Part III. Other — Instruction 1120-S (Schedule K-3)

Section 1—R&E Expenses Apportionment Factors This section reports the information you need to allocate and apportion your R&E expense for foreign tax credit limitation purposes. R&E expenses are allocated and apportioned by the shareholder; see Regulations section 1.861-17(f)(1). Use this Section 1 to determine the R&E expense reported in Form 1116, Part I. See the Instructions for Form 1116.

Line 1. Add the amounts reported on line 1 by SIC code to your other gross receipts to apportion your R&E expense.

Line 2. Add the amounts reported on line 2 to the shareholder’s other R&E expense related to activity performed in the United States and the amount of R&E expense related to activity performed outside the United States by SIC code. See the Instructions for Form 1116 to determine the exclusive apportionment of the R&E expenses.

Section 2—Interest Expense Apportionment Factors This section includes the information you need to allocate and apportion your interest expense for foreign tax credit limitation purposes. Use this Section 2 to determine the interest expense reported on Form 1116, Part I, line 4b. See the Instructions for Form 1116. Because the interest expense is reported on one line on the Form 1116, there is no need to specify additional reporting on the lines below.

Stewardship expenses. In the case of the shareholder’s stewardship expenses incurred to oversee the S corporation, the S corporation’s value is determined and characterized under the asset method in Regulations section 1.861-9. See Regulations section 1.861-8(e)(4)(ii)(C). Therefore, the reporting in Part III, Section 2, generally applies to the shareholder’s stewardship expense apportionment.

Line 6a is the sum of lines 1 and 2 less the sum of lines 3, 4, and 5. Line 6a is divided into the types of assets on lines 6b, 6c, and 6d.

Example 4. Parts II and III. Asset method apportionment of interest expense. A, a U.S. citizen, owns a 10% interest in SC, an S corporation. SC is engaged in the active conduct of a U.S. trade or business. SC’s business generates only domestic source income. SC separately has an investment portfolio consisting of several less-than-10% stock investments. SC has a bank loan. The proceeds of the bank loan were divided equally between the business and the investment portfolio. A’s only business

assets and investment assets are A’s share of those owned by SC. A’s only interest expense is that from A’s pro rata share of the SC loan.

A’s share of the interest expense for SC’s business is $2,000. It is apportioned on the basis of business assets. Because all business income is domestic source, the business assets are domestic assets and reported in Schedule K-3, Part III, Section 2, line 6b, column (a). A’s $2,000 share of the interest expense is reported in Schedule K-3, Part II, line 41, column (f). It is apportioned to U.S. source gross income by the shareholder and doesn’t need to be reported on Form 1116.

The interest expense for A’s share of SC’s investments is $2,000 and is reported in Schedule K-3, Part II, line 42, column (f). The investment interest must be apportioned on the basis of investment assets. A’s share of the adjusted basis in SC’s stock is $8,000 with respect to the stock generating domestic source income and $12,000 with respect to the stock generating foreign source passive income. Such amounts are reported in Schedule K-3, Part III, Section 2, line 6c, columns (a) and (c), respectively. $800 ($8,000/$20,000 x $2,000) is apportioned to domestic source income and $1,200 ($12,000/$20,000 x $2,000) is apportioned to foreign source passive income. The amount apportioned to foreign source passive income is reported on the passive category Form 1116, line 4b.

Lines 7 and 8. The amounts reported on lines 7 and 8 are subsets of the amounts reported on line 6 representing the value of stock held by the S corporation in certain foreign corporations.

The amount reported on line 7 is the value of stock of the S corporation-owned specified 10%-owned foreign corporation that is not a CFC.

The amount reported on line 8 is the value of the stock in S corporation-owned CFCs.

Section 3—Foreign Taxes Section 3 reports your share of the foreign taxes paid or accrued by the S corporation by separate category and source.

Line 1. Report the taxes on line 1 in the applicable portions of Form 1116, Part II, for the applicable separate category of income. To complete these portions, refer to the statement attached to Schedule K-3, referred to earlier in the instructions with respect to Part I, box 4, with the following information.

The dates on which the taxes were paid or accrued.
The exchange rates used.
The amounts in both foreign currency and U.S. dollars. See section 986(a).

No credit is allowed for taxes paid or accrued to a country described in section 901(j). However, a deduction is generally allowed with respect to a tax described in section 901(j).

Note: The shareholder takes the shareholder’s share of the S corporation’s foreign taxes into account in the shareholder’s tax year with or within which the S corporation’s tax year ends, regardless of whether the shareholder or S corporation takes foreign taxes into account on the cash or accrual basis.

Line 2. Report the total reduction of taxes for each separate category of income from line 2 on Form 1116, Part III, line 12.

Instructions for Schedule K-3 (Form 1120-S) (2025) 7

Line 3. Report the redetermined foreign taxes from line 3 on the Foreign Tax Redetermination Schedule of the Form 1116, and on an amended return, if required. See the Instructions for Form 1116 and Regulations sections 1.905-3 through -5 for additional information.

Use the information in the attachment provided by the S corporation to complete Schedule C (Form 1116), Foreign Tax Redeterminations.

If the S corporation checked the “Contested tax” box and reported information about the contested tax on line 3, the S corporation has remitted a contested foreign income tax liability to a foreign country, and you as the shareholder may elect to claim a provisional foreign tax credit for your pro rata share of such contested foreign income tax liability. See Regulations section 1.905-1(f)(2). To make the election to claim the provisional foreign tax credit, file Form 7204, Consent To Extend the Time To Assess Tax Related to Contested Foreign Income Taxes—Provisional Foreign Tax Credit Agreement. See the instructions for Form 1116 or Form 1118, and the Instructions for Form 7204, for additional information.

Note: If you are an accrual method taxpayer, you may generally not claim a credit for additional taxes reported on line 3 by the S corporation unless those taxes have been paid. See section 905(c)(2) and Regulations section 1.905-3(a).