Form Schedule H (Form 965): Amounts Reported on Forms 1116 and 1118 and Disallowed Foreign Taxes (2019)

What the Form Is For

Form Schedule H (Form 965) is a specialized reporting schedule that U.S. taxpayers use to calculate and report foreign tax credit limitations arising from the Section 965 transition tax. When the Tax Cuts and Jobs Act passed in December 2017, it created a one-time mandatory tax on previously untaxed foreign earnings held by certain foreign corporations. Schedule H specifically addresses a complex side effect: because taxpayers can claim a deduction under Section 965(c) to reduce their taxable income inclusion, the IRS disallows a proportional amount of foreign tax credits to prevent "double dipping."

The form has two main sections. Section 1 helps taxpayers report the amounts that will appear on their foreign tax credit forms (Form 1116 for individuals or Form 1118 for corporations), including section 965(a) inclusion amounts, corresponding section 965(c) deductions, and the calculation of disallowed foreign taxes for investments held through pass-through entities like partnerships or S corporations. Section 2 calculates the "applicable percentage"—essentially the proportion of foreign taxes that cannot be claimed as a credit because they relate to income that benefited from the participation deduction.

In plain terms, if you're a U.S. shareholder of a foreign corporation who must include deferred foreign income under Section 965, Schedule H ensures you correctly reduce your foreign tax credit to account for the fact that you're already getting a tax break through the deduction. This prevents taxpayers from receiving both a deduction and a full foreign tax credit on the same income.

When You'd Use This Schedule (Late/Amended Filings)

Schedule H must be attached to Form 965, which in turn attaches to your income tax return for any year in which you have Section 965 inclusion amounts. For most taxpayers, this means tax years 2017 and 2018—specifically, the year that includes the last day of your specified foreign corporation's last tax year beginning before January 1, 2018.

You file Schedule H by the due date of your income tax return, including extensions. If you're filing electronically, Schedule H is included within the electronic submission. The form follows your normal tax return deadlines—April 15 for calendar-year individual filers (or the 15th day of the fourth month after year-end for corporations), with standard extension periods applying.

If you discover after filing that your original Schedule H was incomplete, incorrect, or entirely omitted, you must file a corrected version with an amended tax return. Write "corrected" clearly at the top of the new Form 965 and Schedule H, and attach a detailed statement identifying what changed and why. For individuals, this typically means filing Form 1040-X; corporations use Form 1120-X or the appropriate amended return for their entity type. The same filing location and procedures that applied to your original return apply to the amended version.

Late filers should be aware that failure to properly report Section 965 amounts and comply with payment obligations can result in interest charges and tax penalties. If you're filing late but before the IRS contacts you, you may reduce penalties by acting promptly and including a reasonable cause statement with your late filing.

Key Rules or Details for 2019

Separate Category Requirements

Several critical rules govern Schedule H completion. First, understand the separate category requirement: you must complete a separate Section 1 for each applicable separate category of income as defined by the foreign tax credit rules. These categories include general category income, passive category income, and several specialized categories. However, Section 2 is completed only once per taxpayer because the applicable percentage remains constant across all income categories for that filer.

Foreign Tax Credit Disallowance Mechanism

The foreign tax credit disallowance mechanism works through Section 965(g), which states that no foreign tax credit is allowed for the "applicable percentage" of taxes paid or accrued with respect to amounts for which you claimed the Section 965(c) deduction. The applicable percentage is calculated as one minus the ratio of your participation deduction to your Section 965(a) inclusion.

Pass-Through Entity Rules

Pass-through entity rules add another layer. If you receive Section 965 amounts through partnerships, S corporations, or other pass-through entities, those entities perform their own Schedule H calculations and provide you with the necessary information, including their calculated applicable percentages.

