Schedule A - Cost of Goods Sold
Generally, inventories are required at the beginning and end of each tax year if the production, purchase, or sale of merchandise is an income-producing factor. See Regulations section 1.471-1.
However, if the corporation 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.
A qualifying taxpayer is a taxpayer
- whose average annual gross receipts for the 3 prior tax years are $1 million or less and
- whose business is not a tax shelter (as defined in section 448(d)(3)).
A qualifying small business taxpayer is a taxpayer
- whose average annual gross receipts for the 3 prior tax years are more than $1 million but not more than $10 million,
- whose business is not a tax shelter (as defined in section 448(d)(3)), and
- whose principal business activity is not an ineligible business as explained in Rev. Proc. 2002-28.
Under this accounting method, inventory costs for raw materials purchased for use in producing finished goods and merchandise purchased for resale are deductible in the year the finished goods or merchandise are sold (but not before the year the corporation paid for the raw materials or merchandise, if it is also using the cash method).
Enter amounts paid for all raw materials and merchandise during the tax year on line 2. The amount the corporation can deduct for the tax year is figured on line 8.
For additional guidance on this method of accounting for inventoriable items, see Rev. Proc. 2001-10 if the corporation is a qualifying taxpayer or Rev. Proc. 2002-28 if the corporation is a qualifying small business taxpayer.
All filers not using the cash method of accounting should see Section 263A uniform capitalization rules beginning on page 11 before completing Schedule A.
Line 1. Inventory at beginning of year. If the corporation 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 corporation's section 481(a) adjustment (explained on page 6).
Line 4. Additional section 263A costs. An entry is required on this line only for corporations that have elected a simplified method of accounting.
For corporations that have elected the simplified production method, additional section 263A costs are generally those costs, other than interest, that were not capitalized under the corporation'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 corporations that have elected the simplified resale method, additional section 263A costs are generally those costs incurred with respect to the following categories.
- Off-site storage or warehousing.
- Purchasing; handling, such as processing, assembling, repackaging, and transporting.
- 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 section 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 corporation accounts for inventoriable items in the same manner as materials and supplies that are not incidental, enter on line 7 the portion of its raw materials and merchandise purchased for resale that are included on line 6 and were not sold during the year.
Line 9a. Inventory valuation methods. Inventories can be valued at:
- Cost,
- Cost or market value (whichever is lower), or
- Any other method approved by the IRS that conforms to the requirements of the applicable regulations cited below.
However, if the corporation is using the cash method of accounting, it is required to use cost.
Corporations 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.
Corporations 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. For a manufacturer, market applies to the basic elements of cost - raw materials, labor, and burden. 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 corporation changed or extended its inventory method to LIFO and had to write up its opening inventory to cost in the year of election, report the effect of the write-up as other income (Section II, line 10, on page 3) 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.
Schedule C - Dividends and Special Deductions
For purposes of the 20% ownership test on lines 1 through 7, the percentage of stock owned by the corporation is based on voting power and value of the stock.
Line 1, Column (a)
Enter dividends (except those received on debt-financed stock acquired after July 18, 1984 - see section 246A) that:
- Are received from less-than-20%-owned domestic corporations subject to income tax and
- Qualify for the 70% deduction under section 243(a)(1).
Also include on line 1:
- Taxable distributions from an IC-DISC or former DISC that are designated as eligible for the 70% deduction and certain dividends of Federal Home Loan Banks. See section 246(a)(2).
- 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 corporation 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.
Line 2, Column (a)
Enter on line 2:
- 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) and
- Taxable distributions from an IC-DISC or former DISC that are considered eligible for the 80% deduction.
Line 3, Column (a)
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 corporation acquired by incurring a debt (e.g., it borrowed money to buy the stock).
- Dividends 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 corporation 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 that shows how the amount on line 3, column (c) was figured.
Line 4, Column (a)
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.
Line 5, Column (a)
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.
