IRS Instruction 1120-F (Schedule H) – IRS Form, Instructions, Pubs 2026

IRS Instruction 1120-F (Schedule H) – In the complex world of U.S. taxation for foreign corporations, properly allocating deductions is crucial for compliance and accurate reporting. IRS Schedule H (Form 1120-F) plays a key role in this process, helping foreign entities determine deductions related to effectively connected income (ECI) under Regulations Section 1.861-8. This SEO-optimized guide breaks down the instructions for Schedule H, including its purpose, filing requirements, allocation rules, and step-by-step explanations. Whether you’re a tax professional or a foreign corporation navigating U.S. tax obligations, this article provides essential insights based on the latest IRS guidelines.

What is Schedule H (Form 1120-F)?

Schedule H is an attachment to Form 1120-F, the U.S. Income Tax Return for Foreign Corporations. It is specifically designed to report the allocation and apportionment of deductible expenses between ECI and non-ECI. ECI refers to income effectively connected with a U.S. trade or business, while non-ECI includes other income sources. The schedule ensures that only expenses connected to ECI are deducted against U.S. taxable income, as mandated by Section 882(c) of the Internal Revenue Code.

Expenses covered in Schedule H exclude interest (handled on Schedule I) and bad debts (reported directly on Form 1120-F, line 15). Instead, it focuses on other deductions, using methods from Regulations Sections 1.861-8, 1.861-17, and Temporary Regulations Section 1.861-8T. The results from Schedule H feed into Form 1120-F, Section II, line 26, and for banks, Schedule M-3 (Form 1120-F), Part III, line 31.

Who Must File Schedule H?

Not every foreign corporation needs to file Schedule H, but it’s required for those engaged in a U.S. trade or business. Specifically:

  • Any foreign corporation filing Form 1120-F that conducted business in the U.S. during the tax year must attach Schedule H.
  • Foreign corporations treated as engaged in a U.S. trade or business, including those as partners in partnerships with ECI-allocated deductions.
  • Exceptions include protective returns under Regulations Section 1.882-4(a)(3)(vi) and certain treaty-based filings using OECD Transfer Pricing Guidelines, where treaty disclosures on Form 8833 may apply instead.

If your corporation receives Schedule K-3 from a partnership, refer to its instructions for additional reporting on Schedule H.

Purpose of Schedule H: Allocating Deductions Under Regulations Section 1.861-8

The primary goal of Schedule H is to allocate deductions to the appropriate class of gross income and apportion them if they relate to multiple classes. This is based on factual relationships between expenses and income. For instance:

  • Definitely Related Deductions: These are tied directly to ECI or non-ECI and reported in Part I.
  • Residual Deductions: Apportioned using ratios like gross income, assets, or personnel in Part II.
  • Special rules apply for research and experimentation (R&E) expenses under Section 1.861-17 and charitable contributions under Section 170, which reduce ECI regardless of direct connection.

This allocation ensures compliance with U.S. tax laws, preventing over- or under-deduction against ECI.

Step-by-Step Guide: How to Fill Out Schedule H (Form 1120-F)

Schedule H is divided into four parts. Below is a line-by-line breakdown to help you navigate the form accurately.

This section deals with expenses from non-Schedule L home office books.

  • Line 1a: Enter total expenses from home office financial statements.
  • Line 1b: Indicate if accounting standards were converted.
  • Line 2: Adjust for U.S. tax-deductible amounts (e.g., temporary differences); attach a statement.
  • Line 3: Total deductible expenses before allocation.
  • Line 4: Interest expense (allocated via Schedule I).
  • Line 5: Bad debt expense (ECI portion on Form 1120-F).
  • Line 7: Remaining deductions after subtracting lines 4-6.
  • Lines 8-10: Deductions definitely related to non-ECI (e.g., from subsidiaries or home country).
  • Line 11: Deductions definitely related to ECI (e.g., personnel, R&E, stewardship).

Part II: Home Office Deductible Expenses Allocated and Apportioned to ECI

Focuses on apportioning residual deductions.

  • Line 13: Residual deductions for apportionment.
  • Line 14: Average exchange rate for non-U.S. currency.
  • Line 15: Line 13 in U.S. dollars.
  • Line 16: Amount apportioned to ECI; attach method statement.
  • Line 17: Line 11 in U.S. dollars.
  • Line 18: Total home office deductions to ECI.
  • Line 19: Expenses from other foreign locations apportioned to ECI.
  • Line 20: Grand total non-Schedule L deductions to ECI (transfers to Form 1120-F).

Part III: Allocation and Apportionment Methods and Financial Records Used

Detail your methods here.

  • Check boxes for new methods or interbranch amounts.
  • Lines 21-23: Report ratios (gross income, assets, personnel).
  • Line 24: Other ratio-based methods; attach statement.
  • Line 25: Non-ratio methods (e.g., time-based).
  • Lines 26-28: Specify financial records used.

Part IV: Allocation and Apportionment of Expenses on Schedule L Books

Handles U.S.-based books.

  • Line 29: Total expenses on Schedule L.
  • Line 30: U.S. tax adjustments; attach statement.
  • Lines 32a-35: Special items like interest, bad debts, and interbranch expenses.
  • Line 37: Remaining for allocation.
  • Lines 38a-41: Reconciliation of definitely related and apportioned deductions to ECI/non-ECI.

Always attach statements for explanations, ratios, and methods to avoid processing delays.

Recent Updates to IRS Instructions for Schedule H (2025 Tax Year)

As of the latest review on January 15, 2026, the instructions for the 2025 tax year include no major structural changes to Schedule H. However, foreign corporations should check IRS.gov/Form1120F for any post-publication updates due to new legislation. Key ongoing emphases include proper treatment of disregarded entities and interbranch expenses.

Key Definitions for Schedule H Compliance

  • Effectively Connected Income (ECI): Income from a U.S. trade or business.
  • Non-ECI: Income not connected to U.S. operations.
  • Home Office Books: Non-U.S. records, excluding U.S. branches.
  • Schedule L Books: U.S. trade or business records, potentially including multiple sets.
  • Worldwide Gross Income: Global receipts minus cost of goods sold.
  • U.S. Assets: Average assets for interest allocation.

Understanding these terms ensures accurate allocation under Regulations Section 1.861-8.

Conclusion: Ensuring Compliance with IRS Schedule H

Mastering IRS Schedule H (Form 1120-F) is essential for foreign corporations to correctly allocate deductions and minimize tax liabilities on ECI. By following these instructions, you can avoid common pitfalls and ensure your Form 1120-F is filed accurately. For the full document, download the PDF from the official IRS site. Always consult a tax advisor for personalized guidance, especially with treaty-based exceptions or complex allocations.

This guide is based on trusted IRS sources to provide reliable, up-to-date information for your tax preparation needs.