1120-F Schedule P Instructions for Form 1120-F Schedule P

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2018

Instructions for Schedule P
(Form 1120-F)

Department of the Treasury
Internal Revenue Service

DRAFT AS OF
October 2, 2018

List of Foreign Partner Interests in Partnerships
Section references are to the Internal Revenue
Code unless otherwise noted.

Future Developments

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

General Instructions
Purpose of Schedule

Schedule P (Form 1120-F) is used to
identify and reconcile the foreign
corporation's directly held partnership
interests with the distributive shares of
partnership effectively connected income
(ECI), or expenses allocable to ECI, and
the foreign corporation's effectively
connected outside tax basis in each
interest. Part I is used to identify all
partnership interests the foreign
corporation directly owns that give rise to
a distributive share of income or loss that
is effectively connected with a trade or
business within the United States of the
foreign corporation. Part II is used to
reconcile the foreign corporation's
distributive share of ECI and allocable
expenses with the total income and
expenses reported to it on Schedule K-1
(Form 1065), Partner's Share of Income,
Deductions, Credits, etc. Part III is used as
follows. The corporation's outside basis in
its directly held partnership interests that
include ECI in the corporation's distributive
share is apportioned between ECI and
non-ECI under Regulations section
1.884-1(d)(3) to determine the average
value treated as a U.S. asset for interest
expense allocation purposes under
Regulations section 1.882-5. The
apportionment of the outside basis to ECI
as of the current and prior tax year end is
also taken into account in determining the
average apportioned value included in the
corporation's U.S. assets for purposes of
computing the branch profits tax. The U.S.
assets, and partner share of booked
liabilities and interest expense of the
partnership are also coordinated with the
interest expense allocation computations
reported on Schedule I (Form 1120-F).

!

CAUTION

If you disposed of all or a portion
of any partnership interest listed
on Schedule P during your taxable

Oct 01, 2018

year, then you may have to report any gain
or loss from that disposition on Form
1120-F. See section 864(c)(8) and item
HH on page 3 of Form 1120-F.

Who Must Complete
Schedule P

A foreign corporation that is directly or
indirectly engaged in trade or business
within the United States is required to file
Schedule P (Form 1120-F) for all directly
owned partnership interests that have ECI,
or expenses allocable to ECI, included in
its distributive share of income reported to
the corporation on Schedule K-1 (Form
1065). If the foreign corporation treats any
of its distributive share of partnership net
income or loss from a partnership that is
not engaged in trade or business within
the United States as ECI with another
trade or business of the corporation, the
corporation's entire distributive share of
items of income and expense from any
such partnership must also be reconciled
between ECI and non-ECI and reported
on Schedule P.
A foreign corporation may be engaged
in a trade or business within the United
States either directly through its own
non-partnership related activities or
indirectly, including through the activities
of one or more partnerships in which the
corporation owns a partnership interest. In
addition, if a corporation owns an interest
in a partnership that is itself deemed
engaged in trade or business within the
United States as a result of the
partnership's own directly or indirectly
owned interest in another partnership
(“lower-tier partnership”), the corporation
is also treated as engaged in trade or
business as a result of its direct and
indirect ownership of such interests. See
section 875(1). The foreign corporation's
distributive share of income from a
domestic partnership and certain foreign
partnership interests is reported to the
partner on Schedule K-1 (Form 1065),
together with the corporation's allocable
share of partnership liabilities. If the
partnership is engaged in trade or
business directly or indirectly through a
lower-tier partnership and has ECI to
report in the distributive share of a foreign
partner, it is responsible for making
quarterly installment payments of
withholding tax under section 1446 on the
Cat. No. 50608W

foreign partner's distributive share of
estimated ECI under section 1446 and
reporting the amounts to the foreign
partner for the tax year on Form 8805,
Foreign Partner's Information Statement of
Section 1446 Withholding Tax. If a
partnership is required to report effectively
connected taxable income on Form 8805
to a foreign corporate partner, the
corporation must reconcile its entire
distributive share of income and expenses
reported on Schedule K-1 (Form 1065)
from such partnership, instead of on Form
8805 and report it on Schedule P (Form
1120-F).

