Part II. Foreign Tax Credit Limitation

Column (a). U.S. source. Do not report amounts in this column on Form 1116 or 1118 unless you elect to re-source such income under an applicable U.S. income tax treaty. See section 904(d)(6) and section 865(h). See the instructions for Forms 1116 and 1118 for income re-sourced by treaty reported as a separate category of income.

Columns (b) through (e). Foreign source. Add the amounts reported in these columns to your other income earned or received directly or through other pass-through entities in these separate categories and report the total amounts in the applicable Form 1116, Part I, or Form 1118, Schedule A.

Column (f). Sourced by shareholder. You must determine the source and separate category of the income reported in this column. The income in this column will generally be with respect to sale of personal property other than inventory, depreciable property, and certain intangible property and will generally be sourced under section 865. This column might

also include foreign currency gain on a section 988 transaction. If you are a U.S. citizen or resident, sales and gains reported in this column will generally be U.S. source income and not reported on Form 1116 or 1118 unless you elect to re-source such income under an applicable income tax treaty. Also, the source of foreign currency gain or loss on section 988 transactions may be determined by reference to the residence of the QBU on whose books the asset, liability, or item of income or expense is properly reflected. See the instructions for Form 1116 or 1118 and Pub. 514 for additional details.

Section 1—Gross Income

Lines 1 through 24. Form 1118, Schedule A, requires a corporation to separately report certain types of gross income by source and separate category. Schedule K-3, Part II, lines 1 through 23, generally follow the separately reported types of gross income on Schedule A. Individuals must follow the same sourcing rules, but Form 1116 only requires reporting of total gross income from foreign sources by separate category. Therefore, those required to file Form 1116 would report the amount from Schedule K-3, Part II, line 24, taking into account section 904(b)(2) and PTEP adjustments, by country on their Form 1116, Part I, line 1a. Because all gross income is reported on one line on the Form 1116, there is no need to specify other reporting lines for gross income below.

Country code. Forms 1116 and 1118 require the taxpayer to report the foreign country or U.S. territory with respect to which the gross income is sourced. Lines 1 through 24 report for each gross income item, on a separate line (A, B, or C), the two-letter code (from the list at IRS.gov/CountryCodes ) for the foreign country or U.S. territory within which the gross income is sourced. If a type of income is sourced from more than three countries, a statement is attached to expand Schedules K-2 and K-3, Part II, for that type of income to report the additional countries.

Note: For Part II, column (f), the S corporation entered the code XX because it could not determine the country or U.S. territory with respect to which the gross income is sourced because the source is determined by your residence, or if you are a pass-through trust, the residence of the beneficiary of the trust.

The S corporation entered in column (f) the foreign country to which the S corporation paid tax of at least 10% of the gain. See sections 865(e) and 865(g).

Each gross income item (for example, sales vs. interest income) may have different countries listed on rows A, B, C, etc., given that the S corporation might not have sales income and interest income, for example, from the same country. Line 24 should combine each country’s total income reported in Part II, regardless of the line on which such income is reported, whether A, B, C, etc.

Exceptions. The instructions for Forms 1116 and 1118 specify exceptions from the requirement to report gross income by foreign country or U.S. territory with respect to RICs and section 863(b). See the instructions for Forms 1116 and 1118 for these exceptions that apply.

Schedule K-3 reports gross income by country or U.S. territory because such information is requested on Forms 1116 and 1118. Income and taxes are reported by country on the Forms 1116 and 1118 so that the IRS may, for example, initially evaluate whether taxpayers are claiming credits for compulsory payments to foreign governments.

Instructions for Schedule K-3 (Form 1120-S) (2025) 5

Lines 7 and 8. Ordinary dividends and qualified divi- dends. Some of the amounts reported on these lines may be attributable to PTEP in annual PTEP accounts that you have with respect to a foreign corporation and thus excludable from your gross income. See the Instructions for Form 1116 for additional information with respect to rules regarding capital gain rate differentials (as defined in section 904(b)(3)(D)) for qualified dividends.

Lines 11 through 15 and 27 through 30. Capital gains and losses. Section 904(b)(2)(B) contains rules regarding adjustments to account for capital gain rate differentials (as defined in section 904(b)(3)(D)) for any tax year. These rules apply to individuals and may require adjustments to the amounts on lines 11 through 15, which in turn affects the total amount on line 24. See the Instructions for Form 1116 for additional information. Report Schedule K-3, Part II, lines 27 through 30, on Form 1116, Part I, line 5, by separate category.

Line 12. Net long-term capital gain. Line 12 does not include gains reported on lines 13, 14, and 15.

Line 14. Unrecaptured section 1250 gain. If gain is both unrecaptured section 1250 gain and net section 1231 gain, the gain was reported on line 14 and not on line 15, but the S corporation included an attachment indicating the amount of unrecaptured section 1250 gain that is also net section 1231 gain.

