Interest Expense Allocation Under Regulations Section 1.882-5

2011

Department of the Treasury
Internal Revenue Service

Instructions for Schedule I
(Form 1120-F)
Interest Expense Allocation Under Regulations Section 1.882-5
Section references are to the Internal
Revenue Code unless otherwise noted.

General Instructions
Purpose of Schedule
Schedule I (Form 1120-F) is used to
report the amount of interest expense
allocable to effectively connected income
(“ECI”) and the deductible amount of such
allocation for the tax year under section
882(c) and Regulations section 1.882-5.
The schedule also identifies the various
elections the taxpayer uses, and
discloses the basic calculations for the
year under Regulations sections
1.882-5(a)(7) and (d)(5), and under the
branch profits tax rules of Regulations
section 1.884-1(e)(3).
Note. The tax election under
Regulations section 1.884-1(e)(3) is not
effectuated under the regulations by its
identification on Schedule I (Form
1120-F). See the requirements for the
time, place and manner for making the
branch profits tax liability reduction
election under Regulations section
1.884-1(e)(3).
Under Regulations section 1.882-5,
the amount of interest expense of a
foreign corporation that is allocable under
section 882(c) to income which is
effectively connected (or treated as
effectively connected) with the conduct of
a trade or business within the United
States is the sum of the interest expense
allocable by the foreign corporation under
the three-step process set forth in
Regulations sections 1.882-5(b), (c), and
(d), or (e) and the directly allocated
interest expense determined under
Regulations section 1.882-5(a)(1)(ii). The
interest allocation rules of Regulations
section 1.882-5 are the exclusive rules for
allocating interest expense under section
882(c) to effectively connected income
and for attributing interest expense to
business profits of a U.S. permanent
establishment under all income tax
treaties other than treaties that expressly
permit attribution of business profits to a
U.S. permanent establishment under
application of the OECD Transfer Pricing
Guidelines, by analogy. For examples of
treaties that expressly provide for such
attribution, see Article 7 (Business Profits)
and the accompanying Exchange of
Notes of the U.S. income tax treaties with
the United Kingdom (2004), Japan
(2005), Germany (2008), Belgium (2008),
Aug 11, 2011

Canada (2009), Bulgaria (2009), and
Iceland (2009). If the foreign corporation
files its tax return using a treaty-based
method of the type provided in these
treaties, see Treaty-based return
positions below for reporting
requirements.

Who Must File
All foreign corporations that have interest
expense allocable to ECI under section
882(c) must complete Schedule I to report
this allocation, regardless of whether the
amount allocable under Regulations
section 1.882-5 is deductible in the
current year, or is otherwise deferred or
permanently disallowed under other
sections of the Internal Revenue Code
(e.g., sections 163(e), 163(j), 263A,
265(a), 267(a)(3)). The information
reported on Schedule I is also needed to
complete Form 1120-F, Section III (the
determination of the branch-level interest
tax under section 884(f)). Interest
expense that is treated as “branch
interest” under Regulations section
1.884-4(b) may be subject to information
reporting under section 1461 or section
6049 and potential withholding under
sections 1441 and 1442. A foreign
corporation that is a reporting corporation
and required to file Form 1120-F must
complete Schedule I and attach it to Form
1120-F.
Reporting corporation. A reporting
corporation is any foreign corporation that
is engaged in a trade or business or
treated as engaged in a trade or business
within the United States directly or
indirectly at any time during the tax year.
Treaty-based return positions. If the
corporation determines its interest
expense attributable to its business profits
of a U.S. permanent establishment
pursuant to the express provisions and
accompanying documents of an
applicable treaty instead of under
Regulations section 1.882-5, then
Schedule I still must be completed
applying the rules of Regulations section
1.882-5 and attached to Form 1120-F.
The corporation is also required to
complete and attach Form 8833,
Treaty-Based Return Position Disclosure.
Note. See Purpose of Schedule above
for examples of treaties that expressly
permit interest expense to be determined
under rules other than Regulations
section 1.882-5.
Cat. No. 50606A

Exceptions from Filing
Schedule I
A foreign corporation is not required to file
Schedule I if it (a) does not have a trade
or business within the United States, (b)
has no worldwide interest expense for the
tax year to allocate under Regulations
section 1.882-5, or (c) conducts limited
activities in the United States for the tax
year that it determines do not give rise to
effectively connected income, or do not
give rise to a U.S. permanent
establishment to which business profits
are attributable, and the corporation files
a protective income tax return under
Regulations section 1.882-4(a)(3)(vi).
Protective elections on protective
returns. A corporation that files a
protective tax return on Form 1120-F
under Regulations section
1.882-4(a)(3)(vi) may voluntarily file
Schedule I with the protective return to
preserve timely elections under
Regulations section 1.882-5(a)(7) if the
return is filed by the original due date
(including extensions) of the corporation’s
Form 1120-F. The protective elections are
not effective if filed during the additional
extended period described under
Regulations section 1.882-4(a)(3). The
foreign corporation need only complete
the relevant portions of Schedule I that
identify its right to use the following
elections:
• The Adjusted U.S.-Booked Liability
method (“AUSBL”) or Separate Currency
Pools (“SCP”) method (item B check
boxes);
• The adjusted basis or fair market value
method for valuing its average assets in
Steps 1 and 2 of the computation (line 1
check boxes);
• The actual or fixed ratio in Step 2 (line
6 check boxes);
• The published 30-day LIBOR election
for banks under the AUSBL method in
Step 3 (line 10 check box); and
• The de minimis foreign currency
election under the Separate Currency
Pools method in Step 3 (line 16b check
box).
The corporation need only identify the
protective election in the first year it is
required to be made under Regulations
section 1.882-5(a)(7) or in any year a
taxpayer is eligible to adopt or change an
election and chooses to do so for that
year. For example, an election to use the
adjusted U.S.-booked liability method or
the separate currency pools method is an

