreign corporation’s deductible
expenses that are allocated and
apportioned under Regulations
sections 1.861-8 and 1.861-17 and
Temporary Regulations section
1.861-8T between ECI and non-ECI.
The results reported on Schedule H
are included on Form 1120-F, Section
II, line 26 and, for banks only, on
Schedule M-3 (Form 1120-F), Part III,
line 31.

Who Must File
Any foreign corporation that is
required to file Form 1120-F and is
(or is treated as) engaged in a trade
or business within the United States
at any time during the tax year must
complete Schedule H and attach it to
its Form 1120-F.
Protective returns. If the foreign
corporation files a protective Form
1120-F under Regulations section
1.882-4(a)(3)(vi), Schedule H need
not be completed or attached to the
protective Form 1120-F.
Treaty-based return reporting of
business profits attributable to a
U.S. permanent establishment. Do
not complete Schedule H if the
corporation files Form 1120-F
pursuant to an income tax treaty to
report business profits attributable to
a U.S. permanent establishment and
applies OECD Transfer Pricing
Guidelines principles in lieu of the
ECI and expense allocation and
apportionment rules of section 882(c)
and Regulations sections 1.861-8 and
1.861-17 and Temporary Regulations
section 1.861-8T. This treaty-based
reporting is permitted only if the
applicable income tax treaty and
accompanying documents (such as
Exchange of Notes) expressly
Cat. No. 50605P

provide that attribution of profits is
determined under the OECD Transfer
Pricing Guidelines principles applied
by analogy. See Article 7 and the
accompanying Exchange of Notes to
the 2001 United States-United
Kingdom and 2003 United
States-Japan Income Tax Treaties.
See the instructions for Schedule M-3
(Form 1120-F) for the reporting of
book-tax differences in Parts II and III
of that schedule under a treaty-based
return position pursuant to the OECD
Transfer Pricing Guidelines
principles.

Specific Instructions
Part I – Deductions
Directly Allocated and
Apportioned to ECI and
Non-ECI
Part I is used to identify the total
expenses, including interest expense
and bad debt expense, recorded on
the corporation’s home office books;
to report adjustments made to
determine the amounts that are
deductible for U.S. tax purposes; and
to report the portion of the adjusted
expenses that are definitely related to
ECI and non-ECI. To the extent
included in the home office records
used to report total home office
expenses, interest expense and bad
debt expense are also identified on
Schedule H and removed from
expenses allocable under
Regulations sections 1.861-8 and
1.861-17 and Temporary Regulations
section 1.861-8T. Deductions
reported on home office books may
include expenses incurred outside the
foreign corporation’s home country
(other than in the United States).
Home office deductions do not
include deductions that are reported
on books and records used to
complete Schedule L (Form 1120-F)

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Instructions for Form 1120-L

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(“Schedule L books”). Schedule L
books are the set or sets of books of
the corporation’s U.S. trade or
business or the books of its U.S.
branch (whether maintained within or
outside the United States) as defined
in Regulations section 1.882-5(d)(2).
Part I may be completed in U.S.
dollars or in the foreign corporation’s
functional currency. If the corporation
completes Part I in U.S. dollars,
check the box in the Part I heading. If
the corporation completes Part I in its
foreign functional currency, specify
the currency in the space provided in
the Part I heading.
Line 1. Enter on line 1 the total
expenses recorded on the
non-Schedule L books and records of
the home office (including books and
records maintained in locations
outside the United States other than
in the corporation’s home country).
The books and records may be home
office records (e.g., management cost
accounting reports) that identify only
the expenses included in the
corporation’s financial statements for
the tax year. It is not necessary that
the home office records or reports
used also include items of income,
gain or loss (including bad debt
charge-offs), or financial transaction
expenses such as interest expense
and periodic notional principal
contract expense. Alternatively, the
expenses reported on line 1 may be
derived from audited or unaudited
financial statements. The home office
books may be books recorded under
the Generally Accepted Accounting
Principles (“GAAP”) applicable to the
corporation’s local accounting
practices or under U.S. GAAP, at the
corporation’s choosing. Expenses of
other includible entities (i.e.,
disregarded entities) are included in
home office expenses reported on
line 1 only if the expenses of such
other entities are recorded on the
home office’s books. Expenses
recorded on non-Schedule L books of
disregarded entities (and not on the
home office books) that are allocated
and apportioned to ECI are reported
on line 20. If the corporation uses
management cost accounting
statements for its home office books
that include expenses of one or more
disregarded entities, and also
maintains certified audited
third-country GAAP statements for a
disregarded entity, the expenses of
the disregarded entity must be
included in line 1 in either U.S. dollars
or the home office’s functional
currency even if the audited