Exceptions From Filing
Schedule P

Do not file Schedule P if none of the
distributive shares from any of the
corporation's partnership interests include
ECI, or expenses allocable to ECI. A
foreign corporation that has ECI reported
to it from a partnership is not required to
file Schedule P (Form 1120-F) if none of
the corporation's business profits
including its ECI from the partnership are
attributable to a U.S. permanent
establishment pursuant to an applicable
income tax treaty and the corporation files
a protective tax return under Regulations
section 1.882-4(a)(3)(vi).
Protective election on Schedule P.
See Protective election, later, for
instructions for making a protective
partnership outside basis apportionment
election with a protective return filing of
Form 1120-F.

When and Where To File

Attach Schedule P (Form 1120-F) to the
foreign corporation's Form 1120-F income
tax return. See the Instructions for Form
1120-F for the time, place, and manner for
filing the foreign corporation's income tax
return.

Other Forms and
Schedules Related to
Schedule P
Form 1120-F, Section II. Gross ECI
includible in the corporation's distributive
share is reportable on Form 1120-F,
Section II, lines 3 through 10, in the
applicable category of income. Expenses

(other than interest expense) that are
deductions allocated and apportioned on
Schedule P (Form 1120-F) to the partner's
ECI are also reported on Form 1120-F,
Section II.
Schedule I (Form 1120-F). A portion of
the interest expense reportable on
Schedule P is includible in the
corporation's interest expense allocation
computation under Regulations section
1.882-5. The corporation's distributive
share of interest expense that is directly
allocable to ECI under Regulations section
1.882-5(a)(1)(ii)(B) is reported on
Schedule P, line 15b, and on Schedule I
(Form 1120-F), line 22. A portion of the
corporation's distributive share of interest
expense that is reported on Schedule P,
line 15c, is reported on Schedule I (Form
1120-F), line 9, column (b). The average
value of partnership liabilities the
corporation includes in the determination
of its outside basis for purposes of
determining the proportion of the
partnership interest treated as a U.S.
asset is reported on Schedule P (Form
1120-F), line 18 (Total column). The
average value of the partner's outside
basis used to determine the proportion of
the partnership interest treated as a U.S.
asset is reported on Schedule P (Form
1120-F), line 20, and as a U.S. asset on
Schedule I (Form 1120-F), line 5, column
(b).

Form 8990, Limitation on Business Interest Expense Under Section 163(j).
Business interest expense includes any
interest paid or accrued on indebtedness
properly allocable to a trade or business.
Business interest expense is generally
limited to the sum of business interest
income, 30% of the adjusted taxable
income, and floor plan financing interest.
Form 8990 is required, unless an
exception for filing is met. For more
information, see section 163(j), Form
8990, and the Instructions for Form 8990.

companies (LLCs) that are not classified
as corporations for federal income tax
purposes and may be domestic or foreign.
Do not include any interest in any entity
treated as a disregarded entity as
described under Regulations section
301.7701-2(c)(2).
Column (d). With respect to each
partnership interest, check the “Yes” box if
the foreign corporation's distributive share
is ECI, or treated as ECI, in whole or in
part, with a U.S. trade or business
determined under section 875.
Accordingly, with respect to each
partnership interest, check the “Yes” box if
the foreign corporation is engaged in a
U.S. trade or business indirectly through
the activities of the partnership. Check the
“No” box if the foreign corporation has
applied ECI principles solely at the partner
level and not as a result of the
partnership's activities.

