Instructions for Form 990-C (2005)

Specific Instructions

Table of Contents

Period Covered

File the 2005 return for calendar year 2005 and fiscal years that begin in 2005 and end in 2006. For a fiscal or short tax year return, fill in the tax year space at the top of the form.

Effective for tax years ending on or after December 31, 2006, all subchapter T cooperatives will be required to file Form 1120-C, U.S. Income Tax Return for Cooperative Associations.

The 2005 Form 990-C can also be used if:

The cooperative has a tax year of less than 12 months that begins and ends in 2006, and
The 2006 Form 1120-C is not available at the time the cooperative is required to file its return.

The cooperative must show its 2006 tax year on the 2005 Form 990-C and take into account any tax law changes that are effective for tax years beginning after December 31, 2005.

Name and Address

Enter the cooperative's true name (as set forth in the charter or other legal document creating it), address, and EIN on the appropriate lines. 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 cooperative has a P.O. box, show the box number.

If the cooperative 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.

If the cooperative received a Form 990-C tax package, use the preprinted label. Cross out any errors and print the correct information on the label.

Item A. Business Activity With the Largest Total Receipts

Identify the business activity from which the cooperative receives the largest total receipts (that is, wholesale marketing of meat, drying fruit, grain storage, wholesale purchasing of fertilizers, cattle breeding, etc.).

Item B. Employer Identification Number (EIN)

Enter the cooperative's EIN. If the cooperative does not have an EIN, it must apply for one. An EIN can be applied for:

Online-Click on the EIN link at www.irs.gov/businesses/small. The EIN is issued immediately once the application information is validated.
By telephone at 1-800-829-4933 from 8:00 a.m. to 8:00 p.m. in the cooperative's local time zone.
By mailing or faxing Form SS-4, Application for Employer Identification Number.

If the cooperative has not received its EIN by the time the return is due, enter “Applied for” in the space for the EIN. For more details, see Pub. 583.

The online application process is not yet available for cooperatives with addresses in foreign countries or Puerto Rico.

Item C. Consolidated Return

Cooperatives filing a consolidated return must attach Form 851, Affiliations Schedule, and other supporting statements to the return. The first year a subsidiary cooperative is being included in a consolidated return attach Form 1122, Authorization and Consent of Subsidiary Corporation To Be Included in a Consolidated Income Tax Return, to the parent's consolidated return. Attach a separate Form 1122 for each subsidiary being included in the consolidated return. If you check the “Tax exempt” box in Item D, you cannot file a consolidated return.

Item D. Type of Cooperative

Check the “Tax exempt” (section 521) box if the cooperative is a tax-exempt farmers', fruit growers', or like association, organized and operated on a cooperative basis and is described in section 521.

If the cooperative has submitted Form 1028, Application for Recognition of Exemption, but has not received a determination letter from the IRS, check the “Tax exempt” box, and enter “Application Pending” on Form 990-C, at the top of page 1.

Farmers' cooperatives without section 521 exempt status, organized and operated as described under Who Must File on page 2 of the instructions, should check the “Nonexempt” box.

Item E. Initial Return, Final Return, Name Change, Address Change, or Amended Return

If this is the cooperative's first return, check the “Initial return” box.
If the cooperative ceases to exist, file Form 990-C and check the “Final return” box.
If the cooperative changed its name since it last filed a return, check the “Name change” box. Generally, a cooperative also must have amended its articles of incorporation and filed the amendment with the state in which it was incorporated.
If the cooperative has changed its address since it last filed a return (including a change to an “in care of” address), check the “Address change” box.
If the cooperative must change their originally filed return for any year, it should file a new return including any required attachments. Use the revision of Form 990-C applicable to the year being amended. The amended return must provide all the information called for by the form and instructions, not just the new or corrected information. Check the “Amended return” box.

If a change in address occurs after the return is filed, use Form 8822, Change of Address, to notify the IRS of the new address.

Income

Except as otherwise provided in the Internal Revenue Code, gross income includes all income from whatever source derived.

Extraterritorial income. Gross income generally does not include extraterritorial income that is qualifying foreign trade income. The extraterritorial income exclusion is reduced by 20% for transactions in 2005 (40% for transactions in 2006), unless made under a binding contract with an unrelated person in effect on September 17, 2003, and at all times thereafter. Use Form 8873, Extraterritorial Income Exclusion, to figure the exclusion. Include the exclusion in the total for Other deductions on line 26, Form 990-C.

