| Instructions for Form 1120-FSC |
2006 Tax Year |
This is archived information that pertains only to the 2006 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
Period covered.
File the 2006 return for calendar year 2006 and fiscal years that begin in 2006 and end in 2007. For a fiscal year
return, fill in the tax year
space at the top of the form.
Note.
The 2006 Form 1120-FSC may also be used if:
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The FSC has a tax year of less than 12 months that begins and ends in 2007 and
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The 2007 Form 1120-FSC is not available at the time the FSC is required to file its return.
The FSC must show its 2007 tax year on the 2006 Form 1120-FSC and take into account any tax law changes that are effective
for tax years beginning
after December 31, 2006.
Name.
Print or type the FSC's true name (as set forth in the charter or other legal document creating it).
Address.
Enter the U.S. address where the FSC maintains the records required under section 6001. Include the suite, room, or
other unit number after the
street address. If the post office does not deliver mail to the street address and the FSC has a P.O. box, show the box number
instead.
If the FSC receives its mail in care of a third party (such as an accountant or an attorney), enter on the street
address line “ C/O” followed
by the third party's name and street address or P.O. box.
Item A. Foreign country or U.S. possession of incorporation.
See Definition of a Foreign Sales Corporation (FSC) on page 2.
Item E. Total assets.
Enter the FSC's total assets (as determined by the accounting method regularly used in keeping the FSC's books and
records) at the end of the tax
year from page 6, Schedule L, column (d), line 15. If there are no assets at the end of the tax year, enter -0-.
Item F. Final return, name change, address change, or amended return.
-
If this is the FSC's final return and it will no longer exist, check the “Final return” box.
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If the FSC changed its name since it last filed a return, check the box for “Name change.” Generally, a FSC also must have amended its
articles of incorporation and filed the amendment with the jurisdiction in which it was incorporated.
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If the FSC has changed its address since it last filed a return (including a change to an “in care of” address), check the box for
“Address change.”
Note.
If a change of address occurs after the return is filed, use Form 8822, Change of Address, to notify the IRS of the new address.
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If the FSC is amending its return, check the box for “Amended return.”
Line 1. Principal shareholder.
Complete lines 1a through 1h for the shareholder (individual, corporation, partnership, trust, or estate) that was
the principal shareholder at the
beginning of the FSC's tax year. See the Note on page 5 under Accounting Period .
Foreign address.
Enter the information in the following order: city, province or state, and country. Follow the country's practice
for entering the postal code. Do
not abbreviate the country name.
Line 2. Parent-subsidiary controlled group.
If the FSC is a subsidiary in a parent-subsidiary controlled group and the principal shareholder is not the common
parent of the group, complete
lines 2a through 2g for the common parent. Enter the consolidated total assets on line 2d for a group that files a consolidated
return; otherwise,
enter only the common parent's total assets.
Note.
Check the “Yes” box on line 2 if the FSC is a subsidiary in a parent-subsidiary controlled group. This applies even if the FSC is a
subsidiary member of one group and the parent corporation of another.
The term “ parent-subsidiary controlled group” means one or more chains of corporations connected through stock ownership (sections 927(d)(4)
and 1563(a)(1)). Both of the following requirements must be met:
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More than 50% of the total combined voting power of all classes of stock entitled to vote or more than 50% of the total value
of all classes
of stock of each corporation in the group (except the parent) must be owned by one or more of the other corporations in the
group.
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The common parent must own more than 50% of the total combined voting power of all classes of stock entitled to vote or more
than 50% of the
total value of all classes of stock of at least one of the other corporations in the group.
Stock owned directly by other members of the group is not counted when computing the voting power or value.
See sections 927(d)(4) and 1563(d)(1) for the definition of “ stock” for purposes of determining stock ownership above.
Line 2h. Credit for federal telephone excise tax paid.
If the FSC was billed after February 28, 2003, and before August 1, 2006, for the federal telephone excise tax on
long distance or bundled service,
the FSC may be able to request a credit for the tax paid. The FSC had bundled service if its local and long distance service
was provided under a plan
that does not separately state the charge for local service. The FSC may not request the credit if it has already received
a credit or refund from its
service provider. If the FSC requests the credit, it may not ask its service provider for a credit or refund and must withdraw
any request previously
submitted to its provider.
The FSC may request the credit by attaching Form 8913, Credit for Federal Telephone Excise Tax Paid, showing the actual
amount the FSC paid. The
FSC also may be able to request the credit based on an estimate of the amount paid. See Form 8913 for details. In either case,
the FSC must keep
records to substantiate the amount of the credit requested.
Line 2i. Backup withholding.
If the FSC had income tax withheld from any payments it received due to backup withholding, include the amount withheld
in the total for line 2i.
Show the amount withheld in the blank space in the right-hand column between lines 1 and 2i, and write “ backup withholding.”