election that generally must be
maintained for a minimum five-year
period. However, the election available to
foreign banks to use 30-day LIBOR under
the AUSBL method in Step 3 must be
made each year. If a corporation is
subject to Regulations section 1.882-5 for
the first time, the election is due with a
timely filed return (excluding the
additional extended period provided by
Regulations section 1.882-4(a)(3))
whether or not the taxpayer files a
protective return under Regulations
section 1.882-4(a)(3)(vi). The protective
election need not be filed with subsequent
protective returns filed under Regulations
section 1.882-4(a)(3)(vi) for any
subsequent year to which the minimum
five-year period applies. However, the
indication of the election with a protective
return is only effective for a year that the
corporation is engaged in trade or
business within the United States.
Accordingly, if a protective election is
made for a first year protective return and
in fact the taxpayer is not engaged in
trade or business until the second year of
activity within the United States, the
protective election made in the first year
is not effective for the corporation’s
second year of activity because
Regulations section 1.882-5 is not
applicable to the corporation until such
second year. The elections used by a
taxpayer for all years in which it files Form
1120-F and reports effectively connected
income must be shown on Schedule I,
including years subsequent to the year in
which an election under Regulations
section 1.882-5(a)(7) is made.
A corporation that files a protective
return under Regulations section
1.882-4(a)(3)(vi) need not enter amounts
on Schedule I (other than for the
published LIBOR election on line 10d) in
order to preserve an allocation method. If
a taxpayer files a protective return under
Regulations section 1.882-4(a)(3)(vi) and
does not file Schedule I to identify the
relevant elections under Regulations
section 1.882-5 for an applicable year,
then the Director of Field Operations is
authorized to make all applicable
allocation method elections on behalf of
the corporation for such applicable year if
it is later determined that the taxpayer
was engaged in trade or business within
the United States and had ECI during the
year.
Note. Under Regulations section
1.882-5(a)(7), no interest expense
allocation elections may be made on an
amended return. In addition, the relief for
late tax elections provided under the rules
of Regulations section 301.9100-1 (and
any guidance promulgated thereunder) is
not available. An election identified on line
1 of a change from a fair market value
method to a previously elected adjusted
basis method for reporting U.S. assets is
not effective without advance consent of
the Commissioner or his delegate. See
Regulations section 1.882-5(b)(2)(ii)(A).

Other Forms and Schedules
Related to Schedule I
Form 1120-F, Schedule L, and
Schedule M-3 (Form 1120-F). The set
or set(s) of books that give rise to
U.S.-booked liabilities under Regulations
section 1.882-5(d)(2) are the same sets of
books and records that are reportable as
of the tax year end on Form 1120-F,
Schedule L. They are also the same sets
of books and records that are used by
foreign banks to report income and
expenses on Schedule M-3 (Form
1120-F).
Form 1120-F, Section III, Part II
(branch-level interest tax). The amount
of interest expense from Schedule I, line
24d is reportable on Form 1120-F,
Section III, Part II, line 7b. The amount of
the allocation under Regulations section
1.882-5 reportable on Schedule I, line 23
is reportable on Form 1120-F, Section III,
Part II, line 7c.
Schedule M-3 (Form 1120-F), Part III,
lines 26b and 26c. The amount of
interest expense allocation reportable on
Schedule I, line 23 is includible on
Schedule M-3 (Form 1120-F), Part III, line
26b, columns (d) and (e). The amounts
subject to deferral and disallowance on
Schedule I, lines 24a through 24c are
reportable on Schedule M-3 (Form
1120-F), Part III, line 26c, columns (b),
(c), and (e).
Schedule P (Form 1120-F). Enter
amounts from Schedule P (Form 1120-F),
lines 19, 17, and 14c on Schedule I, line
5, column (b); line 8, column (b); and line
9, column (b); respectively.

Assets and Liabilities Based on
Schedule L Set(s) of Books and
Records
Generally, the assets and liabilities
required to be reported on Schedule L are
the total assets and liabilities reflected on
the set or sets of books of the foreign
corporation that give rise to income
effectively connected with the
corporation’s trade or business within the
United States and to U.S.-booked
liabilities (as defined in Regulations
section 1.882-5(d)(2).) The total assets
and liabilities reflected on such books
include the third party U.S. assets (as
defined in Regulations section 1.884-1(d))
and third party liabilities (whether with
related or unrelated parties), as well as
the interbranch assets and liabilities and
assets that give rise to noneffectively
connected income in whole or in part.
Such books reflect the assets of the
foreign corporation located in the United
States and all other of its assets used in
its trade or business within the United
States (other than its assets giving rise to
effectively connected income under
sections 864(c)(6) or (7)), as authorized
under Regulations section
1.6012-2(g)(1)(iii). A foreign corporation
may instead report its worldwide assets,
liabilities, and equity on Schedule L.

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If the foreign corporation has more
than one set of books and records
relating to assets located in the United
States or assets used in a trade or
business conducted in the United States,
it must report the combined amounts on
Schedule L and must eliminate asset and
liability amounts recorded between these
books.

Required Reporting on
Schedule I
Lines 1 through 9. Schedule I requires
disclosure of data and interest allocation
elections for all parts of the three-step
formula under Regulations section
1.882-5. On page 1, the corporation is
required to complete Step 1 (lines 1
through 5) to determine its average U.S.
assets, Step 2 (lines 6 through 7c) to
determine its U.S.-connected liabilities,
and Step 3 (lines 8 and 9) to determine its
U.S.-booked liabilities under Regulations
section 1.882-5(d)(2) and its related
U.S.-booked interest expense. The total
on line 9, column (c) is also used for
purposes of determining the corporation’s
branch interest under section 884(f)(1)(A)
and Regulations section 1.884-4(b), and
in the calculation of the corporation’s
branch-level interest tax on excess
interest under section 884(f)(1)(B) and
Regulations section 1.884-4(a)(2). Line 8,
column (c), and line 9, column (c) are also
included in the interest expense allocation
computation in Step 3 of the AUSBL
method if elected by the corporation.
Lines 1 through 9 must be
completed by all corporations
CAUTION
required to file Schedule I,
regardless of whether the corporation
allocates interest expense under the
AUSBL or Separate Currency Pools
method for the applicable year.
Lines 10 through 20. Allocations,
direct interest allocations, deferrals
and other disallowances. Step 3 of the
AUSBL method is provided on lines 10
through 15. Step 3 of the Separate
Currency Pools method is provided on
lines 16 through 20. These Step 3
methods are mutually exclusive and
cannot both apply to the corporation in
the same year. The methods are subject
to the general five-year minimum period
election rules of Regulations section
1.882-5(a)(7).
AUSBL method filers. AUSBL
method filers complete all columns on
lines 1 through 15 and lines 21 through
25. Do not complete lines 16a through 20.
Separate currency pools method
filers. Separate Currency Pools method
filers complete all columns on lines 1
through 9 and lines 16a through 25. Do
not complete lines 10 through 15.
Lines 21 through 25. Summary –
Interest expense allocation and
deduction under Regulations section
1.882-5
Line 22. Direct interest allocations.
Interest expense that is directly allocable
under Regulations section

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1.882-5(a)(1)(ii) in accordance with the
rules of Temporary Regulations section
1.861-10T(b) or (c) is reported on line 22.

