Form 1118 Schedule L Guide: Corporate Tax Redetermination

1. Introduction – What is Form 1118 (Schedule L)?

IRS Form 1118 (Schedule L), officially titled “Foreign Tax Redeterminations for Corporations,” is a supplementary corporate tax schedule. The Internal Revenue Service (IRS) governs this schedule under Section 905(c) of the Internal Revenue Code and Treasury Regulations Section 1.905-3.

When a U.S. domestic corporation claims a Foreign Tax Credit on Form 1118, the credit is based on foreign income taxes paid, accrued, or deemed paid at that time. If foreign tax authorities subsequently adjust the corporation’s foreign tax liability, Schedule L (Form 1118) must be filed to report the redetermination to the IRS.

2. Purpose of the Form

The primary purpose of Schedule L (Form 1118) is to reconcile post-filing changes in corporate foreign tax liabilities. Corporate international tax assessments, foreign tax audits, and foreign subsidiary earnings adjustments frequently occur months or years after a U.S. corporate return is filed.

By requiring Schedule L, the IRS provides a standardized, line-by-line format to report foreign tax refunds, revised foreign tax assessments, or Section 960 deemed-paid tax adjustments. This allows the IRS to recalculate the corporation’s U.S. tax liability for the affected prior tax year and adjust foreign tax credit carryover balances accordingly.

3. Who Needs to File This Form

Domestic C-corporations claiming a Foreign Tax Credit on Form 1118 must file Schedule L if they experience a foreign tax redetermination for a prior corporate tax year. You are required to file Schedule L under the following conditions:

• The corporation receives a refund of direct foreign income taxes previously claimed on Form 1118.
• Direct foreign taxes accrued and claimed on Form 1118 differ from the actual foreign tax amounts paid.
• Direct foreign taxes accrued on Form 1118 remain unpaid after 2 years from the close of the tax year.
• A foreign tax authority adjusts foreign taxes paid by a Controlled Foreign Corporation (CFC), altering Section 960 deemed-paid credits claimed by the U.S. parent.

4. Who Is Exempt / Not Required to File

Corporations that filed Form 1118 in prior years are exempt from filing Schedule L if no post-filing foreign tax adjustments occurred. Additional exemptions include:

• No Foreign Tax Adjustments: Corporations whose prior-year foreign tax payments matched their claimed credits exactly and received no foreign tax refunds or subsidiary adjustments.
• Individual Taxpayers: Individuals, sole proprietors, and partners use Schedule C (Form 1116) rather than Form 1118 Schedule L.
• Deduction Election: Corporations that elected to deduct foreign taxes on Form 1120 instead of claiming a Foreign Tax Credit do not file Schedule L.

5. When to File

The filing deadline for Schedule L (Form 1118) depends directly on whether the foreign tax redetermination increases or decreases U.S. corporate tax liability:

• Redeterminations Increasing U.S. Tax (e.g., Foreign Tax Refunds): The corporation must notify the IRS and file Schedule L with an amended return (Form 1120-X) within 90 days of the foreign tax redetermination date.
• Redeterminations Decreasing U.S. Tax (e.g., Additional Foreign Tax Paid): The corporation can file an amended return claiming an additional credit within 10 years from the original tax return due date for the affected year.

6. Where and How to File

Schedule L (Form 1118) is attached to Form 1118 and Form 1120-X (Amended U.S. Corporation Income Tax Return) for the affected corporate tax year. Most corporations submit this amended tax package electronically using IRS-approved enterprise software.

If submitting a paper amended corporate return, place Schedule L directly behind Form 1118 in the prescribed assembly order. Mail the complete package to the IRS service center address specified in the official Form 1120-X instructions based on the corporation’s location and asset size.

7. Step-by-Step Instructions to Fill the Form

Schedule L (Form 1118) requires detailing the affected tax year, original tax figures, redetermined direct and deemed-paid taxes, and currency conversion adjustments. Below is an overview of the primary parts on the schedule:

Form Part	Part Title	Description & Line Instructions
Category Checkbox	Income Category Code	Select the specific Form 1118 category (e.g., Section 951A / GILTI, Foreign Branch, or General category) affected by the redetermination.
Part I	Redetermination Information	Report the affected prior tax year, date of redetermination, foreign currency amount refunded or paid, exchange rate used, and U.S. dollar equivalent.
Part II	Direct Foreign Taxes Comparison	Report original direct foreign taxes claimed on Form 1118 alongside redetermined direct foreign tax amounts in foreign currency and U.S. dollars.
Part III	Section 960 Deemed-Paid Taxes	Report adjustments to deemed-paid foreign taxes resulting from foreign subsidiary tax changes, subpart F adjustments, or GILTI redeterminations.
Part IV	U.S. Corporate Tax Adjustment	Calculate the net change in allowable Foreign Tax Credits and compute the final U.S. corporate tax deficiency or refund for the affected year.