third-country GAAP statements are in
another non-dollar functional
currency.
Line 2. Enter on line 2 the total of
the adjustments necessary to
conform the amounts on line 1 to the
amounts that are deductible for U.S.
tax purposes. These adjustments
include temporary and permanent
differences of the type applicable in
determining the deductions of U.S.
corporations that file their income tax
returns on Form 1120 (e.g.,
adjustments eliminating any line 1
expenses of entities whose expenses
are includible in the corporation’s
expenses for book purposes but not
for U.S. tax purposes). In addition,
include adjustments to loan losses
and loss reserves included in line 1
expenses to reflect the amount of bad
debt expense that is deductible for
U.S. tax purposes. Such adjustments
include any amount of bad debt
expense included in line 1 that is
treated as an involuntary charge-off
under Regulations section
1.166-2(d)(2). The deductible amount
of bad debt expense remaining after
any adjustments on line 2 is
eliminated from Schedule H
expenses on line 5.

of deductible expenses (determined
under U.S. tax principles before
apportionment between ECI and
non-ECI) of the foreign corporation
that files Form 1120-F, other than
those that are included on the
corporation’s Schedule L books.
Line 4. Enter on line 4 the total
amount of interest expense (including
interbranch interest), if any, recorded
on the home office books that is
included on line 3.
Line 5. Enter on line 5 the bad debt
expense, if any, that is included on
line 3. Any portion of the amount
included on line 5 that is allocable to
ECI is reported directly on Form
1120-F, Section II, line 15.
Line 7. Subtract line 6 from line 3
and enter the difference on line 7.
This is the total amount of the
corporation’s home office deductions
which are allocated and apportioned
between ECI and non-ECI in Parts I
and II of Schedule H.

Do not include on line 2 the
amount of any expenses allocated
and apportioned to ECI or non-ECI. In
addition, do not make adjustments on
line 2 to reflect book-to-tax
adjustments for any home office
interest expense (including
interbranch interest expense)
included on line 1. Interest expense
included on line 1 is adjusted on line
4. The allocation of deductible
interest expense to ECI is reported on
Schedule I (Form 1120-F). Attach a
schedule listing the amount of the
adjustment for each of the following
categories:
1. Expenses included on line 1 of
entities whose expenses are not
includable in the corporation’s
expenses for U.S. tax purposes.
2. Temporary differences (e.g.,
costs capitalized under section 263A,
carrying charges under section
263(g), depreciation and
amortization, general loan loss
reserves).
3. Permanent differences (e.g.,
interbranch transactions other than
interest, non-deductible meals and
entertainment and executive salary
compensation).

Note. The amounts reported on
lines 8 through 10 are deductions that
are definitely related to non-ECI
under Regulations sections 1.861-8
and 1.861-17 and Temporary
Regulations section 1.861-8T. If the
corporation has deductions included
in line 7 that are definitely related and
allocable to ECI that is exempt from
tax under the Code or an income tax
treaty, the deductions should be
treated as allocable to non-ECI for
purposes of Schedule H and included
in the amounts reported on lines 8
through 10.

