IRS Form 1120-F (Schedule I) – IRS Forms, Instructions, Pubs 2026

IRS Form 1120-F (Schedule I) – IRS Forms, Instructions, Pubs 2026 – Foreign corporations engaged in a U.S. trade or business face complex U.S. tax rules for deducting interest expenses against effectively connected income (ECI). IRS Form 1120-F Schedule I reports the allocation of interest expense to ECI under Treasury Regulations Section 1.882-5. Proper completion affects deductible interest, U.S. taxable income, branch profits tax under Section 884, and excess interest tax.

This guide explains the purpose of Schedule I, filing requirements, the three-step allocation process, available methods and elections, step-by-step completion instructions, and key considerations based on the latest 2025 IRS instructions and regulations.

What Is Schedule I (Form 1120-F)?

Schedule I (Form 1120-F), titled “Interest Expense Allocation Under Regulations Section 1.882-5,” calculates and reports the portion of a foreign corporation’s worldwide interest expense allocable to its U.S. effectively connected income (ECI). The schedule must attach to Form 1120-F even if the allocated interest is not currently deductible due to other Code provisions (e.g., Section 163(j) business interest limitation, Section 267(a)(3) related-party rules, or Section 265 disallowances).

Key purposes:

  • Compute allocable and deductible interest expense under the exclusive rules of Regs. §1.882-5.
  • Support the computation of “branch interest” for Section 884(f) excess interest tax.
  • Disclose elections under Regs. §1.882-5 (e.g., allocation methods, fixed ratios, currency pools).
  • Provide data for Form 1120-F, Section III (Branch Profits Tax and Excess Interest Tax).

The rules apply to most foreign corporations with ECI and are generally the exclusive method for attributing interest to a U.S. permanent establishment under U.S. income tax treaties (with limited treaty-based exceptions requiring Form 8833 disclosure).

Download the official PDF: The user-provided link (https://www.irs.gov/pub/irs-pdf/f1120fi.pdf) is the form; instructions are at https://www.irs.gov/pub/irs-pdf/i1120fi.pdf (2025 revision, dated around October 2025).

Who Must File Schedule I?

All foreign corporations with interest expense allocable to ECI under Section 882(c) must complete and attach Schedule I, regardless of whether any amount is deductible in the current year. This includes reporting corporations (those engaged in or treated as engaged in a U.S. trade or business).

Exceptions (no Schedule I required):

  • No U.S. trade or business.
  • No worldwide interest expense to allocate.
  • Only limited U.S. activities that do not produce ECI (and filing a protective return under Regs. §1.882-4(a)(3)(vi)).

Protective returns: Taxpayers filing protective Form 1120-F can voluntarily attach Schedule I to preserve timely elections (e.g., method choices), but only if filed by the original due date (including extensions). Elections generally bind for at least 5 years.

Treaty-based positions (using OECD-style attribution instead of §1.882-5) still require Schedule I using treaty amounts plus Form 8833.

The Three-Step Process Under Regs. §1.882-5

Regs. §1.882-5 uses a mandatory three-step formula (plus direct allocations) to determine interest allocable to ECI. This is the exclusive method for most taxpayers.

Step 1: Average Value of U.S. Assets (Regs. §1.882-5(b))
Determine the average value of U.S. assets (assets that produce or are held to produce ECI) for the tax year. Use adjusted tax basis (or elective fair market value with consistency rules). Average at regular intervals (at least semiannually; monthly for large banks/securities dealers). Exclude or adjust for interbranch items, certain non-ECI assets, direct-allocation assets, partnerships, etc.
U.S. assets include those on U.S. books plus adjustments (e.g., partnership interests via Schedule P).

Step 2: U.S.-Connected Liabilities (Regs. §1.882-5(c))
Multiply average U.S. assets by the “actual ratio” (average worldwide liabilities ÷ average worldwide assets) or an elective fixed ratio (50% for non-banks/insurers; 95% for qualifying banks).
A liability reduction election under Regs. §1.884-1(e)(3) (to reduce branch profits tax) can further reduce this amount.

Step 3: Interest Expense Allocation (Regs. §1.882-5(d) or (e))
Compare U.S.-connected liabilities (Step 2) to average U.S.-booked liabilities (third-party liabilities properly reflected on U.S. books).