Note.
Do not include backup withholding amounts on line 2g. Include on line 2g only amounts withheld under Chapter 3 of the Code.
Line 3. Estimated tax penalty.
A FSC that does not make estimated tax payments when due may be subject to an underpayment penalty for the period
of underpayment. Generally, a FSC
is subject to the penalty if its tax liability is $500 or more and it did not timely pay the smaller of:
See section 6655 for details and exceptions, including special rules for large corporations.
Use Form 2220, Underpayment of Estimated Tax by Corporations, to see if the FSC owes the penalty and to figure the
amount of the penalty.
Generally, the FSC does not have to file this form because the IRS can figure the amount of any penalty and bill the FSC for
it. However, even if the
FSC does not owe the penalty, complete and attach Form 2220 if:
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The annualized income or adjusted seasonal installment method is used or
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The FSC is a large corporation computing its first required installment based on the prior year's tax. (See the Form 2220
instructions for
the definition of a large corporation.)
If Form 2220 is attached, check the box on line 3 and enter the amount of any penalty on this line.
Cost of Goods Sold Related To Foreign Trading Gross Receipts
Complete Schedule A only for the cost of goods sold deduction related to foreign trading gross receipts reported on lines
1 through 5 of Schedule
B.
Complete column (a) to show the cost of goods sold for inventory acquired in transactions using the administrative pricing
rules. Complete column
(b) to show the cost of goods sold for inventory acquired in transactions that did not use the administrative pricing rules.
For details on the
administrative pricing rules, see the Instructions for Schedule P (Form 1120-FSC).
If the FSC acts as another person's commission agent on a sale, do not enter any amount on Schedule A for the sale.
Small FSCs will have to make two separate computations for cost of goods sold if their foreign trading gross receipts exceed
the limitation amount
on line 6e of Schedule B. In this case, a deduction for cost of goods sold will be figured separately for the income on line
6h of Schedule B, and
separately for the income on line 7 of Schedule F.
Generally, inventories are required at the beginning and end of each tax year if the purchase or sale of merchandise is an
income-producing factor.
See Regulations section 1.471-1.
However, if the FSC is a qualifying taxpayer or a qualifying small business taxpayer, it may adopt or change its accounting
method to account for
inventoriable items in the same manner as materials and supplies that are not incidental (unless its business is a tax shelter
(as defined in section
448(d)(3)).
A qualifying taxpayer is a taxpayer that has average annual gross receipts of $1 million or less for the 3 prior years.
A qualifying small business taxpayer is a taxpayer (a) that has average annual gross receipts of $10 million or less for the
3 prior tax years and
(b) whose principal business activity is not an ineligible activity.
Under this accounting method, inventory costs for merchandise purchased for resale are deductible in the year the merchandise
is sold (but not
before the year the FSC paid for the merchandise, if it is also using the cash method). For additional guidance on this method
of accounting for
inventoriable items, see Pub. 538, and the Instructions for Form 3115.
Enter amounts paid for merchandise during the tax year on line 2. The amount the FSC may deduct for the tax year is figured
on line 8.
All FSCs not using the cash method of accounting should see Section 263A uniform capitalization rules in the instructions for Schedule G
on page 10. See those instructions before completing Schedule A.
If the FSC uses intercompany pricing rules (for purchases from a related supplier), use the transfer price figured in Part
II of Schedule P (Form
1120-FSC).
Line 1. Inventory at beginning of year.
If the FSC is changing its method of accounting for the current tax year, it must refigure last year's closing inventory
using its new method of
accounting and enter the result on line 1. If there is a difference between last year's closing inventory and the refigured
amount, attach an
explanation and take it into account when figuring the FSC's section 481(a) adjustment (explained on page 5).
Line 4. Additional section 263A costs.
An entry is required on this line only for FSCs that have elected a simplified method of accounting.
For FSCs that have elected the simplified production method, additional section 263A costs are generally those costs,
other than interest, that
were not capitalized under the FSC's method of accounting immediately prior to the effective date of section 263A but are
now required to be
capitalized under section 263A. For details, see Regulations section 1.263A-2(b).
For FSCs that have elected the simplified resale method, additional section 263A costs are generally those costs incurred
with respect to the
following categories:
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Off-site storage or warehousing.
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Purchasing.
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Handling, such as processing, assembling, repackaging, and transporting.
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General and administrative costs (mixed service costs).
For details, see Regulations section 1.263A-3(d).
Enter on line 4 the balance of section 263A costs paid or incurred during the tax year not includible on lines 2,
3, and 5.
Line 5. Other costs.
Enter on line 5 any costs paid or incurred during the tax year not entered on lines 2 through 4.
Line 7. Inventory at end of year.
