An IC-DISC may have to attach Schedule N (Form 1120), Foreign Operations of U.S. Corporations to its Form 1120-IC-DISC. See Schedule N
(Form 1120) for details.
Shareholders who are foreign persons.
The corporation should inform shareholders who are nonresident alien individuals or foreign corporations, trusts, or estates that if they have
gains from disposal of stock in the IC-DISC, former DISC, or former IC-DISC, or distributions from accumulated IC-DISC income, including deemed
distributions, they must treat these amounts as effectively connected with the conduct of a trade or business conducted through a permanent
establishment in the United States and derived from sources within the United States.
Transfers to a corporation controlled by the transferor.
If a person receives stock of a corporation in exchange for property, and no gain or loss is recognized under section 351, the person (transferor)
and the transferee must each attach to their tax returns the information required by Regulations section 1.351-3.
Assembling the Return
To ensure that the corporation's tax return is correctly processed, attach all schedules and other forms after page 6, Form 1120-IC-DISC, and in
the following order.
- Schedule N (Form 1120).
- Form 4136.
- Additional schedules in alphabetical order.
- Additional forms in numerical order.
Complete every applicable entry space on Form 1120-IC-DISC. Do not write See Attached instead of completing the entry spaces. If more space
is needed on the forms or schedules, attach separate sheets using the same size and format as the printed forms. If there are supporting statements
and attachments, arrange them in the same order as the schedules or forms they support and attach them last. Show the totals on the printed forms.
Also, be sure to enter the corporation's name and EIN on each supporting statement or attachment.
An accounting method is a set of rules used to determine when and how income and expenses are reported.
Figure taxable income using the method of accounting regularly used in keeping the IC-DISC's books and records. Generally, permissible methods
- Accrual, or
- Any other method authorized by the Internal Revenue Code.
In all cases, the method used must clearly reflect taxable income. If inventories are required, the accrual method must be used for sales and
purchases of merchandise. However, qualifying taxpayers and eligible businesses of qualifying small business taxpayers are excepted from using the
accrual method and may account for inventoriable items as materials and supplies that are not incidental. For details, see Cost of Goods
Sold on page 7.
Generally, an IC-DISC (other than a qualified personal service corporation) must use the accrual method of accounting if its average annual gross
receipts exceed $5 million. See section 448(c). For exceptions, see section 447.
Under the accrual method, an amount is includible in income when:
- All the events have occurred that fix the right to receive the income, which is the earliest of the date: (a) the required
performance takes place, (b) payment is due, or (c) payment is received, and
- The amount can be determined with reasonable accuracy.
See Regulations section 1.451-1(a) for details.
Generally, an accrual basis taxpayer can deduct accrued expenses in the tax year when:
- All events that determine the liability have occurred,
- The amount of the liability can be figured with reasonable accuracy, and
- Economic performance takes place with respect to the expense.
There are exceptions to the economic performance rule for certain items, including recurring expenses. See section 461(h) and the related
regulations for the rules for determining when economic performance takes place.
A member of a controlled group cannot use an accounting method that would distort any group member's income, including its own. For example, an
IC-DISC acts as a commission agent for property sales by a related corporation that uses the accrual method and pays the IC-DISC its commission more
than 2 months after the sale. In this case, the IC-DISC should not use the cash method of accounting because that method materially distorts its
Change in accounting method.
Generally, the IC-DISC must get IRS consent to change the method of accounting used to report taxable income (for income as a whole or for any
material item). To do so, it must file Form 3115, Application for Change in Accounting Method. For more information, see Pub. 538,
Accounting Periods and Methods.
The IC-DISC may also have to make an adjustment to prevent amounts of income or expenses from being duplicated or omitted. This is called a
section 481(a) adjustment, which is taken into account over a period not to exceed 4 years.
An IC-DISC changes to the cash method of accounting. It accrued sales in 2000 for which it received payment in 2001. It must report those sales in
both years as a result of changing its accounting method and must make a section 481(a) adjustment to prevent duplication of income.
See Rev. Proc. 99-49, 1999-2 C.B. 725, to figure the amount of this adjustment for 2001. Include any positive section 481(a) adjustment on page 2,
Schedule B, line 2j or 3f (depending on whether the inventory, when sold, will generate qualified export receipts). If the section 481(a) adjustment
is negative, report it on page 3, Schedule E, line 2g.