Line 3. Combine lines 1 and 2 and
enter the result on line 3. The amount
reported on line 3 is the total amount
-2-

Lines 8 Through 10. Direct
Allocation and Apportionment
of Home Office Deductions to
Non-Effectively Connected
Income

Line 8. Enter on line 8 deductions
included on line 7 that are definitely
related and allocable to non-ECI
received from subsidiaries (other than
disregarded entities whose income
and deductions are treated as income
and deductions of the corporation
filing Form 1120-F). See, for
example, Temporary Regulations
section 1.861-8T(e)(4)(ii) and
Regulations section 1.861-17
(relating to treatment of stewardship
expenses attributable to dividends
and research and experimentation
expenses).
Line 9. Enter on line 9, deductions
included on line 7 (other than
amounts included on line 8) that are
definitely related under Regulations
Instructions for Form 1120-L

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Instructions for Form 1120-L

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sections 1.861-8 and 1.861-17 and
Temporary Regulations section
1.861-8T to non-ECI of the
corporation that is booked in the
corporation’s home office and in other
locations in the corporation’s home
country. For example, line 9 includes
deductions included on line 7 that are
definitely related to non-ECI of a
banking corporation that is booked in
the corporation’s home office and in
its retail banking branches in the
corporation’s home country. The
amount of any inter-office or
interbranch charges from the home
office to various locations and
departments recorded on the home
office books as home office “service”
fees for internal management or
home office tax accounting purposes
(which amounts are eliminated on line
2) is not determinative of the amount
of the home office’s deductible
expense that is definitely related to
non-ECI.
Line 10. Enter on line 10,
deductions included on line 7 (other
than amounts included on line 8) that
are definitely related to non-ECI of
the corporation that is booked in
locations outside the corporation’s
home country (including the United
States). For example, if a banking
corporation conducts global banking
operations through branch offices
(including through disregarded
entities) in locations outside the
corporation’s home country, the home
office deductions included on line 7
that are definitely related to non-ECI
booked in those locations are
reportable on line 10. These
deductions include home office
deductions definitely related to
non-ECI of disregarded entities,
whether or not the balance sheet
from such entity is reportable on
Schedule L of Form 1120-F. (For
corporations other than banks, such
non-ECI may be reflected as income
from includable entities on Schedule
M-3 (Form 1120-F), Part I, line 5.
Foreign banks record such non-ECI
on Schedule M-3 (Form 1120-F), Part
I, line 5 only if the entity’s sets of
books are reportable on Form
1120-F, Schedule L.) See instructions
for Schedule M-3 (Form 1120-F), Part
I.
Line 11. Add lines 8, 9, and 10 and
enter the total on line 11. The amount
on line 11 constitutes the total portion
of the deductions entered on line 7
that are definitely related solely to the
corporation’s non-ECI.
Line 12. Subtract line 11 from line 7
and enter the difference on line 12.

The amount on line 12 is the residual
amount of the deductions entered on
line 7 that, under Regulations
sections 1.861-8 and 1.861-17 and
Temporary Regulations section
1.861-8T, is definitely related to ECI
or is apportioned between the
corporation’s ECI and non-ECI.
Line 13. Enter on line 13 the portion
of the deductions included on line 12
that is definitely related to ECI under
Regulations sections 1.861-8 and
1.861-17 and Temporary Regulations
section 1.861-8T. Deductions
definitely related to ECI may include
specifically identifiable personnel and
other associated costs incurred in the
home office with respect to persons
who work on the evaluation and
approval of ECI-producing activities
of the corporation’s trade or business
within the United States (e.g.,
specifically identifiable home office
deductions incurred for the evaluation
and approval of U.S. loans to
customers negotiated and solicited by
the corporation’s U.S. branch office
where a banking, financing or similar
business is carried on). Also include
on line 13 deductible research and
experimentation expenditures that are
definitely related to ECI under
Regulations section 1.861-17 and
deductible charitable contributions
that are included on line 7.
Line 14. Subtract line 13 from line
12 and enter the difference on line
14. The amount on line 14 is the
residual amount of the deductions
entered on line 7 that is not definitely
related solely to the corporation’s ECI
or non-ECI. The amount on line 14 is
subject to apportionment under
Regulations sections 1.861-8 and
1.861-17 and Temporary Regulations
section 1.861-8T in Part II, line 17,
below.

Part II – Home Office
Deductions Indirectly
Allocated and
Apportioned to ECI and
Non-ECI
Line 15. If the corporation reports
expenses and deductions in Part I in
the corporation’s foreign functional
currency, enter the average
exchange rate that is used to convert
those deductions to U.S. dollars for
purposes of lines 16 and 18. If the
corporation reports Part I in U.S.
dollars, leave line 15 blank.
-3-

Instructions for Form 1120-L

delete "below."

