Section 1. R&E Expenses Apportionment Factors

This information is relevant to partners to allocate and apportion its R&E expense for foreign tax credit limitation purposes.

A Form 8865 filer isn’t required to complete Section 1 of Part III unless either (a) the partnership incurs R&E expense; or (b) the partner is expected to license, sell, or transfer its intangible property to the partnership (as provided in Regulations section 1.861-17(f)(3)).

Deductible R&E expenses, as described in section 174, are ordinarily definitely related to gross intangible income

reasonably connected with relevant broad product categories of the taxpayer and are allocable to gross intangible income as a class related to such product categories. The product categories are determined by reference to the three-digit classification of the SIC code. In general, R&E expenses are apportioned based on gross receipts.

R&E expenses are allocated and apportioned by the partner. See Regulations section 1.861-17(f)(1). This requires that Form 8865 reports to its partners the gross receipts by SIC code according to source and separate category of income. This also requires that the Form 8865 reports the amount of R&E expense performed in the United States and outside the United States to apply exclusive apportionment. See Regulations section 1.861-17(f)(2).

Column (e). As of the date of these instructions, the only separate category that could be included in column (e) is the section 901(j) category of income. See the Instructions for Form 1118 for the potential countries to be listed with the section 901(j) category of income.

Line 1. Enter the gross receipts by SIC code for each grouping. Such gross receipts include both the partnership’s gross receipts and certain other parties’ gross receipts. See Regulations sections 1.861-17(d)(3) and (4). Sales of parties controlled by the partnership should be included on line 1 if such controlled parties can reasonably be expected to benefit from the R&E expense connected with the product categories. This includes sales that benefit from the partner’s R&E expenses if licensed through the partnership. Sales of uncontrolled parties are also taken into account if such sales involve intangible property that was licensed or sold to the uncontrolled party if the uncontrolled party can reasonably be expected to benefit from the R&E expense.

Line 2. Report the amount of 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. The total of the amounts on Schedule K-2, Part III, Section 1, line 2, must equal Schedule K-2, Part II, line 32. Similarly, the total of the amounts on Schedule K-3, Part III, Section 1, line 2, must equal Schedule K-3, Part II, line 32.

Note: Line 2 isn’t reported according to source or separate category.

Note: The SIC code for line 2B(i) doesn’t need to be the same SIC code for line 2A(i).