Form Schedule H (Form 965): Amounts Reported on Forms 1116 and 1118 and Disallowed Foreign Taxes
What the Form Is For
Schedule H (Form 965) is a specialized tax form that works hand-in-hand with the main Form 965 to help taxpayers report certain foreign income amounts and calculate reduced foreign tax credits related to the transition tax. Think of it as a bridge document that connects the transition tax reporting on Form 965 to the foreign tax credit forms (Form 1116 for individuals or Form 1118 for corporations).
The form serves a specific purpose under Section 965 of the Internal Revenue Code, which was created by the 2017 Tax Cuts and Jobs Act. This law required U.S. shareholders of certain foreign corporations to pay a one-time ""transition tax"" on previously untaxed foreign earnings, as if those earnings had been brought back to the United States. Schedule H helps taxpayers report the amounts that need to go on their foreign tax credit forms and calculates which portions of foreign taxes cannot be claimed as credits.
For the 2020 tax year specifically, Schedule H is used only by taxpayers who receive their Section 965 income through pass-through entities—such as partnerships, S corporations, or trusts—that themselves own shares in foreign corporations. If you directly owned the foreign corporation in 2017, you would have already filed different schedules in previous years. The 2020 version addresses the continuing tax consequences for indirect owners.
When You'd Use This Form (Including Late and Amended Returns)
The original transition tax primarily applied to tax years that included the last day of a foreign corporation's tax year beginning before January 1, 2018—typically the 2017 or 2018 tax year for most calendar-year taxpayers. However, the 2020 version of Schedule H comes into play for taxpayers who received Section 965 amounts through pass-through entities during their 2020 tax year.
You would file Schedule H (Form 965) attached to your income tax return if you are an individual, corporation, estate, or trust that received a pass-through share of Section 965 income in 2020. The pass-through entity should provide you with the information you need, typically through a Schedule K-1 or similar statement showing your share of the Section 965(a) inclusion amount, the Section 965(c) deduction, deemed-paid foreign taxes, and the applicable percentage for disallowed taxes.
For late or amended returns, if you discover you should have reported Section 965 amounts on your 2020 return but didn't, you should file an amended return using Form 1040-X for individuals or the appropriate amended corporate return. Write ""corrected"" at the top of Form 965 and Schedule H, and attach a detailed statement explaining what changed. The IRS takes Section 965 compliance seriously, and failure to report properly can result in interest charges and penalties. The deadline for making certain elections related to Section 965 has generally passed, but you must still report the income amounts correctly even on late returns.
IRS Section 965 Transition Tax Information
Key Rules You Need to Know
Several important rules govern how Schedule H works. First, you must complete a separate Schedule H for each ""separate category"" of foreign income. The tax law divides foreign income into different baskets—such as passive income, general category income, and others—and you must track each separately for foreign tax credit purposes. The codes for these categories appear in the Form 1116 or Form 1118 instructions, and you enter the appropriate code on line ""a"" at the top of Schedule H.
Second, Schedule H calculates ""disallowed foreign taxes"" under Section 965(g). This is perhaps the most consequential rule: Congress decided that when you claim the special Section 965(c) deduction (which reduces your transition tax rate to either 15.5% or 8%), you cannot claim the full foreign tax credit on those same foreign taxes. The law requires a partial disallowance to prevent what would essentially be double tax relief. The percentage of disallowance depends on how much of your foreign corporation's income came from cash positions versus other assets—this is called the ""applicable percentage.""
Third, the amounts you report on Schedule H must flow to specific lines on Form 1116 (for individuals) or Form 1118 (for corporations). Line 3 of Schedule H shows your Section 965(a) inclusion amount, which goes to Part I of Form 1116 or Schedule A of Form 1118. Line 6 shows your Section 965(c) deduction, which reduces your foreign-source income. Line 9 shows foreign taxes deemed paid through the pass-through entities. Line 14 shows the critical disallowed foreign tax amount that you must report on Form 1118, Schedule G, Part I, line F, reducing your allowable foreign tax credit.
Fourth, if you received Section 965 amounts from multiple pass-through entities, you may need to attach additional schedules showing the breakdown by entity, particularly for line 11, which reports the applicable percentage. Each pass-through entity should have calculated its own applicable percentage on its 2018 Form 965 and should provide this to you.
How to Complete Schedule H: Step-by-Step (High Level)
The process begins with gathering information from your pass-through entities. You should receive Form Schedule K-1 or similar statements showing your share of Section 965 amounts. Make sure you have the following key figures: your share of the Section 965(a) inclusion amount, your share of the Section 965(c) deduction, any deemed-paid foreign taxes allocated to you, and the applicable percentage for foreign tax disallowance.
Next, determine which separate categories of income apply to you. If your foreign income falls into multiple categories (for example, both general category and passive category), you must prepare a separate Schedule H for each category. Look at the Form 1116 or Form 1118 instructions to identify the correct category codes.
