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                                                                                                     Department of the Treasury
                                                                                                     Internal Revenue Service
Instructions for Schedule J 

(Form 1118)

(Rev. December 2018)

Section references are to the Internal Revenue which section 901(j) applies and each        amount allocated to a given category 
Code unless otherwise noted.                   item of income resourced under a tax         across the same line under the 
                                               treaty are treated as a separate category    appropriate column heading to which it 
What’s New                                     of “other income.”                           was allocated.
As a result of the Tax Cuts and Jobs Act                                                    Note.    The numbers entered across any 
(P.L. 115-97), sections 14201 and 14302,       Specific Instructions                        given line should “zero out.”
the following changes have been made to                                                     If a separate limitation loss in one 
Schedule J for two new categories of           Part I                                       category offsets income in a second 
income ("Section 951A income" and              Note. See Regulations section 1.904(g)-3     category and the second category has a 
"Foreign Branch Income").                      for detailed information on the ordering of  separate limitation loss account balance 
Two new columns have been added to             adjustments in Part I.                       that has not been recaptured with respect 
Schedule J.                                                                                 to the first category, then the two offsetting 
Two new lines have been added to Part          Line 1.  For columns (i) through (v), enter 
                                                                                            separate limitation loss account balances 
I, line 2 (allocation of separate limitation   in each applicable column, the income or 
                                                                                            are netted for purposes of determining the 
losses), Part I, line 9 (recharacterization of (loss) from column 18 of the 
                                                                                            amount of income in the second category 
separate limitation income), and Part II       corresponding Schedule A for that 
                                                                                            that is subject to recharacterization on 
(year-end balances of future separate          separate category. In column (vi), enter an 
                                                                                            line 9, Part I, if any, and for purposes of 
limitation income that must be                 amount equal to the income or (loss) from 
                                                                                            determining the year-end balances in both 
recharacterized).                              Schedule B, Part II, line 8c, minus the 
                                                                                            categories reported in Part II.
                                               aggregate income or (loss) entered in the 
                                               other columns of this line 1.                The combined separate limitation 
General Instructions                           Line 2.  This allocation grid must be        losses for the tax year that are more than 
                                               completed to show the pro rata share of      the combined separate limitation income 
Purpose of Schedule                            each separate limitation loss to allocate    for the tax year reduce the U.S. source 
Use Part I to show adjustments to              among other applicable separate              income (if any) for the tax year. If the 
separate limitation income or (losses) in      categories.                                  corporation has no U.S. source income for 
                                                                                            the tax year, or if the excess of its 
determining the numerator of the limitation    To determine each pro rata share:            combined separate limitation losses for 
fraction for each separate category.
Use Part II to show the year-end               1. Add all of the separate limitation        the tax year over combined separate 
balances of future separate limitation         loss amounts entered across line 1. Then     limitation income for the tax year exceeds 
income that must be recharacterized as         add all of the separate limitation income    its U.S. source income for the tax year, the 
income in other separate categories (as        amounts entered across line 1.               excess is treated as a net operating loss. 
the result of current year or prior year       2. If the combined separate limitation       This loss may be carried over or back to 
separate limitation losses that were           losses for the tax year do not exceed the    other tax years according to the rules of 
allocated to reduce income in those other      combined separate limitation income for      section 172.
separate categories).                          the tax year, the pro rata share of each     Example 1.      Corporation X has a 
Use Part III to show: (a) the balances in      separate limitation loss to allocate to each separate limitation loss of $2,000 in its 
the corporation's overall foreign loss         category with positive income is as          general category (line 1, column (iv)) and 
accounts at the beginning of the tax year,     follows:                                     separate limitation income of $4,000 in its 
(b) any current year adjustments, and (c)      (Separate limitation income /                passive category (line 1, column (iii)). In 
the balances in the overall foreign loss       Combined separate limitation income from     addition, the corporation has separate 
accounts at the end of the tax year.           all categories with positive income) x       limitation income of $1,000 in its 
Use Part IV to show: (a) the balances in       Separate limitation loss being allocated     resourced treaty income category (line 1, 
the corporation's overall domestic loss                                                     column (v)).
accounts at the beginning of the tax year,     3. If the combined separate limitation 
(b) any current year adjustments, and (c)      losses for the tax year exceed the           Since the corporation's combined 
the balances in the overall domestic loss      combined separate limitation income for      separate limitation losses for the tax year 
accounts at the end of the tax year.           the tax year, the pro rata share of each     ($2,000) do not exceed its combined 
                                               separate limitation loss to allocate to each separate limitation income for the tax year 
Important. Complete Schedule J only            category with positive income is as          ($5,000), the entire $2,000 loss may be 
once. Include adjustments for each             follows:                                     allocated to other separate categories. 
applicable separate category.                  (Separate limitation loss being              Therefore, Corporation X enters a positive 
Computer-Generated Schedule                    allocated / Combined separate limitation     $2,000 in the bold-outlined box on line 2d, 
                                               losses from all categories with losses) x    column (iv).
A computer-generated Schedule J can be         Separate limitation income in a given 
filed if it conforms to the IRS version of the category                                     To compute the portion of the $2,000 
schedule. Expand Schedule J to properly                                                     separate limitation loss that is allocable to 
complete Parts I, II, III, and IV of the       If separate limitation losses can be         passive category income, Corporation X 
schedule if the corporation has more than      allocated, enter the total amounts           divides the $4,000 of income by $5,000 
one separate category of “other income.”       allocated in the bold-outlined boxes as      (the combined separate limitation income 
Income from each sanctioned country to         positive numbers. Enter each separate        from all separate categories with positive 