Line 16. Enter on line 16 the amount
on line 14, converted if necessary to
U.S. dollars. If the amount on line 14
is stated in the corporation’s foreign
functional currency, multiply line 14
by the line 15 exchange rate and
enter the result on line 16.

amounts in

on

.

Line 17. Enter on line 17 the amount
of deductions included on line 16 that
is apportioned to ECI under
Regulations sections 1.861-8 and
1.861-17 and Temporary Regulations
section 1.861-8T. Attach a schedule
describing the apportionment
methods used, identifying the
numerator and denominator of any
ratio-based method, and listing the
amount apportioned under each
method to ECI.
Line 18. Enter on line 18 the amount
entered on line 13, converted if
necessary to U.S. dollars. If the
amount on line 13 is stated in the
corporation’s foreign functional
currency, multiply line 13 by the line
15 exchange rate and enter the result
on line 18.
Line 19. Add lines 17 and 18 and
enter the total on line 19. The amount
on line 19 is the total amount of
deductible expenses reported on the
home office books that is allocated
and apportioned to ECI under
Regulations sections 1.861-8 and
1.861-17 and Temporary Regulations
section 1.861-8T.
Line 20. Enter on line 20, in U.S.
dollars, the amount of deductible
expenses allocated and apportioned
to ECI under Regulations sections
1.861-8 and 1.861-17 and Temporary
Regulations section 1.861-8T that is
recorded on non-Schedule L books
and records of foreign locations other
than those of the home office. Attach
a schedule listing the amount of
deductions allocated and apportioned
to ECI from each location.
Line 21. Add lines 19 and 20 and
enter the total on line 21. The amount
entered on line 21 is the total amount
of deductible expenses reported on
the corporation’s non-Schedule L
books that is allocated and
apportioned to ECI under Regulations
sections 1.861-8 and 1.861-17 and
Temporary Regulations section
1.861-8T. This amount is also
reported on Form 1120-F, Section II,
line 26, and, for banks only, on
Schedule M-3 (Form 1120-F), Part III,
line 31.

Insert A

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Instructions for Form 1120-L

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Part III – Indirect
Allocation and
Apportionment Methods
and Financial Records
Part III is used to identify the income,
asset, and personnel attributes of the
U.S. trade or business and to report
the methodologies and financial
records used to determine the
amount of the deductions that are
allocated and apportioned to ECI in
Parts I and II of Schedule H. The
corporation’s ratios of effectively
connected gross income, U.S. assets,
and U.S. personnel to worldwide
gross income, gross assets, and
personnel are reported on lines 22
through 24. Other ratio-based
methods and any non-ratio-based
methods the corporation used for the
tax year to allocate and apportion
deductions to non-ECI on lines 8
through 10 and to ECI on lines 13
and 20 are identified in attachments
required by the instructions for lines
25 and 26.

Check Boxes Above Line 22
New methods. Check the box to
indicate if the corporation used a
method to allocate and apportion
deductions for the current tax year
that was not used in the prior year.
Interbranch amounts in Part IV.
Check the box to indicate if an
expense in respect of any amount
included in Part II, line 21, in the
home office allocation and
apportionment was recorded on the
Schedule L books that are used to
complete Part IV of Schedule H.
Include the full amount of the
interbranch charge in Part IV, line 36.

Lines 22 Through 24. Gross
Income, Gross Asset, and
Number of Personnel Ratios
The corporation must complete the
gross income ratio for line 22 whether
or not it used such method to allocate
and apportion deductions in Parts I
and II. If the corporation used a gross
asset or number of personnel method
(whether separately or as
components of a multi-factor
method), it must report the attributes
on lines 23 and 24. If the corporation
did not use either the gross asset or
the personnel method to allocate and
apportion deductions for the year,
then, except as provided for
worldwide assets reported on line
23b, only the numerators of each
method must be reported on lines 23