Line 6, Column (a)
Enter the U.S.-source portion of dividends that:
- Are received from less-than-20%-owned foreign corporations and
- Qualify for the 70% deduction under section 245(a). To qualify for the 70% deduction, the corporation must own at least 10% of the stock of the foreign corporation by vote and value.
Line 7, Column (a)
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).
Line 8, Column (c)
Limitation on dividends-received deduction. Generally, line 8, column (c), may not exceed the amount from the worksheet above. 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).
Worksheet for Schedule C, line 8 (Keep for your records)
| 1.
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Refigure Section II, line 29 without any adjustment under section 1059 and without any capital loss carryback to the tax year under section 1212(a)(1)
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1.
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| 2.
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Multiply line 1 by 80%
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2.
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| 3.
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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
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3.
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| 4.
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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 the rest of this worksheet
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4.
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| 5.
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Enter the total amount of dividends from 20%-or-more-owned corporations that are included on lines 2, 3, 5, and 7, column (a)
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5.
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| 6.
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Subtract line 5 from line 1
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6.
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| 7.
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Multiply line 6 by 70%
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7.
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| 8.
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Subtract line 3 above from line 8, column (c)
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8.
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| 9.
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Enter the smaller of line 7 or line 8
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9.
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| 10.
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Dividends-received deduction after limitation (sec. 246(b)). Add lines 4 and 9. Enter the result here and on line 8, column (c)
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10.
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Line 9, Column (a)
Enter foreign dividends that are not reportable on lines 3, 6, or 7 of column (a).
Line 10, Column (a)
If the corporation claims the foreign tax credit, enter the tax that is deemed paid under sections 902 and 960. See sections 78 and 906(b)(4).
Line 11, Column (a)
Enter taxable distributions from an IC-DISC or former DISC that are designated as not eligible for a dividends-received deduction.
No deduction is allowed under section 243 for a dividend from an IC-DISC or former DISC (as defined in section 992(a)) to the extent the dividend:
- Is paid out of the corporation's accumulated IC-DISC income or previously taxed income or
- Is a deemed distribution under section 995(b)(1).
Line 12, Column (a)
Include the following:
If patronage dividends or per-unit retain allocations are included on line 12, identify the total of these amounts in a schedule and attach it to Form 1120-F.
Line 13, Column (c)
Section 247 allows public utilities a deduction of 40% of the smaller of:
- Dividends paid on their preferred stock during the tax year or
- Taxable income computed without regard to this deduction.
In a year in which an NOL occurs, compute the deduction without regard to section 247(a)(1)(B). See section 172(d).
Schedule J - Tax Computation
Lines 1 and 2
Members of a controlled group. A member of a controlled group, as defined in section 1563, must check the box on line 1 and complete lines 2a and 2b of Schedule J.
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).
Tax Computation Worksheet for Members of a Controlled Group (Keep for your records)
| Note: Each member of a controlled group (except a qualified personal service corporation) must compute the tax using this worksheet.
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| 1.
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Enter taxable income (Section II, line 31)
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1.
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| 2.
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Enter line 1 or the corporation's share of the $50,000 taxable income bracket, whichever is less
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2.
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Subtract line 2 from line 1
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3.
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Enter line 3 or the corporation's share of the $25,000 taxable income bracket, whichever is less
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4.
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Subtract line 4 from line 3
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5.
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Enter line 5 or the corporation's share of the $9,925,000 taxable income bracket, whichever is less
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6.
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Subtract line 6 from line 5
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7.
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| 8.
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Multiply line 2 by 15%
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8.
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Multiply line 4 by 25%
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9.
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Multiply line 6 by 34%
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10.
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| 11.
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Multiply line 7 by 35%
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11.
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| 12.
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If the taxable income of the controlled group exceeds $100,000, enter this member's share of the smaller of (a) 5% of the taxable income in excess of $100,000, or (b) $11,750. (See the instructions for Schedule J, line 2b.)
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12.
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| 13.
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If the taxable income of the controlled group exceeds $15 million, enter this member's share of the smaller of (a) 3% of the taxable income in excess of $15 million, or (b) $100,000. (See the instructions for Schedule J, line 2b.)