Aug 07, 2018                                               Cat. No. 50277F

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income). The result of 80% is multiplied by   The total amount of current year              foreign corporation (CFC). See section 
the separate limitation loss of $2,000.       separate limitation income subject to         904(f)(3)(D) for details.
Corporation X enters the product of           recapture is the smaller of the aggregate     Example 2. Corporation Y has $1,400 
$1,600 on line 2d, column (iii).              amount of maximum potential recapture in      of current year separate limitation income, 
                                              all overall foreign loss accounts, or 50% of  $1,000 in its general category (Part I, 
To compute the portion of the $2,000          all amounts entered on Part I, line 6,        line 6, column (iv)) and $400 in its passive 
separate limitation loss that is allocable to columns (i) through (v). The maximum          category (Part I, line 6, column (iii)). The 
resourced treaty income, Corporation X        potential recapture amount for the overall    corporation has overall foreign loss 
divides the $1,000 of separate limitation     foreign loss account in any given category    accounts of $600 in its general category 
income by $5,000. The result of 20% is        is the smaller of the current year separate   and $800 in its passive category (Part III, 
multiplied by the separate limitation loss of limitation income in that category (the       line 1, columns (iv) and (iii)). The 
$2,000. Corporation X enters the product      applicable amount entered in Part I,          maximum potential recapture for the 
of $400 on line 2d, column (v).               line 6), or the balance in the applicable     overall foreign loss account in the general 
                                              overall foreign loss account (the             category is $600 (the smaller of current 
Corporation X enters $0 (negative             applicable line 1 amount in Part III). If the year income of $1,000 in that category or 
$2,000 plus positive $2,000) on line 3,       aggregate amount of maximum potential         the overall foreign loss account balance of 
column (iv); $2,400 ($4,000 minus $1,600)     recapture in all overall foreign loss         $600). The maximum potential recapture 
on line 3, column (iii); and $600 ($1,000     accounts exceeds 50% of all amounts           for the overall foreign loss account in the 
minus $400) on line 3, column (v).            entered on Part I, line 6, columns (i)        passive category is $400 (the smaller of 
Line 4. In columns (i) through (v), enter     through (v), then the amount of current       current year income of $400 in that 
the overall foreign losses for the tax year   year separate limitation income in each       category or the overall foreign loss 
(from line 3) as positive numbers if they     separate category subject to recapture is     account balance of $800). The aggregate 
have reduced U.S. source income for the       computed using the following formula:         amount of maximum potential recapture in 
tax year. In column (vi), enter the total                                                   all overall foreign loss accounts is 
amount of overall foreign losses that have    Total recapture amount x (Maximum 
                                                                                            therefore $1,000 ($600 + $400).
reduced U.S. source income for the tax        potential recapture amount for the overall 
year as a negative number.                    foreign loss account in the separate          The total amount of current year 
                                              category / Aggregate amount of maximum        income subject to recharacterization is 
Note.   The numbers entered across this       potential recapture in all overall foreign    $700 (the smaller of the aggregate amount 
line should “zero out.”                       loss accounts)                                of maximum potential recapture, $1,000, 
                                                                                            or 50% of total current year separate 
Line 5. In columns (i) through (v), enter     The corporation can make an annual,           limitation income entered on line 6, Part I 
U.S. source losses allocated to separate      revocable election to recapture a greater     (50% x $1,400, or $700)). To compute the 
categories with income on line 3 for the      portion of the balance in an overall foreign  amount of current year separate limitation 
current tax year. In column (vi), enter the   loss account by attaching a statement to      income in the general category that is 