Lines 1 Through 9: All
Foreign Corporations

Line 23. Summary of Regulations
section 1.882-5 allocation. The amount
of interest expense allocable to effectively
connected income under Regulations
section 1.882-5 is the sum of the amount
allocated under either the AUSBL or
Separate Currency Pools method on line
15 or 20, and the amount directly
allocated to ECI and reportable on line
22. The resulting amount allocable and
reported on line 23 is also reconciled and
reported on Form 1120-F, Section III, Part
II, line 7c (branch-level interest tax).

Lines 1 Through 5. Step 1:
Determination of Total Value of
U.S. Assets

interbranch assets are eliminated only to
the extent they are allocated under
Proposed Regulations section 1.863-3(h)
to foreign source non-ECI. The allocable
amount to non-ECI is eliminated from
U.S. assets on line 3c, column (a) (total
other non-ECI assets).

Assets includible on lines 1 through 5 are
the U.S. assets of the corporation as
defined in Regulations sections
1.882-5(b) and 1.884-1(d). The U.S.
assets are valued on an average basis for
interest expense allocation purposes.
Frequency of averaging. The average
value of assets for this step is to be
computed at the most frequent, regular
intervals for which data is reasonably
available. For foreign banks, the minimum
averaging period is monthly (beginning of
tax year and monthly thereafter). For
corporations other than a bank, the
minimum averaging period is
semi-annually (beginning, middle, and
end of the tax year). See Regulations
section 1.882-5(b)(3).
Line 1. Indicate whether the corporation
values its U.S. assets on the adjusted
basis method (see Regulations section
1.882-5(b)(2)(i)) or whether it has elected
the fair market value method (see
Regulations section 1.882-5(b)(2)(ii)). The
adjusted basis method election is subject
to the minimum five-year period described
in Regulations section 1.882-5(a)(7). In
order to elect the fair market value
method, the corporation must also use
the actual ratio method. Once elected, the
fair market value method must be used
for Step 1 and Step 2 of the three-step
formula under Regulations section
1.882-5 and may not be changed back to
the adjusted basis method without
advance consent from the Commissioner
or his delegate.
Line 2, column (a). Total assets per
books. Enter the total average assets
derived from the combined set or set(s) of
books that are reportable on Schedule L.
The total average assets includes
interbranch balances with other set(s) of
books of the corporation that are not
reportable on Schedule L.
Line 3a, column (a). Total interbranch
assets. Enter on line 3a, column (a), the
total of the corporation’s average
interbranch assets included on line 2,
column (a). The average interbranch
assets recorded on the set(s) of Schedule
L books do not create U.S. assets under
Regulations section 1.882-5(b)(1)(iv) and
are disregarded for purposes of the
interest expense allocation rules.
Note. If under the global dealing
proposed regulations (Proposed
Regulations section 1.863-3(h), which
references the Proposed Regulations
section 1.482-8 principles), the
corporation recognizes an amount
recorded as an interbranch asset, such
amount is treated as the allocation and
source of third-party securities dealing
income and is not eliminated from U.S.
assets on line 3a, column (a). Such

Line 3b, column (a). Total non-ECI
assets under section 864(c)(4)(D).
Enter on line 3b, column (a), the average
assets included on line 2, column (a) that
give rise to non-ECI received from
foreign-related corporations under section
864(c)(4)(D). Such amounts include
assets from transactions with
foreign-related corporations that give rise
to foreign source dividends, interest, rents
or royalties, whether or not such amounts
are attributable to a U.S. office of the
corporation under section 864(c)(5). A
foreign related corporation is a foreign
corporation the taxpayer owns (under
section 958(a)) or is treated as owning
(under section 958(b)) more than 50% of
the total combined voting power of all
classes of stock entitled to vote. Enter the
average asset number for assets
described in section 864(c)(4)(D) on line
3b, column (a), regardless of whether
such assets give rise to non-ECI under
another Code section or regulation. For
example, report income that is non-ECI
under section 864(c)(4)(D) on line 3b,
column (a) even if such income is also not
attributable to a U.S. office of a banking,
financing, or similar business under
Regulations section 1.864-6(b)(2)(ii)(b)
and the principles of Regulations section
1.864-4(c)(5)(ii).
Line 3c, column (a). Total other
non-ECI assets. Enter on line 3c,
column (a), all other assets (or portion
thereof) included on line 2, column (a)
that give rise to domestic or foreign
source non-ECI. If income from a security
is treated as partially ECI and partially
non-ECI under Regulations section
1.864-4(c)(5)(ii), enter the amount of the
asset on line 3c, column (a) in the
proportion that the income, gain, or loss
from such asset that is treated as
non-ECI bears to the total income, gain,
or loss from such asset. Do the same for
the non-ECI portion of any asset whose
income is allocated under the proposed
global dealing regulations or under an
Advance Pricing Agreement pursuant to a
competent authority agreement. See
Proposed Regulations sections
1.884-1(d)(2)(vii) and 1.884-1(d)(2)(xi),
Example 8. Attach a schedule which
describes each type of “other” non-ECI
asset included on line 3c. For each type,
show the calculation of the amount
included on line 3c for that type, including
a total for each type. With respect to any
amount included on line 3c pursuant to
Regulations section 1.864-4(c)(5)(ii)),
attach a separate schedule which
indicates this amount and how it was
calculated.
Line 3d, column (a). Adjustments for
amounts from partnerships and certain
disregarded entities included on line 2,

Line 24. Deferrals and
disallowances under other Code
sections. The interest expense
allocation reportable on line 23 is
determined under Regulations section
1.882-5 before application of other Code
sections that defer or disallow the interest
deduction in whole or in part. See
Regulations section 1.882-5(a)(5).

Specific Instructions
Item A. Foreign banks. Check the box
in item A if the foreign corporation is a
bank as defined in Regulations section
1.882-5(c)(4). The term “bank” is defined
in the regulation as a bank that meets the
statutory definition applicable to domestic
banks (except for the fact that the
corporation is foreign) and without regard
to whether the corporation’s required
banking activities are effectively
connected with its trade or business
within the United States. The required
banking activities need only be conducted
on a worldwide basis. To qualify as a
bank for interest expense allocation
purposes, the foreign corporation must be
subject to bank regulatory supervision
and examination in its home country of a
type similar to that required of domestic
banks by a State or Federal authority
having supervision over banking
institutions, and a substantial amount of
the corporation’s business must consist of
receiving deposits and making loans and
discounts, or of exercising fiduciary
powers similar to those permitted to
national banks under authority of the
Comptroller of the Currency. See sections
581 and 585(a)(2).
Note. The reference to the definition of
the term “bank” for purposes of
determining the U.S.-booked liabilities of
banks under Regulations section
1.882-5(d)(2)(iii) requires that the
corporation meet the section 585(a)(2)
regulated banking requirements in its
trade or business within the United
States. The section 585(a)(2) standard
must also be satisfied at the corporation’s
U.S. trade or business level for purposes
of electing the deposit liability safe harbor
applicable to the reduction of excess
interest under Regulations section
1.884-4(a)(2)(iii).