  • If U.S.-booked liabilities ≥ U.S.-connected liabilities → Scale down the interest expense on U.S.-booked liabilities pro-rata.
  • If U.S.-booked liabilities < U.S.-connected liabilities → Use all interest on U.S.-booked liabilities + interest on the “excess” at a rate derived from non-U.S.-booked U.S. dollar liabilities (or elective published rate for banks, e.g., Term SOFR + 0.11448%).

Direct allocations (Regs. §1.882-5(a)(1)(ii) referencing Temp. Regs. §1.861-10T) apply separately to certain secured or integrated financings and reduce asset basis/liabilities in the steps above.

Separate Currency Pools Method (elective under Regs. §1.882-5(e)): Allocates by currency pools using currency-specific borrowing rates (with a 3% de minimis election to convert small pools to USD).

Available Methods and Elections

  • Adjusted U.S. Booked Liabilities (AUSBL) Method (default under §1.882-5(d)): Most common; focuses on U.S.-booked liabilities with adjustment for excess.
  • Separate Currency Pools Method (§1.882-5(e)): Useful for multi-currency operations; requires currency-specific calculations.
  • Fixed Ratio Election in Step 2: Simplifies liability computation (5-year minimum commitment).
  • Published Rate Election (banks only): Uses a safe-harbor rate (Term SOFR + spread) for excess liabilities; annual election.
  • Fair Market Value Election for assets (with conformity requirements).
  • 3% De Minimis Currency Election (under currency pools).

Elections are disclosed on Schedule I and generally irrevocable for 5 years without IRS consent. They must be made timely on an original return.

Special rules for foreign banks: Higher fixed ratio (95%), specific U.S.-booked liability definitions (including certain interbranch loans in lending activities), and published rate options.

How to Complete Schedule I (Form 1120-F) – Step-by-Step Overview?

The 2025 Schedule I includes checkboxes for the chosen method (AUSBL or Separate Currency Pools) and lines grouped by steps:

  • Lines 1–5: Step 1 – Average U.S. assets (detailed adjustments from book assets, interbranch, non-ECI, partnerships, direct allocations, etc.).
  • Lines 6–7: Step 2 – U.S.-connected liabilities (actual or fixed ratio, liability reduction).
  • Lines 8–9: U.S.-booked liabilities and related interest expense.
  • Lines 10–15 (AUSBL): Excess or scale-down calculations, rate for excess.
  • Lines 16–20 (Currency Pools): Per-currency computations (attach statements for multiple currencies).
  • Lines 21–25: Total allocable interest, direct allocations, summary, deferrals/disallowances, and reconciliation to Form 1120-F.

Attach statements for complex adjustments, partnership data (via Schedule P), and elections. The total on Schedule I flows to Form 1120-F deductions, Schedule M-3 reconciliations, and Section III for excess interest tax.

Impact on Overall U.S. Taxation

The allocated interest reduces ECI on Form 1120-F, Section II. It also determines “branch interest” for withholding and Section 884(f) tax on excess interest (interest paid by the U.S. branch to foreign persons treated as paid by a domestic corporation to the extent of ECI). Coordination with Section 163(j) and other limitations occurs after allocation.

Common Pitfalls and Best Practices

  • Failing to average assets/liabilities properly or omitting adjustments for partnerships/disregarded entities.
  • Missing timely elections (no relief via amended returns or §301.9100 generally).
  • Inconsistent U.S. tax basis vs. book values.
  • Ignoring currency translation rules (§988) or hyperinflationary currency issues.
  • Not reconciling with Schedule H (other expense allocations) or Form 8990 (business interest limitation).

Tip: Maintain detailed workpapers showing averaging methodology, asset classifications, and election disclosures. Foreign banks should pay special attention to regulated lending activities.

Conclusion

IRS Form 1120-F Schedule I is a critical compliance tool for foreign corporations with U.S. operations. Accurate interest expense allocation under Regs. §1.882-5 directly impacts U.S. tax liability, branch-level taxes, and treaty positions. Given the complexity—especially for multi-currency or banking entities—consult a qualified U.S. international tax advisor or CPA familiar with cross-border taxation.

Always refer to the latest official IRS instructions and regulations, as rules can be updated. For the current forms:

This article is for informational purposes only and does not constitute tax or legal advice. Tax laws are complex and subject to change; professional guidance is essential for your specific situation.