Income from qualifying shipping activities. Gross income does not include income from qualifying shipping activities if the cooperative makes an election under section 1354 to be taxed on its notional shipping income (as defined in section 1353) at the highest corporate rate (35%). If the election is made, the cooperative generally may not claim any loss, deduction, or credit with respect to qualifying shipping activities. A cooperative making this election also may elect to defer gain on the disposition of a qualifying vessel.

Use Form 8902, Alternative Tax on Qualifying Shipping Activities, to figure the tax. Include the alternative tax on Schedule J, line 9.

Line 1. Gross Receipts or Sales

Enter gross receipts or sales from all business operations except those that must be reported on lines 4a through 10. In general, advance payments are reported in the year of receipt. To report income from long-term contracts, see section 460. For special rules for reporting certain advance payments for goods and long-term contracts, see Regulations section 1.451-5. For permissible methods for reporting certain advance payments for services by an accrual method cooperative, see Rev. Proc. 2004-34, 2004-22 I.R.B. 991.

Allocation of patronage and nonpatronage income and deductions (Form 8817). Certain cooperatives that have gross receipts of $10 million or more and have patronage and nonpatronage source income and deductions must complete and attach Form 8817, Allocation of Patronage and Nonpatronage Income and Deductions, to their return.

Installment sales. Generally, the installment method cannot be used for dealer dispositions of property. A “dealer disposition” is any disposition of: (a) personal property by a person who regularly sells or otherwise disposes of personal property of the same type on the installment plan or (b) real property held for sale to customers in the ordinary course of the taxpayer's trade or business.

These restrictions on using the installment method do not apply to dispositions of property used or produced in a farming business or sales of timeshares and residential lots for which the cooperative elects to pay interest under section 453(I)(3).

For sales of timeshares and residential lots reported under the installment method, the cooperative's income tax is increased by the interest payable under section 453(l)(3). To report this addition to tax, see the instructions for Schedule J, line 9, on page 20.

Enter on line 1 (and carry to line 3), the gross profit on collections from installment sales for any of the following:

Dealer dispositions of property before March 1, 1986.
Dispositions of property used or produced in the trade or business of farming.
Certain dispositions of timeshares and residential lots reported under the installment method.

Attach a schedule showing the following information for the current and the 3 preceding years: (a) gross sales, (b) cost of goods sold, (c) gross profits, (d) percentage of gross profits to gross sales, (e) amount collected, and (f) gross profit on the amount collected.

Nonaccrual experience method. Cooperatives 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 line 1a.

Line 2. Cost of Goods Sold

Enter the cost of goods sold on line 2, page 1. Before making this entry, complete Form 990-C, Schedule A, on page 2. See the Schedule A instructions.

Line 4a. Income from Patronage Dividends and Per-unit Retain Allocations

Attach a schedule listing the name of each declaring association from which the cooperative received income from patronage dividends and per-unit retain allocations, and the total amount received from each association.

Include the items listed below:

Patronage dividends received in:
- Money,
- Qualified written notices of allocation, or
- Other property (except nonqualified written notices of allocation).
Nonpatronage distributions received on a patronage basis from tax-exempt farmers' cooperatives in:
- Money,
- Qualified written notices of allocation, or
- Other property (except nonqualified written notices of allocation), based on earnings of that cooperative either from business done with or for the United States or any of its agencies (or from sources other than patronage, such as investment income).
Qualified written notices of allocation at their stated dollar amounts and property at its fair market value (FMV).
Amounts received on the redemption, sale, or other disposition of nonqualified written notices of allocation.

Generally, patronage dividends from purchases of capital assets or depreciable property are not includible in income but must be used to reduce the basis of the assets. See section 1385(b) and the related regulations.
Amounts received (or the stated dollar value of qualified per-unit retain certificates received) from the sale or redemption of nonqualified per-unit retain certificates.
Per-unit retain allocations received (except nonqualified per-unit retain certificates). See section 1385.

Payments from the Commodity Credit Corporation to a farmers' cooperative for certain expenses of the co-op's farmers-producers under a “reseal” program of the U.S. Department of Agriculture are patronage-source income that may give rise to patronage dividends under section 1382(b)(1). See Rev. Rul. 89-97, 1989-2 C.B. 217, for more information.

