1120-F Schedule H Instructions for Form 1120-F Schedule H

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2018

Instructions for Schedule H
(Form 1120-F)

Department of the Treasury
Internal Revenue Service

DRAFT AS OF
September 26, 2018
Deductions Allocated to Effectively Connected Income Under Regulations Section
1.861-8
Section references are to the Internal
Revenue Code unless otherwise noted.

Future Developments

For the latest information about
developments related to Schedule H
(Form 1120-F) and its instructions,
such as legislation enacted after they
were published, go to
IRS.gov/Form1120F.

General Instructions
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
Sep 25, 2018

the rules provided in Regulations
section 1.882-5 and is reported on
Schedule I (Form 1120-F). See
Regulations section 1.882-5(a)(2).
Bad debt expense allocated to ECI is
reported directly on Form 1120-F,
Section II, line 15.

Purpose of Schedule

Schedule H (Form 1120-F) is used by
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 in lieu of the ECI and
expense allocation and apportionment
rules of section 882(c) and
Regulations sections 1.861-8 and
Cat. No. 50605P

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 provide
that attribution of business profits to a
U.S. permanent establishment is
determined under OECD Transfer
Pricing Guidelines applied by analogy.
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 OECD
Transfer Pricing Guidelines. See also
Form 8833, Treaty-Based Return
Position Disclosure Under Section
6114 or 7701(b).

Specific Instructions
Part I – Home Office
Deductible Expenses
Definitely Related Solely
to ECI or 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 allocated and apportioned
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 Form
1120-F, Schedule L (“Schedule L
books”). Schedule L books are the set
or sets of books of the corporation's
U.S. trade or business or books of its
U.S. branch (whether maintained
within or outside the United States) as
defined in Regulations section
1.882-5(d)(2).

amounts are adjusted on line 2. If the
consolidated group's expenses are
used, the taxpayer must attach a
statement listing the foreign
consolidated group members.
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 19. 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 (or other
applicable accounting standards)
statements for a disregarded entity,
the expenses of the disregarded entity
must be included on line 1a in either
U.S. dollars or the home office's
functional currency even if the audited
third-country GAAP (or other
applicable accounting standards)
statements are in another non-dollar
functional currency.

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).

DRAFT AS OF
September 26, 2018
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 1a. Enter on line 1a 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 1a may be
derived from audited or unaudited
financial statements. The home office
books may be books recorded under
the Generally Accepted Accounting
Principles (“GAAP”), or other
applicable accounting standards,
including International Financial
Reporting Standards, 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 1a only if the expenses of such
other entities are recorded on the
home office's books. However, if the
home office's books and records are
maintained as part of a foreign,
consolidated financial statement, the
consolidated group's expenses may
be entered on line 1a, although such

Line 2. Enter on line 2 the total of the
adjustments necessary to conform the
amounts on line 1a 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 1a 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 1a
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 on line 1a 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.
Attach a statement listing the
amount of the adjustment for each of
the following categories.
1. Expenses included on line 1a of
entities whose expenses are not
includible in the corporation's
expenses for U.S. tax purposes.
-2-

Do not allocate and apportion
expenses to ECI and non-ECI on
line 2. 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 1a. Interest expense
included on line 1a is adjusted on
line 4. The allocation of deductible
interest expense to ECI is reported on
Schedule I (Form 1120-F).
If the corporation is a foreign bank
that charges its U.S. branch office
cost reimbursements for services and
overhead which are booked by the
branch in the third-party category of
expense actually incurred rather than
as a lump sum interbranch amount,
list the adjustment for each third-party
category expense separately on the
statement for permanent differences.
Line 3. Combine lines 1a and 2 and
enter the result on line 3. The amount
reported on line 3 is the total amount
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 corporation's remaining home
office deductions which are to be
allocated and apportioned between
ECI and non-ECI in Parts I and II of
Schedule H.

Instructions for Schedule H (Form 1120-F) (2018)

Lines 8 through 10. 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 on 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.

included on lines 8 and 9). 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 includible 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
the Instructions for Schedule M-3
(Form 1120-F), Part I.

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 13 is
subject to apportionment under
Regulations sections 1.861-8 and
1.861-17 and Temporary Regulations
section 1.861-8T on Part II, line 16.

DRAFT AS OF
September 26, 2018
Line 8. Enter on line 8 deductions
included on line 7 that are definitely
related 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, Regulations section
1.861-8(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 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 all other
deductions included on line 7 that are
definitely related solely to non-ECI of
the corporation (other than amounts

Line 11. Enter on line 11 the portion
of the deductions included on line 7
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 11 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.

Part II – Home Office
Deductible Expenses
Allocated and Apportioned
to ECI
Line 13. Subtract line 12 from line 7
and enter the difference on line 13.
The amount on line 13 is the residual

Instructions for Schedule H (Form 1120-F) (2018)

-3-

Line 14. 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 15 and 17. The
exchange rate must be rounded to at
least five places.
Note. You must round the result to
more than five places if failure to do
so would materially distort the
exchange rate or the equivalent
amount of U.S. dollars.
If the corporation reports amounts
in Part I in U.S. dollars, leave line 14
blank.