total amount of U.S. losses allocated to      Form 1118 indicating:                         treated as U.S. source income, 
the separate categories as a positive         1. The percentage and dollar amount           Corporation Y multiplies the total 
number. Use the following formula:            of the separate limitation income that is     recapture amount of $700 by the 
U.S. source loss x (Line 3 income in a        treated as U.S. source income, and            maximum recapture amount for the 
                                                                                            general category of $600, divided by the 
given category / Combined line 3 income       2. The percentage and dollar amount           aggregate amount of maximum potential 
of all separate categories with income on     of the balance (both before and after         recapture of $1,000. Corporation Y enters 
line 3)                                       recapture) in the overall foreign loss        the result of $420 on line 7, column (iv). To 
U.S. source losses in excess of the           account that is recaptured.                   compute the amount of current year 
combined line 3 income for a tax year is      If the corporation disposes of property       separate limitation income in the passive 
treated as a net operating loss that may be   that was used predominantly in a foreign      category that is treated as U.S. source 
carried back or forward to other tax years    trade or business and that generated          income, Corporation Y multiplies the total 
using the rules of section 172.               foreign source income in the same             recapture amount of $700 by the 
                                              separate category as the applicable           maximum recapture amount for the 
Note.   The numbers entered across this       overall foreign loss account, the             passive category of $400, divided by the 
line should “zero out.”                       corporation generally must recognize gain     aggregate amount of maximum potential 
Line 7. Recapture overall foreign losses      on the disposition to the extent of the       recapture of $1,000. Corporation Y enters 
that reduced U.S. source income in prior      balance in the account (after amounts are     the result of $280 on line 7, column (iii). 
tax years (section 904(f)(1)). To do this,    recaptured under section 904(f)(1)),          Corporation Y enters the total recapture 
treat a portion of the current year separate  whether or not gain would otherwise be        amount of $700 as a positive number on 
limitation income that is of the same         recognized on the disposition. See section    line 7, column (vi). Note that the total 
category as the loss that resulted in the     904(f)(3) and Regulations section             amounts entered across line 7 equal zero.
prior year overall foreign loss as U.S.       1.904(f)-2(d). Such gain is treated as 
source income. Recapture continues until      foreign source taxable income in the same     Line 9. If a separate limitation loss was 
the applicable overall foreign loss account   separate category as the applicable           allocated in a prior tax year and the 
balance (Part III) is reduced to zero. Enter  overall foreign loss account and is subject   corporation has income during the current 
the recapture amount for each category of     to recapture to the extent of the             tax year in the separate category from 
separate limitation income in the             corporation's foreign source taxable          which the loss was allocated, that current 
appropriate column as a negative number.      income in that separate category or, if       year income (if it was not previously 
Enter the total amount of recapture for all   less, 100% of the corporation's foreign       recharacterized) must be recharacterized 
categories of separate limitation income      source taxable income.                        as income of the separate category(ies) to 
                                                                                            which the loss was allocated in the prior 
as a positive number in column (vi).                                                        year(s) (section 904(f)(5)).
                                              Note. For dispositions after October 22, 
Note.   The numbers entered across this       2004, the previous paragraph applies to 
line should “zero out.”                       certain dispositions of stock in a controlled Note. The amount of current year income 
                                                                                            in a category subject to recharacterization 