An IC-DISC must figure its taxable income on the basis of a tax year. The tax year is the annual accounting period the IC-DISC uses to keep its
records and report its income and expenses. Generally, IC-DISCs can use a calendar year or a fiscal year. Personal service corporations, however, must
generally use a calendar year.
For more information about accounting periods, see Temporary Regulations sections 1.441-1T, 1.441-2T, and Pub. 538.
The tax year of an IC-DISC must be the same as the tax year of the principal shareholder which, at the beginning of the IC-DISC tax year, has the
highest percentage of voting power. If two or more shareholders have the highest percentage of voting power, the IC-DISC must have a tax year that
conforms to any one tax year of the principal shareholders. See section 441(h)(1).
If the calendar year is adopted as the annual accounting period, the IC-DISC must maintain its books and records and report its income and expenses
for the period from January 1 through December 31 of each year.
A fiscal year is 12 consecutive months ending on the last day of any month except December. A 52-53 week year is a fiscal year that varies from 52
to 53 weeks.
Adoption of tax year.
An IC-DISC adopts a tax year when it files its first income tax return. It must adopt a tax year by the due date (not including extensions) of its
first income tax return.
Change in tax year.
Generally, an IC-DISC must get the consent of the IRS before changing its tax year by filing Form 1128, Application To Adopt, Change, or
Retain a Tax Year. However, under certain conditions, an IC-DISC (other than a personal service corporation) may change its tax year without getting
the consent. See Regulations section 1.442-1 and Pub. 538.
Rounding Off to Whole Dollars
The IC-DISC may show amounts on the return and accompanying schedules as whole dollars. To do so, drop amounts less than 50 cents and increase
amounts from 50 cents through 99 cents to the next higher dollar.
Keep the IC-DISC's records for as long as they may be needed for the administration of any provision of the Internal Revenue Code. Usually, records
that support an item of income, deduction, or credit on the return must be kept for 3 years from the date the return is due or filed, whichever is
later. Keep records that verify the IC-DISC's basis in property for as long as they are needed to figure the basis of the original or replacement
The IC-DISC should keep copies of all filed returns. They help in preparing future and amended returns.
The following definitions are based on sections 993 and 994.
United States, as used in these instructions, includes Puerto Rico and U.S. possessions, as well as the 50 states and the District of
Qualified export receipts
are any of the following:
- Gross receipts from selling, exchanging, or otherwise disposing of export property.
- Gross receipts from leasing or renting export property that the lessee uses outside the United States.
- Gross receipts from supporting services related to any qualified sale, exchange, lease, rental, or other disposition of export property by
- Gross receipts from selling, exchanging, or otherwise disposing of qualified export assets that are not export property, but only
if there is a recognized gain.
- Dividends (under section 951) or amounts includible in gross income with respect to stock of a related foreign export corporation.
- Interest on any obligation that is a qualified export asset.
- Gross receipts for engineering or architectural services on construction projects outside the United States.
- Gross receipts for performance of managerial services in furtherance of the production of other qualified export receipts of an
For more information, see Regulations section 1.993-1.
Qualified export assets
are any of the following:
- Export property (see below).
- Assets used mainly in performing the engineering or architectural services (listed under Qualified export receipts, item
7 above) or managerial services that further the production of qualified export receipts (items 1, 2, 3, and 7
above), or assets used mainly in assembling, servicing, handling, selling, leasing, renting, packaging, transporting, or storing of export
- Accounts receivable produced by transactions listed under Qualified export receipts, items 1- 4, 7 or 8
- Temporary investments, such as money and bank deposits, in an amount reasonable to meet the IC-DISC's needs for working capital.
- Obligations related to a producer's loan.
- A related foreign export corporation's stock or securities that the IC-DISC holds.
- Certain obligations that are issued or insured by the U.S. Export-Import Bank or the Foreign Credit Insurance Association and that the
IC-DISC acquires from such Bank or Association or from the person who sold or bought the goods from which the obligations arose.
- Certain obligations held by the IC-DISC that were issued by a domestic corporation organized to finance export property sales under an
agreement with the Export-Import Bank, by which the corporation makes export loans that the Export-Import Bank guarantees.
- Other deposits in the United States used to acquire qualified export assets within the time provided by Regulations section
See Regulations section 1.993-2 for more information.
- Made, grown, or extracted in the United States by someone other than an IC-DISC.
- Neither excluded under section 993(c)(2) nor declared in short supply under section 993(c)(3).