See Regulations sections 1.263A-1 through 1.263A-3 for details on figuring the amount of additional section 263A costs
to be included in ending
inventory. If the FSC accounts for inventoriable items in the same manner as materials and supplies that are not incidental,
enter on line 7 the
portion of its merchandise purchased for resale that is included on line 6 and was not sold during the year.
Lines 9a through 9f. Inventory valuation methods.
Inventories may be valued at:
However, if the FSC is using the cash method of accounting, it is required to use cost.
FSCs that account for inventoriable items in the same manner as materials and supplies that are not incidental may
currently deduct expenditures
for direct labor and all indirect costs that would otherwise be included in inventory costs.
The average cost (rolling average) method of valuing inventories generally does not conform to the requirements of
the regulations. See Rev. Rul.
71-234, 1971-1 C.B. 148.
FSCs that use erroneous valuation methods must change to a method permitted for Federal income tax purposes. To make
this change, use Form 3115.
On line 9a, check the method(s) used for valuing inventories. Under lower of cost or market, the term “ market” (for normal goods) means the
current bid price prevailing on the inventory valuation date for the particular merchandise in the volume usually purchased
by the taxpayer. If
section 263A applies to the taxpayer, the basic elements of cost must reflect the current bid price of all direct costs and
all indirect costs
properly allocable to goods on hand at the inventory date.
Inventory may be valued below cost when the merchandise is unsalable at normal prices or unusable in the normal way
because the goods are subnormal
due to damage, imperfections, shop wear, etc., within the meaning of Regulations section 1.471-2(c). The goods may be valued
at the current bona fide
selling price, minus direct cost of disposition (but not less than scrap value) if such a price can be established.
If this is the first year the Last-in, First-out (LIFO) inventory method was either adopted or extended to inventory
goods not previously valued
under the LIFO method provided in section 472, attach Form 970, Application To Use LIFO Inventory Method, or a statement with
the information required
by Form 970. Also check the LIFO box on line 9c. On line 9d, enter the amount or the percent of total closing inventories
covered under section 472.
Estimates are acceptable.
If the FSC changed or extended its inventory method to LIFO and had to write up the opening inventory to cost in the
year of election, report the
effect of the write-up as other income (as appropriate on Schedule F, line 16), proportionately over a 3-year period that
begins with the year of the
LIFO election (section 472(d)).
For more information on inventory valuation methods, see Pub. 538.
Line 2.
Show any tax-exempt interest received or accrued. Include any exempt-interest dividends received as a shareholder in a mutual fund or
other regulated investment company. Also include this amount on Schedule M-1, line 7a.
Line 5.
If the FSC owned at least a 10% interest, directly or indirectly, in any foreign partnership, attach a statement listing
the following information
for each foreign partnership. For this purpose, a foreign partnership includes an entity treated as a foreign partnership
under Regulations section
301.7701-2 or 301.7701-3.
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Name and EIN (if any) of the foreign partnership;
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Identify which, if any, of the following forms the foreign partnership filed for its tax year ending with or within the FSC's
tax year: Form
1042, 1065 or 1065-B, or 8804;
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Name of the tax matters partner (if any) and
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Beginning and ending dates of the foreign partnership's tax year.
Line 6.
If the FSC has a net operating loss (NOL) for its 2006 tax year, it may elect to waive the entire carryback period
for the NOL and instead carry
the NOL forward to future tax years. To do so, check the box on line 6 and file the tax return by its due date, including
extensions (do not attach
the statement described in Temporary Regulations section 301.9100-12T). Once made, the election is irrevocable. See Pub. 542
and Form 1139,
Corporation Application for Tentative Refund, for more details.
Line 7.
Enter the amount of the NOL carryover to the tax year from prior years, even if some of the loss is used to offset
income on this return. The
amount to enter is the total of all NOLs generated in prior years but not used to offset income (either as a carryback or
carryover) to a tax year
prior to 2006. Do not reduce the amount by any NOL deduction reported on line 19a, Part II of Schedule B.
Lines 8c and 9b(2).
See Definition of a Foreign Sales Corporation (FSC) on page 2 for definitions of qualifying foreign country and U.S. possession.
Line 9.
All FSCs (except small FSCs) must answer these questions. For more information, see Foreign Management Rules on page 3.
Line 10.
All FSCs (except small FSCs) must answer these questions. On line 10b, indicate how the FSC met the foreign direct
costs requirement of section
924(d) for all transactions that generated foreign trading gross receipts reported on lines 1 through 5 of Schedule B. Also,
complete line 10a
and/or line 10d to make an election to use either of the annual grouping election(s) indicated. See Foreign Economic Process Rules on
page 3 for details.
Taxable Income or (Loss)
Use Schedule B to compute taxable income from all sources.
Use Part I to compute net income attributable to nonexempt foreign trade income. Income and expenses on lines 1 through 15
are reported in column
(a) if the administrative pricing rules were used in the transaction that produced the income.