Insert B

and 24. See the instructions for line
23b for disclosure of the gross asset
ratio by corporations that used the
actual ratio to allocate interest
expense under Regulations section
1.882-5 and Temporary Regulations
section 1.882-5T.
Line 22a. Enter on line 22a the
corporation’s gross ECI reportable on
Schedule M-3 (Form 1120-F), Part II,
line 25, column (e), plus any
additional gross income amounts
reportable on line 27, column (e). If
the corporation is not required to and
does not file Schedule M-3 (Form
1120-F) for the tax year, enter the
amount of gross income from Form
1120-F, Section II, line 11.
Line 22b. Enter on line 22b the
corporation’s worldwide gross income
stated in U.S. dollars. Corporations
other than banks enter the worldwide
gross income amount from Schedule
M-3 (Form 1120-F), Part II, line 25,
column (a), plus any additional gross
income amounts included on line 27,
column (a). If the corporation is not
required to and does not report
worldwide gross income in column (a)
of Schedule M-3 (Form 1120-F),
enter the worldwide gross income
from any other reasonable source.
Reasonable sources include
worldwide income statements used to
report allocations of income or capital
to other regulatory or non-Federal tax
authorities or the worldwide income
statements that would be used if the
corporation was required to report
worldwide gross income in column (a)
of Schedule M-3 (Form 1120-F).
Line 23a. Enter on line 23a the
average assets reported on Schedule
I (Form 1120-F), line 5, column (d).
These are the average U.S. assets
included in the corporation’s
Regulations section 1.882-5 and
Temporary Regulations section
1.882-5T interest expense allocation.
If the corporation does not have any
interest expense for the year and
does not file Schedule I (Form
1120-F), enter the average assets
derived from the beginning and
ending U.S. assets included in the
computation of U.S. net equity on
Form 1120-F, Section III, lines 4a and
4b. If the corporation is exempt from
the branch profits tax under an
applicable income tax treaty and is
not required to complete Form
1120-F, Section III, the average U.S.
assets should be derived from the
beginning and ending U.S. assets
included on Schedule L (Form
1120-F).
-4-

Line 23b. If the corporation used the
worldwide actual ratio under
Regulations section 1.882-5(c)(2) to
allocate interest expense to ECI,
enter the amount from Schedule I
(Form 1120-F), line 6b. If the
corporation did not use the actual
ratio, but used a worldwide asset ratio
to apportion deductions to ECI for
purposes of Schedule H, Part II, line
17 or 20, enter the worldwide assets
used in that ratio. If a worldwide asset
ratio is not available from either
Schedule I (Form 1120-F), line 6b or
Schedule H, Part II, line 17 or 20,
leave line 23b blank.
Line 23c. If an amount is entered on
line 23b, divide line 23a by line 23b to
determine the gross asset ratio and
enter the percentage on line 23c. If
line 23b is blank, leave line 23c blank.
Line 24a. Enter on line 24a the
number of personnel who worked in
the corporation’s U.S. trade or
business during the tax year. The
corporation may use any reasonable
method to determine the number of
personnel, including data that is
already prepared and used by the
corporation for a non-tax business
purpose. For example, if the
corporation maintains headcount data
(such as weighted average
headcount data) in its personnel
records or for other purposes such as
budgeting, planning and control, such
numbers may be used in the
numerator.
Line 24b. If the corporation used a
ratio based on number of personnel
to apportion deductions in Part II, line
17 or 20 of Schedule H, enter the
worldwide personnel count used in
the denominator of such ratio on line
24b. If the corporation does not
apportion deductions using a number
of personnel ratio, leave line 24b
blank.
Line 24c. If an amount is entered on
line 24b, divide line 24a by line 24b to
determine the number of personnel
ratio and enter the percentage on line
24c. If line 24b is blank, leave line
24c blank.
Line 25. If the corporation used any
other ratio-based method to allocate
and apportion deductions to ECI and
non-ECI on line 8, 9, 10, 13 or 20 of
Schedule H, attach a schedule
describing the ratio used on each
line. Include the numerator and
denominator of the ratio used for
each applicable line.
Line 26. If the corporation used a
non-ratio-based method to allocate
and apportion deductions to ECI and
Instructions for Form 1120-L

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Instructions for Form 1120-L

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that is included in the
amount reported on line 32.
non-ECI on line 8, 9, 10, 13 or 20 of
Schedule H, attach a schedule
describing each such method and the
percentage used, if any, for each
applicable line. These may include
methods for which percentage
allocations to ECI or non-ECI are
estimated and documented by
questionnaires or home office
department interviews (e.g.,
estimated percent of time spent by
employees of particular home office
departments or sub-departments on
U.S. trade or business activities).