- Held mainly for sale, lease, or rent in the ordinary course of trade or business, by or to an IC-DISC for direct use, consumption, or
disposition outside the United States.
- Property not more than 50% of the fair market value of which is attributable to articles imported into the United States.
- Neither sold nor leased by or to another IC-DISC that, immediately before or after the transaction, either belongs to the same controlled
group (defined in section 993(a)(3)) as your IC-DISC or is related to your IC-DISC in a way that would result in losses being denied under section
See Regulations section 1.993-3 for details.
A producer's loan
must meet all the following terms:
- Satisfy sections 993(d)(2) and (3) limiting loans the IC-DISC makes to any one borrower.
- Not raise the unpaid balance due the IC-DISC on all its producer's loans above the level of accumulated IC-DISC income it had at the start
of the month in which it made the loan.
- Be evidenced by written evidence of debt, such as a note, that has a stated maturity date no more than 5 years after the date of the
- Be made to a person engaged in a U.S. trade or business of making, growing, or extracting export property.
- Be designated as a producer's loan when made.
For more information, see Schedule Q (Form 1120-IC-DISC), Borrower's Certificate of Compliance With the Rules for Producer's Loans, and
Regulations section 1.993-4.
A related foreign export corporation
of any of the following kinds can pay dividends and interest to the IC-DISC without loss of IC-DISC status. The IC-DISC's investment must be
related to exports from the United States.
- A foreign international sales corporation is a related foreign export corporation if:
- The IC-DISC directly owns more than 50% of the total voting power of the foreign corporation's stock;
- For the tax year that ends with your IC-DISC's tax year or ends within it, at least 95% of the foreign corporation's gross receipts consists
of the qualified export receipts described in items 1-4 of Qualified export receipts and interest on the qualified export assets
listed in items 3 and 4 of Qualified export assets; and
- The adjusted basis of the qualified export assets in items 1-4 of Qualified export assets that the foreign corporation
held at the end of the tax year is at least 95% of the adjusted basis of all assets it held then.
- A real property holding company is a related foreign export corporation if:
- The IC-DISC directly owns more than 50% of the total voting power of the foreign corporation's stock and
- Applicable foreign law forbids the IC-DISC to hold title to real property; the foreign corporation's sole function is to hold the title; and
only the IC-DISC uses the property, under lease or otherwise.
- An associated foreign corporation is a related foreign export corporation if:
- The IC-DISC or a controlled group of corporations to which the IC-DISC belongs owns less than 10% of the total voting power of
the foreign corporation's stock (section 1563 defines a controlled group in this sense, and sections 1563(d) and (e) define ownership) and
- The IC-DISC's ownership of the foreign corporation's stock or securities reasonably furthers transactions that lead to qualified export
receipts for the IC-DISC.
See Regulations section 1.993-5 for more information about related foreign export corporations.
are the IC-DISC's total receipts from selling, leasing, or renting property that the corporation holds for sale, lease, or rent in the course of
its trade or business and from all other sources. For commissions on selling, leasing, or renting property, include gross receipts from selling or
renting the property on which the commissions arose. See Regulations section 1.993-6 for more information.
Section 994, Intercompany Pricing Rules
If a related person described in section 482 sells export property to the IC-DISC, use the intercompany pricing rules to figure taxable income for
the IC-DISC and the seller. These rules generally do not permit the related person to price at a loss. Under intercompany pricing, the IC-DISC's
taxable income from the sale (regardless of the price actually charged) may not exceed the greatest of:
- 4% of qualified export receipts on the IC-DISC's sale of the property plus 10% of the IC-DISC's export promotion expenses attributable to
- 50% of the IC-DISC's and the seller's combined taxable income from qualified export receipts on the property, derived from the IC-DISC's
sale of the property plus 10% of the IC-DISC's export promotion expenses attributable to the receipts, or
- Taxable income based on the sale price actually charged, provided that under section 482 the price actually charged clearly reflects the
taxable income of the IC-DISC and the related person.
Schedule P (Form 1120-IC-DISC), Intercompany Transfer Price or Commission, explains the intercompany pricing rules in more detail.
Section 994(c), Export Promotion Expenses
These expenses are incurred to help distribute or sell export property for use or distribution outside the United States. These expenses do not
include income tax, but do include 50% of the cost of shipping the export property on U.S.-owned and U.S.-operated aircraft or ships if U.S. law or
regulations do not require that it be shipped on them.