Report in column (b) all foreign trade income from all transactions in which the administrative pricing rules were not used.
Attach a schedule that
shows the computation of the taxable and nontaxable income included on line 15, column (b). Include only the taxable amount
on line 16.
Nonaccrual experience method.
Accrual method FSCs are not required to accrue certain amounts to be received from the performance of certain services
that, on the basis of their
experience, will not be collected, if the FSC's average annual gross receipts for the 3 prior tax years does not exceed $5
million.
This provision does not apply to any amount if interest is required to be paid on the amount or if there is any penalty
for failure to timely pay
the amount. For more information, see section 448(d)(5) and Regulations section 1.448-2.
Corporations that qualify to use the nonaccrual experience method should attach a schedule showing total gross receipts,
the amount not accrued as
a result of the application of section 448(d)(5), and the net amount accrued. Enter the net amount on the applicable line
of
Schedule B.
Lines 1 through 5.
Enter the foreign trading gross receipts requested on lines 1 through 5. See section 924 and Foreign Trading Gross Receipts on page 3 of
these instructions for receipts that are excluded and other details. Report commission income on line 1 or line 2 based on
the sale, lease, or rental
of property on which that commission arose.
Line 5.
If the 50% gross receipts test of section 924(a)(5) is not met, report the FSC's gross receipts that would have otherwise
qualified under that
section on line 16, Schedule F, instead of line 5,
Schedule B.
Lines 6b through 6h.
See section 924(b)(2)(B) for the rules regarding the limitation on the amount of foreign trading gross receipts that
a small FSC may take into
account in determining its exempt foreign trade income.
Line 6d.
Temporary Regulations section 1.921-1T(b)(5) indicates that, in the case of a small FSC having a short tax year, the
dollar limitation reported on
line 6b or 6c is to be prorated on a daily basis. A small FSC having a short tax year must divide the number of days in its
short tax year by the
number of days that would have made up a full tax year and enter the resulting fraction on line 6d as a decimal less than
1.00000.
Example.
For its 2006 calendar year tax year, a small FSC has a short tax year of 73 days. The FSC enters 0.20 (73/365) on
line 6d.
Line 6f.
If commission income is reported in the total for line 6a of Schedule B, total receipts for purposes of line 6f are
figured as follows:
| 1. |
Enter total of columns (a) and (b), line 6a, Schedule B
|
1. |
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| 2. |
Enter total commission income reported on line 1 and line 2, Schedule B
|
2. |
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| 3. |
Subtract line 2 from line 1
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3. |
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| 4. |
With respect to the commission income reported on line 2 above, enter total gross receipts on the sale,
lease, or rental of property on which the commission income arose (section 927(b)(2))
|
4. |
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| 5. |
Add lines 3 and 4. Enter here and on line 6f, Schedule B
|
5. |
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Line 6h.
When making the line 6h allocation, allocate only the commission income from the gross receipts on line 4 above. If
the small FSC's foreign trading
gross receipts for the tax year (line 6f, Schedule B) exceed its allowable limitation (line 6e, Schedule B), the small FSC
may select the gross
receipts to which the limitation is allocated. In such a case, allocate the amount on line 6g between columns (a) and (b)
on line 6h based on whether
the administrative pricing rules were used for the gross receipts selected. See Regulations section 1.921-2(b), Q&A-4.
Line 19a. Net operating loss deduction.
A FSC may use the NOL incurred in one tax year to reduce its taxable income in another tax year. Enter on line 19a
the total NOL carryovers from
other tax years, but do not enter more than the FSC's taxable income (after the dividends-received deduction). Attach a schedule
showing the
computation of the NOL deduction. Also complete line 7 in Additional Information on page 2 of the form.
For details on the NOL deduction, see Pub. 542, section 172, and Form 1139.
Line 19b. Dividends-received deduction.
A FSC may be entitled to a deduction for dividends it receives from other corporations. Complete the worksheet on
page 10 using the instructions
that begin below. Attach the completed worksheet to Form 1120-FSC.
Line 20. Taxable income or (loss).
If line 20 is zero or less, the FSC may have an NOL that may be carried back or forward as a deduction to other tax
years. Generally, a FSC first
carries back an NOL 2 tax years. However, the FSC may elect to waive the carryback period and instead carry the NOL forward
to future tax years. To
make the election, see the instructions for Additional Information, line 6 on page 8.
See Form 1139 for details, including other elections that may be available, which must be made no later than 6 months
after the due date (excluding
extensions) of the FSC's tax return.
Exemption Percentages Used in Figuring Exempt Foreign Trade Income
For purposes of the Note at the top of Schedule E, a C corporation is a corporation other than an S corporation. Shareholders, other
than C corporations, are individuals, partnerships, S corporations, trusts, and estates.