DRAFT AS OF
October 2, 2018

Schedule H (Form 1120-F), Part I, Part
II, and Part IV. The corporation's
distributive share of non-interest expenses
included on Schedule P, lines 4 and 5, is
also included in the corporation's overall
allocation and apportionment of expenses
on Schedule H (Form 1120-F), Part IV,
lines 38a through 41, if the partnership
books constitute set(s) of books that are
also reportable on Form 1120-F,
Schedule L or the partnership interest is
recorded on Schedule L books of the
corporation's own separate trade or
business within the United States. If the
partnership interest is not reported on
Schedule L, the distributive share of
partnership expenses allocable to the
corporation's distributive share of ECI is
included on Schedule H (Form 1120-F) in
Parts I and II. See the Instructions for
Schedule H (Form 1120-F).
Schedule M-3 (Form 1120-F), Part II.
The corporation's distributive share of
partnership income or loss may be
reported on Schedule M-3 (Form 1120-F),
Part II, line 9 (domestic partnerships) and
line 10 (certain foreign partnerships), in
accordance with the corporation's
reporting on its applicable financial
statements for Schedule M-3 (Form
1120-F) purposes. See the instructions for
Schedule M-3 (Form 1120-F), Part II, lines
9 and 10, for the specific reporting
requirements.

Part I—List of Foreign
Partner Interests in
Partnerships

In Part I, list the name, address, and
employer identification number (EIN) of
each directly owned partnership interest
that has ECI included in the partner's
distributive share on Schedule K-1 (Form
1065). Also include in the list of
partnership interests any interest in a
partnership that is not engaged in trade or
business within the United States if the
corporation treats some or all of its
distributive share as ECI with a separate
trade or business of its own within the
United States. Do not report on
Schedule P any indirectly owned
partnership interests (lower-tier
partnership interests) that have income
effectively connected with the lower-tier
partnership's own trade or business within
the United States unless the corporation
also owns a direct interest in the lower-tier
partnership. The corporation's distributive
share of ECI earned through lower-tier
partnership interests is includible on the
Schedule K-1 (Form 1065) reportable to
the corporation by the partnership in which
the corporation owns a direct interest,
whether or not the directly owned
partnership is itself directly engaged in
trade or business within the United States.
Schedule P (Form 1120-F)
accommodates reporting for four directly
owned partnership interests. Complete a
separate line in Part I, and the
corresponding columns in Parts II and III,
for each directly owned partnership
interest. If the corporation directly owns
more than four partnership interests which
are required to be reported on Schedule P
(Form 1120-F), report the required
information for those additional
partnership interests on attached separate
sheets using the same size and format as
shown on the schedule. Also, in the
“Totals” column of Parts II and III, for each
line item, enter the sum for all directly
owned partnership interests, including
those interests reported on attached
sheets.
Entities treated as partnerships for tax
purposes include limited liability
partnerships (LLPs) and limited liability
-2-

Part II—Foreign Partner
Income and Expenses:
Reconciliation to
Schedule K-1 (Form 1065)

Part II reconciles the partner's ECI and
non-ECI to its Schedule K-1 (Form 1065)
distributive share from each partnership
listed in Part I. The Schedule K-1 lines are
grouped for reconciliation of their income
and expense in the following manner.
• Schedule P, lines 1 through 5: ECI and
non-ECI reconciliation of income and
non-interest expenses from Schedule K-1
(Form 1065), lines 1 through 3.
• Schedule P, lines 6 through 10:
Reconciliation of other income and other
non-interest expenses from Schedule K-1
(Form 1065).
• Schedule P, lines 11 and 12: Total
gross income and total gross ECI from
Schedule K-1 (Form 1065).
• Schedule P, lines 13 through 15c:
Reconciliation of total interest expense
from Schedule K-1 (Form 1065).
Note. The information needed to
complete Schedule P (Form 1120-F)
generally should appear on a statement
attached to the partner's Schedule K-1
(Form 1065).

Lines 1 Through 5. ECI and
Non-ECI Reconciliation of
Income and Non-Interest
Expenses
Line 1. Net income (loss). Enter on
line 1 the combined total income (loss)
from Schedule K-1 (Form 1065), Part III,
line 1, Ordinary business income (loss);
line 2, Net rental real estate income (loss);
and line 3, Other net rental income (loss).
Enter the combined amount in the column
in Part II which corresponds to the
partnership listed in Part I. The amount

