Printable Form 2026

IRS Form 1118 (Schedule I) – Reduction of Foreign Oil and Gas Taxes

IRS Form 1118 (Schedule I) – Reduction of Foreign Oil and Gas Taxes – Corporations claiming the foreign tax credit (FTC) on income from international oil and gas operations must navigate special limitations under IRC Section 907. IRS Form 1118 Schedule I (Reduction of Foreign Oil and Gas Taxes) calculates the required reduction in creditable foreign taxes on combined foreign oil and gas income. This prevents excess credits beyond the U.S. corporate tax rate applied to that income.

As of 2026, the latest Schedule I (Form 1118) remains the December 2021 revision, while the main Form 1118 and its instructions were updated in December 2025. This article provides a clear, step-by-step explanation based exclusively on official IRS sources to help tax professionals and corporate filers comply accurately.

What Is IRS Form 1118 Schedule I?

Schedule I (Form 1118) is an attachment to Form 1118 (Foreign Tax Credit — Corporations). It computes the reduction of foreign income taxes paid, accrued, or deemed paid on combined foreign oil and gas income under Section 907(a). The reduced amount flows to Schedule G of Form 1118 and directly lowers the allowable FTC.

Corporations complete a separate Schedule I for each applicable separate category of income (e.g., general category, section 951A category). Report all amounts in U.S. dollars.

Official download:
Schedule I (Form 1118) PDF
Instructions for Form 1118 (Rev. Dec. 2025)

Who Must File Schedule I (Form 1118)?

File Schedule I if your corporation:

  • Claims (or could claim) a foreign tax credit under Section 901 for taxes on foreign oil and gas income.
  • Has combined foreign oil and gas income (defined below) from sources outside the United States and its possessions.
  • Reports taxes paid, accrued, or deemed paid (including under Sections 960/951A) on that income.

Even if the final reduction is zero, many corporations must complete the schedule to document the computation when oil-and-gas activities exist.

Note: Schedule I does not apply to taxes withheld at source reported in certain columns of Schedule A — those are handled differently.

Understanding Section 907: Why the Reduction Exists

Section 907(a) limits the foreign tax credit on foreign oil and gas income to the U.S. corporate tax rate (currently 21% under Section 11(b)) times the combined foreign oil and gas income. This prevents foreign governments from imposing taxes that exceed the U.S. rate while still allowing a full credit.

Any excess foreign taxes (the “reduction”) cannot be credited or deducted in the current year but may be carried over under special rules in Section 907(f).

Key point: The reduction applies before the overall FTC limitation under Section 904.

Key Definitions: Foreign Oil and Gas Extraction Income (FOGEI) and Foreign Oil Related Income (FORI)

Combined foreign oil and gas income = FOGEI + FORI (with specific inclusions and exclusions).

Gross foreign oil and gas extraction income (FOGEI) — Section 907(c)(1):

  • Income from the extraction (by the taxpayer or any other person) of minerals from oil or gas wells located outside the U.S. and its possessions.
  • Income from the sale or exchange of assets used in the trade or business of extracting such minerals.

Gross foreign oil related income (FORI) — Section 907(c)(2):

  • Processing of minerals from oil/gas wells into primary products.
  • Transportation, distribution, or sale of such minerals or primary products.
  • Disposition of assets used in the above activities.
  • Performance of any related service.

Inclusions:

  • Subpart F inclusions (Section 951(a)(1)) and GILTI inclusions (Section 951A) attributable to a CFC’s combined foreign oil and gas income (including Section 78 gross-up).
  • Distributive share from partnerships.
  • Certain interest income under look-through rules (but not passive-category interest from a foreign subsidiary’s FOGEI).

Exclusions:

  • Passive income dividends or interest (see Form 1118 instructions for passive category definition).
  • Section 863(b) income uses special single-line reporting.

Step-by-Step Guide to Completing Schedule I (Form 1118)

Top Section

  • Enter the same separate category code as on the attached Form 1118 (line a).
  • If applicable, enter sanctioned country code (901j) or treaty country code (RBT categories) on lines b or c.

