IRS Instruction 1118 (Schedule L)

IRS Instruction 1118 (Schedule L) – In the complex world of international taxation, U.S. corporations operating abroad often face the challenge of managing foreign tax credits to avoid double taxation. One critical component of this process is handling foreign tax redeterminations, which can impact a corporation’s U.S. tax liability. IRS Schedule L (Form 1118), also known as the Foreign Tax Redetermination schedule, plays a pivotal role in reporting these adjustments. This SEO-optimized article delves into the purpose, filing requirements, definitions, and step-by-step instructions for Schedule L, drawing from official IRS guidelines to help tax professionals and corporate filers navigate this form effectively.

Whether you’re searching for “IRS Schedule L Form 1118 instructions” or “how to report foreign tax redeterminations,” this guide provides clear, actionable insights based on the latest available IRS resources as of February 2026.

What Is Schedule L (Form 1118)?

Schedule L (Form 1118) is a supplementary schedule attached to Form 1118, the Foreign Tax Credit—Corporations form. It is specifically designed to report foreign tax redeterminations that occur in the current tax year but relate to prior tax years. This schedule ensures that any changes in foreign taxes—such as refunds, adjustments, or contested liabilities—are properly accounted for in the U.S. tax system.

Introduced as part of updates to Form 1118, Schedule L reflects the IRS’s emphasis on transparency in foreign tax credit calculations. It must be filed with the corporation’s income tax return for the year in which the redetermination happens, regardless of whether it alters the final U.S. tax liability. Failure to report can lead to penalties, underscoring the IRS’s zero-tolerance approach to unreported adjustments.

Purpose of Schedule L: Why It Matters for Foreign Tax Credits

The primary purpose of Schedule L is to identify and summarize foreign tax redeterminations across applicable separate income categories (e.g., passive, general, or treaty-resourced income). These redeterminations arise when there’s a need to adjust the foreign tax credit (FTC) claimed on prior returns due to changes in foreign tax obligations.

Key scenarios triggering a redetermination include:

  • Differences between the amount of foreign taxes accrued and those actually paid or adjusted.
  • Foreign tax refunds or credits received.
  • Failure to pay accrued taxes within 24 months after the close of the tax year.
  • Changes affecting subpart F inclusions, global intangible low-taxed income (GILTI) under sections 951 or 951A, or qualified electing fund inclusions under section 1293.
  • Shifts between claiming a credit or deduction for foreign taxes.

By requiring Schedule L, the IRS ensures accurate reconciliation of carryovers and prevents discrepancies in FTC computations. It also supports adjustments for pre-2018 tax years of foreign corporations, helping corporations maintain compliance amid evolving international tax rules.

Who Must File Schedule L (Form 1118)?

Not every corporation needs to file Schedule L, but it’s mandatory in specific situations:

  • Corporations claiming FTC under section 901: If there’s a foreign tax redetermination, attach Schedule L to Form 1118.
  • Even without electing FTC: File if a redetermination occurs under section 905(c), irrespective of its impact on U.S. tax liability.
  • Contested foreign taxes: For corporations electing a provisional credit, file annually until the contest is resolved (applies to both cash and accrual basis taxpayers).
  • Domestic corporations with inclusions: Those with subpart F or GILTI inclusions under sections 951(a) or 951A.
  • Individuals, estates, or trusts: If electing under section 962 to be taxed as a corporation for FTC purposes.

Third-party sources note that corporations handling contested liabilities must stay vigilant, as the IRS is developing updated drafts of Schedule L to address these complexities. Always consult the IRS instructions for Form 1118 for the most current thresholds and requirements.

Key Definitions in IRS Instructions for Schedule L

Understanding the terminology is crucial for accurate filing. Here are essential definitions from IRS guidelines:

  • Foreign Tax Redetermination: Any adjustment requiring a change to the FTC and U.S. tax liability, as defined in Regulations sections 1.905-3(a) and (b). This includes refunds, non-payments, or changes in inclusions.
  • Relation-Back Year: The original tax year to which contested foreign income taxes relate, relevant for provisional credit elections.
  • Post-1986 Pools: Accumulated earnings and taxes of foreign corporations for tax years beginning after 1986 but before 2018.
  • Pre-1987 Accumulated Profits: Earnings from foreign corporations before 1987, subject to specific adjustment rules.

These definitions help filers categorize redeterminations correctly and apply the appropriate exchange rates or adjustments.

How to Complete Schedule L: Step-by-Step Instructions?

Completing Schedule L involves summarizing redeterminations and may require amended returns. Here’s a breakdown based on IRS instructions:

  1. Gather Information: Collect details from prior returns, including foreign tax amounts in both foreign currency and USD, exchange rates, and changes to inclusions or distributions. If applicable, reference Schedule K-3 (Form 1065), Part III, Section 4.
  2. Report on Schedule L:
    • Complete one Schedule L (not per category) attached to the current-year Form 1118.
    • Detail redeterminations by separate category, prior years affected, and amounts.
    • For pre-2018 foreign corporation years: Adjust post-1986 pools (include closing balances, dividend dates, amounts, and exchange rates) or pre-1987 profits (distribution dates, E&P amounts).
  3. If U.S. Tax Liability Changes:
    • File an amended return (e.g., Form 1120-X) with an amended Form 1118.
    • Attach a statement explaining the redetermination, including taxpayer details, dates, currency conversions, amended Form 5471 (if needed), and interest computations.
    • Note on Form 1120-X that the amendment relates to a foreign tax credit change increasing U.S. tax.
  4. No Change in Liability: Simply attach Schedule L to the original return—no amended filing needed.
  5. Contested Taxes: File Form 7204 (Consent To Extend the Time To Assess Tax Related To Contested Foreign Income Taxes) and Schedule L annually until resolution.

Schedule L reconciles with Schedule K (Form 1118) for carryover adjustments. For large businesses, refer to Regulations section 1.905-4(b)(4) for additional rules.

Election Options for Foreign Tax Redeterminations

IRS provides flexibility through elections:

  • Pre-2018 Redeterminations in Last Pooling Year: Controlling domestic shareholders can irrevocably elect to treat pre-2018 redeterminations as occurring in the foreign corporation’s last pre-2018 year. This is binding on all U.S. shareholders and requires a statement under Regulations section 1.964-1(c)(3)(ii), plus notices and amended returns.
  • Provisional Credit for Contested Taxes:
    • Cash method: Claim in the year of remission.
    • Accrual method: Claim in the relation-back year via amended return.
    • Requires electing credit over deduction; binding once made.

These elections can simplify reporting but demand careful consideration of long-term impacts.

Reporting Requirements and Penalties

Redeterminations are excepted from standard statutes of limitations under sections 6501(c)(5) and 905(c). Interest on deficiencies or overpayments applies per sections 6601 and 6611. Non-compliance may trigger penalties under section 6689, emphasizing the need for timely and accurate filing.

For contested taxes, refunds upon resolution create a new redetermination, requiring further reporting.

Conclusion: Staying Compliant with IRS Schedule L

Mastering IRS Schedule L (Form 1118) is essential for corporations dealing with foreign tax redeterminations to optimize foreign tax credits and avoid penalties. By understanding its purpose, who must file, and how to complete it, you can ensure seamless compliance. Always refer to the official IRS PDF instructions (Rev. December 2025) for the most up-to-date details, and consider consulting a tax advisor for complex scenarios.

For more on Form 1118 and related schedules, visit the IRS website or explore resources on foreign tax credits. This guide aims to simplify “foreign tax redetermination instructions” and help your business thrive in a global economy.