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13.
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Add lines 8 through 13. Enter here and on line 3, Schedule J
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14.
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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 corporation figured its share of the additional tax.
Line 2b(1). Enter the corporation's share of the additional 5% tax on line 2b(1).
Line 2b(2). Enter the corporation's share of the additional 3% tax on line 2b(2).
Line 3. Income Tax
Most corporations should figure their tax using the Tax Rate Schedule that follows. Exceptions apply to members of a controlled group (see the worksheet on page 18) and qualified personal service corporations (see instructions on page 18). Members of a controlled group must attach to Form 1120-F a statement showing the computation of the amount entered on line 3.
| Tax Rate Schedule
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| If taxable income (Section II, line 31) is:
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| Over -
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But not over -
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Tax is:
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Of the amount over -
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| $0
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$50,000
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15%
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$0
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| 50,000
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75,000
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$ 7,500 + 25%
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50,000
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| 75,000
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100,000
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13,750 + 34%
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75,000
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| 100,000
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335,000
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22,250 + 39%
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100,000
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| 335,000
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10,000,000
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113,900 + 34%
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335,000
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| 10,000,000
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15,000,000
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3,400,000 + 35%
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10,000,000
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| 15,000,000
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18,333,333
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5,150,000 + 38%
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15,000,000
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| 18,333,333
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- - - - -
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35%
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0
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Qualified personal service corporation. A qualified personal service corporation is taxed at a flat rate of 35% on its taxable income. If the corporation is a qualified personal service corporation, check the box on line 3, Schedule J, even if the corporation has no tax liability.
A corporation is a qualified personal service corporation if it meets both of the following tests:
- Substantially all of the corporation's activities involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting and
- At least 95% of the corporation's stock, by value, is owned, directly or indirectly, by
- employees performing the services,
- retired employees who had performed the services listed above,
- any estate of an employee or retiree described above, or
- any person who acquired the stock of the corporation 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 or retiree's death). See Temporary Regulations section 1.448-1T(e) for details.
Additional tax under section 197(f). A corporation that elects to pay tax on the gain from the sale of an intangible under the related person exception to the anti-churning rules should include any additional tax due under section 197(f)(9)(B) in the total for line 3. On the dotted line next to line 3, write Section 197 and the amount. For more information, see Pub. 535, Business Expenses.
Line 4. Alternative Minimum Tax
Unless the corporation is treated as a small corporation exempt from the alternative minimum tax (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 corporation must file Form 4626 if its taxable income (or loss) before the NOL deduction combined with these adjustments and tax preference items is more than the smaller of $40,000 or the corporation's allowable exemption amount (from Form 4626).
Exemption for small corporations. A corporation is treated as a small corporation exempt from the AMT for its tax year beginning in 2002 if that year is the corporation's first tax year in existence (regardless of its gross receipts) or:
- 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 corporation was in existence) ending before its tax year beginning in 2002 did not exceed $7.5 million ($5 million if the corporation had only 1 prior tax year).
Line 6a. Foreign Tax Credit
A foreign corporation engaged in a U.S. trade or business during the tax year can take a credit for income, war profits, and excess profits taxes paid, accrued, or deemed paid to any foreign country or U.S. possession for income effectively connected with the conduct of a trade or business in the United States. See section 906 and Form 1118, Foreign Tax Credit - Corporations.
Line 6b
If the corporation can take either of the following credits, check the appropriate box(es) and include the amount of the credits in the total for line 6b.
Nonconventional source fuel credit. A credit is allowed for the sale of qualified fuels produced from a nonconventional source. Section 29 contains a definition of qualified fuels, provisions for figuring the credit, and other special rules. Attach a separate schedule to the return showing the computation of the credit.
Qualified electric vehicle (QEV) credit. Use Form 8834, Qualified Electric Vehicle Credit, if the corporation can claim a credit for the purchase of a new qualified electric vehicle. Vehicles that qualify for this credit are not eligible for the deduction for clean-fuel vehicles under section 179A.
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