What Schedule H (Form 965) Is For
Schedule H (Form 965) is used to report deferred foreign income passed through from partnerships, S corporations, and other pass-through entities. It helps the Internal Revenue Service determine how much foreign tax and foreign income tax is allowable for federal purposes when completing tax returns, such as Form 1040, Form 1040-NR, Form 1120, or Form 1120-F.
The schedule connects information from Form 965 and Schedule F (Form 965) to foreign tax credit forms, including entries related to foreign-source income, foreign-source gross income, and taxable income. It also supports reporting obligations for controlled foreign corporations, specified foreign corporations, or deferred foreign income corporations.
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 (2020).
When Schedule H Must Be Filed
A taxpayer must file Form 965 Schedule H when receiving deferred foreign income through Schedule K, Schedule K-1, Schedule B, or other statements provided by pass-through entities. These details are reported on multiple tax forms, including Form 5471, Form 1065, Form 2555, and Form 1042-S, depending on the type of international income.
Individuals, estates, trusts, and any business entity may need this federal form when foreign-source income affects net tax liability or tax payments. International taxpayers must also follow updates in the Federal Register, Federal Business Update notices, and Federal Software Updates when reporting Section 951A or Section 962 amounts.
Key Rules for 2020
For 2020, Schedule H requires separate reporting for each category of foreign-source income, including Section 901(j) income and other classifications tied to Form 1116 or Form 1118. A taxpayer must calculate disallowed foreign taxes using information from pass-through entities and attach any required supporting schedules.
Additional rules include reporting eligible expenses, carrying over deduction entries, and international income required for federal purposes. The taxpayer may also need to coordinate figures with tax forms such as Form 4136, Form 6765, Form 7204, Form 8889, Form 2210-F, Form 2220, and Form 1045.
Step-by-Step (High Level)
Step 1: Gather Required Records.
Collect Schedule K, Schedule K-1, and other statements from pass-through entities that report deferred foreign income and foreign taxes. Verify inclusion amounts related to Section 951A and foreign-source income.
Step 2: Identify the Correct Income Category.
Determine the appropriate foreign-source income category using codes from Form 1116 or Form 1118. Include a country code if reporting Section 901(j) income or other restricted categories.
Step 3: Enter Key Section 965 Amounts.
Report the Section 965(a) inclusion amount and the Section 965(c) deduction based on information provided by the pass-through entity. Ensure all entries reflect correct taxable income adjustments for federal purposes.
Step 4: Provide Foreign Tax Details.
Enter foreign taxes deemed paid and confirm figures from any controlled foreign corporation or specified foreign corporation. Use the applicable percentage to calculate disallowed foreign taxes and attach supporting statements if needed.
Step 5: Transfer Amounts to Related Tax Forms.
Move the results to Form 1116, Form 1118, and other required tax forms such as Form 1040, Form 1120, or Form 1040-NR. Check for consistency with Schedule F (Form 965), Form 5471, Form 1065, and related schedules.
Step 6: Final Review and Electronic Filing.
Review all entries for accuracy and alignment with Internal Revenue Service instructions. Use a PDF editor, Lumin Sign, an eSignature API, or a Google Workspace digital signature workflow to apply legally-compliant signatures before submitting.
Common Mistakes and How to Avoid Them
- Filing a single Schedule H instead of separate schedules: Prepare a distinct Schedule H for each income category to ensure accurate reporting and prevent processing delays.
- Using an incorrect applicable percentage from a pass-through entity: Verify the percentage provided by the entity and confirm it matches supporting statements before filing.
- Misreporting foreign taxes subject to disallowance: Review disallowance rules carefully and report only the allowable portion of foreign taxes to avoid IRS adjustments.
- Failing to attach required supplementary schedules: Include all supporting schedules and statements so the IRS can verify foreign tax credit calculations without follow-up requests.
- Submitting electronic forms without legally compliant signatures: Use approved e-signature tools—such as Lumin Sign, Google Workspace integrations, workflow tools, or an eSignature API—to ensure federally compliant digital signatures.
Learn more about how to avoid business tax problems in our guide on How to File and Avoid Penalties.
What Happens After Filing
The Internal Revenue Service reviews Schedule H to confirm proper reporting of foreign taxes, foreign income taxes, and amounts tied to deferred foreign income. The agency may compare the entries with Form 965, Schedule F (Form 965), and data reported by foreign corporations or pass-through entities.
A taxpayer must retain worksheets, schedules, and copies of federal forms prepared using tools such as a PDF editor, Lumin Sign, an eSignature API, or a digital signature workflow. These records help verify calculations in case questions arise about net tax liability, legally compliant signatures, or workflow tool submissions through Google Workspace.
FAQs
Who must file Schedule H for 2020?
Schedule H is required for any taxpayer who received Section 965 income through pass-through entities during the 2020 tax year.
How does Schedule H affect foreign tax credits?
Schedule H determines the portion of foreign taxes disallowed due to the Section 965(c) deduction. The remaining foreign taxes may be used on Form 1116 or Form 1118.
What forms are commonly filed with Schedule H?
Forms often filed with Schedule H include Form 5471, Form 1116, Form 1118, Schedule F (Form 965), and Form 2555, depending on the type of foreign-source income reported.
Can a taxpayer amend Schedule H?
A taxpayer can amend Schedule H by filing an amended return and updating Form 965 and related schedules. Supporting statements must explain the changes.
Does the applicable percentage remain relevant after 2020?
Yes, the applicable percentage continues to apply when foreign corporations distribute previously taxed deferred foreign income in future years.
