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Department of the Treasury
Internal Revenue Service
Instructions for Schedule J

(Form 1118)

(Rev. December 2020)

Section references are to the Internal Revenue If the corporation has more than among other applicable separate
Code unless otherwise noted. ! one separate category of "other categories.
CAUTION income," expand Schedule J as
To determine each pro rata share:
Future Developments explained below to properly complete
Parts I, II, III, and IV of the schedule. 1. Add all of the separate limitation
For the latest information about loss amounts entered across line 1. Then
developments related to Schedule J add all of the separate limitation income
(Form 1118) and instructions, such as A corporation has more than one amounts entered across line 1.
legislation enacted after they were separate category of "other income" if it
published, go to IRS.gov/Form1118. has more than one of the following: 2. If the combined separate limitation
• Income from a sanctioned country to losses for the tax year do not exceed the
which section 901(j) applies (each combined separate limitation income for
What’s New sanctioned country is a separate category the tax year, the pro rata share of each
On Schedule J (Form 1118), the column of income). separate limitation loss to allocate to each
headings and lines used to report "other • An item of income resourced under a category with positive income is as
income" have been revised to require tax treaty (see Regulations section follows:
taxpayers to identify each item of other 1.904-4(k) for rules regarding grouping of (Separate limitation income /
income. In these instructions, the items of treaty resourced income into Combined separate limitation income from
Computer-Generated Schedule section, separate categories). all categories with positive income) x
below, has been revised to indicate how Separate limitation loss being allocated
each item of other income is to be If the corporation has more than one 3. If the combined separate limitation
identified. separate category of “other income,” add losses for the tax year exceed the
a column (and, in some cases, a line, if combined separate limitation income for
completing Part l, line 2; Part I, line 9; the tax year, the pro rata share of each
General Instructions and/or Part II) for each additional separate separate limitation loss to allocate to each
category of other income. Each column category with positive income is as
Purpose of Schedule and line must be identified as follows. With follows:
• Use Part I to show adjustments to respect to the 901(j) category of income,
separate limitation income or (losses) in the category must be identified as “901(j) - (Separate limitation loss being
determining the numerator of the limitation name of sanctioned country.” With respect allocated / Combined separate limitation
fraction for each separate category. to the resourced by treaty category of losses from all categories with losses) x
• Use Part II to show the year-end income, the category must be identified as Separate limitation income in a given
balances of future separate limitation “RBT - name of treaty country and category
income that must be recharacterized as separate category of items of income. For If separate limitation losses can be
income in other separate categories (as example, if you are filing a Form 1118 for allocated, enter the total amounts
the result of current year or prior year separate category code RBT-PAS with allocated in the bold-outlined boxes as
separate limitation losses that were respect to treaty Country X, you would positive numbers. Enter each separate
allocated to reduce income in those other enter “RBT - Country X, Passive.” amount allocated to a given category
separate categories). Furthermore, for each new line, the across the same line under the
• Use Part III to show: (a) the balances in amounts going across the line must equal appropriate column heading to which it
the corporation's overall foreign loss zero. was allocated.
accounts at the beginning of the tax year, Note. The numbers entered across any
(b) any current year adjustments, and (c) Specific Instructions given line should equal zero.
the balances in the overall foreign loss If a separate limitation loss in one
accounts at the end of the tax year. category offsets income in a second
• Use Part IV to show: (a) the balances in Part I
the corporation's overall domestic loss Note. See Regulations section 1.904(g)-3 category and the second category has a
accounts at the beginning of the tax year, for detailed information on the ordering of separate limitation loss account balance
(b) any current year adjustments, and (c) adjustments in Part I. that has not been recaptured with respect
to the first category, then the two offsetting
the balances in the overall domestic loss Line 1. For columns (i) through (v), enter separate limitation loss account balances
accounts at the end of the tax year. in each applicable column, the income or are netted for purposes of determining the
Important. Complete Schedule J only (loss) from column 18 of the amount of income in the second category
once. Include adjustments for each corresponding Schedule A for that that is subject to recharacterization on
applicable separate category. separate category. In column (vi), enter an line 9, Part I, if any, and for purposes of
amount equal to the income or (loss) from determining the year-end balances in both
Computer-Generated Schedule Schedule B, Part II, line 8c, minus the categories reported in Part II.
A computer-generated Schedule J can be aggregate income or (loss) entered in the
filed if it conforms to the IRS version of the other columns of this line 1. The combined separate limitation
losses for the tax year that are more than
schedule. Line 2. This allocation grid must be the combined separate limitation income
completed to show the pro rata share of for the tax year reduce the U.S. source
each separate limitation loss to allocate