Line 4b. Dividends

See the instructions for Schedule C, then complete Schedule C and enter on line 4b, the amount from Schedule C, line 17.

Line 5. Interest

Enter taxable interest on U.S. obligations and on loans, notes, mortgages, bonds, bank deposits, corporate bonds, tax refunds, etc. Do not offset interest expense against interest income. Special rules apply to interest income from certain below-market rate loans. See section 7872 for more information.

Interest income is generally nonpatronage income to nonexempt cooperatives (Regulations section 1.1382-3(c)(2)). As such, a patronage dividend deduction may not be allowable.

Report tax-exempt interest income on Schedule N, item 15. Also, if required, include the same amount on Schedule M-1, line 7.

Line 6. Gross Rents

Enter the gross amount received from the rental of property. Deduct expenses such as repairs, interest, taxes, and depreciation on the applicable lines.

Generally, gross rents are considered nonpatronage income to nonexempt cooperatives (Regulations section 1.1382(c)(2)). As such, a patronage dividend deduction may not be allowable.

Line 10. Other Income

Enter any other taxable income not reported on lines 1 through 9. List the type and amount of income on an attached schedule. If the cooperative has only one item of other income, describe it in parentheses on line 10. Examples of other income to report on line 10 are:

Recoveries of bad debts deducted in prior years under the specific charge-off method.
The amount included in income from Form 6478, Credit for Alcohol Used as Fuel.
The amount included in income from Form 8864, Biodiesel and Renewable Diesel Fuels Credit.
Refunds of taxes deducted in prior years to the extent they reduced income subject to tax in the year deducted (see section 111). Do not offset current year taxes against any tax refunds.
Any recapture amount under section 179A for certain clean-fuel vehicle property (or clean-fuel vehicle refueling property) that ceases to qualify. See Regulations section 1.179A-1 for details.
For cooperatives described in section 1381 that are shareholders in a foreign sales corporation (FSC), include the nonexempt portion of foreign trade income from the sale or other disposition of agricultural or horticultural products by the FSC for the tax year that includes the last day of the FSC's tax year, even though the FSC is not required to distribute such income until the due date of its income tax return.
Ordinary income from trade or business activities of a partnership (from Schedule K-1 (Form 1065 or 1065-B)). Do not offset ordinary losses against ordinary income. Instead, include the losses on Form 990-C, line 26. Show the partnership's name, address, and EIN on a separate statement attached to this return. If the amount entered is from more than one partnership, identify the amount from each partnership.
Any net positive section 481(a) adjustment. The cooperative may have to make an adjustment under section 481(a) to prevent amounts of income or expense from being duplicated or omitted. The section 481(a) adjustment period is generally 1 year for a net negative adjustment and 4 years for a net positive adjustment. However, a cooperative can elect to use a 1-year adjustment period if the net section 481(a) adjustment for the change is less than $25,000. The cooperative must complete the appropriate lines of Form 3115 to make the election. If the net section 481(a) adjustment is negative, report it on Form 990-C, line 26.

Deductions

Limitations on Deductions

Section 263A uniform capitalization rules. The uniform capitalization (UNICAP) rules of section 263A generally require cooperatives to capitalize, or include in inventory, certain costs incurred in connection with:

The production of real property and tangible personal property held in inventory or held for sale in the ordinary course of business.
Real property or personal property (tangible and intangible) acquired for resale.
The production of real property and tangible personal property by a cooperative for use in its trade or business or in an activity engaged in for profit.

Cooperatives subject to the UNICAP rules are required to capitalize not only direct costs but 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; and
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 cooperative.

Exceptions. Section 263A does not apply to:

Personal property acquired for resale if the cooperative's average annual gross receipts for the 3 prior tax years were $10 million or less.
Timber.
Most property produced under a long-term contract.
Certain property produced in a farming business.
Research and experimental costs under section 174.
Geological and geophysical costs amortized under section 167(h).
Intangible drilling costs for oil, gas, and geothermal property.
Mining exploration and development costs.
Inventoriable items accounted for in the same manner as materials and supplies that are not incidental. See Cost of Goods Sold for details.

For more details on the uniform capitalization rules, see Regulations sections 1.263A-1 through 1.263A-3. See Regulations section 1.263A-4 and Pub. 225, Farmer's Tax Guide, for rules for property produced in a farming business.