Use lines 2a through 2d to figure the exemption percentage for foreign trade income determined by not using the administrative
pricing rules. See
section 923(a)(2).
Use lines 3a through 3d to figure the exemption percentage for foreign trade income that was determined by using the administrative
pricing rules
(see section 923(a)(3)). If a qualified cooperative is a shareholder of the FSC, see section 923(a)(4).
Net Income From Nonexempt Foreign Trade Income and Taxable Nonforeign Trade Income
Enter net income from nonexempt foreign trade income and related expenses in Part I.
Line 2.
Enter FSC income that resulted from the FSC's cooperation with an international boycott. See section 927(e)(2) and
Form 5713 and related schedules
and instructions.
Line 3.
Enter the amount, if any, of illegal payments, bribes, or kickbacks that the FSC paid, directly or indirectly, to
government officials, employees,
or agents. See section 927(e)(2).
Line 5.
See the instructions for Schedule A before completing this line.
Enter the taxable portion of gross income of the FSC that was not derived from foreign trading gross receipts. This type of
income includes:
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Small FSCs only. Amounts specifically excluded from foreign trade income because of the small FSC limitation (the amount by
which line 6f of
Schedule B exceeds line 6e of Schedule B). (Enter the excess, if any, on line 7 of Schedule F.)
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Investment type income. (Enter on lines 8 through 12 of Schedule F.)
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Income from property that is subsidized, deemed in short supply, or destined for use in the United States. (Enter on lines
13 and 14 of
Schedule F.)
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Amounts from transactions that did not meet the foreign economic process requirements. (Enter on line 15 of
Schedule F.)
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Other nonforeign trade income. (Enter on line 16 of Schedule F.)
For more details, see sections 924(f) and 927(a)(2) and (3).
Line 9.
Complete the worksheet on page 10 to figure the total dividends to report on
line 9. Attach the completed worksheet to Form 1120-FSC.
Line 18.
Enter the deductions allocated or apportioned to line 17 income. Attach to Form 1120-FSC a schedule listing each type
of deduction. Show deductions
related to cost of goods sold separately. See the instructions for Schedule A on page 7 before completing this line.
Passive activity limitations.
Section 469 generally limits the deduction of passive activity losses for closely held FSCs and FSCs that are personal
service corporations. See
section 469 and the Instructions for Form 8810 for details.
Instructions for Dividends and Dividends-Received Deduction Worksheet
For purposes of the 20% ownership test on lines 1 through 7, the percentage of stock owned by the FSC is based on voting power
and value of the
stock. Preferred stock described in section 1504(a)(4) is not taken into account.
Enter dividends (except those received on debt-financed stock acquired after July 18, 1984-see section 246A) that:
Also include on line 1 dividends (except those received on debt-financed stock acquired after July 18, 1984) from a regulated
investment company
(RIC). The amount of dividends eligible for the dividends-received deduction under section 243 is limited by section 854(b).
The FSC should receive a
notice from the RIC specifying the amount of dividends that qualify for the deduction.
Report so-called dividends or earnings received from mutual savings banks, etc., as interest. Do not treat them as dividends.
Enter dividends (except those received on debt-financed stock acquired after July 18, 1984) that are received from 20%-or-more-owned
domestic
corporations subject to income tax and that are subject to the 80% deduction under section 243(c).
Enter dividends that are:
-
Received on debt-financed stock acquired after July 18, 1984, from domestic and foreign corporations subject to income tax
that would
otherwise be subject to the dividends-received deduction under section 243(a)(1), 243(c), or 245(a). Generally, debt-financed
stock is stock that the
FSC acquired by incurring a debt (for example, it borrowed money to buy the stock).
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Received from a RIC on debt-financed stock. The amount of dividends eligible for the dividends-received deduction is limited
by section
854(b). The FSC should receive a notice from the RIC specifying the amount of dividends that qualify for the deduction.
Line 3, Columns (b) and (c)
Dividends received on debt-financed stock acquired after July 18, 1984, are not entitled to the full 70% or 80% dividends-received
deduction. The
70% or 80% deduction is reduced by a percentage that is related to the amount of debt incurred to acquire the stock. See section
246A. Also, see
section 245(a) before making this computation for an additional limitation that applies to dividends received from foreign
corporations. Attach a
schedule to
Form 1120-FSC showing how the amount on line 3, column (c), was figured.
Enter dividends received on the preferred stock of a less-than-20%-owned public utility that is subject to income tax and
is allowed the deduction
provided in section 247 for dividends paid.
Enter dividends received on preferred stock of a 20%-or-more-owned public utility that is subject to income tax and is allowed
the deduction
provided in section 247 for dividends paid.
