IRS Form 1120-F (Schedule P)

IRS Form 1120-F (Schedule P) – Foreign corporations operating in the United States often face complex tax reporting requirements. One key component is IRS Form 1120-F, the U.S. Income Tax Return of a Foreign Corporation. Attached to this form is Schedule P, which focuses on listing foreign partners’ interests in partnerships. This schedule is essential for reconciling effectively connected income (ECI) and ensuring compliance with U.S. tax laws. In this article, we’ll break down what Schedule P is, who needs to file it, its purpose, and step-by-step guidance on completion. Whether you’re a tax professional or a business owner, understanding this form can help avoid penalties and optimize your tax strategy.

What Is IRS Form 1120-F Schedule P?

IRS Form 1120-F Schedule P, titled “List of Foreign Partner’s Interests in Partnerships,” is a supplemental schedule attached to Form 1120-F. It serves multiple purposes related to partnerships where a foreign corporation holds an interest. Specifically, it identifies and reconciles directly held partnership interests with distributive shares of ECI or expenses allocable to ECI. It also reports the foreign corporation’s effectively connected outside tax basis in each interest.

Additionally, Schedule P is used to disclose information about transfers of partnership interests, calculating any gain or loss when the partnership is engaged in a U.S. trade or business or holds U.S. real property interests, as per sections 864(c)(8) and 897(g).

The form is structured into five parts:

  • Part I: Lists the foreign partner’s interests in partnerships.
  • Part II: Reconciles the foreign partner’s income and expenses to Schedule K-3 (Form 1065).
  • Part III: Calculates the foreign partner’s average outside basis under Regulations sections 1.882-5(b) and 1.884-1(d)(3).
  • Part IV and V: Report transfers of partnership interests and related gain/loss calculations.

The form accommodates up to four partnership interests directly. If more are needed, attach additional sheets in the same format. Totals from all interests, including attachments, are summed in the “Totals” columns of Parts II and III.

For the 2025 tax year (relevant for filings in 2026), the latest version of the form and instructions are available on the IRS website. You can download the PDF directly from irs.gov/pub/irs-pdf/f1120fp.pdf.

Purpose of Schedule P (Form 1120-F)

The primary goals of Schedule P are twofold:

  1. Identification and Reconciliation: It identifies directly held partnership interests and reconciles the foreign corporation’s distributive shares of ECI (or related expenses) with the information reported on Schedule K-3 (Form 1065). This ensures accurate reporting of ECI on Form 1120-F, Section II, and coordinates with other schedules like Schedule I (interest expense allocation) and Schedule H (deductions allocation).
  2. Transfer Reporting: It documents transfers of partnership interests, computing gain or loss if the partnership conducts a U.S. trade or business or holds U.S. real property. This aligns with sections 864(c)(8) and 897(g), treating certain gains as effectively connected.

Entities treated as partnerships include limited liability partnerships (LLPs), limited liability companies (LLCs), and publicly traded partnerships not classified as corporations. Disregarded entities under Regulations section 301.7701-2(c)(2) are excluded.

Schedule P also supports calculations for branch profits tax and interest expense limitations under section 163(j). For instance, gross ECI from partnerships is reported on Form 1120-F, Section II, lines 3-10, while interest expenses feed into Schedule I and Form 8990 if applicable.

Who Must File Schedule P?

Foreign corporations must file Schedule P if they:

  • Are directly or indirectly engaged in a U.S. trade or business.
  • Have gross ECI (or expenses allocable to ECI) in their distributive share from directly owned partnerships, reported on Schedule K-3 (Form 1065).
  • Treat any distributive share from a non-U.S. trade or business partnership as ECI with their own U.S. activities.
  • Transfer an interest in a partnership engaged in a U.S. trade or business or holding U.S. real property.

Exceptions include:

  • No ECI or related expenses from any partnership interests, and no qualifying transfers.
  • ECI exempt under an income tax treaty (with Form 8833 attached), though Part I may still be required.
  • Protective returns under Regulations section 1.882-4(a)(3)(vi) where no permanent establishment exists.

If filing a protective return, you can make a protective election for outside basis apportionment by completing Parts I and III (line 14) without full details.

When and Where to File Schedule P?

Attach Schedule P to your Form 1120-F income tax return. File by the due date for Form 1120-F, typically the 15th day of the 6th month after the tax year ends (June 15 for calendar-year filers). Extensions may apply. Submit electronically or by mail as per Form 1120-F instructions.

Step-by-Step Instructions for Completing Schedule P

Part I: List of Foreign Partner’s Interests in Partnerships

List each directly owned partnership with ECI in your distributive share:

  • Columns (a)-(c): Enter the partnership’s name, address, and EIN.
  • Column (d): Check “Yes” if the distributive share is ECI under section 875 (due to partnership activities). Check “No” if ECI is determined solely at the partner level.

Include partnerships not engaged in U.S. business if you treat shares as ECI. Do not list indirect (lower-tier) interests unless directly owned.

Part II: Foreign Partner’s Income and Expenses Reconciliation to Schedule K-3

Reconcile ECI to Schedule K-3 amounts:

  • Lines 1-6: Report total gross income/ECI and deductions/losses from Schedule K-3, Part X.
  • Line 3: Gross ECI (partner determination) – Use Schedule K-3, Part X, Section 1, column (b).
  • Line 6: Deductions/losses against gross ECI – Use Schedule K-3, Part X, Section 2, column (b).
  • Line 7: Interest expense directly allocable under Regulations section 1.882-5(a)(1)(ii)(B). Also report on Schedule I, line 22.
  • Line 8: Interest expense on U.S.-booked liabilities under Regulations section 1.882-5(d)(2)(vii). Matches Schedule K-3, Part X, Section 2, line 7, column (b). Report on Schedule I, line 9, column (b).

Enter totals in the “Totals” column for all partnerships.

Part III: Foreign Partner’s Average Outside Basis

Calculate average outside basis for interest expense allocation and branch profits tax:

  • Line 9: Section 705 outside basis (average value).
  • Lines 10a-10b: Adjust for partner liabilities (directly allocable interest and other liabilities).
  • Line 11: Average partnership liabilities for distributive share of interest expense. Report on Schedule I, line 8, column (b).
  • Line 12: Adjusted average outside basis.
  • Line 13: Basis allocable to ECI. Report on Schedule I, line 5, column (b).
  • Line 14: Elect “Income” or “Asset” method for apportionment (5-year minimum). Use protective election if applicable.

Methods:

  • Asset Method: Proportion based on adjusted bases of U.S. assets.
  • Income Method: Proportion of ECI to total partnership income.

Parts IV and V: Transfer Reporting

Complete only for transfers under sections 864(c)(8) or 897(g):

  • Report details of the transfer, amount realized, and gain/loss calculation.
  • Limited to partnerships engaged in U.S. business or holding U.S. real property.
  • Transferee may need to withhold and file Form 8288-A.

For more, see Partner’s Instructions for Schedule K-3.

Common Mistakes and Filing Tips

  • Overlooking Indirect Interests: Focus only on direct holdings; lower-tier ECI flows through Schedule K-3.
  • Election Timeliness: Make basis apportionment elections in the first ECI year.
  • Treaty Benefits: Attach Form 8833 for exemptions.
  • Section 163(j) Limitations: Consider business interest expense caps on Form 8990.
  • Recordkeeping: Retain Schedule K-3 and partnership documents for audits.

Always consult the latest IRS instructions for updates, as tax laws evolve. For professional advice, contact a tax advisor familiar with international taxation.

This guide is based on 2025 instructions and aims to simplify compliance for foreign corporations with U.S. partnership interests.