Part I: Combined Foreign Oil and Gas Income and Taxes

Use a separate line for each foreign country or U.S. possession (two-letter code from IRS Country Codes list). For Section 863(b) income, use one line and enter “863(b)” in column 1(b); leave 1(a) blank.

Columns 2–6 (Gross Income):

  • Column 2: Gross FOGEI
  • Column 3: Gross FORI
  • Column 4: Inclusions under Sections 951(a)(1) and 951A
  • Column 5: Other (partnership distributive share, certain interest, etc.)
  • Column 6: Total (2 + 3 + 4 + 5)

Deductions (Columns 7–10):

  • Column 7: Allocable deductions
  • Column 8: Apportioned deductions (per Section 861 regulations)
  • Column 9: Total deductions
  • Column 10: Taxable income (Column 6 – Column 9). Losses in one country offset income in others for the total.

Foreign Oil and Gas Taxes (Columns 11–13):

  • Column 11: Taxes paid or accrued
  • Column 12: Taxes deemed paid
  • Column 13: Total
  • Attach a detailed schedule showing the computation of these taxes.

Totals line: Sum across all countries.

Part II: Reduction Under Section 907(a)

  • Line 1: Combined foreign oil and gas income = Total from Part I, Column 10, minus any recapture under Section 907(c)(4).
  • Line 2: Line 1 × highest rate under Section 11(b) = Line 1 × 21%.
  • Line 3: Total foreign oil and gas taxes from Part I, Column 13 (Totals).
  • Line 4: Reduction = Line 3 minus Line 2 (enter $0 if negative or zero).
    Enter this amount on Schedule G, line B of the corresponding Form 1118.

Part III: Foreign Oil and Gas Taxes Available for Use in the Current Tax Year

  • Line 1: Excess Section 907(a) limitation = Part II, line 2 minus Part II, line 3 (if ≤ 0, enter $0 and stop).
  • Line 2: Carryover of foreign oil and gas tax to the current year (attach detailed schedule; corporations are encouraged to use a format similar to Schedule K).
  • Line 3: Smaller of line 1 or line 2.
    Include this on Schedule B, Part II, line 5 of Form 1118.

Special carryover rules (Section 907(f)): Foreign oil and gas taxes have a 1-year carryback and 10-year carryforward, applied before regular Section 904(c) carryovers in unused credit years.

How This Reduction Affects Your Overall Foreign Tax Credit?

The amount on Schedule I, Part II, line 4 reduces the taxes available for credit on Schedule G. The allowable credit on oil-and-gas income is effectively capped at 21% of the taxable combined foreign oil and gas income. Any excess taxes may be carried forward (subject to the special rules) for use in future years when the limitation allows.

Common Mistakes and Pro Tips

  • Forgetting to complete a separate Schedule I for each category.
  • Misclassifying income — double-check FOGEI vs. FORI definitions and passive income exclusions.
  • Incorrect deduction apportionment — follow Section 861 regs carefully.
  • Missing carryover schedules or failing to apply 907(f) before 904(c).
  • Not converting foreign currency properly (attach explanation of exchange rate used).

Pro tip: Use the same country codes and category codes consistently across all Form 1118 schedules to avoid IRS correspondence.

Where to Get the Latest Forms and Instructions?

  • Form 1118 (main form)
  • Schedule G (other reductions)
  • Schedule B (total FTC after reductions)
  • Schedule K (carryovers)
  • Schedule H (deduction apportionment)

Important Disclaimer: This article is for informational purposes only and is based on official IRS publications as of February 2026. Tax laws are complex and subject to change. It is not a substitute for professional tax advice. Consult a qualified tax advisor or CPA familiar with international tax and oil-and-gas operations before filing.

Need help? Download the forms directly from the links above and cross-reference with the latest Instructions for Form 1118. Proper completion of Schedule I ensures your corporation maximizes its legitimate foreign tax credit while staying fully compliant with Section 907.

For questions on specific line items or examples tailored to your situation, refer to the detailed regulations under Treas. Reg. §1.907(a)-1 and §1.907(f)-1.