Enter the U.S.-source portion of dividends that:
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Are received from less-than-20%-owned foreign corporations and
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Qualify for the 70% deduction under section 245(a). To qualify for the 70% deduction, the FSC must own at least 10% of the
stock of the
foreign corporation by vote and value.
Enter the U.S.-source portion of dividends that are received from 20%-or-more-owned foreign corporations and that qualify
for the 80% deduction
under section 245(a).
Limitation on dividends-received deduction.
Generally, line 8, column (c), may not exceed the amount on line 10 of the worksheet below. However, in a year in
which an NOL occurs, this
limitation does not apply even if the loss is created by the dividends-received deduction. See sections 172(d) and 246(b).
| 1. |
Refigure line 18, Part II, Schedule B (page 3 of Form 1120-FSC) without any adjustment under section 1059
and without any capital loss carryback to the tax year under section 1212(a)(1)
|
1. |
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| 2. |
Multiply line 1 by 80%
|
2. |
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| 3. |
Add lines 2, 5, and 7, column (c), and the part of the deduction on line 3, column (c), that is
attributable to dividends from 20%-or-more-owned corporations
|
3. |
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| 4. |
Enter the smaller of line 2 or 3. If line 3 is greater than line 2, stop here; enter the amount from line 4
on line 8, column (c), and do not complete lines 5-10 below
|
4. |
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| 5. |
Enter the total amount of dividends from 20%-or-more-owned corporations that are included on lines 2, 3, 5,
and 7, column (a)
|
5. |
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| 6. |
Subtract line 5 from line 1
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6. |
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| 7. |
Multiply line 6 by 70%
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7. |
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| 8. |
Subtract line 3 above from line 8, column (c)
|
8. |
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| 9. |
Enter the smaller of line 7 or
line 8
|
9. |
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| 10. |
Dividends-received deduction after limitation (sec. 246(b)). Add lines 4 and 9. Enter the result
here and on line 8, column (c)
|
10. |
|
If the FSC claims the foreign tax credit, enter the tax that is deemed paid under sections 902 and 960. See sections 78 and
906(b)(4).
Include the following:
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Dividends (other than capital gain distributions reported on Schedule D (Form 1120) and exempt-interest dividends) that are
received from
RICs and that are not subject to the 70% deduction.
-
Dividends from tax-exempt organizations.
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Dividends (other than capital gain distributions) received from a real estate investment trust that, for the tax year of the
trust in which
the dividends are paid, qualifies under sections 856 through 860.
-
Dividends not eligible for a dividends-received deduction, which include the following:
-
Dividends received on any share of stock held for less than 46 days during the 91-day period beginning 45 days before the
ex-dividend date.
When counting the number of days the FSC held the stock, you may not count certain days during which the FSC's risk of loss
was diminished. See
section 246(c)(4) and Regulations section 1.246-5 for more details.
-
Dividends attributable to periods totaling more than 366 days that the corporation received on any share of preferred stock
held for less
than 91 days during the 181-day period that began 90 days before the ex-dividend date. When counting the number of days the
FSC held the stock, you
may not count certain days during which the FSC's risk of loss was diminished. See section 246(c)(4) and Regulations section
1.246-5 for more details.
Preferred dividends attributable to periods totaling less than 367 days are subject to the 46-day holding period rule above.
-
Dividends on any share of stock to the extent the FSC is under an obligation (including a short sale) to make related payments
with respect
to positions in substantially similar or related property.
-
Any other taxable dividend income not properly reported elsewhere on the worksheet.
If patronage dividends or per-unit retain allocations are included on line 11, identify the total of these amounts in a schedule
attached to Form
1120-FSC.
Deductions Allocated or Apportioned to Foreign Trade Income Other Than Foreign Trade Income Reported on Schedule F
Limitations on Deductions
Section 263A uniform capitalization rules.
The uniform capitalization rules of section 263A generally require FSCs to capitalize, or include in inventory, certain
costs incurred in
connection with:
-
Personal property (tangible and certain intangible property) acquired for resale.
-
The production of real property and tangible personal property by a FSC for use in its trade or business or in an activity
engaged in for
profit.
Tangible personal property
produced by a FSC includes a film, sound recording, videotape, book, or similar property.
FSCs subject to the section 263A uniform capitalization rules are required to capitalize:
-
Direct costs and
-
An allocable part of most indirect costs (including taxes) that (a) benefit the assets produced or acquired for resale or
(b) are incurred
by reason of the performance of production or resale activities.
For inventory, some of the indirect expenses that must be capitalized are:
-
Administration expenses.
-
Taxes.
-
Depreciation.
-
Insurance.
-
Compensation paid to officers attributable to services.
-
Rework labor.
-
Contributions to pension, stock bonus, and certain profit-sharing, annuity, or deferred compensation plans.
Regulations section 1.263A-1(e)(3) specifies other indirect costs that relate to production or resale activities that must
be capitalized and those
that may be currently deductible.