Recordkeeping Requirements

Recordkeeping requirements are strict. You must maintain adequate records supporting all Schedule H calculations, including documentation of:

• section 965(a) inclusion amounts
• aggregate foreign cash position
• section 965(c) deductions
• foreign taxes deemed paid
• applicable percentages

Exchange rates must be reported using a "divide-by convention" rounded to at least four decimal places.

Step-by-Step (High Level)

Step 1: Determine Whether You Must File

Begin by determining whether you need to complete Schedule H at all. If you had no Section 965 inclusion amounts, you don't need this schedule.

Step 2: Gather All Required Information

Gather information from other Form 965 schedules:

• Schedule A: section 965(a) inclusion amounts
• Schedule F (2018) and Schedule G (2017): foreign taxes deemed paid
• Form 965 Part II: section 965(c) deduction calculation

Step 3: Complete Section 1 for Each Income Category

For Section 1:

• Complete separate schedules for each foreign tax credit category
• Enter section 965(a) inclusion amounts (direct and pass-through)
• Enter section 965(c) deductions
• Calculate foreign taxes deemed paid
• Apply the applicable percentage for disallowed taxes

Step 4: Complete Section 2 Once

This calculates the applicable percentage, which flows back into each Section 1.

Step 5: Flow Amounts to Other Forms

Completed amounts flow to:

• Schedule 1 (Form 1040), line 21
• Form 1120, Schedule C
• Form 1118, Schedule B
• Forms 1116 or 1118 for foreign tax credit limitation

Common Mistakes and How to Avoid Them

Mistake 1: Not Completing Separate Sections for Each Category

Always complete a separate Section 1 for each applicable foreign tax credit category.

Mistake 2: Incorrect Pass-Through Reporting

You must enter pass-through amounts in the correct lines and attach detailed supporting schedules.

Mistake 3: Exchange Rate Errors

Use:

• foreign currency units per one U.S. dollar
• at least four decimal places
• spot rate as of December 31, 2017

Mistake 4: Reporting Amounts in the Wrong Tax Year

The year of reporting depends on the foreign corporation’s tax year, not when you file.

Mistake 5: Missing Required Attachments

Attachments must include:

• entity-level breakdowns
• foreign corporation details
• calculations of deemed paid taxes and applicable percentages

What Happens After You File

Impact on Your Tax Return

Once you file Schedule H, the reported amounts flow into your foreign tax credit calculation. Section 965(a) inclusion increases taxable income; Section 965(c) deduction reduces it.

Installment Payments Under Section 965(h)

If you elected installment payments:

• Schedule H still applies in full
• Only payment timing changes

IRS Compliance and Audits

The IRS closely monitors Section 965 compliance. They may review:

• earnings and profits
• cash position calculations
• deficit allocations
• foreign tax documentation

Correcting Errors

If you discover errors, file an amended return. Doing so voluntarily generally leads to better outcomes.

FAQs

Do I need to file Schedule H if I had a Section 965 inclusion but my foreign corporation paid no foreign taxes?

Yes. You must complete Schedule H to report inclusion and deduction amounts even if no foreign taxes were paid.

I own foreign corporations through multiple partnerships. Do I complete one Schedule H or multiple schedules?

One Schedule H, but separate Section 1 schedules for each category of income.

My foreign corporation’s tax year ended in November 2017. Does my Section 965 inclusion go on my 2017 or 2018 return?

It goes on the return for the year in which the corporation’s tax year ended—2017 for calendar-year taxpayers.

What happens if I already filed without Form 965 and Schedule H?

You must file an amended return and include Form 965 and Schedule H marked "corrected."

Can I complete Schedule H if I'm not eligible for the foreign tax credit?

Schedule H mainly applies to those eligible for deemed paid credits, but some pass-through entities must complete it regardless.

What does "applicable percentage" mean?

It is the percentage of foreign taxes you cannot claim as a credit due to the Section 965(c) participation deduction.

How many years do I need to keep records supporting my Schedule H calculations?

Keep all records for at least six years, and longer if paying installments.

‍