Lines 27 Through 29.
Identification of Financial
Records Used
Check the “Yes” or “No” box to
indicate whether the types of financial
books and records indicated were
used to complete Parts I and II of
Schedule H.
Line 29. If the “Yes” box is checked,
attach a list of other documentation
used to complete Parts I and II of
Schedule H (e.g., home country
regulatory reports).

Part IV – Allocation and
Apportionment of
Deductions on Books
and Records Used to
Prepare Form 1120-F,
Schedule L
Use Part IV of Schedule H to report
the allocation and apportionment of
deductions recorded on the
corporation’s Schedule L books, other
than interest and bad debt expense,
to ECI and non-ECI under
Regulations sections 1.861-8 and
1.861-17 and Temporary Regulations
section 1.861-8T.
Line 30. Enter on line 30 the total
expenses recorded on the Schedule
L books.
Note. The Schedule L books may be
maintained using Generally Accepted
Accounting Principles (“GAAP”) other
than U.S. GAAP. The Schedule L
books may include more than one set
of books, including the set(s) of books
of disregarded entities. See the
instructions for Schedule M-3 (Form
1120-F), Part I, lines 4 and 5, for the
Schedule L treatment of disregarded
entities and the combined reporting of
multiple sets of books. These rules
apply to both banks and non-banks
for purposes of determining the
expenses reportable on Schedule H,
line 30. Interbranch income and
expenses recorded between separate
Instructions for Form 1120-L

delete "recorded on the
Schedule L books"

sets of books must be eliminated in
the combined reports.
Line 31. Enter on line 31 the total of
the adjustments necessary to
conform the amounts on line 30 to the
amounts that are deductible for U.S.
tax purposes. Attach a schedule
detailing the items adjusted and
amounts of each adjustment. See the
instructions for Part I, line 2, for a
general description of the types of
temporary and permanent differences
that are reportable as adjustments to
the book expenses in determining
current year tax deductions under
U.S. tax principles. However, do not
include any interbranch expenses on
line 31. Interbranch interest is
reported on line 33b, and other
interbranch expenses on the
Schedule L books (including
interbranch book charges for home
office services provided to the U.S.
trade or business) are reported on
line 36.
Line 33a. Enter on line 33a the
amount of third-party interest
expense (whether owed to unrelated
or related parties) recorded on the
Schedule L books. Interest expense
is allocated to ECI under Regulations
section 1.882-5 and Temporary
Regulations section 1.882-5T and
reported on Schedule I (Form
1120-F).
Line 33b. Enter on line 33b any
interbranch interest expense
recorded on the Schedule L books
that is included in the amount
reported on line 30.
Line 34. Enter on line 34, any bad
debt expense that is included in line
32. Any portion of the amount
eliminated on line 34 that is allocable
to ECI is reported directly on Form
1120-F, Section II, line 15.
Line 35. Enter on line 35 other
third-party expenses reported on the
Schedule L books that are not
allocated and apportioned between
ECI and non-ECI under Regulations
sections 1.861-8 and 1.861-17 and
Temporary Regulations section
1.861-8T. Periodic expense from a
notional principal contract is not
allocated and apportioned under
Regulations section 1.861-8 and
Temporary Regulations section
1.861-8T if the amount is includible in
the profits and losses of a global
dealing operation and the corporation
allocates and apportions such
amounts under Proposed Regulations
section 1.863-3(h). Such periodic
expense is subject to allocation and
apportionment under Proposed