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column (a). With respect to amounts
from partnerships included on line 2,
column (a), all such amounts must be
“backed out” on this line 3d, column (a).
Enter on line 3d, column (a), all amounts
on the Schedule L books for investments
in partnerships (whether recorded as an
investment in the partnership interest or in
the partnership assets) included on line 2,
column (a).
Note. Partnership interests are reported
in Step 1 as follows: The ECI portion of
the corporation’s adjusted outside basis in
a partnership (from Schedule P (Form
1120-F), line 19, “Total” column) is
entered on Schedule I (Form 1120-F), line
5, column (b).
With respect to amounts from
disregarded entities included on line 2,
column (a), enter on line 3d, column (a)
any adjustment needed to reflect the
following: Investments in disregarded
entities should not be included on line 2,
column (a) if the set(s) of books are
reportable on Schedule L. Instead, the
total assets of such disregarded entity’s
Schedule L books should be combined on
line 2, column (a) with all other set(s) of
books reportable on Schedule L. If
another Schedule L book reflects an
investment in a disregarded entity whose
books are not reportable on Schedule L,
then the assets of the disregarded entity
are not reported on line 2, column (a).
The amount of the investment in the
disregarded entity that is included in the
total assets reported on line 2, column (a)
must be reversed on line 3d, column (a)
to reflect its disregarded treatment in
Regulations section 1.882-5.
Line 3e, column (a). Adjustments for
assets that give rise to direct interest
expense allocations under Regulations
section 1.882-5(a)(1)(ii). Enter on line
3e, column (a), the average value of the
portion of all assets included on line 2 that
give rise to direct interest expense
allocations under Regulations section
1.882-5(a)(1)(ii) in accordance with the
requirements of Temporary Regulations
section 1.861-10T(b) or (c), and
Temporary Regulations section
1.861-10T(d). A foreign corporation that
allocates its interest expense under the
direct allocation rules shall reduce the
basis of the asset that meets the
requirements of Temporary Regulations
section 1.861-10T (b) or (c) by the
principal amount of the indebtedness that
meets the requirements of Temporary
Regulations section 1.861-10T (b) or (c).
The amount of directly allocable interest
under Regulations section
1.882-5(a)(1)(ii) is reported on line 22.
Line 3f, column (a). Other adjustments
to average assets included on line 2.
Enter on line 3f, column (a), the average
asset balances for any other amounts
included on line 2, column (a) that do not
constitute U.S. assets as defined in
Regulations section 1.884-1(d). Assets
includible on this line may include, for
example, amounts with respect to

securities that are marked-to-market for
tax purposes under section 475 that are
not marked-to-market on the set(s) of
books reported on line 2, column (a). If
the mark-to-market amount includible for
tax purposes is an increase to the basis
of the assets included on line 2, column
(a), include such increase as a negative
number on line 3f, column (a). Similarly, if
the mark-to-market amount decreases the
basis of the assets included on line 2,
column (a), include such decrease as a
positive number on line 3f, column (a).
Other adjustments for book-to-tax
differences with respect to asset values
on line 2, column (a), such as
depreciation and amortization for
taxpayers using the adjusted basis
method for valuing U.S. assets, are also
reportable on line 3f, column (a). Enter an
aggregate net increase as a negative
number. Enter an aggregate net decrease
as a positive number.
Line 4, column (a). Combine lines 3a
through 3f and enter the result on line 4,
column (a). The result on line 4, column
(a) constitutes the total net adjustment to
the average book assets from the
Schedule L set(s) of books reported on
line 2, column (a).

Line 5. Total Value of U.S. Assets
for the Tax Year
Line 5, column (a). Average U.S. assets
on set(s) of Schedule L books.
Subtract the amount on line 4, column (a)
from line 2, column (a) and enter the
amount on line 5, column (a). The
resulting amount is the total average
value of U.S. assets under Regulations
section 1.884-1(d) included on the
Schedule L set(s) of books, excluding any
partnership interests included on line 2.
Line 5, column (b). ECI portion of the
average value of partnership interests.
Enter on line 5, column (b), the amount
from Schedule P (Form 1120-F), line 19
(“Total” column). This amount is the sum
of all ECI portions of the corporation’s
outside basis in partnership interests as
adjusted under Regulations section
1.884-1(d)(3). The amount entered from
Schedule P, line 19 may include the ECI
portion of the corporation’s outside basis
in partnerships whose book value is
included on line 2, column (a) as well as
the ECI portion of partnership interests
whose book value is not recorded on the
Schedule L books and is not included on
line 2, column (a).
Line 5, column (c). Average U.S. assets
not includible in set(s) of Schedule L
books reported on line 5, column (a),
or from partnerships reported on line
5, column (b). Enter on line 5, column
(c), the average value of U.S. assets
(other than the ECI portion of the
corporation’s outside basis in partnership
interests) from set(s) of books that are not
reportable on Schedule L. Such assets
may generally include certain securities
attributable to a U.S. office of a banking,
financing, or similar business under

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Regulations section 1.864-4(c)(5)(iii) that
are booked in a foreign bank’s home
office or other foreign location. Other
assets reportable on line 5, column (c),
may generally also include assets that are
no longer held in connection with a trade
or business within the United States that
give rise to effectively connected income
under section 864(c)(6) or section
864(c)(7). However, not all assets that
give rise to ECI, including ECI recognized
under section 864(c)(7), constitute U.S.
assets under Regulations section
1.884-1(d). See Regulations section
1.884-1(d)(2)(xi), example 5, and
Regulations section 1.884-1(d)(5).
Line 5, column (d). Total average value
of U.S. assets included in Step 1.
Combine the amounts on line 5, columns
(a), (b), and (c) and enter the amount on
line 5, column (d). This amount is the total
average value of the corporation’s U.S.
assets included in Step 1 of the
Regulations section 1.882-5 formula. If
the corporation uses the Separate
Currency Pools method to allocate
interest expense in Step 3 of the
Regulations section 1.882-5 formula, see
the instructions for line 16a on page 6.
The amount on line 5, column (d) is also
reportable on Schedule H (Form 1120-F),
line 22a.