Transactions between related taxpayers. Generally, an accrual basis taxpayer can only deduct business expenses and interest owed to a related party in the year payment is included in the income of the related party. See sections 163(e)(3), 163(j), and 267 for the limitations on deductions for unpaid interest and expenses.

Section 291 limitations. Cooperatives may be required to adjust deductions for depletion of iron ore and coal, intangible drilling, exploration and development costs, and the amortizable basis of pollution control facilities. See section 291 to determine the amount of the adjustment. Also, see section 43.

Golden parachute payments. A portion of the payments made by a cooperative to key personnel that exceeds their usual compensation may not be deductible. This occurs when the cooperative has an agreement (golden parachute) with these key employees to pay them these excess amounts if control of the cooperative changes. See section 280G and Regulations section 1.280G-1.

Business start-up and organizational costs. Business start-up and organizational costs must be capitalized unless an election is made to deduct or amortize them. The cooperative can elect to amortize costs paid or incurred before October 23, 2004, over a period of 60 months or more. For costs paid after October 22, 2004, the following rules apply separately to each category of costs.

The cooperative can elect to deduct up to $5,000 of such costs for the year the cooperative begins business operations.
The $5,000 deduction is reduced (but not below zero) by the amount the total cost exceeds $50,000. If the total costs are $55,000 or more, the deduction is reduced to zero.
If the election is made, any costs that are not deductible must be amortized ratably over a 180-month period.

In all cases, the amortization period begins the month the cooperative begins business operations. For more details on the election for business start-up and organizational costs, see Pub. 535.

Attach any statement required by Regulations section 1.195-1(b) or 1.248-1(c). Report the deductible amount of these costs and any amortization on line 26. For amortization that begins during the 2005 tax year, complete and attach Form 4562.

Passive activity limitations. Limitations on passive activity losses and credits under section 469 apply to closely held cooperatives.

A cooperative is a “closely held cooperative” (as defined at section 469(j)(1)) if at any time during the last half of the tax year more than 50% in value of its outstanding stock is owned, directly or indirectly, by or for not more than 5 individuals. Certain organizations are treated as individuals for purposes of this test. See section 542(a)(2). For rules of determining stock ownership, see section 544 (as modified by section 465(a)(3)).

Generally, the two kinds of passive activities are:

Trade or business activities in which the cooperative did not materially participate, and
Rental activities, regardless of its participation.

For exceptions, see Form 8810, Corporate Passive Activity Loss and Credit Limitations.

Cooperatives subject to the passive activity limitations must complete Form 8810 to compute their allowable passive activity loss and credit. Before completing Form 8810, see Temporary Regulations section 1.163-8T, which provides rules for allocating interest expense among activities. If a passive activity is also subject to the earnings stripping rules of section 163(j), the at-risk rules of section 465, or the tax-exempt use loss rules of section 470, those rules apply before the passive loss rules.

For more information, see section 469, the related regulations, and Pub. 925, Passive Activity and At-Risk Rules.

Reducing certain expenses for which credits are allowable. For each credit listed below, the cooperative must reduce the otherwise allowable deductions for expenses used to figure the credit.

Employment credits. See the instructions for line 13.
Research credit.
Orphan drug credit.
Disabled access credit.
Enhanced oil recovery credit.
Employer credit for social security and Medicare taxes paid on certain employee tips.
Credit for small employer pension plan start-up costs.
Credit for employer-provided childcare facilities and services.
Low sulfur diesel fuel production credit.

If the cooperative has any of these credits, figure each current year credit before figuring the deduction for the expenses on which the credit is based. See the instructions for the applicable form used to figure the credit.

Limitations on deductions related to property leased to tax-exempt entities. If a cooperative leases property to a governmental or other tax-exempt entity, the cooperative can not claim deductions related to the property to the extent that they exceed the cooperative's income from the lease payments (tax-exempt use loss). Amounts disallowed may be carried over to the next tax year and treated as a deduction with respect to the property for that tax year. See section 470 for more details and exceptions.

Line 12. Compensation of Officers

Enter deductible officer's compensation on line 12. Before entering an amount on line 12, complete Schedule E if the cooperative's total receipts (line 1a plus lines 4 through 10, page 1) are $500,000 or more. 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.

Include only the deductible part of each officer's compensation on Schedule E. Complete Schedule E, line 1, columns (a) through (f), for all officers. The cooperative determines who is an officer under the laws of the state where it is incorporated.

