IRS Form 1118 (Schedule L) - Foreign Tax Redeterminations

IRS Form 1118 (Schedule L) – Foreign Tax Redeterminations – Navigating international tax compliance can be complex for U.S. corporations with foreign operations. One critical component is the foreign tax credit (FTC), which helps avoid double taxation on income earned abroad. However, changes to foreign tax liabilities—known as foreign tax redeterminations—require precise reporting to the IRS. This is where IRS Form 1118 Schedule L comes in, a specialized attachment to Form 1118 that ensures accurate adjustments to your FTC claims.

In this SEO-optimized guide, we’ll break down everything you need to know about Schedule L (Form 1118) for tax year 2025: its purpose, filing requirements, step-by-step instructions, and recent updates. Whether you’re a tax professional or a corporate executive, this resource will help you comply with IRS rules under section 905(c) and avoid penalties. Updated as of December 2025, based on the latest IRS publications.

What is IRS Form 1118?

IRS Form 1118, titled Foreign Tax Credit – Corporations, allows U.S. corporations to calculate and claim credits for foreign income taxes paid or accrued on income from foreign sources or U.S. possessions. It’s essential for multinational companies to offset U.S. tax liabilities and prevent double taxation.

The form includes several schedules:

Schedule A: Summary of foreign taxes paid or accrued.
Schedule B: Separate limitation categories for FTC computation.
Schedule C: Special allocations.
Schedule I: Reductions for foreign oil and gas income.
Schedule J: Adjustments to separate limitation income.
Schedule K: Carryovers and carrybacks.
Schedule L: Foreign tax redeterminations (our focus here).

Form 1118 must be filed with your corporate income tax return (Form 1120) if you claim an FTC exceeding $300 or have foreign-source gross income. For 2025, the form’s revision date is December 2022, but Schedule L was updated in December 2025 to reflect ongoing regulatory changes.

Understanding Foreign Tax Redeterminations

A foreign tax redetermination occurs when your liability for foreign income taxes changes after you’ve already claimed an FTC on your U.S. return. Common triggers include:

Differences between accrued foreign taxes and the actual amount paid (e.g., final assessments or adjustments).
Refunds of foreign taxes.
Failure to pay accrued taxes within 24 months of the tax year-end (treated as a deemed refund under the “two-year rule”).
Changes in foreign-source income inclusions (e.g., under sections 951, 951A, or 1293) or deemed-paid taxes under section 960.
Shifts from credit to deduction elections or vice versa.

These events require recalculating your FTC and potentially your U.S. tax liability for prior years (called “relation back years”). Under Regulations section 1.905-3, you must notify the IRS and adjust accordingly. Failure to report can lead to penalties under section 6689, including interest on underpayments or overpayments.

For pre-2018 tax years, special pooling rules apply for controlled foreign corporations (CFCs), with an irrevocable election option to treat redeterminations as occurring in the last pre-2018 year.

Purpose of Schedule L (Form 1118)

Schedule L (Form 1118) is a dedicated reporting tool for foreign tax redeterminations occurring in the current tax year but relating to prior years. It identifies:

Increases or decreases in foreign taxes.
Adjustments to income inclusions, deemed-paid taxes, and FTC claims.
Impacts on U.S. tax liability.
Ongoing reporting for contested foreign taxes with provisional credits.

Unlike the main Form 1118, Schedule L is filed even if no credit was elected and no U.S. tax change occurs—it satisfies the notification requirement under Regulations section 1.905-4(b). A separate Schedule L is needed for each separate limitation category (e.g., general category income, passive category), plus a “TOTAL” aggregating schedule.

The form’s layout includes header lines (a–d) for category codes and elections, followed by five parts for detailed reporting.

Who Must File Schedule L?

Any corporation (or other taxpayer) experiencing a foreign tax redetermination under section 905(c) must file Schedule L with its current-year Form 1118. This applies to:

Direct foreign taxes paid or accrued (sections 901/903).
Deemed-paid taxes via CFCs or other entities (sections 960/902).
Accrual-basis or cash-basis taxpayers.
Those with provisional FTC elections for contested taxes (requiring annual filings via Form 7204).

If the redetermination changes your U.S. tax liability, file an amended return (Form 1120-X) for affected years, plus Schedule L with your current return. No amendment is needed if there’s no U.S. tax impact.

When and How to File Schedule L

Attach Schedule L to your timely filed Form 1118 for the tax year in which the redetermination occurs. For 2025 returns, due April 15, 2026 (or extended to October 15, 2026), ensure all redeterminations from 2025 events are reported.

Filing Tips:

Use the December 2025 revision of Schedule L.
Report all amounts in U.S. dollars, using the “divide-by” exchange rate convention (e.g., foreign units per $1 USD, rounded to four decimals).
For multiple payors or years, expand the form as needed.
Computer-generated versions must include a “TOTAL” schedule aggregating data.
E-file if possible; paper filers mail to the IRS service center for your location.

If using Schedule K-3 from Form 1065 (partnerships), incorporate redetermination data from Part III, Section 4.