the amount
reported on

-5-

delete
Regulations section 1.863-3(h) in
accordance with the principles of
Proposed Regulations section
1.482-8. If such periodic expense is
included in line 30, it should be
included on line 35 and reported
separately on Form 1120-F, Section
II, as either part of the global dealing
income reported on Form 1120-F,
Section II, line 10, or as a separately
identified deduction under Form
1120-F, Section II, line 27.
Line 36. Enter on line 36 all
interbranch expenses, other than
interbranch interest expense,
recorded on the Schedule L books
that are included in the amount
reported on line 32. The interbranch
amounts reportable on line 36 include
home office charges reflected on the
Schedule L books for home office
management services provided to the
U.S. trade or business.
Note. Amounts paid or accrued on
the Schedule L books to the home
office are not determinative of the
amount of home office expense
allocated and apportioned to ECI on
Schedule H, Part II, line 21.
Line 37. Add the amounts on lines
33a through 36 and enter the total on
line 37. This amount reflects the
deductions included in line 32 for
which there are special rules to which
the general allocation and
apportionment rules under
Regulations sections 1.861-8 and
1.861-17 and Temporary Regulations
section 1.861-8T do not apply.
Line 38. Subtract the amount on line
37 from the amount on line 32 and
enter the difference on line 38. The
amount reported on line 38 is
allocated and apportioned to ECI and
non-ECI under Regulations sections
1.861-8 and 1.861-17 and Temporary
Regulations section 1.861-8T and
reconciled on lines 39a through 42.

Lines 39a Through 42.
Reconciliation of Allocable
Expenses on Books Under
Regulations Section 1.861-8
(from line 38)
The amount of deductions reported
on line 38 that is allocated and
apportioned to ECI and non-ECI is
reported on lines 39a through 42,
columns (a) through (c). Enter the
amount included in line 38 that is
allocated or apportioned to ECI in
column (a) and the amount allocated
or apportioned to non-ECI in column
(b). Add columns (a) and (b) for each
line and enter the total amount in
column (c).

that are included in the amount
reported on line 32 and

32

Page 6 of 6

Instructions for Form 1120-L

14:25 - 31-JAN-2008

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Line 39a. Enter on line 39a the
amount of derivative transaction
deductions included in line 38 that are
definitely related to ECI or non-ECI
under Regulations section 1.861-8
and Temporary Regulations section
1.861-8T. Deductions included on line
39a are periodic expense from
notional principal contracts that are
sourced under Regulations section
1.863-7 with respect to non-dealer
securities hedging transactions or
from securities trading or non-global
dealing operations. If notional
principal contract periodic expense is
allocated and apportioned under the
global dealing rules of Proposed
Regulations section 1.863-3(h), such
amounts should be included on line
35 and, therefore, are not definitely
related to ECI or non-ECI under
Regulations section 1.861-8 and
Temporary Regulations section
1.861-8T.

Note. Periodic expenses from
notional principal contracts may be
allocated and apportioned to ECI and
non-ECI in accordance with the ECI
and non-ECI treatment of the item(s)
the notional principal contract
hedges.
Line 39b. Enter on line 39b all other
deductions included in the amount
reported on line 38 that are definitely
related to ECI or non-ECI under
Regulations sections 1.861-8 and
1.861-17 and Temporary Regulations
section 1.861-8T.
Line 40. Add lines 39a and 39b and
enter the total on line 40 for each of
columns (a) through (c). The amounts
on line 40 are the portion of total
deductions reported on line 38 that
are definitely related to ECI and
non-ECI.

-6-

Line 41. Enter on line 41 the
deductions included in line 38 that are
apportioned to ECI and non-ECI
under Regulations sections 1.861-8
and 1.861-17 and Temporary
Regulations section 1.861-8T. The
total on line 41, column (c), must
equal line 38 minus line 40, column
(c).
Line 42. Add lines 40 and 41 and
enter the total on line 42 for each of
columns (a) through (c). The amount
entered on line 42, column (a) is the
total amount of deductions included
on line 38 that is allocated and
apportioned to ECI. These deductions
are included on Form 1120-F, Section
II, lines 12, 13, 14, 16, 17, 19 through
25, and 27. The total amount on line
42, column (c) must equal the amount
on line 38.

Instructions for Form 1120-L