Interest expense
paid or incurred during the production period of designated property must be capitalized and is governed by special
rules. For more details, see
Regulations sections 1.263A-8 through 1.263A-15.
The costs required to be capitalized under section 263A are not deductible until the property (to which the costs
relate) is sold, used, or
otherwise disposed of by the FSC.
Exceptions.
Section 263A does not apply to:
-
Personal property acquired for resale if the FSC's average annual gross receipts for the 3 prior tax years were $10 million
or
less.
-
Inventoriable items accounted for in the same manner as materials and supplies that are not incidental. See Schedule A on
page 7 for details.
For more details on the uniform capitalization rules, see Regulations sections 1.263A-1 through 1.263A-3.
Transactions between related taxpayers.
Generally, an accrual basis taxpayer may only deduct business expenses and interest owed to a related party in the
year the payment is included in
the income of the related party. See sections 163(e)(3), 163(j), and 267 for limitations on deductions for unpaid interest
and expenses.
Golden parachute payments.
A portion of the payments made by a FSC to key personnel that exceeds their usual compensation may not be deductible.
This occurs when the FSC has
an agreement (golden parachute) with these key employees to pay them these excess amounts if control of the FSC changes. See
section 280G and
Regulations section 1.280G-1.
Line 1.
Enter only foreign direct costs on lines 1a through 1e. See section 924(e) and Regulations sections 1.924(e)-1(a)
through (e) for definitions and
rules on direct activity costs related to foreign trade income.
Line 4. Depreciation.
Include on line 4 depreciation and the cost of certain property that the FSC elected to expense under section 179.
See Form 4562, Depreciation and
Amortization, and its instructions.
Line 5. Salaries and wages.
Enter the total salaries and wages paid for the tax year. Do not include salaries and wages deductible elsewhere on
the return, such as amounts
included in officers' compensation, cost of goods sold, elective contributions to a section 401(k) cash or deferred arrangement,
or amounts
contributed under a salary reduction SEP agreement or a SIMPLE IRA plan.
Line 10. Compensation of officers.
Enter deductible officers' compensation on line 10. Do not include compensation deductible elsewhere on the return,
such as amounts included in
cost of goods sold, elective contributions to a section 401(k) cash or deferred arrangement, or amounts contributed under
a salary reduction SEP
agreement or a SIMPLE IRA plan.
Line 11. Bad debts.
Enter the total debts that became worthless in whole or in part during the tax year. A cash basis taxpayer may not
claim a bad debt deduction
unless the amount was previously included in income.
Line 14. Other deductions.
Attach a schedule, listing by type and amount, all allowable deductions that are not deductible elsewhere on Form
1120-FSC. Enter the total on line
14.
Examples of other deductions include:
-
Amortization (see Form 4562).
-
Insurance premiums.
-
Legal and professional fees.
-
Supplies used and consumed in the business.
-
Utilities.
Also see Special rules below for limits on certain other deductions.
Do not deduct:
Special rules apply to the following expenses:
Travel, meals, and entertainment.
Subject to limitations and restrictions discussed below, the FSC may deduct ordinary and necessary travel, meals,
and entertainment expenses paid
or incurred in its trade or business. Also, special rules apply to deductions for gifts, skybox rentals, luxury water travel,
convention expenses, and
entertainment tickets. See section 274 and Pub. 463, Travel, Entertainment, Gift, and Car Expenses, for more details.
Travel.
The FSC may not deduct travel expenses of any individual accompanying a corporate officer or employee, including a
spouse or dependent of the
officer or employee, unless:
Meals and entertainment.
Generally, the FSC may deduct only 50% of the amount otherwise allowable for meals and entertainment expenses paid
or incurred in its trade or
business. In addition (subject to exceptions under section 274(k)(2)):
-
Meals must not be lavish or extravagant,
-
A bona fide business discussion must occur during, immediately before, or immediately after the meal; and
-
An employee of the FSC must be present at the meal.
Membership dues.
The FSC may deduct amounts paid or incurred for membership dues in civic or public service organizations, professional
organizations (such as bar
and medical associations), business leagues, trade associations, chambers of commerce, boards of trade, and real estate boards.
However, no deduction
is allowed if a principal purpose of the organization is to entertain, or provide entertainment facilities for, members or
their guests. In addition,
FSCs may not deduct membership dues in any club organized for business, pleasure, recreation, or other social purpose. This
includes country clubs,
golf and athletic clubs, airline and hotel clubs, and clubs operated to provide meals under conditions favorable to business
discussion.
Entertainment facilities.
The FSC may not deduct an expense paid or incurred for a facility (such as a yacht or hunting lodge) used for an activity
usually considered
entertainment, amusement, or recreation.
Amounts treated as compensation.