If a consolidated return is filed, each member of an affiliated group must furnish this information.

Line 13. Salaries and Wages

Enter the salaries and wages paid for the tax year, reduced by the total amount claimed on:

Form 5884, Work Opportunity Credit, line 2;
Form 5884-A, Credits for Employers Affected by Hurricane Katrina, Rita, or Wilma, line 2;
Form 8844, Empowerment Zone and Renewal Community Employment Credit, line 2;
Form 8845, Indian Employment Credit, line 4; and
Form 8861, Welfare-to-Work Credit, line 2.

Do not include salaries and wages 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.

If the cooperative provided taxable fringe benefits to its employees, such as personal use of a car, do not deduct as wages the amount allocated for depreciation, and other expenses claimed on lines 20 and 26.

Line 14. Repairs and Maintenance

Enter the cost of incidental repairs, such as labor and supplies, that do not add to the value of the property or appreciably prolong its life. New buildings, machinery, or permanent improvements that increase the value of the property are not deductible here. They must be depreciated or amortized.

Line 15. Bad Debts

Enter the total debts that became worthless in whole or in part during the tax year. A cash method taxpayer cannot claim a bad debt deduction unless the amount was previously included in income.

Line 16. Rents

If the cooperative rented or leased a vehicle, enter the total annual rent or lease expense paid or incurred during the year. Also complete Form 4562, Depreciation and Amortization, Part V. If the cooperative leased a vehicle for a term of 30 days or more, the deduction for vehicle lease expense may have to be reduced by an amount called the inclusion amount. The cooperative may have an inclusion amount if:

The lease term began:	And the vehicle's FMV on the first day of the lease exceeded:
After 12/31/04 but before 1/1/06		$15,200
After 12/31/03 but before 1/1/05		$17,500
After 12/31/02 but before 1/1/04		$18,000
If the lease term began before January 1, 2003, see Pub. 463, Travel, Entertainment, Gift, and Car Expenses, to find out if the cooperative has an inclusion amount. The inclusion amount for lease terms beginning in 2006 will be published in the Internal Revenue Bulletin in early 2006.

See Pub. 463 for instructions on figuring the inclusion amount.

Line 17. Taxes and Licenses

Enter taxes paid or accrued during the tax year, except the following.

Federal income taxes.
Foreign or U.S. possession income taxes if a tax credit is claimed (however, see the Instructions for Form 5735 for special rules for possession income taxes).
Taxes not imposed on the cooperative.
Taxes, including state or local sales taxes, that are paid or incurred in connection with an acquisition or disposition of property (these taxes are treated as part of the cost of the acquired property, or in the case of a disposition, as a reduction in the amount realized on the disposition).
Taxes assessed against local benefits that increase the value of the property assessed (such as for paving, etc.).
Taxes deducted elsewhere on the return, such as those reflected in cost of goods sold.

See section 164(d) for the rule on apportionment of taxes on real property between the seller and purchaser.

Line 18. Interest

Do not offset interest income against interest expense.

Do not deduct the following:

Interest on indebtedness incurred or continued to purchase or carry obligations if the interest is wholly exempt from income tax. For exceptions, see section 265(b).
For cash basis taxpayers, prepaid interest allocable to years following the current tax year. For example, a cash basis calendar year taxpayer who in 2005 prepaid interest allocable to any period after 2005 can deduct only the amount allocable to 2005.
Interest and carrying charges on straddles. Generally, these amounts must be capitalized. See section 263(g).
Interest paid or incurred on any portion of an underpayment of tax that is attributable to an understatement arising from an undisclosed listed transaction or an undisclosed reportable avoidance transaction (other than a listed transaction) entered into in tax years beginning after October 22, 2004.

Special rules apply to:

Interest on which no tax is imposed (see section 163(j)).
Forgone interest on certain below-market-rate loans (see section 7872).
Original issue discount on certain high yield discount obligations (see section 163(e) to figure the disqualified portion).
Interest which is allocable to unborrowed policy cash values of life insurance, endowment, or annuity contracts issued after June 8, 1997. See section 264(f). Attach a statement showing the computation of the deduction.

Line 19. Charitable Contributions

Enter contributions or gifts actually paid within the tax year to or for the use of charitable and governmental organizations described in section 170(c), and any unused contributions carried over from prior years. Special rules and limits apply to contributions to organizations conducting lobbying activities. See section 170(f)(9).