                                                             -2-     Instructions for Schedule J (Form 1118) (Rev. Dec. 2018)

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is limited to the year-end balance in Part II from general category income to all           categories on a pro rata basis in the 
for that category as reported on the prior    separate categories;                          following manner:
tax year Schedule J, reduced by any           2. Multiply the result (80%) by the              Current year U.S. source income 
netting of offsetting separate limitation     $1,500 of general category income; and        subject to recharacterization x (Amount 
loss accounts as provided for in the 
instructions for Part I, line 2.              3. Enter $1,200 as a positive number          remaining to be recharacterized as 
                                              on line 9d, column (iii).                     income of a given separate category / 
   If a prior year separate limitation loss   To compute the portion to be                  Amounts remaining to be recharacterized 
was allocated to more than one separate       recharacterized as resourced treaty           as income of all separate categories)
category and there is not enough current      income, Corporation X should:
year income in the separate category from 
which the loss was allocated to               1. Divide the $400 remaining to be            Part II
recharacterize all remaining balances,        recharacterized from general category         If a separate limitation loss was allocated 
then the current year income must be          income to resourced treaty income by          in a prior tax year and the corporation has 
recharacterized as income of the other        $2,000;                                       income during the current tax year in the 
separate categories on a pro rata basis in    2. Multiply the result (20%) by the           separate category from which the loss was 
the following manner:                         $1,500 of general category income; and        allocated, that current year income (if it 
                                                                                            was not previously recharacterized) must 
   Current year income in separate            3. Enter $300 as a positive number on         be recharacterized as income of the 
category from which losses were               line 9d, column (v).                          category to which the loss was allocated in 
previously allocated x (Amount remaining      Corporation X enters the $1,500 of            the prior year(s) (section 904(f)(5)).
to be recharacterized as income of a given    general category income that was 
separate category / Amounts remaining to      recharacterized in the bold-outlined box         To determine the amounts to enter into 
be recharacterized as income of all           on line 9d, column (iv). Note that the total  the grid:
separate categories)                          amounts entered across line 9d equal             1. Add the current year separate 
   Any amount that is not recharacterized     zero.                                         limitation loss allocations (adjusted as 
during the tax year (i.e., the excess of      Finally, Corporation X completes the          required by Regulations section 
separate limitation losses previously         Part II recharacterization balances grid by   1.904(b)-1(h)(1) relating to capital gains) 
allocated over current year income in that    entering $400 ($1,600 minus $1,200) on        to last year's year-end balances;
same separate category) must be entered       line d, column (iii), and $100 ($400 minus       2. Net any offsetting separate 
into the grid in Part II.                     $300) on line d, column (v).                  limitation loss accounts as described in 
Note. Recharacterization of separate          Line 10. Recapture overall domestic           the instructions for Part I, line 2;
limitation income does not result in          losses that reduced separate limitation          3. Subtract the amounts 
recharacterizing any tax. The rules of        income in prior tax years (section 904(g)     recharacterized during the current tax 
Regulations section 1.904-6 apply on an       (1)). To do this, treat a portion of the      year; and
annual basis for allocating taxes to          current year U.S. source income as               4. Enter the result on the line (line a, 
separate categories before any income is      separate limitation income in the same        b, c, d, or e) for the separate category 
recharacterized.                              category(ies) as the separate limitation      from which losses were previously 
                                              income that was reduced by the prior year     allocated, under the appropriate column 
   If prior year separate limitation losses   overall domestic loss. Recapture              (column (i), (ii), (iii), (iv) or (v)) to which the 