IRS Form 1118 (Schedule L) Download and Printable

Download and Print: IRS Form 1118 (Schedule L)

Step-by-Step Guide to Completing Schedule L

Here’s how to fill out each part of Schedule L. All entries must be in English, with currencies specified.

Header Lines (a–d)

Line a: Enter the separate category code (e.g., “a” for general limitation income).
Line b: If category is 901j (sanctioned countries), add the country code.
Line c: For RBT codes (resourced by treaty), enter the treaty country code.
Line d: Check if electing under Reg. §1.905-5(e) for pre-2018 pooling.

Part I: Increases in Foreign Taxes Accrued

Report additional taxes paid. For each relation back year (most recent first), list up to three payor entities per year.

Column 1: Relation back year end date (MM/DD/YYYY).
Columns 2a–2d: Payor name, EIN/reference ID, owner name/ID (if applicable).
Column 3: Country code (see IRS.gov/CountryCodes).
Columns 4–5: Payment date and foreign tax year end.
Column 6: Payor’s taxable income in foreign jurisdiction.
Column 7: Additional tax in local currency.
Column 8: In functional currency.
Column 9: Original exchange rate (local to USD).
Column 10: USD amount (local / rate).
Column 11: Original USD tax on return.
Column 12: Revised total (10 + 11).
Column 13: Contested tax reference ID (if applicable).
Column 14: Check if it affects high-tax exception (section 954(b)(4)).
Subtotals: Per year and overall.

Part II: Decreases in Foreign Taxes Paid or Accrued

Similar to Part I, but for refunds or deemed refunds.

Columns mirror Part I, but Column 7 is refunded amount; Column 12 subtracts refund from original.
Column 13: Check for two-year rule application.
Column 14: High-tax impact check.

Part III: Changes to Inclusions and Credits

Aggregate changes per relation back year (not per payor).

Line 1: Relation back year.
Lines 2–3: Redetermined vs. original direct taxes (901/903).
Lines 4–5: Section 951(a)(1) inclusions.
Lines 6–7: Deemed-paid under 960(a).
Lines 8–9: Section 951A inclusions.
Lines 10–11: Deemed-paid under 960(d).
Lines 12–13: Deemed-paid under 960(b)(1).
Lines 14–15: Deemed-paid under 902 (pre-repeal).
Lines 16–17: FTC claimed before/after redetermination.

Part IV: Changes in U.S. Tax Liability

Overall taxpayer basis.

Line 1: Affected year end date.
Line 2: Redetermined U.S. tax.
Line 3: Original U.S. tax.
Line 4: Difference (2 – 3).

Part V: Annual Reporting for Contested Taxes

For provisional credit elections; report per contested liability.

Line 1: Relation back year.
Line 2: Payor name.
Line 3: Reference ID (from Form 7204).
Line 4: Country code (up to five columns for multiple).
Line 5: Provisionally claimed amount.
Line 6: Contest ongoing? (check).
Line 7: Resolved? (check).
Line 8: Resolution date.
Line 9: Refunded amount.
Line 10: Additional paid amount.

Key Definitions and Rules

Relation Back Year: The U.S. year when original foreign taxes were claimed.
Affected Tax Year: Any year impacted by carryovers (e.g., FTC carryforward).
Functional Currency: Per section 985(b), the currency of the QBU’s economic environment.
Two-Year Rule: Unpaid accrued taxes after 24 months are deemed refunded; credit only upon actual payment.
Provisional Credit: For contested taxes, elect to claim early but report annually until resolution.

Exchange rates: Use spot rates for refunds; historical for accruals. See Reg. §1.988-1(d).

Common Mistakes and Penalties

Avoid these pitfalls:

Forgetting annual Schedule L for contested taxes.
Incorrect exchange rates leading to distorted USD amounts.
Missing amended returns for liability changes.
Not aggregating for “TOTAL” schedule.

Penalties: Section 6689 imposes up to 5% of underpaid tax per month (max 25%) for failure to notify, plus interest under sections 6601/6611. Statute of limitations doesn’t apply to increases.

Recent Updates for 2025

The December 2025 Schedule L revision splits Part V’s former column 9 into separate refund/additional payment columns for clarity. Notice 2025-72 addresses allocation rules post-repeal of the one-month deferral election, impacting high-tax exceptions and section 905(c) redeterminations for taxable years after November 30, 2025. Taxpayers can rely on these interim rules for specified foreign income taxes.

Conclusion

Mastering IRS Form 1118 Schedule L ensures compliance with foreign tax redetermination rules, protecting your FTC and avoiding costly penalties. Consult a tax advisor for complex cases, and always reference the latest IRS instructions. For the official form and PDFs, visit IRS.gov/Form1118.

FAQs

1. Do I need Schedule L if no U.S. tax changes?

Yes, to notify the IRS under Reg. §1.905-4(b).

2. What’s the deadline for 2025 redeterminations?

Attach to your 2025 Form 1120, due April 15, 2026 (extendable).

3. How do contested taxes affect Schedule L?

File annually via Part V until resolution; use Form 7204 for details.

4. Can I e-file Schedule L?

Yes, as part of electronic Form 1118.

For more on foreign tax redeterminations or Form 1118 filing, bookmark this guide and check IRS updates regularly.