U.S. · Tax forms
Form 1116 line 16, adjustments to line 15.
The six adjustments to foreign source taxable income, the order they go in, and the IRS loss-allocation example.
Line 15 is your foreign source taxable income or loss before adjustments, copied from line 7. Line 16 holds the required adjustments, made in a fixed order: disallowed business loss under section 461(l), allocation of foreign losses, allocation of U.S. losses, recapture of overall foreign loss accounts, recapture of separate limitation loss accounts, and recapture of overall domestic loss accounts. Enter the net adjustment and attach a statement.
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The line 16 adjustments, in order
| Adjustment | Direction | What the IRS says |
|---|---|---|
| 1. Disallowed business loss, section 461(l) | Increase line 15 | Increase line 15 by any business loss disallowed under section 461(l), to the extent attributable to the separate category on that Form 1116. Later adjustments use line 15 after this change. |
| 2. Allocation of foreign losses | Reduce income | A loss on one Form 1116 reduces foreign income on other Forms 1116 pro rata before it reduces U.S. source income. This creates a separate limitation loss account, or an overall foreign loss account for any excess. |
| 3. Allocation of U.S. losses | Reduce income | A net loss from U.S. sources is allocated across the separate categories of foreign income, shown in parentheses on line 16. A U.S. rental loss counts as a U.S. loss. |
| 4. Recapture of overall foreign loss accounts | Reduce income | In later years part of foreign income in the same category is recharacterized as U.S. source, limited to the lesser of the maximum potential recapture or 50% (or more, if you choose) of foreign taxable income. |
| 5. Recapture of separate limitation loss accounts | Mixed | Income in the loss category in later years is recharacterized into the categories that absorbed the earlier loss. Increase line 15 of those categories and decrease the loss category. |
| 6. Recapture of overall domestic loss accounts | Increase line 15 | Part of U.S. source income is treated as foreign source: the smaller of the account balance or 50% of U.S. source taxable income. An election can reach 100% of a pre-2018 unused overall domestic loss. |
Line 15 first
Line 15 says: “Enter the amount from line 7. This is your taxable income or (loss) from sources outside the United States (before adjustments) for the category of income checked above Part I.” If it is zero or a loss, you generally have no foreign tax credit for that category. The instructions are explicit that you must still complete line 16 and continue with the form, because the adjustments can change the answer. Line 17 then combines lines 15 and 16 into your net foreign source taxable income, and if that is zero or less you skip line 18 and enter -0- on line 19.
How the adjustments work together
The instructions say the adjustments “must be made in the order listed.” If you have more than one, you enter the net adjustment on line 16 and attach a detailed statement showing the computation. For adjustments 2 through 6, any reference to line 15 means the amount after the section 461(l) adjustment. Pub. 514 is the instructions’ reference for details. Most filers with a single category and no prior-year loss accounts have nothing to enter here, and line 16 stays blank.
The IRS example for allocating a foreign loss
For 2025, imagine three Forms 1116. The first has a general category loss of $2,000 on line 15. The second has passive category income of $4,000, and the third has $1,000 of certain income re-sourced by treaty. The $2,000 loss is allocated in proportion to each category’s share of the $5,000 total foreign income. Passive absorbs 80% ($4,000 / $5,000), or $1,600, shown in parentheses on line 16, which leaves $2,400 on line 17. The treaty category absorbs 20%, or $400, leaving $600 on line 17. The whole $2,000 loss was used up by foreign income, so nothing reduces U.S. source income.
The consequence arrives the next year. In 2026 the example has $5,000 of general category income, $3,000 passive, and $500 treaty. Because $1,600 of the loss reduced passive income, $1,600 of the general income is recharacterized as passive, and $400 as treaty income. The 2026 general category form shows ($2,000) on line 16. The instructions add that recharacterizing income does not recharacterize any tax.
Allocating U.S. losses and recapturing old accounts
If you have a net loss from U.S. sources, you allocate it across your separate categories by multiplying the net loss by a fraction. The numerator is the foreign source income in a category and the denominator is total foreign source income in all categories. You include the share in parentheses on line 16, and in later years part of your U.S. source income can be treated as foreign. Recapturing a prior-year overall foreign loss works the other way: part of foreign income is recharacterized as U.S. source, limited to the lesser of the maximum potential recapture in all accounts or 50% (or more, if you choose) of total foreign taxable income. Disposing of property used predominantly in a foreign trade or business can trigger recapture up to 100% of foreign source taxable income, and the instructions reference section 904(f)(3) for stock in a CFC.
More line pages in this set
Related lines: Form 1116 Line 18, Form 1116 Line 1a, Form 1116 Line 12.
Sources
- Instructions for Form 1116 (2025): the line-by-line instructions on this page. Read November 2, 2026.
- Form 1116 (2025), Foreign Tax Credit (Individual, Estate, or Trust): the printed line wording and arithmetic on the form. Read November 2, 2026.
Instructions for Form 1116, 2025 edition. The line labels were read from the Form 1116 (2025) PDF the IRS had posted on the date read. Line numbers can shift between years, so check them against the form for your tax year. Examples marked made-up use invented figures; the others reproduce the IRS's own examples.
Frequently asked questions
What is Form 1116 line 15?
Your taxable income or loss from sources outside the United States, before adjustments, for the category of income checked above Part I, copied from line 7.
What do I enter on line 16?
The net of the required adjustments to line 15, made in the order the instructions list, with an attached statement showing the computation if you have more than one.
What if line 15 is zero or a loss?
You generally have no foreign tax credit for that category, but you must still complete line 16 and continue with the form.
How is a foreign loss allocated among categories?
Pro rata to each category of foreign income. In the IRS example a $2,000 general category loss reduces $4,000 of passive income by $1,600 and $1,000 of treaty income by $400.
Can an overall domestic loss be recaptured at more than 50%?
Yes, for an election under section 904(g)(5) covering unused pre-2018 overall domestic loss, for tax years beginning after December 31, 2017, and before January 1, 2028, recapture of up to 100% can be elected.
Not tax advice
This page summarizes IRS instructions, mostly written for the people who prepare the form, and is not tax, legal or financial advice. A CPA or an enrolled agent can confirm what a line means for your return. Everything runs in your browser; nothing you enter is sent anywhere.