Lines 6 Through 7c. Step 2:
Determination of
U.S.-Connected Liabilities Regulations Section 1.882-5(c)
Line 6. Actual ratio or fixed ratio
method. Check the applicable box to
specify whether the corporation uses the
actual ratio or the fixed ratio method for
the tax year to determine its
U.S.-connected liabilities in Step 2 of the
allocation formula. The amount of
U.S.-connected liabilities is the total value
of U.S. assets for the tax year (line 5,
column (d)) multiplied by the actual ratio
or the applicable fixed ratio the
corporation has timely elected and is
eligible to use for the tax year. The actual
ratio or fixed ratio election must be made
on a timely filed tax return for the first
year the corporation is subject to
Regulations section 1.882-5 and is
subject to the minimum five-year period
under Regulations section 1.882-5(a)(7).
An election to change the method after
such minimum five-year period is also
subject to the minimum five-year period.
Actual ratio information. If the
corporation uses the actual ratio,
complete lines 6a through 6c and skip line
6d.
Fixed ratio information. If the
corporation uses the fixed ratio, skip lines
6a through 6c and enter the applicable
fixed ratio on line 6d. For foreign banks
(described in Regulations section
1.882-5(c)(4)), the fixed ratio is 95%. For
corporations other than foreign banks and
insurance companies, the fixed ratio is
50%.

Actual Ratio Filers — Regulations
Section 1.882-5(c)

attached to Form 1120-F for each liability
reduction election made.

Line 6a. Average worldwide liabilities.
Enter on line 6a the average worldwide
liabilities as adjusted for U.S. tax
principles for the year. The corporation’s
worldwide liabilities include the liabilities
of only the corporation filing the Form
1120-F, plus the corporation’s share of
partnership liabilities and any liabilities of
any disregarded entities that are treated
as liabilities of the foreign corporation
under U.S. tax principles. The books of
the foreign corporation and any such
disregarded entities must be combined,
with applicable eliminating entries for
transactions between them. See
Regulations section 1.882-5(c)(2)(viii).
The classification of the worldwide
liabilities is determined under U.S. tax
principles. See Regulations section
1.882-5(c)(2)(ii). The value of the
worldwide liabilities must be determined
substantially in accordance with U.S. tax
principles. Foreign banks must average
the worldwide liabilities using the
beginning, middle, and end of year
values. Corporations other than banks
must average the worldwide liabilities
using the year-to-year values of its
liabilities.

If the corporation uses the Separate
Currency Pools Method for Step 3 (lines
16a through 20), the amount included on
line 7b must also be allocated to
determine the U.S.-connected liabilities
for each currency. See the instructions for
lines 7c below and line 17b on page 7. If
no liability reduction election is made for
the tax year, enter -0- on line 7b.

Line 6b. Average worldwide assets.
Enter the average worldwide assets as
adjusted for U.S. tax principles on line 6b,
using the same nonconsolidated books
for reporting average worldwide liabilities
on line 6a. Transactions with disregarded
entities included in the actual ratio
computation constitute interbranch
transactions under U.S. tax principles and
must be eliminated. See Regulations
section 1.882-5(c)(2)(viii). Use the same
averaging period applicable to worldwide
liabilities. If the corporation uses the
actual ratio method, the amount entered
on line 6b is also reported on Schedule H
(Form 1120-F), line 22b.

Fixed Ratio Filers — Regulations
Section 1.882-5(c)(4)
Line 7a. U.S.-connected liabilities
before Regulations section
1.884-1(e)(3) election(s). Multiply the
average U.S. assets from line 5, column
(d), by the ratio entered on line 6e and
enter the result on line 7a. The result is
the amount of U.S.-connected liabilities
determined before the application of any
liability reduction election(s) made under
Regulations section 1.884-1(e)(3).
Line 7b. U.S. liability reduction election
amount. Enter the total amount of all
liability reduction election amounts made
under Regulations section 1.884-1(e)(3).
Note. A liability reduction election may
be made only to the extent needed to
reduce a dividend equivalent amount
under section 884(b) to zero. See
Regulations section 1.884-1(e)(3)(iv) for
the time, place, and manner for making
the liability reduction election and the
separate disclosures required to be

Line 7c. U.S.-connected liabilities.
Subtract line 7b from line 7a and enter the
amount on line 7c. The amount entered is
the amount of U.S.-connected liabilities
for purposes of determining the amount of
interest expense allocable to effectively
connected income in Step 3. If the
corporation uses the Separate Currency
Pools Method for Step 3, the sum of all
U.S.-connected liabilities shown on line
17b (including any attachments for lines
16a through 19 for additional separate
currency pool computations) must equal
the amount shown on line 7c after the
liability reduction election has been taken
into account.

Lines 8 and 9. Step 3: Interest
Expense Allocation (Including
U.S.-Booked Liabilities and
U.S.-Booked Interest Expense
Included in the Determination
of Branch Interest)
Line 8. Average Third Party
U.S.-Booked Liabilities
Line 8, column (a). Schedule L
U.S.-booked liabilities. Enter on line 8,
column (a), the average amount of
third-party U.S.-booked liabilities from the
set(s) of books reportable on Schedule L
using the most frequent averaging period
available but not less frequently than the
minimum averaging periods required for
U.S. assets reported on line 5. The
average U.S.-booked liabilities include all
third-party liabilities on the set(s) of
Schedule L books whether interest
bearing or not. Exclude interbranch
liabilities shown on the Schedule L books
unless such amounts are treated as
allocations of third-party amounts with
respect to a global dealing operation
under Proposed Regulations section
1.863-3(h) (e.g., mark-to-market
valuations of dealer derivative securities
may constitute liabilities that are treated
as U.S.-booked liabilities includible on line
8, column (a)). Do not include liability
amounts on line 8a to the extent they give
rise to directly allocable interest under
Regulations section 1.882-5(a)(1)(ii) or
are partnership liabilities includible in
column (b).
• Corporations other than banks. The
definition of U.S.-booked liability for a
foreign corporation other than a bank is
described in Regulations section
1.882-5(d)(2)(ii). Liabilities reflected on
the Schedule L books must be recorded
on such books reasonably

-5-

contemporaneous to the time the liability
is incurred.
• Foreign banks. The liability recorded
on the set(s) of Schedule L books must
be that of a foreign bank that conducts
regulated banking operations in the
United States as described in section
585(a)(2)(B). Note: This requirement
applies only for the determination of
U.S.-booked liabilities and corresponding
U.S.-booked interest expense. It does not
apply for other purposes such as
determining the eligibility for the fixed
ratio under Step 2, reportable on line 6d.
The liability must be recorded on the
Schedule L books before the close of the
day on which the liability is incurred
unless an inadvertent error is shown
under the facts and circumstances. See
the definition and requirements for
U.S.-booked liabilities of foreign banks
under Regulations section
1.882-5(d)(2)(iii). Note: The section
585(a)(2)(B) standard also applies for
eligibility to reduce excess interest using
the deposit liability safe harbor under the
branch-level interest tax on excess
interest under Regulations section
1.884-4(a)(2)(iii).
Line 8, column (b). U.S.-booked
liabilities of partnership interests.
Enter on line 8, column (b), the amount
from Schedule P, line 17 (“Total” column).
This amount is the corporation’s average
U.S.-booked liabilities with respect to its
distributive share of liabilities during the
averaging period from partnerships
engaged in trade or business within the
United States. The amount reportable on
line 8, column (b), and Schedule P, line
17 is the corporation’s share of
partnership liabilities for which it is
allocated a distributive share of interest
expense. See Regulations section
1.884-1(d)(3)(vi).

