Special Rules

Look-Through Rules Certain income received or accrued by you as a 10%-or-more U.S. shareholder in a CFC is treated as income in one of the separate categories listed under Categories of Income, earlier. For example, subpart F inclusions, dividends, interest, rents, and royalties from a CFC are only treated as passive category income to the extent they are attributable to passive category income of the CFC. See Regulations section 1.904-5 for more information.

Reporting Foreign Tax Information From Partnerships and S Corporations If you received a Schedule K-3 from a partnership or S corporation that includes foreign tax information, use the rules below to report that information on Form 1116.

Note: The partnership or S corporation may be excepted from providing Schedule K-3 to you if the partnership or S corporation has limited foreign activity. You still have the right to request Schedule K-3 and it may provide information that can increase your foreign tax credit. See the partnership and S corporation instructions for Form 1065 and Form 1120-S, Schedules K-2 and K-3, and the partner and shareholder instructions for Forms 1065 and 1120-S, Schedule K-3, available at IRS.gov/Form1065 and IRS.gov/Form1120S, respectively, for further information.

General Information for Partners and S Corporation Shareholders

Less-than-10% limited partners. If you are a limited partner and you own a less-than-10% interest (by value) in the partnership, you must generally categorize your distributive share of foreign source income and deductions from that partnership as passive income. See the Partner’s Instructions for Schedule K-3 (Form 1065) and Regulations section 1.904-4(n) for more details and exceptions.

Reporting amounts on Form 1116. Include amounts reported to you on Schedule K-3 with any other amounts reportable on Form 1116 using:

• A separate Form 1116 for each category of income, and

• A separate column in Part I and a separate line in Part II for each country or territory.

Note: For any item that isn’t reported by country on Schedule K-3, you may use any reasonable method to allocate it between countries or territories on Form 1116.

Explanation of Certain Line Items on Schedule K-3 for Forms 1065, 1120-S, and 8865

Forms 1065, 1120-S, and 8865, Schedule K-3, Part II, Section 1, columns (b) through (e)—Foreign gross in- come sourced at partnership or S corporation level. Income reported in these columns has already been sourced for you by the partnership or S corporation. The partnership or S corporation has reported this income to you by country and by category of income. Include these amounts in Part I of each of the applicable Forms 1116 (that is, a separate Form 1116 for each category of income you received). See the partner and shareholder instructions for Forms 1065 and 1120-S, Schedule K-3, for further information.

Forms 1065, 1120-S, and 8865, Schedule K-3, Part II, Section 1, column (f)—Gross income sourced by part- ner or shareholder. This column includes income from the sale of eligible personal property (most personal property other than inventory, depreciable property, and certain intangible property). See Pub. 514 for details. You must first determine (using the rules described next) whether the income in this column is U.S. source income or foreign source income. Then, only enter the foreign source income in Part I of each of the applicable Forms 1116 (that is, a separate Form 1116 for each category of income you received).

Use the following rules to source the income reported to you in this column of Schedule K-3. If you are a U.S. resident (as defined next), the income is U.S. source income. If you are a nonresident (as defined later), the income is foreign source income. See the partner and shareholder instructions

Instructions for Form 1116 (2025) 7

for Forms 1065 and 1120-S, Schedule K-3, for further information.

U.S. resident. A U.S. resident is a U.S. citizen or resident alien who doesn’t have a tax home in a foreign country or a nonresident alien who has a tax home in the United States.

Tax home. Generally, your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. Your tax home is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual. If you don’t have a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live. If you don’t fit either of these categories, you are considered an itinerant and your tax home is wherever you work.

Nonresident. A nonresident is any person who isn’t a U.S. resident. U.S. citizens and resident aliens with a foreign tax home won’t be treated as nonresidents for a sale of eligible personal property unless a foreign tax of 10% or more was paid or accrued on the gain on the sale (or, in the case of a loss sale, a foreign tax of 10% or more would have been paid had the sale resulted in a gain).

Note: To help you with these rules, the partnership or S corporation has specifically identified the following on an attachment to Form 1065, 1120-S, or 8865. See box 1 of Schedule K-3, Part I.

• Gains on the sale of eligible personal property for which a foreign tax of 10% or more was paid or accrued.

• Losses on the sale of eligible personal property for which a foreign tax of 10% or more would have been paid had the sale resulted in a gain.

Include foreign source income in Part I of the applicable Form 1116 (that is, the Form 1116 for the applicable category of income). Don’t include in Part I of Form 1116 income that you determined (using these rules) to be U.S. source income.

Caution: If the partnership or S corporation has specifically identified any capital gains or losses or unrecaptured section 1250 gain on Schedule K-3, Part II, Section 1, line 8, or lines 11 through 15, and you have determined that those gains or losses are foreign source, see Foreign Qualified Dividends and Capital Gains (Losses), later, before entering an amount in Part I of Form 1116. See the partner and shareholder instructions for Forms 1065 and 1120-S, Schedule K-3, for further information.