Fill out the header information at the top of Schedule H. Enter your name and identifying number (Social Security number or Employer Identification Number). On line ""a,"" enter the appropriate separate category code. If you enter code ""901j"" (for sanctioned countries), also complete line ""b"" with the country code.
Complete Section 1 of Schedule H by entering the amounts in the appropriate lines. Line 3 receives your total Section 965(a) inclusion amount in U.S. dollars for that separate category—this comes from column (e)(1), line 16 of Schedule F. Line 6 receives your Section 965(c) deduction amount. Line 9 receives the deemed-paid foreign taxes from column (l), line 16 of Schedule F, if applicable. Line 11 receives the applicable percentage from your pass-through entities; if you have multiple entities, you may need to attach a separate schedule instead of entering a single number.
Finally, calculate line 14, the disallowed foreign taxes. This requires multiplying the deemed-paid taxes on line 9 by the applicable percentage on line 11. You must attach a detailed calculation schedule showing the computation by pass-through entity and relevant foreign corporation. This disallowed amount reduces your foreign tax credit when you complete Form 1116 or Form 1118.
Transfer the amounts from Schedule H to the appropriate locations on your other tax forms. Attach Schedule H to Form 965, and attach both to your income tax return. The Schedule H amounts integrate into your foreign tax credit calculations on Form 1116 or Form 1118, ultimately affecting your total U.S. tax liability.
Common Mistakes and How to Avoid Them
One frequent error is filing only one Schedule H when multiple separate categories apply. Remember that foreign income categories must be kept separate for foreign tax credit purposes. If you have both general category and passive category Section 965 income, prepare two complete Schedule H forms with the correct category codes. Mixing categories will result in incorrect foreign tax credit calculations.
Another common mistake involves incorrectly calculating or omitting the disallowed foreign tax amount on line 14. Some taxpayers forget that they cannot claim the full foreign tax credit on Section 965 income when they also benefit from the Section 965(c) deduction. Always multiply the deemed-paid taxes by the applicable percentage to determine the disallowance, and attach the supporting calculation schedule. Failing to disallow the required portion overstates your foreign tax credit and can trigger IRS adjustments.
Taxpayers sometimes use outdated versions of Schedule H. The form changed significantly for 2020 tax years, with most lines reserved for earlier years. Make sure you're using the December 2020 revision of Schedule H specifically designed for pass-through situations, not earlier versions meant for direct ownership. Using the wrong version can lead to reporting amounts on lines that no longer apply.
A fourth mistake involves confusion about which schedules to file. Not everyone needs to complete both Schedule F and Schedule H. Schedule F is required only for taxpayers eligible to claim deemed-paid foreign tax credits—generally corporations and certain individuals who make a Section 962 election to be taxed at corporate rates. If you're an individual who hasn't made this election and aren't a pass-through entity with eligible owners, you may not need Schedule F but still need Schedule H to report your inclusion and deduction amounts. Check the ""Who Must File"" section of the instructions carefully.
Many taxpayers fail to keep adequate supporting documentation. The IRS may request detailed records showing how Section 965 amounts were calculated, including foreign corporation financial statements, earnings and profits computations, and cash position calculations. Maintain all statements received from pass-through entities, and keep detailed worksheets showing how you allocated amounts among separate categories. These records typically must be retained for at least three years from the return due date, but potentially longer if issues arise.
Finally, some taxpayers miss the connection between Schedule H and the ongoing consequences of Section 965. Even though the primary transition tax was paid in 2017 or 2018, the applicable percentage you report on line 11 continues to matter. This percentage also applies to foreign taxes on future distributions of Section 965 previously taxed earnings and profits. Losing track of this percentage means you won't correctly calculate disallowances on withholding taxes when your foreign corporations eventually distribute the earnings.
What Happens After You File
Once you file Schedule H with your return, the IRS processes your foreign tax credit claims along with your overall return. The Schedule H amounts integrate into your Form 1116 or Form 1118 calculations, which in turn affect your final tax liability. If you claimed foreign tax credits correctly, including the proper disallowances, your return should process smoothly without raising red flags.
The IRS has indicated that it's monitoring Section 965 compliance closely. If the IRS believes you should have filed Form 965 and Schedule H but didn't, or if your reported amounts appear inconsistent with information from pass-through entities, you may receive a notice or face an examination. Common triggers include missing the required attachments (like the disallowed tax calculation schedule for line 14), mathematical errors in foreign tax credit computations, or mismatches between K-1 amounts and what appears on your return.
If the IRS audits your Section 965 reporting, examiners typically request the underlying documentation showing your ownership interests in foreign corporations, the financial statements of those corporations, Schedule K-1 forms from pass-through entities, and worksheets supporting your Schedule H calculations. They may also verify that you correctly separated income into different foreign tax credit categories and properly calculated the applicable percentage disallowance. Having thorough contemporaneous records significantly helps if questions arise.