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

entered on line 1 is grouped into its gross
income and gross expense components
for allocation and apportionment to ECI
and non-ECI under sections 864(c) and
882(c). The gross income apportionments
are shown on line 3, and the allocation
and apportionments of non-interest
expenses shown on line 5 are determined
under Regulations sections 1.861-8 and
1.861-17 and Temporary Regulations
section 1.861-8T(c). See Regulations
section 1.861-17 for the allocation and ECI
apportionment treatment of research and
experimentation expenditures that are
included in trade or business income on
line 1 or 3, Schedule K-1, and which are
also reportable on Schedule P (Form
1120-F), lines 4 and 5.

non-interest expense from line 9 that is
allocated and apportioned to ECI. Include
on line 9 (and line 10, if applicable)
guaranteed payments made by the
partnership that are not included on lines 4
and 5.

Lines 11 and 12. Summary of
Gross Income

booked liabilities is required to be reported
on Schedule I (Form 1120-F), line 9,
column (b). See Regulations section
1.882-5(d)(4). A portion of the line 15c
amount is also taken into account on Form
1120-F, Section III, Part II, line 8, in
determining the corporation's branch
interest under Regulations section
1.884-4(b).

DRAFT AS OF
October 2, 2018

Lines 2 and 3. Gross income. Enter on
line 2 the total gross income included in
Schedule P (Form 1120-F), line 1. On
line 3, enter the amount of ECI included in
the gross income reported on line 2. If all
of the gross income reported on line 2 is
ECI, then report the same number on
line 3.

Lines 4 and 5. Non-interest expense.
Enter on line 4 the total amount of
non-interest expense included on line 1.
On line 5, enter the amount of non-interest
expense included on line 1 that is
allocated and apportioned to gross ECI.
Include on line 4 (and line 5, if applicable)
guaranteed payments made by the
partnership that are included in the
combined net income (loss) reported on
line 1. Interest expense included in line 1
is subject to allocation under Regulations
section 1.882-5 and is reported in a
separate grouping of the corporation's
distributive share of all interest expense
on Schedule P (Form 1120-F), line 13.

Lines 6 Through 10. Other
Gross Income and Other
Non-Interest Expenses
Line 6. Net income (loss). Enter on
line 6 the combined total income (loss)
from Schedule K-1 (Form 1065) that is not
included on lines 1 through 3 of the
Schedule K-1 (and is not reportable on
line 2 of Schedule P).
Lines 7 and 8. Other gross income.
Enter on line 7 all other gross income from
Schedule K-1 (Form 1065) that is not
included on lines 1 through 3 of the
Schedule K-1 (and is not reportable on
line 2 of Schedule P). On line 8, enter the
amount of gross income from line 7 that is
allocated and apportioned to ECI.
Lines 9 and 10. Other non-interest expenses. Enter on line 9 all other
non-interest expense from Schedule K-1
(Form 1065) that is not included on lines 1
through 3 of the Schedule K-1 (and is not
reportable on lines 4 and 5 of Schedule P).
On line 10, enter the amount of

Line 11. Total gross income. Enter on
line 11 the sum of the gross income
amounts entered on line 2 and line 7. The
amount on line 11 is the total gross
income from Schedule K-1 (Form 1065).

Line 12. Total gross effectively connected income. Enter on line 12 the sum
of the ECI amounts entered on lines 3 and
8. The amount on line 12 is the total gross
ECI from Schedule K-1 (Form 1065).