Line 9. U.S.-Booked Interest
Expense
Line 9, column (a). Schedule L booked
interest expense. Enter the amount of
third-party interest expense from the
Schedule L set(s) of books with respect to
liabilities reported on line 8, column (a).
Do not include interest expense that is
directly allocable under Regulations
section 1.882-5(a)(1)(ii), including the
corporation’s distributive share of direct
interest expense allocations from
partnerships otherwise reportable in
column (b). All direct interest expense
allocations to ECI are reported on line 22.
Line 9, column (b). U.S.-booked
interest expense from partnerships.
Enter on line 9, column (b), the amount
from Schedule P (Form 1120-F), line 14c
(“Total” column). Do not include interest
expense that is directly allocable under
Regulations section 1.882-5(a)(1)(ii) from
the corporation’s distributive share of a
partnership’s direct interest expense
allocations. All direct interest expense
allocations to ECI are reported on line 22.

Line 9, column (c). Total U.S.-booked
interest expense. Add the amounts on
line 9, column (a), and line 9, column (b)
and enter the result on line 9, column (c).
This result is also required to be reported
on Form 1120-F, Section III, line 8. This
amount plus line 22 is the corporation’s
tentative branch interest for purposes of
the branch level interest tax under
Regulations section 1.884-4(b). See the
instructions for Form 1120-F, Section III,
Part II, line 8.

Lines 10 Through 15. Step
3: Adjusted U.S.-Booked
Liabilities Method
If the amount on line 7c exceeds the
amount on line 8, column (c), the
corporation has “excess interest” as
defined in section 884(f)(1)(B). Complete
lines 10 through 13, and skip lines 14a
and 14b. If the amount on line 7c is less
than or equal to the amount on line 8,
column (c), skip lines 10 through 13, and
complete the determination of the scaling
ratio on lines 14a and 14b.

Lines 10 Through 13.
Computation of AUSBL Method
Allocation with Excess Interest
Line 10. 30-day LIBOR election for
banks. If the corporation is a foreign
bank that elects to compute excess
interest under the AUSBL method using a
published 30-day LIBOR for the tax year,
check the box on line 10 and skip lines
10a through 10c. Enter the published
30-day LIBOR on line 10d. See
Regulations section 1.882-5(d)(5)(ii)(B)
for additional information. The 30-day
LIBOR election does not apply to
corporations other than foreign banks. For
this purpose, the corporation is eligible to
make the 30-day LIBOR election under
the same standard that qualifies the
corporation as a bank eligible to make the
95% fixed ratio election in Regulations
section 1.882-5(c)(4). The 30-day LIBOR
election is an annual election.

Lines 10a Through 10c. Excess
Interest – Average Actual U.S.
Dollar Rate
Line 10a. Actual U.S. dollar interest. If
the corporation does not properly make or
is not eligible to make a 30-day LIBOR
election for the tax year, enter the interest
expense paid or accrued by the
corporation for the tax year on its average
worldwide U.S. dollar liabilities, excluding
U.S.-booked liabilities included on line 8,
column (c).
Line 10b. Enter on line 10b, the average
worldwide U.S. dollar denominated
liabilities (whether or not interest bearing)
that are not U.S.-booked liabilities
included on line 8, column (c). See
Regulations section 1.882-5(d)(5)(ii).
Line 10e. If the amount on line 10b is
zero and the foreign corporation is not a
bank (and is therefore not permitted to
elect the 30-day LIBOR), enter on line

10e an interest rate that is reasonable
under the facts and circumstances. One
reasonable approach in determining such
interest rate would include using an
interest rate that:
• Approximates the foreign corporation’s
actual average U.S.-dollar borrowing rate
with respect to interest-bearing
U.S.-dollar denominated liabilities and
• Is consistently applied by the foreign
corporation from year to year.
Examples of interest rates that would
generally be considered reasonable
include the actual average interest rate on
interest-bearing U.S.-dollar denominated
liabilities that are U.S.-booked liabilities or
an average arm’s length rate of interest
that would be charged to the foreign
corporation on its interest-bearing
U.S.-dollar denominated liabilities. A
U.S.-dollar borrowing rate of zero would
generally not be considered reasonable.
If the rules set forth above apply to the
foreign corporation, attach a statement to
Schedule I (Form 1120-F) explaining how
the interest rate entered on line 10e was
derived.
Line 12. Excess interest. Multiply the
rate on line 10e by the amount of excess
U.S.-connected liabilities on line 11 and
enter the result on line 12. This amount is
the corporation’s excess interest expense
portion of its overall Regulations section
1.882-5 allocation that is allocable to
effectively connected income under the
AUSBL method in Regulations section
1.882-5(d)(5). The amount on line 12 also
constitutes the corporation’s excess
interest under section 884(f)(1)(B). See
Regulations section 1.884-4(a)(2).
Line 13. Interest expense allocation.
Add the amount reported on line 12 and
the amount of U.S.-booked interest
expense from line 9, column (c) and enter
the result on line 13. This amount is the
corporation’s total amount of interest
expense allocable under the three-step
formula when U.S.-connected liabilities
exceed U.S.-booked liabilities under the
AUSBL method. It does not include any
amounts directly allocable to effectively
connected income under Regulations
section 1.882-5(a)(1)(ii).