Forms 1065, 1120-S, and 8865, Schedule K-3, Part II, Section 1, line 24, column (g)—Total gross income. Combine your distributive share of “Total gross income” from Schedule K-3 with all of your other gross income and enter the total on line 3e. Note that you must include the total for all countries in each column of line 3e. “Gross income from all sources” is a constant amount (that is, you will enter the same amount on line 3e for each column of all Forms 1116 that you file).

Forms 1065, 1120-S, and 8865, Schedule K-3, Part II, Section 2, lines 25 through 38, and 44 through 50, col- umns (b) through (e)—Deductions allocated and appor- tioned at partnership or S corporation level to foreign source income. The partnership or S corporation has already allocated these expenses to foreign source income and has reported them to you by category of income. Include these amounts on line 2 of each of the applicable Forms 1116 (that is, a separate Form 1116 for each category of income you received). See the partner and shareholder

instructions for Forms 1065 and 1120-S, Schedule K-3, for further information.

Forms 1065, 1120-S, and 8865, Schedule K-3, Part II, Section 2, lines 25 through 38, and 44 through 50, col- umn (f)—Other expenses. These lines in column (f) include expenses (other than interest expense) of the partnership or S corporation that must be allocated and apportioned at the partner or shareholder level (for example, research and experimental (R&E) expenses on line 32).

Combine your distributive share of these expenses with all of your other like expenses, if any, and then allocate and apportion them using the applicable rules (for example, for R&E expenses, the rules under Regulations section 1.861-17(f)). Forms 1065, 1120-S, and 8865, Schedule K-3, Part III, Section 1, reports information you will need to allocate and apportion R&E expenses. Forms 1065 and 8865, Schedule K-3, Part III, Section 3, reports information you will need to allocate and apportion the foreign-derived intangible income deduction to foreign source income in separate categories. Include expenses that you allocate to foreign source income on line 2 of the applicable Form 1116. Expenses that you allocate to U.S. source income shouldn’t be entered on any line of Part I of Form 1116. See the partner and shareholder instructions for Forms 1065 and 1120-S, Schedule K-3, for further information.

Forms 1065, 1120-S, and 8865, Schedule K-3, Part II, Section 2, lines 39 through 43—Interest expense. See the instructions for line 4b, later, to allocate and apportion the interest expense shown on these lines of Schedule K-3. In applying those instructions, take into account your distributive share of the partnership’s or S corporation’s gross income (for purposes of the $5,000 threshold) or your pro rata share of the partnership’s or S corporation’s assets. See Forms 1065, 1120-S, and 8865, Schedule K-3, Part III, Section 2, for the share of the partnership’s or S corporation’s assets. However, if you were a limited partner and your interest in the partnership was less than 10%, see the next paragraph. Include interest expense that you allocate to foreign source income on line 4b of the applicable Form 1116. Don’t enter in Part I of Form 1116 any interest expense that you allocate to U.S. source income.

Less-than-10% limited partners. If you are a limited partner and you own (directly or indirectly) a less-than-10% interest (by income) in the partnership, you may generally allocate your distributive share of interest expense from that partnership to foreign or U.S. source income based on your distributive share of the gross foreign or U.S. source income of that partnership. The interest expense you allocate to foreign source income may generally be apportioned exclusively to passive category income. However, see Temporary Regulations section 1.861-9T(e)(4) for exceptions. See the Partner’s Instructions for Schedule K-3 (Form 1065) for further information.

Forms 1065 and 8865, Schedule K-3, Part III, Section 4, line 1; and Form 1120-S, Schedule K-3, Part III, Section 3, line 1—Foreign taxes. The partnership or S corporation has already allocated and apportioned total foreign taxes for you and has reported them to you by country and by category of income. Include these amounts in Part II of each of the applicable Forms 1116 (that is, a separate Form 1116 for each category of income you received). See the partner and shareholder instructions for Forms 1065 and 1120-S, Schedule K-3, for further information.

8 Instructions for Form 1116 (2025)

Forms 1065 and 8865, Schedule K-3, Part III, Section 4, line 2; and Form 1120-S, Schedule K-3, Part III, Section 3, line 2—Reduction of taxes. The partnership or S corporation has already apportioned the reduction in taxes available for credit and has reported it to you by category of income. Include these amounts on line 12 of each of the applicable Forms 1116 (that is, a separate Form 1116 for each category of income you received). See the partner and shareholder instructions for Forms 1065 and 1120-S, Schedule K-3, for further information.

Forms 1065 and 8865, Schedule K-3, Part III, Section 4, line 3; and Form 1120-S, Schedule K-3, Part III, Section 3, line 3—Foreign tax redeterminations. The partnership or S corporation has already apportioned the change in foreign income tax liability and has reported it to you by country and by category of income. Include these amounts on each of the applicable Schedules C (Form 1116) (that is, a separate Schedule C (Form 1116) for each category of income you received). See the partner and shareholder instructions for Forms 1065 and 1120-S, Schedule K-3, for further information.

Note: See the partner and shareholder instructions for Forms 1065 and 1120-S, Schedule K-3, Parts I, II, and III, for information related to foreign oil and gas taxes, high-taxed income, partner loan transactions, foreign tax redeterminations, and other information that may be necessary to complete Form 1116.