Cooperatives reporting taxable income on the accrual method can elect to treat as paid during the tax year any contributions paid by the 15th day of the 3rd month after the end of the tax year if the contributions were authorized by the board of directors during the tax year. Attach a declaration to the return stating that the resolution authorizing the contributions was adopted by the board of directors during the current tax year. The declaration must include the date the resolution was adopted.

Limitation on deduction. The total amount claimed may not be more than 10% of taxable income (line 30) computed without regard to the following.

Any deduction for contributions.
The special deductions on line 29b, Form 990-C.
The deduction allowed under section 249.
The deduction allowed under section 199.
Any net operating loss (NOL) carryback to the tax year under section 172.
Any capital loss carryback to the tax year under section 1212(a)(1).

Temporary suspension of 10% limitation. A cooperative may elect to deduct qualified cash contributions without regard to the general 10% limit if the contributions were made after August 27, 2005, and before January 1, 2006, to a qualified charitable organization (other than certain private foundations described in section 509(a)(3)), for Hurricane Katrina, Rita, or Wilma relief efforts. The total amount claimed cannot be more than taxable income as computed above substituting “100%” for “10%.” Excess qualified contributions are carried over to the next 5 years. Attach a statement substantiating that the contributions are for Hurricane Katrina, Rita, or Wilma relief efforts and indicating the amount of qualified contributions for which the election is made. For more information, see section 1400S.

Carryover. Charitable contributions over the 10% limitation cannot be deducted for the current tax year but may be carried over to the next 5 tax years.

Special rules apply if the cooperative has an NOL carryover to the tax year. In figuring the charitable contributions deduction for the tax year, the 10% limit is applied using the taxable income after taking into account any deduction for the NOL.

To figure the amount of any remaining NOL carryover to later years, taxable income must be modified (see sections 172(b)). To the extent that contributions are used to reduce taxable income for this purpose and increase an NOL carryover, a contributions carryover is not allowed. See section 170(d)(2)(B).

Substantiation requirements. Generally, no deduction is allowed for any contribution of $250 or more unless the cooperative gets a written acknowledgment from the donee organization that shows the amount of cash contributed, describes any property contributed, and either gives a description and a good faith estimate of the value of any goods or services provided in return for the contribution or states that no goods or services were provided in return for the contribution. The acknowledgment must be obtained by the due date (including extensions) of the cooperative's return, or, if earlier, the date the return is filed. Do not attach the acknowledgment to the tax return, but keep it with the cooperative's records. These rules apply in addition to the filing requirements for Form 8283, Noncash Charitable Contributions.

Contributions of property other than cash. If a cooperative contributes property other than cash and claims over a $500 deduction for the property, it must attach a schedule to the return describing the kind of property contributed and the method used to determine its fair market value (FMV). Complete and attach Form 8283 for contributions of property (other than money) if the total claimed deduction for all property contributed was more than $5,000. Special rules apply to the contribution of certain property. See the Instructions for Form 8283.

Larger deduction. A larger deduction is allowed for certain contributions of:

Inventory and other property to certain organizations for use in the care of the ill, needy, or infants (section 170(e)(3)) including contributions made after August 27, 2005, and before January 1, 2006, of “apparently wholesome food” (section 170(e)(3)(C)) and qualified book contributions (section 170(e)(3)(D));
Scientific equipment used for research to institutions of higher learning or to certain scientific research organizations (other than by personal holding companies and service organizations (section 170(e)(4)); and
Computer technology and equipment for educational purposes (section 170(e)(6).

For more information on charitable contributions, including substantiation and recordkeeping requirements, see section 170, the related regulations, and Pub. 526, Charitable Contributions. For special rules that apply to corporations, see Pub. 542.

Line 20a. Depreciation

Include on line 20a depreciation and the cost of certain property that the cooperative elected to expense under section 179. See Form 4562 and its instructions.

Line 21. Depletion

See sections 613 and 613A for percentage depletion rates applicable to natural deposits. Also, see section 291(a)(2) for the limitation on the depletion deduction for iron ore and coal (including lignite).

Attach Form T (Timber), Forest Activities Schedule, if a deduction for depletion of timber is taken.

Foreign intangible drilling costs and foreign exploration and development costs must either be added to the cooperative's basis for cost depletion purposes or be deducted ratably over a 10-year period. See sections 263(i), 616, and 617 for details. See Pub. 535 for more information on depletion.