Lines 13 Through 15c. Interest
Expense Reconciliation

Enter on line 13 the amount of interest
expense included in the net income (loss)
on lines 1 through 3 of Schedule K-1
(Form 1065) and in the net income (loss)
reported on line 1 of Schedule P (Form
1120-F). On line 14, enter the sum of the
other interest expense reported on
Schedule K-1 (Form 1065), lines 13 and
18.
Note. If interest expense is included on
any line of Schedule K-1 (Form 1065)
other than line 1, 2, 3, 13, or 18, attach a
statement indicating the line the interest is
included on and reclassify the interest
expense reported on such other line to
Schedule K-1 (Form 1065), line 13 or
line 18, as appropriate, for purposes of
reporting the reclassified amount on
line 14 of Schedule P. The reclassification
will require an adjustment to such other
line to prevent double counting of total
expenses.
Line 15a. Total interest expense. Add
lines 13 and 14 and enter the result on
line 15a. This amount is the corporation's
total distributive share of interest expense
from Schedule K-1 (Form 1065) that is
subject to allocation under Regulations
section 1.882-5.
Line 15b. Direct interest expense allocation. On line 15b, enter the amount of
interest expense included in line 15a that
is directly allocable to ECI under
Regulations section 1.882-5(a)(1)(ii)(B)
and the applicable requirements of
Temporary Regulations section
1.861-10T(b) or (c). The amount entered
on line 15b is also included on Schedule I
(Form 1120-F), line 22.
Line 15c. U.S.-booked interest expense of the partnership. Subtract
line 15b from line 15a and enter the
amount on line 15c. The portion of this
expense amount that arises from U.S.-

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

-3-

Part III—Foreign Partner's
Average Outside Basis
Under Regulations
Sections 1.882-5(b) and
1.884-1(d)(3)

Report in Part III the corporation's outside
basis for each partnership interest
identified in Part I of this Schedule P (Form
1120-F) for purposes of determining the
amount the corporation includes as a U.S.
asset in Step 1 of the interest expense
allocation under Regulations section
1.882-5. The corporation's outside basis in
its partnership interests reported on
Schedule P is determined and adjusted
under the rules applicable to the
determination of the corporation's outside
basis in the partnership for branch profits
tax purposes under Regulations section
1.884-1(d)(3), except that the amounts
entered on lines 16 through 20 are the
average values rather than the
determination dates used under the
section 884 regulations for branch profits
tax purposes. If the corporation is not
exempt from the branch profits tax under
an applicable income tax treaty, attach a
statement showing the determination of
the corporation's outside basis in
accordance with the requirements of lines
16 through 20 for an averaging period that
shows the apportioned outside basis for
the beginning and ending determination
dates of the corporation's tax year. See
also section 163(j) for rules on how the
trade or business interest limitation may
affect outside basis.
Line 16. Section 705 outside basis.
Enter on line 16 the corporation's average
value of the outside basis (otherwise
determined under section 705) of the
partnership in the column which
corresponds to the line in Part I on which
the partnership interest is listed. The
average value is determined using the
most frequent averaging period for which
data is reasonably available. See
Regulations sections 1.882-5(b)(3) and
1.882-5(c)(2)(iv).
Line 17. Partner liabilities included in
the corporation's outside basis. The
corporation's outside basis reported on
line 16 is adjusted on line 17 to conform
the amount of liabilities the corporation
includes in the determination of its outside
basis to the proportionate amount of the
corporation's distributive share of interest

expense with respect to the partnership's
liabilities. This adjustment is made only for
purposes of determining the corporation's
outside basis included in the interest
expense allocation and branch profits tax
computations. The adjustment is not made
for other federal income tax purposes
such as for determining the corporation's
gain or loss from disposition of the
partnership interest.

line 20 amount on Schedule I (Form
1120-F), line 5, column (b). See
Regulations section 1.884-1(d)(3)(i) for
the elective requirements for apportioning
outside basis on the income or asset
method. For purposes of determining the
proportion of the partnership interest that
is a U.S. asset, a foreign corporation may
elect separately for each partnership
interest to use either the asset method or
the income method described in
Regulations sections 1.884-1(d)(3)(ii) and
(iii). See the instructions for line 21 below.
If the corporation does not timely elect
either method in the first year the
corporation has a distributive share of ECI
from the partnership, the Director of Field
Operations may make the election on
behalf of the corporation. See Regulations
section 1.884-1(d)(3)(v).

assets to total assets of the partnership is
determined as if the partnership were a
foreign corporation engaged in trade or
business within the United States.
Generally, a partner's proportionate share
of a partnership asset is the same as its
proportionate share of all items of income,
gain, loss, and deduction that may be
generated by the asset. See Regulations
section 1.884-1(d)(3)(ii)(B) for
non-uniform treatment of certain
partnership items.