can be recaptured, the total amounts          continues until the applicable overall        losses were previously allocated.
recharacterized should be entered into the    domestic loss account balance (Part IV) is 
bold-outlined boxes as negative numbers.      reduced to zero. Enter the total overall         Example 4. Assume the same facts as 
Each prior-year separate limitation loss      domestic loss recapture amount as a           in Example 1 on page 1. Also assume that 
recaptured should be entered as a             negative number in column (vi). Enter the     Corporation X does not have any 
positive number on the same line under        amount recharacterized as separate            remaining balances from any prior 
the appropriate column heading to which       limitation income in each category, as        allocations of losses from its general 
income was recharacterized.                   appropriate, as positive numbers in           category to its passive category or its 
                                              columns (i) through (v).                      resourced treaty income category. The 
Note. The numbers entered across any                                                        corporation should enter $1,600 on line d, 
given line should “zero out.”                 Note.   The numbers entered across this       column (iii), and $400 on line d, column 
   Example 3. Assume the same facts as        line should “zero out.”                       (v).
in Example 1 on page 1. Also assume 
that, in a subsequent tax year, Corporation   The total amount of any current year          Part III
X has $1,500 of income in its general         U.S. income subject to recapture is the 
category (on line 8, column (iv), of its      smaller of the total balance in the           Line 1.  Enter the ending balances from 
Schedule J).                                  applicable overall domestic loss accounts     last year's schedule.
                                              (the applicable column(s) in Part IV, line 1) Lines 2, 3, and 4. Show any adjustments 
   Since there is not enough general          or 50% of the amount entered on Part I,       made to the overall foreign loss accounts 
category income to recapture the entire       line 6.                                       for each separate category during the tax 
$2,000 prior-year balance remaining to be 
                                                                                            year. See Regulations section 
recaptured, Corporation X will prorate the    If a prior year overall domestic loss or      1.904(f)-1(d) for a list of possible additions 
$1,500 of general category income in that     losses were allocated to more than one        to the accounts. See Regulations section 
subsequent year as follows.                   separate category and there is not            1.904(f)-1(e) for a list of possible 
   To compute the portion to be               enough income in the current year subject     reductions (including recapture).
recharacterized as passive category           to recharacterization to recapture all 
income, Corporation X should:                 remaining overall domestic loss account       Line 5.  Enter the year-end balances of 
   1. Divide the $1,600 remaining to be       balances, then the current year U.S.          the overall foreign loss accounts for each 
recharacterized from general category         source income subject to                      separate category.
income to passive category income by the      recharacterization must be 
$2,000 remaining to be recharacterized        recharacterized as income of the separate 

Instructions for Schedule J (Form 1118) (Rev. Dec. 2018)           -3-

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Part IV                                      additions to the accounts. See               overall domestic loss account in the year 
                                             Regulations section 1.904(g)-1(e) for a list in which the loss arose, not the earlier year 
Line 1. Enter the ending balances from       of possible reductions (including            to which the loss was carried back to 
last year's schedule.                        recapture).                                  offset the foreign income.
Lines 2, 3, and 5. Show any adjustments                                                   Line 6. Enter the year-end balances of 
made to the overall domestic loss account    Note. A U.S. source loss that is carried 
with respect to each separate category       back as part of a net operating loss to      the overall domestic loss account with 
during the tax year. See Regulations         offset foreign income in a prior qualified   respect to each separate category.
section 1.904(g)-1(d) for a list of possible tax year will result in an increase to the 

                                                         -4- Instructions for Schedule J (Form 1118) (Rev. Dec. 2018)