Line 23. Pension, Profit-sharing, etc., Plans

Enter the deduction for contributions to qualified pension, profit-sharing, or other funded deferred compensation plans. Employers who maintain such a plan generally must file one of the forms listed below, even if the plan is not a qualified plan under the Internal Revenue Code. The filing requirement applies even if the cooperative does not claim a deduction for the current tax year. There are penalties for failure to file these forms timely and for overstating the pension plan deduction. See sections 6652(e) and 6662(f).

Form 5500, Annual Return/Report of Employee Benefit Plan. File this form for a plan that is not a one-participant plan (see below).

Form 5500-EZ, Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan. File this form for a plan that only covers the owner (or the owner and his or her spouse) but only if the owner (or the owner and his or her spouse) owns the entire business.

Line 24. Employee Benefit Programs

Enter the contributions to employee benefit programs not claimed elsewhere on the return (that is, insurance, health and welfare programs, etc.) that are not an incidental part of a pension, profit-sharing, etc., plan included on line 23.

Line 26. Other Deductions

Attach a schedule, listing by type and amount, all allowable deductions that are not deductible elsewhere.

See Special rules, later, for limits on certain other deductions. Also, see Pub. 535 for details on other deductions that may apply to cooperatives.

Examples of other deductions include the following.

Amortization (see Form 4562).
Certain business start-up and organizational costs the cooperative elects to deduct. See Business start-up and organizational costs under Deductions.
Reforestation costs. The cooperative can elect to deduct up to $10,000 of qualifying reforestation expenses for each qualified timber property. The cooperative can elect to amortize over 84 months any amount not deducted. See Pub. 535.
Insurance premiums.
Legal and professional fees.
Supplies used and consumed in the business.
Utilities.
Ordinary losses from trade or business activities of a partnership (from Schedule K-1 (Form 1065 or 1065-B)). Do not offset ordinary losses against ordinary income. Instead, include the income on line 10. Show the partnership's name, address, and EIN on a separate statement attached to this return. If the amount entered is from more than one partnership, identify the amount from each partnership.
Extraterritorial income exclusion (from Form 8873, line 54).
Deduction for clean-fuel vehicle and certain refueling property placed in service before January 1, 2006. See Pub. 535.
Any negative net section 481(a) adjustment. See the instructions for line 10.
Deduction for certain energy efficient commercial property placed in service after December 31, 2005. See section 179D.
Dividends paid in cash on stock held by an employee stock ownership plan.

See section 404(k) for more details and the limitation on certain dividends.
Do not deduct:

Fines or penalties paid to a government for violating any law.
Any amount allocable to a class of exempt income. See section 265(b) for exceptions.

Special rules

Travel, meals, and entertainment. Subject to limitations and restrictions discussed below, a cooperative can deduct ordinary and necessary travel, meals, and entertainment expenses paid or incurred in its trade or business.

Special rules that apply to deductions for gifts, skybox rentals, luxury water travel, convention expenses, and entertainment tickets. See section 274 and Pub. 463.

Travel. The cooperative cannot deduct travel expenses of any individual accompanying a cooperative officer or employee, including a spouse or dependent of the officer or employee, unless:

That individual is an employee of the cooperative, and
His or her travel is for a bona fide business purpose that would otherwise be deductible by that individual.

Meals and entertainment. Generally, the cooperative can 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 cooperative must be present at the meal.

See section 274(n)(3) for a special rule that applies to meal expenses for individuals subject to the hours of service limits of the Department of Transportation.

Membership dues. The cooperative can deduct amounts paid or incurred for membership dues in civic or public service organizations, professional organizations, business leagues, trade associations, chambers of commerce, boards of trade, and real estate boards, unless a principal purpose of the organization is to entertain or provide entertainment facilities for members or their guest.

Cooperatives 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 cooperative cannot deduct an expense paid or incurred for use of a facility (such as a yacht or hunting lodge) for an activity that is usually considered entertainment, amusement, or recreation.

Travel, meals, and entertainment treated as compensation. Generally, the cooperative 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 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.

Lobbying expenses. Generally, lobbying expenses are not deductible. These expenses include amounts paid or incurred in connection with:

Influencing federal or state legislation (but not local legislation), or
Any communication with certain federal executive branch officials in an attempt to influence the official actions or positions of the officials. See Regulations section 1.162-29 for the definition of “influencing legislation.”