DRAFT AS OF
October 2, 2018

Line 17a. Adjustment for directly
allocable interest. The outside basis is
reduced by the average amount of
liabilities that give rise to directly allocable
interest expense in accordance with
Regulations section 1.882-5(a)(1)(ii)(B).
Enter the portion of the partnership liability
that is subject to the direct interest
expense allocation rules under Temporary
Regulations section 1.861-10T(b) or (c)
and is subject to exclusion from the
determination of the corporation's average
U.S. asset values under Regulations
section 1.882-5. See Temporary
Regulations section 1.861-10T(d).
Line 17b. Enter the average amount
of the corporation's share of all other
partnership liabilities it otherwise takes
into account under section 752 in
determining its outside basis in its
partnership interest.

Line 18. Enter the corporation's average
partnership liabilities, or portion thereof,
for the year for which the corporation
receives a distributive share of interest
expense for the year. See Regulations
section 1.884-1(d)(3)(vi). Also, enter this
line 18 amount on Schedule I (Form
1120-F), line 8, column (b), to the extent
applicable in determining the corporation's
interest expense deduction under
Regulations section 1.882-5.
Line 19. Partner's adjusted average
outside basis in partnership. Add lines
17d and 18 and enter the amount on
line 19. The amount reported on line 19 is
the corporation's adjusted outside basis
that is eligible for apportionment between
ECI and non-ECI.
Line 20. Partner's outside basis allocable to ECI. Enter on line 20 the
corporation's average outside basis
reported on line 19 that is treated as a
U.S. asset under Regulations sections
1.884-1(d)(3) and 1.882-5. Also enter this

Note. The required timely filed election
under Regulations section 1.884-1(d)(3)
(iv) for apportioning outside basis between
ECI and non-ECI also applies to lower-tier
partnership interests that are not required
to be identified and reconciled to
Schedule K-1 (Form 1065) on Schedule P
(Form 1120-F).

Line 21. Outside basis election method. Enter “income” or “asset” on line 21
to indicate the elective outside basis
apportionment method used to determine
the amount of the corporation's outside
basis in its partnership interests
apportioned to ECI and reported on
line 20. The allocation method is subject to
a 5-year minimum period election that
must be made in the first year the partner
has a distributive share of ECI included in
the income reported on Schedule K-1
(Form 1065). The elective method chosen
must be used for both branch profits tax
and interest expense allocation purposes
during the same 5-year minimum period.
See Regulations section 1.884-1(d)(3)(iv).
Asset method. In general, a partner's
interest in a partnership shall be treated as
a U.S. asset in the same proportion that
the sum of the partner's proportionate
share of the adjusted bases of all
partnership assets as of the determination
date, bears to the sum of the partner's
proportionate share of the adjusted bases
of all partnership assets as of the
determination date. The proportion of U.S.

-4-

Income method. Under the income
method, a partner's interest in a
partnership shall be treated as a U.S.
asset in the same proportion that its
distributive share of partnership ECI for
the partnership's tax year that ends with or
within the partner's tax year bears to its
distributive share of all partnership income
for that tax year.
Protective election. If the
corporation files a protective tax return
under Regulations section 1.882-4(a)(3)
(vi), and the partnership is not engaged in
trade or business within the United States
or does not have business profits
attributable to a U.S. permanent
establishment, the corporation need not
file Schedule P and report its distributive
share of income and expenses with its
Form 1120-F. However, if it is later
determined that the corporation's
distributive share of partnership income is
ECI with respect to a trade or business of
the corporation, the corporation will have
failed to make a timely income method or
asset method election with respect to such
partnership for outside basis
apportionment purposes if no other
election disclosure is made. To preserve
the right to allocate and apportion its
outside basis under a chosen method, the
corporation may make a protective
election by completing Part I, and Part III,
line 21, of Schedule P, and including it
with the protective return filing of Form
1120-F. The protective election is effective
only for the year in which the protective
election is also the first year in which the
corporation's distributive share is in fact
ECI with a trade or business of the
corporation within the United States. The
corporation need not complete Part II, or
Part III, lines 16 through 20, with the
protective election.

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