Guide to Global Payroll Management - 2020 - D-138

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Guide to Global Payroll Management

Line 16

You are required to increase or
decrease the amount on line 15 by the
following adjustments. The adjustments
must be made in the order listed. If you
have more than one adjustment, enter
the net adjustment on line 16 and attach
a detailed statement showing your
computation. See Pub. 514 for more
details on each of these adjustments.
The adjustments are as follows.

1. Adjustment for disallowed business loss under section 461(l).
Increase the amount on line 15 by the
amount of any business loss that is
disallowed under section 461(l) to the
extent it is attributable to the separate
category of income of the applicable
Form 1116. For purposes of
adjustments 2-6 described below, any
reference to an amount on line 15 shall
mean the amount on line 15 after taking
into account this adjustment for
disallowed business loss.

2. Allocation of foreign losses. If you
have a loss on line 15 of one Form 1116
and you have income on line 15 of one
or more other Forms 1116, you must
reduce the foreign income by a pro rata
share of the loss before you use any
remaining loss to reduce U.S. source
income.
If the loss reduces foreign source
income, you must create, or increase
the balance of, a separate limitation loss
account and you must recharacterize
the income you receive in the loss
category in later years. See under 5.
Recapture of separate limitation loss
accounts, later. In situations where the
loss to be allocated exceeds foreign
income in other categories:
* The excess reduces U.S. source
income (as modified under Capital
losses next);
* You must create, or increase the
balance in, an overall foreign loss
account; and
* For later years, you must follow the
rules described under 4. Recapture of
prior year overall foreign loss accounts,
later.
If the loss in one category reduces
foreign source income in another
category and that second category has
a separate limitation loss account with
respect to the first category, then the
two offsetting separate limitation loss
account balances are netted for
purposes of determining the amount of
income in either category that is subject
to recharacterization under 5.
Recapture of separate limitation loss
accounts, later.
Instructions for Form 1116 (2019)

D-138

Capital losses. In determining your
U.S. source income, reduce the amount
of any capital losses from U.S. sources
by the amount you entered on line 4 of
Worksheet A or line 5 of the Line 2
Worksheet for Worksheet B. If you have
capital losses from U.S. sources and
you didn't use either Worksheet A or
Worksheet B, see Pub. 514 to
determine your U.S. source income.

Example. For 2019, you completed
three Forms 1116. The first had a loss
from general category income of $2,000
on line 15, the second had passive
category income of $4,000 on line 15,
and the third had income of $1,000 from
the certain income re-sourced by treaty
category on line 15. You must allocate
the $2,000 loss between the passive
category income and the certain income
re-sourced by treaty category in the
same proportion as each category's
income bears to the total foreign
income.
The amount of the loss that would
reduce passive category income would
be 80% ($4,000/$5,000) of the $2,000
loss or $1,600. Include the $1,600 (in
parentheses) on line 16 of the passive
category income Form 1116. Assuming
you have no other line 16 adjustments,
enter $2,400 ($4,000 − $1,600) on
line 17 of that form.
The amount of the loss that would
reduce the certain income re-sourced
by treaty would be 20% ($1,000/$5,000)
of the $2,000 loss or $400. Include the
$400 (in parentheses) on line 16 of the
certain income re-sourced by treaty
Form 1116. Assuming you have no
other line 16 adjustments, enter $600
($1,000 − $400) on line 17 of that form.
In this case, all of the $2,000 loss
was allocated between the foreign
source passive category income and
the certain income re-sourced by treaty
category, and no reduction was made to
U.S. source income.
If you receive general category
income in a later year, you must
recharacterize all or part of that income
as passive category income and certain
income re-sourced by treaty in that later
year. See the example under 5.
Recapture of separate limitation loss
accounts, later.
3. Allocation of U.S. losses. If you
have a net loss from U.S. sources,
proportionately allocate that loss among
the separate categories of your foreign
income. Reduce the income on line 15
(adjusted by any allocation of losses, as
described under 2. Allocation of foreign
losses in these line 16 instructions) by
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including (in parentheses) on line 16 the
allocable portion of any U.S. loss. In
later years, you will be allowed to treat
part of your U.S. source income as
foreign source income.
A U.S. loss includes a rental loss on
property located in the United States. If
you have any qualified dividends or
capital gains (including capital gain
distributions) or losses for the tax year
and you are required to make any
adjustments to those amounts, as
explained under Foreign Qualified
Dividends and Capital Gains (Losses),
earlier, or in the instructions for line 18,
the amount of your U.S. loss is the
excess of:
a. The total of the amounts entered
on line 15 for each Form 1116 you are
filing, over
b. The amount entered on line 18 of
the Form 1116.
You allocate the net loss to a
separate category of income by
multiplying the net loss by a fraction.
The numerator of the fraction is the
foreign source income in a separate
category and the denominator is the
total foreign source income in all
separate categories.

4. Recapture of prior year overall
foreign loss accounts. If you had an
overall foreign loss in a prior year that
offset U.S. source income, a part of your
foreign income (in the same category as
the loss) is recharacterized as U.S.
source income in each following tax
year.
The part of your total foreign income
subject to recharacterization is the
lesser of the following.
a. The total amount of maximum
potential recapture in all overall foreign
loss accounts. The maximum potential
recapture in any account for a category
is the lesser of:
i. The current year taxable income
from foreign sources in that category
(the amount from line 15, less any
adjustment for allocation of losses, as
described earlier under 2. Allocation of
foreign losses and 3. Allocation of U.S.
losses for that category); or
ii. The balance in the overall foreign
loss account for that category.
b. 50% (or more, if you choose) of
your total taxable income from foreign
sources.
If the total foreign income subject to
recharacterization is the amount
described in (a), earlier, then for each
separate category the recapture amount
is the maximum potential recapture

Guide to Global Payroll Management - 2020

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