Section 1. Lines 1 Through 24. Total Gross Income

Form 1118, Schedule A, requires a corporation to separately report certain types of gross income and gross receipts by source and separate category. Separate reporting is required because each type of gross income and gross receipts has a different sourcing rule. See sections 861 through 865 (and section 904(h) and, in some cases, U.S. income tax treaties). Schedules K-2 and K-3, Part II, Section 1, generally follow the separately reported types of gross income and gross receipts 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.

So, those required to file Form 1116 will report line 24 by country on their Form 1116, Part I, line 1a. Section 1 also generally follows the types of gross income and gross receipts separately reported on Form 8865, Schedule K.

For each line, report the total for each country in column (g).

Country code. Forms 1116 and 1118 require the taxpayer to report the foreign country or U.S. territory for which the gross income and gross receipts are sourced. On lines 1 through 24, for each gross income and gross receipts item, enter 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 and gross receipts are sourced. If

a type of income is sourced from more than three countries, attach a schedule with the information required on Schedule K-2, Part II, and Schedule K-3, Part II, for that type of income.

If income is U.S. source, enter “US.” Don’t enter “various” or “OC” for the country code.

Note: In Part II, column (f), enter the code “XX” if the country or U.S. territory for which the gross income and gross receipts are sourced by the ultimate non-pass-through entity partner and the filer can’t determine the source. However, don’t enter the code “XX” in Part II, column (f), if an income tax of at least 10% of the gain derived from the sale is actually paid to a foreign country for that gain. See sections 865(e) and 865(g). Instead, enter in Part II, column (f), the foreign country to which the partnership paid the income tax equal to at least 10% of the gain.

Each gross income and gross receipts item (for example, sales vs. interest income) may have different countries listed on A, B, C, etc., given that the partnership might not have sales income and interest income, for example, from the same country. Line 24 should sum each country’s total income reported in Part II, regardless of the line in 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 and gross receipts by foreign country or U.S. territory regarding RICs and section 863(b). See the instructions for Forms 1116 and 1118 for these exceptions that apply in completing the Schedules K-2 and K-3, Parts II and III. Don’t enter a foreign country or U.S. territory (to report on a country-by-country basis) for lines 16 through 18.

Note: Schedules K-2 and K-3 request that gross income and gross receipts be reported 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 initially evaluate whether taxpayers are claiming credits for compulsory payments to foreign governments.

Example 2. Part II: multiple country code: gross income. In Year 1, FP, a foreign partnership, has employees who perform services in Country X and Country Y. FP earns $25,000 of general category services income, $10,000 for Country X and $15,000 for Country Y. The two-letter code for Country X is XX and the two-letter country code for Country Y is YY. The U.S. person filing Form 8865 makes the following entries on the first two lines of Schedule K-2, Part II, line 2. Example 2 Table

Description (d)

A XX $10,000

B YY $15,000

Lines 3 and 4. Rental income. These lines are reported separately because they are reported separately on Form 8865, Schedule K. The sourcing rule may be the same for both types of rental income.

Lines 7 and 8. Ordinary dividends and qualified dividends. Enter only ordinary dividends on line 7 and only qualified dividends on line 8.

Note: The amount of distributions which are attributable to PTEP in annual PTEP accounts of a direct or indirect partner isn’t determined by the partnership and so isn’t taken into account for purposes of determining the ordinary dividends to be entered on line 7 or the qualified dividends to be entered on line 8.

8 Inst. for Schedules K-2 and K-3 (Form 8865) (2025)

Lines 11 through 15 and 27 through 30. Capital gains and losses. These lines generally match the types of gains and losses reported separately on Form 8865, Schedule K. Further, 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. Example 3. Parts II and III: capital gains and losses. Partnership has the following amounts for the tax year 2025.

Example 3. Table 1

These amounts are reported on Schedule K-2, Part II, Section 1, as follows.

Example 3. Table 2

Line 12. Net long-term capital gain. Don’t include gains reported on lines 13, 14, and 15 on line 12.

Line 13. Collectibles (28%) gain. Report collectibles gain on line 13 and not on line 12.

Line 14. Unrecaptured section 1250 gain. Report unrecaptured section 1250 gain on line 14 and not on line 12. If gain is both unrecaptured section 1250 gain and net section 1231 gain, report the gain on line 14 and not on line 15, but include an attachment indicating the amount of unrecaptured section 1250 gain that is also net section 1231 gain.

Line 15. Net section 1231 gain. Report net section 1231 gain on line 15 and not on line 12 unless such amount is also unrecaptured section 1250 gain. See the instructions for line 14.

Lines 16 and 46. Section 986(c) gain and loss. Report the partnership’s share of a lower-tier pass-through entity’s section 986(c) gain or loss. This isn’t reported as a net amount but rather total section 986(c) gains for the year are reported on line 16. Total section 986(c) losses for the year are reported on line 46.

Note: Don’t figure or report foreign currency gain or loss under section 986(c) for distributed PTEP sourced from an annual PTEP account of a person other than the partnership (for example, a partner).

Lines 17 and 47. Section 987 gain and loss. The source of section 987 gain or loss is generally determined using the asset method under Regulations sections 1.861-9(g) and 1.861-9T. It’s also possible to obtain section 987 gain or loss information from

Form 8858. This isn’t reported as a net amount but rather total section 987 gains for the year are reported on line 17. Total section 987 losses for the year are reported on line 47.

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 is determined by reference to the residence of the taxpayer partner, the section 988 gain and loss would be reported in column (f).

Line 20. Other income. Include other income by country and attach a statement to explain the type of other income for each line. If there are more than three types of other income by country, then attach a statement identifying these other types of income by country. For electronic filers, the rows will expand automatically. The statement must conform to the format of Part II.

Line 24. Total gross income. Enter the total gross income received from all sources on line 24. Then, add the gross income on lines 1 through 23 by country or U.S. territory and enter the total by country in rows A, B, and C (and additional rows if more than three countries). The sum of the amounts in rows A, B, C, etc., doesn’t need to equal the amount on line 24, given that not every gross income amount is required to be reported by country.

Line 28. Net long-term capital loss. Don’t include losses reported on line 29.

Line 29. Collectibles loss. Report collectibles loss on line 29 and not on line 28.