Jan 28, 2021 Cat. No. 50277F

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income (if any) for the tax year. If the categories with income on line 3 for the loss account by attaching a statement to
corporation has no U.S. source income for current tax year. In column (vi), enter the Form 1118 indicating:
the tax year, or if the excess of its total amount of U.S. losses allocated to 1. The percentage and dollar amount
combined separate limitation losses for the separate categories as a positive of the separate limitation income that is
the tax year over combined separate number. Use the following formula: treated as U.S. source income, and
limitation income for the tax year exceeds U.S. source loss x (Line 3 income in a 2. The percentage and dollar amount
its U.S. source income for the tax year, the given category / Combined line 3 income of the balance (both before and after
excess is treated as a net operating loss. of all separate categories with income on recapture) in the overall foreign loss
This loss may be carried over or back to line 3) account is recaptured.
other tax years according to the rules of
section 172. U.S. source losses in excess of the If the corporation disposes of property
combined line 3 income for a tax year is that was used predominantly in a foreign
Example 1. Corporation X has a treated as a net operating loss that may be trade or business and that generated
separate limitation loss of $2,000 in its carried back or forward to other tax years foreign source income in the same
general category (line 1, column (iv)) and using the rules of section 172. separate category as the applicable
separate limitation income of $4,000 in its
overall foreign loss account, and there is a
passive category (line 1, column (iii)). In Note. The numbers entered across this balance in the account after amounts are
addition, the corporation has separate line should equal zero. recaptured under section 904(f)(1), the
limitation income of $1,000 in its treaty
resourced general category income Line 7. Recapture overall foreign losses corporation may be required to recapture
(line 1, column (v)). that reduced U.S. source income in prior an additional amount of the overall foreign
tax years (section 904(f)(1)). To do this, loss account, whether or not gain would
Since the corporation's combined treat a portion of the current year separate otherwise be recognized on the
separate limitation losses for the tax year limitation income that is of the same disposition. See section 904(f)(3) and
($2,000) do not exceed its combined category as the loss that resulted in the Regulations section 1.904(f)-2(d) for more
separate limitation income for the tax year prior year overall foreign loss as U.S. details.
($5,000), the entire $2,000 loss may be source income. Recapture continues until
If, under these rules, the corporation is
allocated to other separate categories. the applicable overall foreign loss account
Therefore, Corporation X enters a positive balance (Part III) is reduced to zero. Enter required to recognize gain it would not
have otherwise recognized, special
$2,000 in the bold-outlined box on line 2d, the recapture amount for each category of
ordering rules apply that impact the steps
column (iv). separate limitation income in the
necessary to complete Schedule J (Form
appropriate column as a negative number.
1118), including special rules for
To compute the portion of the $2,000 Enter the total amount of recapture for all
dispositions of property that require
separate limitation loss that is allocable to categories of separate limitation income
additional recognition of income under
passive category income, Corporation X as a positive number in column (vi).
divides the $4,000 of income by $5,000 branch loss recapture and dual
(the combined separate limitation income Note. The numbers entered across this consolidated loss recapture rules. See
from all separate categories with positive line should equal zero. Regulations sections 1.904(f)-2(d)(4) and
1.904(g)-3(i) and (j).
income). The result of 80% is multiplied by The total amount of current year
the separate limitation loss of $2,000. separate limitation income subject to Note. For dispositions after October 22,
Corporation X enters the product of recapture is the smaller of the aggregate 2004, the previous paragraph applies to
$1,600 on line 2d, column (iii). amount of maximum potential recapture in certain dispositions of stock in a controlled
To compute the portion of the $2,000 all overall foreign loss accounts, or 50% of foreign corporation (CFC). See section
separate limitation loss that is allocable to all amounts entered on Part I, line 6, 904(f)(3)(D) for details.
treaty resourced general category income, columns (i) through (v). The maximum
Corporation X divides the $1,000 of potential recapture amount for the overall Example 2. Corporation Y has $1,400
separate limitation income by $5,000. The foreign loss account in any given category of current year separate limitation income,
result of 20% is multiplied by the separate is the smaller of the current year separate $1,000 in its general category (Part I,
limitation loss of $2,000. Corporation X limitation income in that category (the line 6, column (iv)) and $400 in its passive
enters the product of $400 on line 2d, applicable amount entered in Part I, category (Part I, line 6, column (iii)). The
column (v). line 6), or the balance in the applicable corporation has overall foreign loss
overall foreign loss account (the accounts of $600 in its general category
Corporation X enters $0 (negative applicable line 1 amount in Part III). If the and $800 in its passive category (Part III,
$2,000 plus positive $2,000) on line 3, aggregate amount of maximum potential line 1, columns (iv) and (iii)). The
column (iv); $2,400 ($4,000 minus $1,600) recapture in all overall foreign loss maximum potential recapture for the
on line 3, column (iii); and $600 ($1,000 accounts exceeds 50% of all amounts overall foreign loss account in the general
minus $400) on line 3, column (v). entered on Part I, line 6, columns (i) category is $600 (the smaller of current
through (v), then the amount of current year income of $1,000 in that category or
Line 4. In columns (i) through (v), enter year separate limitation income in each the overall foreign loss account balance of
the overall foreign losses for the tax year separate category subject to recapture is $600). The maximum potential recapture
(from line 3) as positive numbers if they computed using the following formula: for the overall foreign loss account in the
have reduced U.S. source income for the passive category is $400 (the smaller of
tax year. In column (vi), enter the total Total recapture amount x (Maximum current year income of $400 in that
amount of overall foreign losses that have potential recapture amount for the overall category or the overall foreign loss
reduced U.S. source income for the tax foreign loss account in the separate account balance of $800). The aggregate
year as a negative number. category / Aggregate amount of maximum amount of maximum potential recapture in
potential recapture in all overall foreign all overall foreign loss accounts is
Note. The numbers entered across this loss accounts) therefore $1,000 ($600 + $400).
line should equal zero. The total amount of current year
The corporation can make an annual,
Line 5. In columns (i) through (v), enter revocable election to recapture a greater income subject to recharacterization is
U.S. source losses allocated to separate portion of the balance in an overall foreign $700 (the smaller of the aggregate amount