Line 15. Enter on line 15 the amount
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, divide line 13 by
the line 14 exchange rate and enter
the result on line 15.
Line 16. Enter on line 16 the amount
of deductions included on line 15 that
is allocated and apportioned to ECI
under Regulations sections 1.861-8
and 1.861-17 and Temporary
Regulations section 1.861-8T. Attach
a statement 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 17. Enter on line 17 the amount
entered on line 11, converted if
necessary to U.S. dollars. If the
amount on line 11 is stated in the
corporation's foreign functional
currency, divide line 11 by the line 14
exchange rate and enter the result on
line 17.
Line 18. Add lines 16 and 17 and
enter the total on line 18. The amount
on line 18 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.

deductions for the current tax year
that was not used in the prior year.

Line 19. Enter on line 19, 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 statement listing the amount of
deductions allocated and apportioned
to ECI from each location.

Interbranch amounts in Part IV.
Check the box to indicate if an
expense in respect of any amount
included in Part II, line 20, 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 35.

corporation should instead enter the
gross income amount from
Schedule M-3, Part II, line 25, column
(e) (plus any additional gross income
amounts included on line 27, column
(a)), but only if there are no
permanent differences for tax-exempt
income under section 103 or under a
treaty (e.g., force of attraction income
not attributable to a U.S. permanent
establishment) that would otherwise
be removed in column (c). 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).
Worldwide gross income is worldwide
gross receipts less only cost of goods
sold, if applicable.

DRAFT AS OF
September 26, 2018
Line 20. Add lines 18 and 19 and
enter the total on line 20. The amount
entered on line 20 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.

Part III – Allocation and
Apportionment Methods
and Financial Records
Used to Complete Parts I
and II

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,
worldwide assets, and worldwide
personnel are reported on lines 21
through 23. 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 11, 16,
and 19 are identified in statements
required by the instructions for lines
24 and 25.

Check Boxes Above Line 21
New methods. Check the box to
indicate if the corporation used a
method to allocate and apportion

Lines 21 Through 23. Gross
Income, Asset, and Number of
Personnel Ratios

The corporation must complete the
gross income ratio for line 21 whether
or not it used such method to allocate
and apportion deductions in Parts I
and II. If the corporation used the
asset or number of personnel method
(whether separately or as
components of a multi-factor method),
it must report the attributes on lines 22
and 23. If the corporation did not use
either the asset or the personnel
method to allocate and apportion
deductions for the year, then, except
as provided for worldwide assets
reported on line 22b, only the
numerators of each method must be
reported on lines 22 and 23. See the
instructions for line 22b for disclosure
of the asset ratio by corporations that
used the actual ratio to allocate
interest expense under Regulations
section 1.882-5.

Line 21a. Enter on line 21a 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 21b. Enter on line 21b 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).
However, if the corporation's
worldwide income is effectively
connected to its trade or business
within the United States, the
-4-

Line 22a. Enter on line 22a 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 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, Part I, the average U.S.
assets should be derived from the
beginning and ending U.S. assets
included on Form 1120-F,
Schedule L.
Line 22b. 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

Instructions for Schedule H (Form 1120-F) (2018)

deductions to ECI for purposes of
line 11, 16, or 19, 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, line 11, 16, or
19, leave line 22b blank.
Line 22c. If an amount is entered on
line 22b, divide line 22a by line 22b to
determine the asset ratio and enter
the percentage on line 22c. If line 22b
is blank, leave line 22c blank.

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).

sets of books must be eliminated in
the combined reports.
Line 30. Enter on line 30 the total of
the adjustments necessary to conform
the amounts on line 29 to the amounts
that are deductible for U.S. tax
purposes. 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 on line 30
any adjustments that are otherwise
reportable on lines 32a through 35.
Specifically, third-party interest
expense and interbranch interest
expense included on line 29 is
adjusted on lines 32a and 32b,
instead of line 30. Bad debt expense
included on line 29 is adjusted on
line 33, instead of line 30. Other
third-party deductible expenses not
allocated or apportioned to ECI and
non-ECI under Regulations section
1.861-8 are adjusted on line 34,
instead of line 30. Interbranch
expenses (other than interest
expense) included on line 29
(including interbranch book charges
for home office services provided to
the U.S. trade or business) are
adjusted on line 35, instead of line 30.
However, if the corporation is a
foreign bank that charges its U.S.
branch office cost reimbursements for
services and overhead which are
booked by the branch in the
third-party category of expense
actually incurred rather than as a lump
sum interbranch amount, the
interbranch amounts charged and
recorded by the U.S. branch
Schedule L book should not be
reported on line 35 as interbranch
expenses, but should be left in the
third-party categories to which they
are assigned on the U.S. books and
records. If any such amounts require
adjustment for U.S. tax principles
(e.g., meals and entertainment at
50%), then such adjustment should
be shown on line 30.
Attach a statement detailing the
items adjusted and amounts of each
adjustment.