8. Required Documents/Information Needed Before Filling

To accurately complete Schedule L (Form 1118), corporate tax departments must compile detailed historical tax documentation. Make sure you gather the following items before filling out the form:

• Copies of original Form 1120, Form 1118, and Form 5471 filings for the affected prior corporate tax year.
• Foreign tax refund receipts, revised foreign tax return filings, or foreign audit notices.
• Form 5471 Schedule E and Schedule E-1 workpapers tracking foreign subsidiary tax adjustments.
• Historical exchange rate data for the original tax payment date and the redetermination date.

9. Common Mistakes to Avoid

Errors on Schedule L (Form 1118) can lead to severe statutory penalties and corporate audit adjustments. Tax preparers should avoid these frequent missteps:

• Missing the 90-Day IRS Notification Window: Failing to submit Schedule L and Form 1120-X within 90 days of receiving a foreign tax refund.
• Using Incorrect Currency Exchange Rates: Translating foreign tax refunds into U.S. dollars using current exchange rates instead of the exchange rates used when foreign taxes were originally claimed.
• Omitting Section 960 Deemed-Paid Adjustments: Failing to report foreign subsidiary tax redeterminations on Part III when foreign tax audits alter CFC taxes.
• Forgetting Form 1120-X: Submitting Schedule L (Form 1118) without attaching an amended corporate return (Form 1120-X) to process the tax adjustment.
• Failing to Update Schedule K Carryovers: Forgetting to update Schedule K (Form 1118) carryover balances when a redetermination reduces available foreign tax credit carryforwards.

10. Penalties for Non-Filing or Errors

Failing to report a foreign tax redetermination that increases U.S. corporate tax liability carries mandatory statutory penalties under Section 6689 of the Internal Revenue Code.

If a corporation fails to notify the IRS of a foreign tax refund or reduction within the 90-day window, the IRS assesses a penalty of 5% of the tax deficiency per month (or fraction of a month) that the failure continues, up to a maximum penalty of 25%. In addition, mandatory interest accrues on any underpaid U.S. corporate tax from the original tax return due date until paid in full.

11. Related Forms or Schedules

Schedule L (Form 1118) is closely integrated with several other corporate international tax forms:

• Form 1118: Foreign Tax Credit — Corporations, the core form to which Schedule L is attached.
• Schedule K (Form 1118): Foreign Tax Carryover Reconciliation, used to track carryforward adjustments caused by redeterminations.
• Form 1120-X: Amended U.S. Corporation Income Tax Return, required to process prior-year tax adjustments.
• Form 5471: Information Return of U.S. Persons With Respect to Certain Foreign Corporations.

12. Frequently Asked Questions

What constitutes a corporate foreign tax redetermination?

A foreign tax redetermination is any post-filing change in foreign tax liability, including foreign tax refunds, differences between accrued and paid foreign taxes, or adjustments to foreign subsidiary taxes.

What is the 90-day notification rule for foreign tax refunds?

If a corporation receives a foreign tax refund that reduces the credit claimed on a prior U.S. tax return, it must file Schedule L (Form 1118) and Form 1120-X within 90 days of the refund.

Do foreign subsidiary tax audits trigger Schedule L (Form 1118)?

Yes. If a foreign tax audit alters foreign taxes paid by a Controlled Foreign Corporation (CFC), changing Section 960 deemed-paid credits, Schedule L must be filed.

What exchange rate is used for foreign tax refunds on Schedule L?

Foreign tax refunds generally must be translated into U.S. dollars using the exchange rate applied when the foreign taxes were originally paid or accrued.

What happens if accrued foreign taxes are not paid within 2 years?

If accrued direct foreign taxes claimed on Form 1118 are not paid within 2 years after the close of the tax year, the corporation must file Schedule L to reverse the claimed credit.

What is the penalty for failing to report a corporate foreign tax refund?

Under Section 6689, failing to report a foreign tax refund carries a penalty of 5% per month of the tax underpayment, up to a maximum of 25%, plus accrued interest.

13. Conclusion – Key Takeaways

IRS Form 1118 (Schedule L) is a vital compliance schedule used by U.S. domestic corporations to reconcile post-filing changes in foreign tax liabilities. Whether caused by a foreign tax refund or a foreign subsidiary audit adjustment, Schedule L ensures U.S. corporate tax liabilities are accurately adjusted.

Complying with the mandatory 90-day notification rule for foreign tax refunds, applying proper historical exchange rates, and attaching Schedule L to Form 1120-X protects corporations from severe penalty assessments while maintaining full IRS compliance.