Lines 14a Through 15.
Computation of AUSBL Method
Allocation Under the
Scale-Down Ratio
If U.S.-connected liabilities on line 7c are
equal to or less than U.S.-booked
liabilities on line 8, column (c), the AUSBL
method allocation is subject to a
“scale-down” of the U.S.-booked interest
expense reported on line 9, column (c).
Complete lines 14a and 14b in lieu of
lines 10 through 13. If line 7c exceeds line
8, column (c), leave lines 14a and 14b
blank.
Line 14b. Scaled-down U.S. book
interest. Multiply the amount of U.S.
booked interest on line 9, column (c), by
the scale-down ratio on line 14a, and
enter the result on line 14b. The allocated

-6-

amount is the total amount of the AUSBL
method allocation under Regulations
section 1.882-5(d)(4). The amount on line
14b does not include any amount directly
allocable to ECI under Regulations
section 1.882-5(a)(1)(ii).
Hedging amounts. If the corporation
has income, expense, gain, or loss from a
hedging transaction of a U.S.-booked
liability that gives rise to interest expense
subject to the scale-down ratio, such
hedging income, expense, gain, or loss
amount is also subject to reduction under
the same scaling ratio reported on line
14a. See Regulations section
1.882-5(d)(4) and Proposed Regulations
section 1.882-5(d)(2)(vi). Do not report
such scale-down reductions of
hedging income, expense, gains, or
losses on line 14b. The ratio reported on
line 14a shall be applied to each type of
item in accordance with its
characterization and the scaled down
hedging income, expense, gain, or loss is
reported on Form 1120-F, Section II in the
appropriate category to which the hedging
item is characterized. For instance,
periodic expense from an interest rate
notional principal contract hedging
transaction that is recorded on the sets of
books reportable on Schedule L, and that
is subject to the scaling ratio, is reported
on Form 1120-F, Section II, line 27. Such
amount is also subject to reporting on
Schedule H (Form 1120-F), line 38a, as
allocable in part to ECI and in part to
non-ECI in accordance with the scaling
ratio of line 14a.

Lines 16a Through 20.
Step 3: Separate Currency
Pools Method
Corporations that allocate interest
expense under a Separate Currency
Pools election report the allocations under
a three-step method for each currency in
which the corporation has U.S. assets (as
defined in Regulations section
1.884-1(d)), on Schedule I, lines 16a
through 20. The amount of the interest
expense allocation is the sum of the
separate interest expense allocations in
each currency. If the corporation makes a
3% currency election under Regulations
section 1.882-5(e)(1)(i), check the box on
line 16b and include the U.S. dollar value
of all currencies for which the 3%
currency election applies in the U.S.
dollar denominated column on line 16a.
Schedule I accommodates reporting of
the interest expense allocations in four
currencies (including the U.S. dollar and
the foreign corporation’s functional
currency). If the foreign corporation has
U.S. assets in more than four currencies
that are not subject to a 3% currency
election, attach separate sheets using the
same size and format as shown on the
schedule and provide the information
requested on lines 16a through 19 on the
attached sheets for all such additional
currencies. Report on Schedule I, line 20,
column (d), the total results for all

separate currency allocations shown on
line 19 for columns (a) through (d), plus
any additional line 19 amounts shown on
attached separate sheets (if any).
Line 16a. U.S. Assets — U.S. dollar
value denominated in currency. Enter
the U.S. dollar value of the average
amount of U.S. assets in the appropriate
column (a) through (d) (or on the attached
separate sheets for additional currencies).
Enter in column (a) the U.S. dollar
denominated U.S. assets, plus the U.S.
dollar value of any U.S. assets for which a
3% currency election is applicable for the
tax year. In column (b), enter the average
U.S. dollar value of U.S. assets
denominated in the corporation’s home
country functional currency. Enter the
average U.S. assets of all other currency
pools beginning with column (c).
Note. The sum of all U.S. assets in
columns (a) through (d) (and in any
columns shown on any attached separate
sheets) must equal the total average U.S.
assets entered on line 5, column (d).
A transaction that hedges a U.S. asset
is taken into account for purposes of
determining the currency denomination
and the value of the U.S. asset. See
Regulations section 1.882-5(e)(1)(i).
Line 17b. U.S.-connected liabilities per
currency. Complete line 17b as follows:
Determination of U.S.-connected
liabilities if no U.S. liability reduction
election is made. For each applicable
column, multiply the U.S. assets on line
16a by the U.S.-connected liability ratio
on line 17a and enter the amount on line
17b. The resulting amount constitutes the
U.S.-connected liabilities for each
currency pool when the corporation does
not make a U.S. liability reduction election
under Regulations section 1.884-1(e)(3).
Determination of U.S.-connected
liabilities if a U.S. liability reduction
election is made. If the corporation
makes one or more U.S. liability reduction
elections for the tax year under
Regulations section 1.884-1(e)(3), the
total amount of the liability reduction
shown on line 7b must be allocated to
each of the separate currency pools in
proportion to the U.S. assets in each pool.
The amount entered on line 17b for each
column is computed as:
1. The amount on line 16a multiplied
by the ratio on line 17a, less
2. The amount of the liability reduction
election entered on line 7b multiplied by
the proportion that the average U.S.
assets in the separate currency pool
bears to all of the U.S. assets in all
separate currencies (i.e., the total
average U.S. assets entered on line 5,
column (d)).
Attach a schedule showing the
computation and the allocation of the
liability reduction election to each
separate currency pool.
Line 18a. Worldwide book interest
expense for each separate currency

pool. Enter for each column on line 18a,
the corporation’s worldwide interest
expense paid or accrued for the tax year
in the separate currency pool. In column
(a), enter the worldwide U.S. dollar
interest paid or accrued. For all other
separate currency pools, enter the
worldwide interest expense in the
functional currency of the currency pool.
Do not enter the U.S. dollar value of the
functional currency pool in column (b) or
for any other non-U.S. dollar currencies
for which a separate currency pool
allocation is made in additional columns.
See Regulations section 1.882-5(e)(2).
The worldwide interest expense in each
currency pool includes interest expense in
each currency that is recorded on the
Schedule L books and reportable on
Schedule I, line 9, column (c).
Line 18b. Worldwide average liabilities
in each separate currency pool. Enter
on line 18b, the average liabilities
(whether or not interest bearing)
denominated in each separate currency
pool. In column (a), enter the average
worldwide liabilities (whether or not
interest bearing) denominated in U.S.
dollars. For all other separate currency
pools, enter the average amount of
liabilities (whether or not interest bearing)
denominated in the currency of the
currency pool. Do not enter the U.S.
dollar value of the currency pool for any
column other than column (a). In
determining the average worldwide
borrowing rate, the liabilities in each
currency pool include the amounts
recorded on the sets of books reportable
on Schedule L and included on Schedule
I, line 8, column (c). Determine the
average third-party liabilities using the
most frequent averaging period for which
data is reasonably available in
accordance with the principles of
Regulations sections 1.882-5(b)(3) and
(c)(2)(iv).
Line 18c. Borrowing rate. Divide line
18a by line 18b. The result is the average
worldwide borrowing rate for each
separate currency pool.
Line 19. Interest expense allocation by
separate currency pool. For each
column, multiply the amount on line 17b
by the borrowing rate on line 18c and
enter the result on line 19. The amount on
line 19 is the amount of interest expense
allocable to ECI in each separate
currency pool.
Line 20. Total interest expense
allocable to ECI under the separate
currency pools method. On line 20,
enter the sum of the amounts in each
column on line 19 (including amounts
from line 19 of attached schedule, if any).
The amount on line 20 is the total amount
of interest expense allocable to ECI under
the Separate Currency Pools method.
The amount on line 20 does not include
any amount of interest expense directly
allocable under Regulations section
1.882-5(a)(1)(ii).