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of maximum potential recapture, $1,000, same separate category) must be entered line d, column (iii), and $100 ($400 minus
or 50% of total current year separate into the grid in Part II. $300) on line d, column (v).
limitation income entered on line 6, Part I
(50% x $1,400, or $700)). To compute the Note. Recharacterization of separate Line 10. Recapture overall domestic
amount of current year separate limitation limitation income does not result in losses that reduced separate limitation
income in the general category that is recharacterizing any tax. The rules of income in prior tax years (section 904(g)
treated as U.S. source income, Regulations section 1.904-6 apply on an (1)). To do this, treat a portion of the
Corporation Y multiplies the total annual basis for allocating taxes to current year U.S. source income as
recapture amount of $700 by the separate categories before any income is separate limitation income in the same
maximum recapture amount for the recharacterized. category(ies) as the separate limitation
income that was reduced by the prior year
general category of $600, divided by the If prior year separate limitation losses overall domestic loss. Recapture
aggregate amount of maximum potential can be recaptured, the total amounts continues until the applicable overall
recapture of $1,000. Corporation Y enters recharacterized should be entered into the domestic loss account balance (Part IV) is
the result of $420 on line 7, column (iv). To bold-outlined boxes as negative numbers. reduced to zero. Enter the total overall
compute the amount of current year Each prior-year separate limitation loss domestic loss recapture amount as a
separate limitation income in the passive recaptured should be entered as a negative number in column (vi). Enter the
category that is treated as U.S. source positive number on the same line under amount recharacterized as separate
income, Corporation Y multiplies the total the appropriate column heading to which limitation income in each category, as
recapture amount of $700 by the income was recharacterized. appropriate, as positive numbers in
maximum recapture amount for the
columns (i) through (v).
passive category of $400, divided by the Note. The numbers entered across any
aggregate amount of maximum potential given line should equal zero. Note. The numbers entered across this
recapture of $1,000. Corporation Y enters Example 3. Assume the same facts as line should equal zero.
the result of $280 on line 7, column (iii). in Example 1 on page 1. Also assume
Corporation Y enters the total recapture that, in a subsequent tax year, Corporation The total amount of any current year
amount of $700 as a positive number on X has $1,500 of income in its general U.S. income subject to recapture is the
line 7, column (vi). Note that the total category (on line 8, column (iv), of its smaller of the total balance in the
amounts entered across line 7 equal zero. Schedule J). applicable overall domestic loss accounts
(the applicable column(s) in Part IV, line 1)
Line 9. If a separate limitation loss was Since there is not enough general or 50% of the amount entered on Part I,
allocated in a prior tax year and the category income to recapture the entire line 6.
corporation has income during the current $2,000 prior-year balance remaining to be
tax year in the separate category from recaptured, Corporation X will prorate the Note. Under the Tax Cuts and Jobs Act,
which the loss was allocated, that current $1,500 of general category income in that section 904(g)(5) allows for an election to
year income (if it was not previously subsequent year as follows. recapture up to 100% of any pre-2018
recharacterized) must be recharacterized • To compute the portion to be unused overall domestic loss from a prior
as income of the separate category(ies) to recharacterized as passive category year, as opposed to the 50% stated in the
which the loss was allocated in the prior income, Corporation X should: previous paragraph. This election is
year(s) (section 904(f)(5)).
1. Divide the $1,600 remaining to be applicable for any taxable year beginning
Note. The amount of current year income recharacterized from general category after December 31, 2017, and before
in a category subject to recharacterization income to passive category income by the January 1, 2028.
is limited to the year-end balance in Part II $2,000 remaining to be recharacterized
for that category as reported on the prior from general category income to all If a prior year overall domestic loss or
tax year Schedule J, reduced by any separate categories; losses were allocated to more than one
netting of offsetting separate limitation 2. Multiply the result (80%) by the separate category and there is not
loss accounts as provided for in the $1,500 of general category income; and enough income in the current year subject
to recharacterization to recapture all
instructions for Part I, line 2. 3. Enter $1,200 as a positive number remaining overall domestic loss account
If a prior year separate limitation loss on line 9d, column (iii). balances, then the current year U.S.
was allocated to more than one separate • To compute the portion to be source income subject to
category and there is not enough current recharacterized as resourced treaty recharacterization must be
year income in the separate category from income, Corporation X should: recharacterized as income of the separate
which the loss was allocated to 1. Divide the $400 remaining to be categories on a pro rata basis in the
recharacterize all remaining balances, recharacterized from general category following manner:
then the current year income must be income to resourced treaty income by
recharacterized as income of the other $2,000; Current year U.S. source income
separate categories on a pro rata basis in subject to recharacterization x (Amount
the following manner: 2. Multiply the result (20%) by the
$1,500 of general category income; and remaining to be recharacterized as
Current year income in separate income of a given separate category /
category from which losses were 3. Enter $300 as a positive number on Amounts remaining to be recharacterized
previously allocated x (Amount remaining line 9d, column (v). as income of all separate categories)
to be recharacterized as income of a given Corporation X enters the $1,500 of
separate category / Amounts remaining to general category income that was Part II
be recharacterized as income of all recharacterized in the bold-outlined box If a separate limitation loss was allocated
separate categories) on line 9d, column (iv). Note that the total in a prior tax year and the corporation has
Any amount that is not recharacterized amounts entered across line 9d equal income during the current tax year in the
during the tax year (i.e., the excess of zero. separate category from which the loss was
separate limitation losses previously Finally, Corporation X completes the allocated, that current year income (if it
allocated over current year income in that Part II recharacterization balances grid by was not previously recharacterized) must
entering $400 ($1,600 minus $1,200) on be recharacterized as income of the