Lines 16 and 46. Section 986(c) gain and loss. These lines report the S corporation’s share of a lower-tier pass-through entity’s section 986(c) gain or loss, and the amount of section 986(c) gain or loss on distributions of PTEP sourced from the S corporation’s annual PTEP accounts. You will need to determine your foreign currency gain or loss under section 986(c) with respect to distributed PTEP sourced from annual PTEP accounts that you have with respect to a foreign corporation, using Schedule K-3, Part IV.

The amount of foreign currency gain and loss that you report on Form 1040 will include your share of the S corporation’s foreign currency gain or loss under section 986(c) and your own foreign currency gain or loss under section 986(c).

Lines 18 and 48. Section 988 gain and loss. The source of foreign currency gain or loss on section 988 transactions is generally determined by reference to the residence of the taxpayer or QBU on whose books the asset, liability, or item of income or expense is properly reflected. If the source of the foreign currency gain or loss is determined by reference to the residence of the taxpayer, the foreign currency gain and loss will be reported in column (f). For example, if you are a U.S. resident, such gain or loss is U.S. source and would not be reported on Form 1116.

Line 19. Section 951(a) inclusions. If you make a section 962 election, on Form 1118, add the amount reported on line 19 to your other section 951(a) inclusions and report the total in Form 1118, Schedule A, column 3(a), by separate category.

Line 21. Section 951A(a) inclusions. If you make a section 962 election, on Form 1118, add the amount reported on line 21 to your other section 951A(a) inclusions and report the total in Form 1118, Schedule A, column 3(a), by separate category.

Line 24. Total gross income. Add the amounts reported in rows A, B, and C (and additional rows, if applicable) to your other foreign source gross income from those countries, and enter the totals on Form 1116, Part I, line 1a, taking into account any section 904(b) adjustments for capital gains, as described earlier for lines 11 through 15 and 27 through 30, or PTEP adjustments, as described earlier for lines 7, 8, 16, and 46.

Section 2—Deductions

Lines 25 through 54. Form 1116 requires a taxpayer to separately report certain types of deductions and losses by source and separate category. Separate reporting is required because each type of deduction may be allocated and apportioned according to a different methodology; see Regulations sections 1.861-8 through -20. For purposes of allocating and apportioning expenses, in general, a shareholder adds their share of the S corporation’s deductions with other deductions incurred directly by the shareholder or through other pass-through entities. See Regulations section 1.861-8(e)(15). Individuals must generally follow the same expense allocation and apportionment rules, but Form 1116 only requires separate reporting of certain deductions. See Form 1116, Part I, lines 2 through 5.

Line 28. Net long-term capital loss. Line 28 does not include losses reported on line 29.

Line 32. Research & experimental (R&E) expenses. Add the R&E expenses reported in column (f) to your other R&E expenses. After determining the portion of such expenses that are allocable to U.S. source income or foreign source income because they are performed predominantly in a particular geographic area, report the remaining R&E expense on Form 1116. See Regulations section 1.861-17(f).

Line 38. Charitable contributions. Charitable contribution deductions should not be reported on Form 1116 because such deductions are allocable to U.S. source income.

Lines 39 and 40. Interest expense specifically allocable under Regulations sections 1.861-10 and -10T. Report interest expense directly allocated under Regulations section 1.861-10 and Temporary Regulations section 1.861-10T on Form 1116, Part I, line 2.

Lines 41 through 43. Other interest expense. On Form 1116, allocate and apportion the sum of the interest expense included on lines 41 through 43 in column (f) and report the allocated and apportioned amounts on the applicable separate category Form 1116, Part I, line 4b. Interest expense incurred by certain individuals, estates, and trusts is allocated and apportioned based on the categories of interest expense in sections 163 and 469: active trade or business interest, investment interest, or passive activity interest, adjusted for any interest expense directly allocated under Temporary Regulations section 1.861-10T. See Regulations section 1.861-9(e)(3) and Temporary Regulations sections 1.861-9T(d)(1) and (3).

Exception. See Regulations sections 1.861-9(e)(8) and (9) for special rules concerning downstream and upstream S corporation loans that require a matching of related interest income to interest expense allocations.

Exception. See Temporary Regulations section 1.861-9T(d)(1) for an exception to the apportionment of interest expense when an individual’s foreign source income (including income excluded under section 911) does not

6 Instructions for Schedule K-3 (Form 1120-S) (2025)

exceed $5,000. Such interest expense may be allocated entirely to U.S. source income.

Line 45. Foreign taxes deductible, but not creditable. See the Instructions for Form 1116 for examples of foreign taxes deductible, but not creditable.

Note: Foreign taxes that are creditable (even if a shareholder chooses to deduct such taxes) are not reported as expenses in Part II. Do not claim a foreign tax credit on Form 1116 for amounts reported on line 45. However, you may claim a deduction for such taxes on the applicable form, including Form 1040.

Creditable foreign taxes are reported in Part III, Section 3.