The transition tax can be paid in installments over eight years under Section 965(h) if an election was made. If you elected installment payments and subsequently trigger an acceleration event (such as certain corporate transactions or failing to file required information), the remaining unpaid tax becomes immediately due. Schedule H reporting doesn't directly involve the installment payment tracking, but errors in Schedule H that lead to tax adjustments could affect installment obligations.
Keep in mind that Section 965 previously taxed earnings and profits create ongoing reporting obligations. When your foreign corporations eventually distribute these earnings, you'll need to track them using Form 5471 and report them on future tax returns. The distributions themselves won't be taxed again (they're previously taxed income under Section 959), but withholding taxes on distributions remain subject to the applicable percentage disallowance you calculated on Schedule H. This means the information on your 2020 Schedule H has lasting effects beyond just the 2020 tax year.
FAQs
If I'm an individual owner of a partnership that owns foreign corporations, do I need to file Schedule H even if I didn't receive Form 965 directly?
Yes, if the partnership is a U.S. shareholder of a deferred foreign income corporation and passes through Section 965 amounts to you during your 2020 tax year, you must report them on Form 965 with Schedule H. The partnership should provide you with the necessary information through a Schedule K-1 or supplemental statement. Even if you didn't directly own the foreign corporation, the income flows through to you and must be reported on your individual return.
What's the difference between Schedule F and Schedule H, and do I need both?
Schedule F calculates deemed-paid foreign taxes under the rules that applied before the foreign tax credit limitation, while Schedule H reports the final amounts after applying foreign tax credit limitations and disallowance rules. You need Schedule F only if you're eligible to claim deemed-paid credits—typically corporations and individuals making a Section 962 election. All filers with Section 965 pass-through amounts generally need Schedule H to report the inclusion amount, deduction, and any disallowed taxes. If you're an individual without a Section 962 election, you'll likely file Schedule H without Schedule F, though you still complete certain Schedule H lines.
How do I find the ""applicable percentage"" that goes on line 11 of Schedule H?
The applicable percentage should be provided to you by the pass-through entity from which you received Section 965 income. The pass-through entity calculated this percentage on its 2018 Form 965, Schedule H, Section 2, based on the ratio of cash positions to total Section 965 inclusions. This percentage determines how much of your foreign taxes are disallowed due to the preferential tax rates from the Section 965(c) deduction. If you have interests in multiple pass-through entities with different applicable percentages, you should attach a schedule showing each entity's percentage rather than entering a single number on line 11.
Can I claim a foreign tax credit for withholding taxes when my foreign corporation distributes Section 965 previously taxed earnings to me in future years?
Yes, but only partially. When future distributions occur, they'll be distributions of previously taxed earnings and profits that aren't taxed again as income. However, any foreign withholding taxes on those distributions are still potentially creditable. The catch is that these taxes remain subject to the same applicable percentage disallowance that applied to the original Section 965 inclusion. So if your applicable percentage was 64%, you could claim only 36% of the withholding taxes as a credit. This is why preserving your Schedule H records and the applicable percentage is critical for years beyond 2020.
I made an error on my 2020 Schedule H that affected my foreign tax credit. Can I file an amended return, and how far back can I go?
Yes, you should file an amended return using Form 1040-X for individuals or the appropriate amended corporate return. Write ""corrected"" at the top of the revised Form 965 and Schedule H, and attach an explanation of the changes. Generally, you have three years from the original filing deadline or two years from when you paid the tax, whichever is later, to file an amended return and claim a refund. However, if the error resulted in underpayment rather than overpayment, the IRS can assess additional tax for three years (or longer if there's substantial understatement), so don't delay in making corrections.
My pass-through entity provided me with Section 965 information but I'm not sure which lines to complete on Schedule H since many are marked ""reserved.""
For 2020 tax years, most Schedule H lines are indeed reserved because they applied to earlier years when taxpayers had direct ownership Section 965 inclusions. You should primarily focus on the lines specifically mentioned in the 2020 instructions: lines 3 (Section 965(a) inclusion amount), 6 (Section 965(c) deduction), 9 (deemed-paid taxes, if applicable), 11 (applicable percentage), and 14 (disallowed foreign taxes). Leave the reserved lines blank. The reduced complexity for 2020 reflects that the form is now used only for pass-through situations rather than direct inclusions.
Do tax-exempt organizations need to file Schedule H if they received Section 965 amounts through a partnership?
Most tax-exempt organizations under Section 501(a) are required to file Form 965 and Schedule H only if the Section 965 amounts are subject to unrelated business income tax under Section 511 or private foundation investment income tax under Section 4940. If the Section 965 income isn't taxable to the exempt organization, generally no filing is required. However, the analysis can be complex, particularly for private foundations, so organizations should consult the specific exemption rules in the Form 965 instructions or seek professional advice to determine their filing obligations.
Sources: All information is drawn from official IRS publications including Form Schedule H (Form 965) (Rev. December 2020), Instructions for Form 965 (Rev. January 2021), and IRS.gov resources on Section 965 transition tax.