Instructions for Schedule J (Form 1118) (Rev. Dec. 2020) -3-

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category to which the loss was allocated in         remaining balances from any prior              Part IV
the prior year(s) (section 904(f)(5)).              allocations of losses from its general 
   To determine the amounts to enter into           category to its passive category or its        Line 1. Enter the ending balances from 
the grid:                                           resourced treaty income category. The          last year's schedule.
                                                    corporation should enter $1,600 on line d,     Lines 2, 3, and 5. Show any adjustments 
   1. Add the current year separate                 column (iii), and $400 on line d, column       made to the overall domestic loss account 
limitation loss allocations (adjusted as            (v).                                           with respect to each separate category 
required by Regulations section 
1.904(b)-1(h)(1) relating to capital gains)                                                        during the tax year. See Regulations 
to last year's year-end balances;                   Part III                                       section 1.904(g)-1(d) for a list of possible 
   2. Net any offsetting separate                   Line 1. Enter the ending balances from         additions to the accounts. See 
limitation loss accounts as described in            last year's schedule.                          Regulations section 1.904(g)-1(e) for a list 
                                                                                                   of possible reductions (including 
the instructions for Part I, line 2;                Lines 2, 3, and 4. Show any adjustments        recapture).
   3. Subtract the amounts                          made to the overall foreign loss accounts 
recharacterized during the current tax              for each separate category during the tax      Note. A U.S. source loss that is carried 
year; and                                           year. See Regulations section                  back as part of a net operating loss to 
   4. Enter the result on the line (line a,         1.904(f)-1(d) for a list of possible additions offset foreign income in a prior qualified 
b, c, d, or e) for the separate category            to the accounts. See Regulations section       tax year will result in an increase to the 
from which losses were previously                   1.904(f)-1(e) for a list of possible           overall domestic loss account in the year 
allocated, under the appropriate column             reductions (including recapture).              in which the loss arose, not the earlier year 
                                                                                                   to which the loss was carried back to 
(column (i), (ii), (iii), (iv) or (v)) to which the Line 5. Enter the year-end balances of 
                                                                                                   offset the foreign income.
losses were previously allocated.                   the overall foreign loss accounts for each 
   Example 4. Assume the same facts as              separate category.                             Line 6. Enter the year-end balances of 
in Example 1 on page 1. Also assume that                                                           the overall domestic loss account with 
Corporation X does not have any                                                                    respect to each separate category.

                                                                       -4- Instructions for Schedule J (Form 1118) (Rev. Dec. 2020)

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