U.S. Income Tax Return of a Foreign Sales Corporation
Schedule G
Deductions Attributable 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 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 include 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:
- Administrative 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 section 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 8 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.
Business startup expenses.
Business startup expenses must be capitalized unless an election is made to amortize them over a period of 60 months. See section 195 and
Regulations section 1.195-1.
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.
Besides depreciation, include on line 4 the part of the cost that the FSC elected to expense under section 179 for certain tangible property placed
in service during tax year 2001 or carried over from 2000. See Form 4562, Depreciation and Amortization, and its instructions.
Line 5. Salaries and wages.
Enter the amount of salaries and wages paid for the tax year. 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.
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 of business start-up expenditures, organizational expenses, etc. (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:
- Fines or penalties paid to a government for violating any law.
- Any amount that is allocable to a class of exempt income. See section 265(b) for exceptions.
Worksheet for controlled group
Special rules apply to the following expenses:
Travel, meals, and entertainment.
Subject to limitations and restrictions discussed below, the FSC can 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. For details, see section 274 and Pub. 463, Travel, Entertainment, Gift, and Car Expenses.
Travel.
The FSC cannot deduct travel expenses of any individual accompanying a corporate officer or employee, including a spouse or dependent of the
officer or employee, unless:
- That individual is an employee of the corporation and
- His or her travel is for a bona fide business purpose and would otherwise be deductible by that individual.
Meals and entertainment.
Generally, the FSC 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 FSC must be present at the meal.
See section 274(n)(3) for a special rule that applies to expenses for meals consumed by individuals subject to the hours of service limits of the
Department of Transportation.
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 cannot 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.
Note.
The FSC may be able to deduct otherwise nondeductible meals, travel, and entertainment expenses if the amounts are treated as compensation and
reported on Form W-2 for an employee or on Form 1099-MISC for an independent contractor.
Schedule J
Tax Computation
Lines 1 and 2
Members of a controlled group.
A member of a controlled group, as defined in section 927(d)(4), must check the box on line 1 and complete lines 2a and 2b of Schedule J, Form
1120-FSC.
Line 2a.
Members of a controlled group are entitled to one $50,000, one $25,000, and one $9,925,000 taxable income bracket amount (in that order) on line
2a.
When a controlled group adopts or later amends an apportionment plan, each member must attach to its tax return a copy of its consent to this plan.
The copy (or an attached statement) must show the part of the amount in each taxable income bracket apportioned to that member. See Regulations
section 1.1561-3(b) for other requirements and for the time and manner of making the consent.
Unequal apportionment plan.
Members of a controlled group may elect an unequal apportionment plan and divide the taxable income brackets as they want. There is no need for
consistency among taxable income brackets. Any member may be entitled to all, some, or none of the taxable income bracket. However, the total amount
for all members cannot be more than the total amount in each taxable income bracket.
Equal apportionment plan.
If no apportionment plan is adopted, members of a controlled group must divide the amount in each taxable income bracket equally among themselves.
For example, Controlled Group AB consists of Corporation A and Corporation B. They do not elect an apportionment plan. Therefore, each corporation is
entitled to:
- $25,000 (one-half of $50,000) on line 2a(1),
- $12,500 (one-half of $25,000) on line 2a(2), and
- $4,962,500 (one-half of $9,925,000) on line 2a(3).
Line 2b.
Members of a controlled group are treated as one group to figure the applicability of the additional 5% tax and the additional 3% tax. If an
additional tax applies, each member will pay that tax based on the part of the amount used in each taxable income bracket to reduce that member's tax.
See section 1561(a). If an additional tax applies, attach a schedule showing the taxable income of the entire group and how the FSC figured its share
of the additional tax.
Line 2b(1).
Enter the FSC's share of the additional 5% tax on line 2b(1).
Line 2b(2).
Enter the FSC's share of the additional 3% tax on line 2b(2).
Line 3
Most FSCs should figure their tax using the Tax Rate Schedule below. Exceptions apply to members of a controlled group (see worksheet below) and
qualified personal service corporations (see instructions below).
Members of a controlled group must attach to Form 1120-FSC a statement showing the computation of the tax entered on line 3.
Tax Rate Schedule
| If taxable income (Schedule B, line 20) is: |
Tax is: |
Of the amount over - |
| Over - |
But not 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 and
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). See Temporary Regulations section 1.448-1T(e) for details.
Note:
If the FSC meets these tests, check the box on line 3, Schedule J, Form 1120-FSC.
Line 4
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 (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.
Exception for small corporations.
A FSC is treated as a small corporation exempt from the AMT for its tax year beginning in 2001 if:
- It was treated as a small corporation exempt from the AMT for all prior tax years beginning after 1997 and
- Its average annual gross receipts for the 3-tax-year period (or portion thereof during which the FSC was in existence) ending before its tax
year beginning in 2001 did not exceed $7.5 million ($5 million if the FSC had only 1 prior tax year).
Line 6
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 under section 921(d). See
Temporary Regulations section 1.921-3T(d)(2) for more details.
Line 8
Personal holding company tax.
See Personal Holding Companies and Foreign Personal Holding Companies on page 5.
Line 9
Total tax. Interest on tax deferred under the installment method for certain nondealer installment obligations.
If an obligation arising from the disposition of property to which section 453A applies is outstanding at the close of the year, the FSC must
include the interest due under section 453A(c) in the amount on line 9, Schedule J. On the dotted line to the left of line 9, Schedule J, write
Section 453A(c) interest and the amount. Attach a schedule showing the computation.
Schedule L
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:
- Unrealized gains and losses on securities held available for sale.
- Foreign currency translation adjustments.
- The excess of additional pension liability over unrecognized prior service cost.
If the total adjustment to be entered on line 27 is a negative amount, enter the amount in parentheses.
Schedule M-1
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.
Include on line 7a any exempt-interest dividends received as a shareholder in a mutual fund or other regulated investment company.
Paperwork Reduction Act Notice.
We ask for the information on this form to carry out the Internal Revenue laws of the United States. You are required to give us the information.
We need it to ensure that you are complying with these laws and to allow us to figure and collect the right amount of tax.
You are not required to provide the information requested on a form that is subject to the Paperwork Reduction Act unless the form displays a valid
OMB control number. Books or records relating to a form or its instructions must be retained as long as their contents may become material in the
administration of any Internal Revenue law. Generally, tax returns and return information are confidential, as required by section 6103.
The time needed to complete and file this form and related schedule will vary depending on individual circumstances. The estimated average times
are:
| Form |
Recordkeeping |
Learning about the law or the form |
Preparing and sending the form to the IRS |
| 1120-FSC |
94 hr., 13 min. |
19 hr., 5 min. |
33 hr., 33 min. |
| Sch. P (1120-FSC) |
9 hr., 48 min. |
1 hr., 29 min. |
1 hr., 43 min. |
If you have comments concerning the accuracy of these time estimates or suggestions for making this form and related schedule simpler, we would be
happy to hear from you. You can write to the Tax Forms Committee, Western Area Distribution Center, Rancho Cordova, CA 95743-0001. Do not
send the tax form to this office. Instead, see Where To File on page 4.
Form 1120-FSC Codes for Principal Business Activity
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