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

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2021

Instructions for Schedule P
(Form 1120-F)

Department of the Treasury
Internal Revenue Service

DRAFT AS OF
November 3, 2021

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.

What’s New

The following changes have been made to
the 2021 Schedule P (Form 1120-F).

Lines 1 through 6 and 8 have been
modified to reference new Schedule K-3
(Form 1065).
Lines 7 and 9 through 13 have been
modified due to the fact that several lines
that previously preceded them have been
deleted.
Two check boxes have been added to
each column of line 14. For each
partnership interest reported in a column,
the corporate partner will check either the
"income" box or the "asset" box to indicate
the allocation method used on line 13 of
that column. The new check boxes
replace the write-ins previously used for
line 14.
These instructions have been modified
to take into account the changes
described above.

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-3

Nov 03, 2021

(Form 1065), Partner's Share of Income,
Deductions, Credits, etc. - International.
Part III is used to report the following
information. 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).
If you disposed of all or a portion
of any partnership interest listed
CAUTION on Schedule P during your taxable
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 a trade or business
within the United States is required to file
Schedule P (Form 1120-F) for all directly
owned partnership interests that have
gross ECI, and/or expenses allocable to
gross ECI, included in its distributive share
of income reported to the corporation on
Schedule K-3 (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 a
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
Cat. No. 50608W

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 a trade or business within the
United States as a result of the
partnership's directly or indirectly owned
interest in another partnership (“lower-tier
partnership”), the corporation is also
treated as engaged in a 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-3 (Form 1065),
together with the corporation's allocable
share of partnership liabilities. If the
partnership is engaged in a 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
foreign partner's allocable share of
estimated effectively connected taxable
income (ECTI) and reporting to the foreign
partner, on Form 8805, Foreign Partner’s
Information Statement of Section 1446
Withholding Tax, the amounts of ECTI and
section 1446 tax withheld for the tax year.

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.

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.

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.

DRAFT AS OF
November 3, 2021

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 7, 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 8, 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 11 (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 13, and as a U.S. asset on
Schedule I (Form 1120-F), line 5, column
(b).
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, line 4, 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 a set(s) of books that are
also reportable on Form 1120-F,
Schedule L or the partnership interest is
recorded on the Schedule L books of the
corporation's own separate trade or
business within the United States. If the

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.

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-3 (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 from 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 as ECI earned through lower-tier
partnership interests is includible on the
Schedule K-3 (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.

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Entities treated as partnerships for tax
purposes include limited liability
partnerships (LLPs) and limited liability
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, of 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.

Part II—Foreign Partner
Income and Expenses:
Reconciliation to
Schedule K-3 (Form 1065)

Part II reconciles the partner's ECI to its
Schedule K-3 (Form 1065) distributive
share from each partnership listed in Part
I. The Schedule K-3 lines are grouped for
reconciliation of their income and expense
in the following manner.
• Schedule P, lines 1 through 6: Total
gross income and gross ECI, and related
deductions and losses, from Schedule K-3
(Form 1065), Part X.
• Schedule P, line 7: Interest expense
directly allocable under Regulations
section 1.882-5(a)(1)(ii)(B).
• Schedule P, line 8: Interest expense on
U.S.-booked liabilities as described under
Regulations section 1.882-5(d)(2)(vii) from
Schedule K-3 (Form 1065), Part X,
Section 2, line 7, column (b).

Instructions for Schedule P (Form 1120-F) (2021)

Line 3. Gross ECI - Partner determination. See the Instructions for
Schedule K-3 (Form 1065), Part X,
Section 1, column (b) for information the
foreign corporate partner can use to
determine the amounts to include on
Schedule P (Form 1120-F), Part II, line 3.
Line 6. Total deductions and losses
deductible against gross ECI - Partner
determination. See the Instructions for
Schedule K-3 (Form 1065), Part X,
Section 2, column (b) for information the
foreign corporate partner can use to
determine the amounts to include on
Schedule P (Form 1120-F), Part II, line 6.

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
9 through 13 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 11. 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 11 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.

DRAFT AS OF
November 3, 2021

Line 7. Interest expense directly
allocable under Regulations section
1.882-5(a)(1)(ii)(B). On line 7 enter the
amount of interest expense 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 7 is also included on
Schedule I (Form 1120-F), line 22.

Line 8. Interest expense on
U.S.-booked liabilities as described
under Regulations section 1.882-5(d)
(2)(vii). On line 8 enter the amount of
interest expense that arises from U.S.booked liabilities as described in
Regulations section 1.882-5(d)(2). The
amount on line 8 should generally be the
same amount reported on Schedule K-3,
Part X, Section 2, line 7, column (b). The
amount entered on line 8 is also reported
on Schedule I (Form 1120-F), line 9,
column (b). A portion of the line 8 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).

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 9 through 13 are the
average values rather than the
determination dates used under the

Line 9. Section 705 outside basis.
Enter on line 9 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).

Lines 10a and 10b. Partner liabilities
included in the corporation's outside
basis. The corporation's outside basis
reported on line 9 is adjusted on lines 10a
and 10b 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 10a. 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 10b. 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.

Instructions for Schedule P (Form 1120-F) (2021)

-3-

Line 12. Partner's adjusted average
outside basis in partnership. Add lines
10d and 11 and enter the amount on
line 12. The amount reported on line 12 is
the corporation's adjusted outside basis
that is eligible for apportionment between
ECI and non-ECI.
Line 13. Partner's outside basis allocable to ECI. Enter on line 13 the
corporation's average outside basis
reported on line 12 that is treated as a
U.S. asset under Regulations sections
1.884-1(d)(3) and 1.882-5. Also enter this
line 13 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 14 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).
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-3 (Form 1065) on Schedule P
(Form 1120-F).
Line 14. Outside basis election method. Check either the "income" box or the
"asset" box on line 14 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 13. 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-3 (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).

See Regulations section 1.884-1(d)(3)(ii)
(B) for non-uniform treatment of certain
partnership items.

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.
assets to total assets of the partnership is
determined as if the partnership were a
foreign corporation engaged in a 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. Use amounts from
Schedule K-3, Part X, Section 3, lines 2a
and 2b to calculate the asset ratio that is
applied to the Schedule P, line 13 amount.

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. Use amounts from
Schedule K-3, Part X, Section 3, lines 2a
and 2b to calculate the asset ratio that is
applied to the Schedule P, line 13 amount.

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 14, 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 of a trade or business of the
corporation within the United States. The
corporation need not complete Part II, or
Part III, lines 9 through 13, with the
protective election.

DRAFT AS OF
November 3, 2021
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
a 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

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Instructions for Schedule P (Form 1120-F) (2021)