-7-

Lines 21 Through 25.
Summary – Interest
Expense Allocation and
Deduction Under
Regulations Section
1.882-5
Line 22. Interest expense directly
allocable under Regulations section
1.882-5(a)(1)(ii). Enter the amount of
interest expense directly allocable to ECI
under Regulations section
1.882-5(a)(1)(ii). A foreign corporation
that has a U.S. asset and indebtedness
that meet the requirements of Temporary
Regulations section 1.861-10T(b) or (c),
as limited by Temporary Regulations
section 1.861-10T(d)(1), shall directly
allocate interest expense from such
indebtedness to income from such asset
in the manner and to the extent provided
in Temporary Regulations section
1.861-10T.
Note. See Temporary Regulations
section 1.861-10T(d) for rules requiring
reductions in basis to assets required by
the direct interest allocation rules in
Temporary Regulations section
1.861-10T(b) or (c). The rules of
Temporary Regulations section
1.861-10T(c) apply only to non-financial
institutions. Financial institutions are
permitted to directly allocate interest
expense only under the non-recourse
indebtedness rules described in
Temporary Regulations section
1.861-10T(b).
Line 23. Total interest expense
allocable to ECI under Regulations
section 1.882-5. Add lines 21 and 22
and enter the result on line 23. This result
is the total amount of interest expense
allocable to ECI, including directly
allocated interest. This allocable amount
may not exceed the total interest expense
paid or accrued by the corporation. See
Regulations section 1.882-5(a)(3). If the
corporation’s total interest expense paid
or accrued is less than the amount of
allocation that would result by adding
lines 21 and 22, enter such lesser amount
on line 23. The amount entered on line 23
is the amount of interest expense taken
into account for branch-level interest tax
purposes under section 884(f)(1)(B) and
Regulations section 1.884-4(a),
regardless of whether the deductibility of
such amount is temporarily deferred or
disallowed for allocation to tax-exempt
income (including treaty exempt income).
The amount reportable on line 23 is
reconciled and reported on Form 1120-F,
Section III, line 7c, and on Schedule M-3
(Form 1120-F), Part III, line 26b, columns
(d) and (e).
Line 24. Tax-exempt allocations,
deferrals and capitalization of interest
expense allocation from line 23. The
amount of interest expense allocable to
ECI entered on line 23 is subject to

additional rules that may defer or disallow
deductibility in whole or in part.
Line 24a. Tax-exempt allocations.
Enter on line 24a the amount of allocable
interest expense on line 23 that is subject
to further allocation and apportionment to
tax-exempt income under section 265 or
under the provisions of an applicable
income tax treaty. Attach a schedule
showing how such allocation between
exempt and non-exempt ECI has been
made. See Regulations section
1.882-5(a)(5) and Regulations section
1.882-5(a)(8), examples (3) and (4).
Treaty-exempt income may include
income that is ECI under the force of
attraction principle of section 864(c)(3)
but which is business profits not
attributable to a U.S. permanent
establishment of the corporation under an
applicable treaty to which Regulations
section 1.882-5 applies in determining the
attributable business profits. For such
treaties, the amount allocable to ECI
reported on line 23 requires additional
allocation and apportionment between
taxable ECI and treaty-exempt ECI under
Regulations section 1.882-5(a)(5).
Note. Enter all amounts on line 24a as a
negative amount. These line 24a amounts
are a reduction of the allocation in
determining the deductible interest
expense for the year.
Line 24b. Deferred interest expense.
Enter on line 24b the amount of allocable
interest expense on line 23 that is subject
to deferral (for example, under sections
163(e)(3), 163(j) or 267(a)(3)) in the
current tax year. Also enter on line 24b
the amount of allocable interest expense
deferred under any of these sections in a

prior year that is deductible in the current
taxable year. If the amount of current year
deferrals of the interest expense allocated
and reported on line 23 exceeds the
current year amount of the deductible
amount of prior year interest deferrals,
enter the excess current year deferral as
a negative number on line 24b. If the
current year deductible amount of prior
year deferrals exceeds the current year
deferrals, enter the excess deductible
amount over the current year deferrals as
a positive number on line 24b.
Note. If the corporation made an
election under section 108(i) to defer
income from cancellation of debt in
connection with an applicable debt
instrument reacquired after December 31,
2008, and before January 1, 2011, and,
as part of the reacquisition, issues a debt
instrument with Original Issue Discount
(“OID”) that is subject to section 108(i)(2),
the interest deduction for this OID is
deferred. Include as a negative number
on line 24b the amount of allocable
interest expense on line 23 that is subject
to such deferral in the current tax year.
The accrued OID is allowed as a
deduction ratably over the 5-year period
that the income from cancellation of debt
is includible in income. The deduction is
limited to the income from the canceled
debt with respect to the debt instrument
reacquired. Include as a positive number
on line 24b any such deduction which
pertains to amounts deferred in a prior tax
year that is deductible in the current tax
year.
Attach a schedule indicating the
amount of current year deferral and the

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amount of current year deduction of a
prior year deferral for each applicable
provision. In the case of deferrals and
deductions under section 163(j), attach
Form 8926, Disqualified Corporate
Interest Expense Disallowed Under
Section 163(j) and Related Information, in
lieu of, or in addition to, a schedule.
Line 24c. Capitalized interest
expense. Enter on line 24c the amount
of interest expense allocation reported on
line 23 that is capitalizable under section
263A. Attach a schedule describing how
such allocation has been made.
Note. Enter all amounts on line 24c as a
negative amount. These amounts are
treated as a reduction of the allocation in
determining the deductible interest
expense for the year.
Line 24d. Total deferrals and
disallowances. Combine lines 24a, 24b,
and 24c and enter the result on line 24d.
The amount entered on line 24d is also
reported and reconciled for its temporary
and permanent differences on Schedule
M-3 (Form 1120-F), Part III, line 26c,
columns (b) and (c). See the Instructions
for Schedule M-3 (Form 1120-F), Part III,
line 26c.
Line 25. Amount of allocation
deductible on Form 1120-F, Section II,
line 18. Combine lines 23 and 24d and
enter the result on line 25. The result is
the corporation’s deductible amount of
interest expense allocation for the tax
year and is reportable on Form 1120-F,
Section II, line 18.