Dues and other similar amounts paid to certain tax-exempt organizations may not be deductible. See section 162(e)(3). If certain in-house expenditures do not exceed $2,000, they are deductible. See section 162(e)(5)(B).

Line 28. Taxable Income Before NOL Deduction and Special Deductions

At-risk rules. Special at-risk rules under section 465 generally apply to closely held cooperatives (see Passive activity limitations on page 9) engaged in any activity as a trade or business or for the production of income. These cooperatives may have to adjust the amount on line 28.

A taxpayer is generally considered “at-risk” for an amount equal to his or her investment in the entity. That investment consists of money and other property contributed to the entity and amounts borrowed on behalf of the entity.

The at-risk rules do not apply to:

Holding real property placed in service by the cooperative before 1987;
Equipment leasing under sections 465(c)(4), (5), and (6); and
Any qualifying business of a qualified cooperative under section 465(c)(7).

The at-risk rules do apply to the holding of mineral property.

If the at-risk rules apply, complete Form 6198, At-Risk Limitations, then adjust the amount on line 28 for any section 465(d) losses. These losses are limited to the amount for which the cooperative is at risk for each separate activity at the close of the tax year. If the cooperative is involved in one or more activities, any of which incurs a loss for the year, report the losses for each activity separately. Attach Form 6198 showing the amount at risk and gross income and deductions for the activities with the losses.

If the cooperative sells or otherwise disposes of an asset or its interest (either total or partial) in an activity to which the at-risk rules apply, determine the net profit or loss from the activity by combining the gain or loss on the sale or disposition with the profit or loss from the activity. If the cooperative has a net loss, the loss may be limited because of the at-risk rules.

Treat any loss from an activity not allowed for the current tax year as a deduction allocable to the activity in the next tax year.

Line 29a. Net Operating Loss Deduction

A cooperative can use the net operating loss incurred in one tax year to reduce its taxable income in another year. Enter the total NOL carryovers from other tax years on line 29a, but do not enter more than the cooperative's taxable income (after special deductions). Attach a schedule showing the computation of the deduction. Also complete item 20 on Schedule N.

The following special rules apply.

A personal service corporation may not carry back an NOL to or from any tax year to which an election under section 444 to have a tax year other than a required tax year applies.
A corporate equity reduction interest loss may not be carried back to a tax year preceding the year of the equity reduction transaction (see section 172(b)(1)(E)).
If an ownership change occurs, the amount of the taxable income of a loss corporation that may be offset by the pre-change NOL carryovers may be limited (see section 382 and the related regulations). A loss corporation must file an information statement with its income tax return for each tax year that certain ownership shifts occur (see Temporary Regulations section 1.382-2T(a)(2)(ii) for details). See Regulations section 1.382-6(b) for details on how to make the closing-of-the-books election.
If a cooperative acquires control of another cooperative (or acquires its assets in a reorganization), the amount of pre-acquisition losses that may offset recognized built-in gain may be limited (see section 384).
If a cooperative elects the alternative tax on qualifying shipping activities under section 1354, no deduction is allowed for an NOL attributable to the qualifying shipping activities to the extent that the loss is carried forward from a tax year preceding the first tax year for which the alternative tax election was made. See section 1358(b)(2).

For details on the NOL deduction, see Pub. 542, section 172, and Form 1139, Corporation Application for Tentative Refund.

Line 30. Taxable Income

Certain cooperatives may need to file Form 8817. If so, taxable income reported on line 30 may not exceed the combined taxable income shown on line 30, Form 8817. Attach Form 8817 to Form 990-C.

Patronage source losses cannot be used to offset nonpatronage income. See Form 8817.

Minimum taxable income. The cooperative's taxable income cannot be less than the largest of the following amounts.

The amount of nondeductible CFC dividends under section 965. This amount is equal to the difference between columns (a) and (c) of Form 990-C, Schedule C, line 11.
The inversion gain of the cooperative for the tax year, if the cooperative is an expatriated entity or a partner in an expatriated entity. For details, see section 7874.

Net operating loss. If line 30 (figured without regard to the minimum taxable income rule stated above) is zero or less, the cooperative can have an NOL that can be carried back or forward as a deduction to other tax years. Generally, a cooperative first carries an NOL back