What Schedule H (Form 965) (2019) Is For
Schedule H (Form 965) is used to calculate foreign taxes deemed paid and disallowed foreign taxes connected to Section 965 inclusions. It helps taxpayers reporting deferred foreign income from a specified foreign corporation or a deferred foreign income corporation determine the amounts that flow to Form 1116 or Form 1118 for foreign tax credit purposes. The schedule relies on data from Schedule A, Schedule B, Schedule D, Schedule F, Schedule G, and other sections of Form 965.
This schedule supports accurate reporting on a federal return, including Form 1040, Form 1120, Form 1120-F, Form 1120-L, Form 1065, Form 1066, and Form 1042. It also ensures proper treatment of taxable income under the Participation Exemption System when preparing Schedules A through H for federal purposes.
For a detailed breakdown of filing requirements, eligibility rules, and step-by-step instructions, see our comprehensive guide for Form Schedule H (Form 965): Amounts Reported on Forms 1116 and 1118 and Disallowed Foreign Taxes (2019).
When You’d Use Schedule H (Form 965)
Taxpayers use Schedule H when filing tax returns that include a Section 965 inclusion from a controlled foreign corporation or ownership through pass-through entities. It applies to transition tax years and to late or amended filings where a corrected Transition Tax Statement, Form 965-A, or Form 965-B must be attached. The Internal Revenue Service requires this schedule whenever foreign taxes or deemed paid amounts relate to deferred foreign income.
Schedule H must also be used when reporting foreign tax information that originates from partnerships, S corporations, or other entities supplying Schedule K-1 data. International taxpayers, multinationals, and filers using tax software such as TaxSlayer Pro rely on the schedule to ensure proper reporting for federal tax purposes.
Key Rules or Details for 2019
The 2019 version of Schedule H includes instructions for computing the applicable percentage that reduces foreign tax credits connected to Section 965. Taxpayers must report separate foreign tax credit categories using Schedule C, Schedule R, Schedule E, and related schedules while following exchange rate conventions and reporting foreign taxes using the divide-by method. These calculations impact the amounts reported on Forms 1116, 1118, and 1120 for federal purposes.
Pass-through entities must prepare Schedules A through H and provide owners with category-level data for reporting on a federal return. State adjustments may apply using FTB Pub guidance, FTB 3805Q, FTB 3544, or FTB 3807, primarily when real property transactions or financial transactions affect California or nonconformity rules.
Step-by-Step (High Level)
Step 1: Gather required information.
Collect Form 965 and Schedules A through H, including Schedule A, Schedule B, Schedule D, Schedule F, and Schedule G. Make sure you also have any Transition Tax Statement, Form 965-A or Form 965-B, and statements from pass-through entities.
Step 2: Identify each foreign tax credit category.
Review your records to determine which foreign tax credit categories apply to your Section 965 income. Confirm general, passive, and any specialized categories that will be reported on Form 1116 or Form 1118.
Step 3: Complete Section 1 for each category.
Enter Section 965(a) inclusion amounts and Section 965(c) deduction amounts for each category in Section 1. Include foreign taxes and any amounts from pass-through entities such as partnerships or S corporations.
Step 4: Calculate the applicable percentage in Section 2.
Use the Section 965 instructions to compute the ratio of the deduction to the deferred foreign income. Convert this ratio into the applicable percentage that will be used to determine disallowed foreign taxes.
Step 5: Apply the applicable percentage to foreign taxes.
Multiply foreign taxes in each category by the applicable percentage to find the disallowed portion. Record these results in the appropriate lines of Schedule H.
Step 6: Transfer results to other IRS forms.
Move the final amounts from Schedule H to Form 1116 or Form 1118 and then to Form 1040, Form 1120, Form 1120-F, or other required federal return forms. Confirm that all totals agree with Schedules A through H and any pass-through entity schedules.
Step 7: Review, sign, and keep your records.
Check Schedule H and related schedules for math errors, missing attachments, or incomplete information. Sign and file your federal return, then keep all supporting documents for your records in case the Internal Revenue Service requests them later.
For more information about IRS assistance, including help with your tax questions and payment options, see this comprehensive guide.
Common Mistakes and How to Avoid Them
- Completing only one Section 1 when multiple foreign tax credit categories apply: Review Schedules F and G to identify all applicable categories and avoid incomplete reporting.
- Mixing direct ownership information with pass-through amounts: Report each source separately to ensure accurate calculations and proper attribution.
- Using incorrect foreign currency exchange rates: Apply the divide-by method required on Schedule H—foreign currency units per one U.S. dollar—to prevent errors across all schedules.
- Failing to attach required supporting documents: Include pass-through statements, foreign corporation worksheets, and other attachments to avoid IRS delays or follow-up inquiries.
- Overlooking updates to Form 965-A or Form 965-B when amending: Recalculate installment amounts and adjust related schedules to ensure the amended return reflects accurate tax liability.
Learn more about how to avoid business tax problems in our guide on How to File and Avoid Penalties.
What Happens After You File
Once Schedule H is filed, the Internal Revenue Service uses the information to determine allowable foreign tax credits and apply any disallowed amounts. The Section 965(a) inclusion increases taxable income, while the Section 965(c) deduction reduces the inclusion under the Participation Exemption System. Correct amounts are reported on Form 1116 or Form 1118 and affect the final tax assessment.
After filing, taxpayers may need to provide supporting documentation during the review or audit process, particularly for controlled foreign corporations, pass-through entities, or significant foreign tax payments. Digital tools, such as Google Workspace, a PDF editor, an eSignature API, Lumin Sign, or other platforms used for legally compliant signatures, can support a complete digital signature workflow if the filing is electronic.
FAQs
Do taxpayers need Schedule H if no foreign taxes were paid?
Yes, Schedule H must be filed whenever Section 965(a) inclusion is reported, even if no foreign taxes were paid.
Do pass-through entity owners complete their own Schedule H?
Pass-through entities complete Schedules A through H, and then owners transfer this information to their own federal return.
How should amended returns be handled?
A taxpayer must attach a complete and corrected Form 965 package, including Schedule H, to Form 1040-X or Form 1120-X with explanations for any changes.
Does Schedule H apply only to controlled foreign corporations?
No, it applies to all specified foreign corporations and deferred foreign income corporations that report Section 965 inclusion amounts.
How long should supporting records be kept?
Taxpayers should maintain all foreign tax and Section 965 documentation for at least six years.