DRAFT AS OF
September 26, 2018
Line 23a. Enter on line 23a 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 23b. If the corporation used a
ratio based on number of personnel to
apportion deductions on line 11, 16,
or 19, enter the worldwide personnel
count used in the denominator of such
ratio on line 23b. If the corporation
does not apportion deductions using a
number of personnel ratio, leave
line 23b blank.
Line 23c. If an amount is entered on
line 23b, divide line 23a by line 23b to
determine the number of personnel
ratio and enter the percentage on
line 23c. If line 23b is blank, leave
line 23c blank.
Line 24. If the corporation used any
other ratio-based method to allocate
and apportion deductions to ECI and
non-ECI on line 8, 9, 10, 11, 16, or 19
of Schedule H, attach a statement
describing the ratio used on each line.
Include the numerator and
denominator of the ratio used for each
applicable line.
Line 25. If the corporation used a
non-ratio-based method to allocate
and apportion deductions to ECI and
non-ECI on line 8, 9, 10, 11, 16, or 19
of Schedule H, attach a statement
describing each such method and the
percentage used, if any, for each
applicable line. These may include
methods for which percentage

Lines 26 Through 28.
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 28. If the “Yes” box is checked,
attach a statement listing the other
documentation used to complete
Parts I and II of Schedule H (e.g.,
home country regulatory reports or
functional analyses).

Part IV – Allocation and
Apportionment of
Expenses 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 29. Enter on line 29 the total
expenses recorded on the Schedule L
books.
Note. The Schedule L books may be
maintained using GAAP, or other
applicable accounting standards,
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 29. Interbranch income and
expenses recorded between separate

Instructions for Schedule H (Form 1120-F) (2018)

-5-

Line 32a. Enter on line 32a the
amount of third-party interest expense
(whether owed to unrelated or related
parties) that is included in the amount
reported on line 31. Interest expense

is allocated to ECI under Regulations
section 1.882-5 and reported on
Schedule I (Form 1120-F).
Line 32b. Enter on line 32b any
interbranch interest expense that is
included in the amount reported on
line 31.

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 20.
Line 36. Add the amounts on lines
32a through 35 and enter the total on
line 36. This amount reflects the
deductions included on line 31 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.

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 34 and, therefore, are not
definitely related to ECI or non-ECI
under Regulations section 1.861-8
and Temporary Regulations section
1.861-8T.

DRAFT AS OF
September 26, 2018
Line 33. Enter on line 33 any bad
debt expense that is included in the
amount reported on line 31. Any
portion of the amount eliminated on
line 33 that is allocated and
apportioned to ECI is reported directly
on Form 1120-F, Section II, line 15.

Line 34. Enter on line 34 other
third-party expenses that are included
in the amount reported on line 31 and
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
Regulations section 1.863-3(h) in
accordance with the principles of
Proposed Regulations section
1.482-8. If such periodic expense is
included on line 31, it should be
included on line 34 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 35. Enter on line 35 all
interbranch expenses, other than
interbranch interest expense, that are
included in the amount reported on
line 31. The interbranch amounts
reportable on line 35 include home
office charges reflected on the
Schedule L books for home office
management services provided to the
U.S. trade or business.

Line 37. Subtract the amount on
line 36 from the amount on line 31 and
enter the difference on line 37. The
amount reported on line 37 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 38a through 41.

Lines 38a Through 41.
Reconciliation of Allocable
Expenses on Books Under
Regulations Section 1.861-8
(from line 37)

The amount of deductions reported on
line 37 that is allocated and
apportioned to ECI and non-ECI is
reported on lines 38a through 41,
columns (a) through (c). With respect
to each of lines 38a through 41, enter
the amount included on line 37 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).

Line 38a. Enter on line 38a the
amount of derivative transaction
deductions included on line 37 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 38a are periodic
expense from notional principal
contracts that are sourced under
Regulations section 1.863-7 with
respect to non-dealer securities

-6-

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 38b. Enter on line 38b all other
deductions included in the amount
reported on line 37 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 39. Add lines 38a and 38b and
enter the total on line 39 for each of
columns (a) through (c). The amounts
on line 39 are the portion of total
deductions reported on line 37 that
are definitely related to ECI and
non-ECI.
Line 40. Enter on line 40 the
deductions included on line 37 that
are not definitely related to ECI or
non-ECI 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 40, column
(c), must equal line 37 minus line 39,
column (c).
Line 41. Add lines 39 and 40 and
enter the total on line 41 for each of
columns (a) through (c). The amount
entered on line 41, column (a), is the
total amount of deductions included
on line 37 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 41, column (c), must equal the
amount on line 37.

Instructions for Schedule H (Form 1120-F) (2018)