Generally, the FSC may be able to deduct otherwise nondeductible entertainment, amusement, or recreation expenses
if the amounts are treated as
compensation to the recipient and reported on Form W-2 for an employee or on Form 1099-MISC or Form 1042-S for an independent
contractor.
However, if the recipient is an officer, director, or beneficial owner (directly or indirectly) of more than 10% of
any class of stock, the
deductible expense is limited. See section 274(e)(2) and Notice 2005-45, 2005-24 I.R.B. 1228.
Tax Computation
If the FSC is a member of a controlled group, as defined in section 927(d)(4), it must check the box on line 1 and
complete Schedule O (Form 1120).
Members of a controlled group must use Schedule O (Form 1120) to figure the tax for the group. See Schedule O and its instructions
for more
information.
Most FSCs should figure their tax using the Tax Rate Schedule on page 12. Qualified personal service corporations should see
the instructions on
page 12.
Tax Rate Schedule
| If taxable income (Schedule B, line 20) is: |
| Over— |
But not over— |
Tax is: |
Of the amount over— |
|
$0
|
$50,000
|
15% |
$0
|
|
50,000
|
75,000
|
$ 7,500 + 25% |
50,000
|
|
75,000
|
100,000
|
13,750 + 34% |
75,000
|
|
100,000
|
335,000
|
22,250 + 39% |
100,000
|
|
335,000
|
10,000,000
|
113,900 + 34% |
335,000
|
|
10,000,000
|
15,000,000
|
3,400,000 + 35% |
10,000,000
|
|
15,000,000
|
18,333,333
|
5,150,000 + 38% |
15,000,000
|
|
18,333,333
|
- - - - -
|
35% |
0
|
Qualified personal service corporations.
A qualified personal service corporation is taxed at a flat rate of 35% on its taxable income. A FSC is a qualified
personal service corporation if
it meets both of the following tests:
-
Substantially all of the FSC's activities involve the performance of services in the fields of engineering, architecture,
or management
consulting and
-
At least 95% of the corporation's stock, by value, is owned, directly or indirectly, by (1) employees performing the services,
(2) retired
employees who had performed the services listed above, (3) any estate of the employee or retiree described above, or (4) any
person who acquired the
stock of the FSC as a result of the death of an employee or retiree (but only for the 2-year period beginning on the date
of the employee's or
retiree's death).
Note.
If the FSC meets these tests, check the box on line 2.
Alternative minimum tax (AMT).
Unless the FSC is treated as a small corporation exempt from the AMT, it may owe the AMT if it has any of the adjustments
and tax preference items
listed on Form 4626, Alternative Minimum Tax-Corporations. The FSC must file Form 4626 if its taxable income (or loss) combined
with these
adjustments and tax preference items is more than the smaller of $40,000 or the FSC's allowable exemption amount (from Form
4626). For this purpose,
taxable income does not include the NOL deduction. See Form 4626 for details.
See Form 4626 for definitions and details on how to figure the tax.
Foreign tax credit.
Generally, a FSC may not claim a foreign tax credit. It may, however, claim a foreign tax credit for any foreign taxes
imposed on foreign source
taxable nonforeign trade income (Schedule F, Part II) that is treated as effectively connected with a U.S. trade or business.
See Temporary
Regulations section 1.921-3T(d)(2) for more details.
Balance Sheets per Books
The balance sheet should agree with the FSC's books and records. Include certificates of deposit as cash on line 1, Schedule
L.
Line 5. Tax-exempt securities.
Include on this line:
-
State and local government obligations, the interest on which is excludible from gross income under section 103(a) and
-
Stock in a mutual fund or other regulated investment company that distributed exempt-interest dividends during the tax year
of the
FSC.
Line 27. Adjustments to shareholders' equity.
Some examples of adjustments to report on this line include:
If the total adjustment to be entered on line 27 is a negative amount, enter the amount in parentheses.
Reconciliation of Income (Loss) per Books With Income per Return
Line 5c. Travel and entertainment.
Include on line 5c any of the following:
-
Meal and entertainment expenses not deductible under section 274(n).
-
Expenses for the use of an entertainment facility.
-
The part of business gifts over $25.
-
Expenses of an individual over $2,000, which are allocable to conventions on cruise ships.
-
Employee achievement awards over $400.
-
The cost of entertainment tickets over face value (also subject to 50% limit under section 274(n)).
-
The cost of skyboxes over the face value of nonluxury box seat tickets.
-
The part of luxury water travel expenses not deductible under section 274(m).
-
Expenses for travel as a form of education.
-
Other nondeductible travel and entertainment expenses.
For more information, see Pub. 542.
Line 7a. Tax-exempt interest.
Report any tax-exempt interest received or accrued, including any exempt-interest dividends received as a shareholder
in a mutual fund or other
regulated investment company. Also report this amount on line 2, Additional Information, on page 2 of the form.
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