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Instructions for Forms 1120 & 1120-A 2003 Tax Year

General Instructions

This is archived information that pertains only to the 2003 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

Table of Contents

Purpose of Form

Use Form 1120, U.S. Corporation Income Tax Return, or Form 1120-A, U.S. Corporation Short-Form Income Tax Return, to report the income, gains, losses, deductions, credits, and to figure the income tax liability of a corporation. Also see Pub. 542, Corporations, for more information.

Who Must File

Unless exempt under section 501, all domestic corporations (including corporations in bankruptcy) must file whether or not they have taxable income. Domestic corporations must file Form 1120 or, if they qualify, Form 1120-A, unless they are required to file a special return (see Special Returns for Certain Organizations on this page).

Limited liability companies.   If an entity was formed as a limited liability company (LLC) under state law, it is generally treated as a partnership for Federal income tax purposes and files Form 1065, U.S. Return of Partnership Income. The LLC can file a Form 1120 or 1120-A only if it has filed Form 8832, Entity Classification Election, to elect to be treated as an association taxable as a corporation. For more information about LLCs, see Pub. 3402, Tax Issues for Limited Liability Companies.

Corporations engaged in farming.   Any corporation that engages in farming should use Form 1120 or, if they qualify, Form 1120-A to report the income (loss) from such activities. Enter the income and deductions of the corporation in accordance with the instructions for lines 1 through 10 and 12 through 29.

Who May File Form 1120-A

Form 1120-A may be filed by a corporation if it met all of the following requirements during the tax year:

  • Its gross receipts (line 1a on page 1) are under $500,000.
  • Its total income (line 11 on page 1) is under $500,000.
  • Its total assets (Item D on page 1) are under $500,000.
  • Its only dividend income is from domestic corporations and those dividends (a) qualify for the 70% dividends-received deduction and (b) are not from debt-financed securities.
  • It is a small corporation exempt from the alternative minimum tax (AMT) under section 55(e) or it does not owe any AMT on Form 4626, Alternative Minimum Tax—Corporations.
  • It does not have any of the “write-in” additions to tax listed in the Instructions for Form 1120, Schedule J, line 3 or line 11.
  • It has no nonrefundable tax credits other than the general business credit or the credit for prior year minimum tax.
  • It is not: (a) filing its final return, (b) dissolving or liquidating, (c) a member of a controlled group, (d) a personal holding company, (e) filing a consolidated return, (f) electing to forego the entire carryback period for any NOL, or (g) required to file one of the returns listed under Special Returns for Certain Organizations below.
  • It does not have: (a) any ownership in a foreign corporation or foreign partnership, (b) foreign shareholders that directly or indirectly own 25% or more of its stock, or (c) any ownership in, or transactions with, a foreign trust.

Special Returns for
Certain Organizations

Instead of filing Form 1120 or Form 1120-A, certain organizations, as shown below, have to file special returns.

If the organization is a File Form
▼ ▼
Farmers' cooperative (sec. 1381) 990-C
Exempt organization with unrelated trade or business income 990-T
Religious or apostolic organization exempt under section 501(d) 1065
Entity formed as a limited liability company under state law and treated as a partnership for Federal income tax purposes 1065
Entity that elects to be treated as a real estate mortgage investment conduit (REMIC) under sec. 860D 1066
Interest charge domestic international sales corporation (section 992) 1120-IC-DISC
Foreign corporation (other than life and property and casualty insurance company filing Form 1120-L or Form 1120-PC) 1120-F
Foreign sales corporation (sec. 922) 1120-FSC
Condominium management, residential real estate management, or timeshare association that elects to be treated as a homeowners association under section 528 1120-H
Life insurance company (sec. 801) 1120-L
Fund set up to pay for nuclear decommissioning costs (sec. 468A) 1120-ND
Property and casualty insurance company (section 831) 1120-PC
Political organization (section 527) 1120-POL
Real estate investment trust (section 856) 1120-REIT
Regulated investment company (section 851) 1120-RIC
S corporation (section 1361) 1120S
Settlement fund (section 468B) 1120-SF

Ownership Interest in a FASIT

If a corporation holds an ownership interest in a financial asset securitization investment trust (FASIT), it must report all items of income, gain, deductions, losses, and credits on the corporation's income tax return (except as provided in section 860H). Show a breakdown of the items on an attached schedule. For more information, see sections 860H and 860L.

Electronic Filing

Corporations will have an option to file Form 1120 and related forms, schedules, and attachments electronically. However, the option to file electronically does not apply to certain returns, including:

  • Amended returns,
  • Bankruptcy returns,
  • Final returns,
  • Returns with a name change,
  • Returns with precomputed penalty and interest,
  • Returns with reasonable cause for failing to file timely,
  • Returns with reasonable cause for failing to pay timely,
  • Returns with request for overpayment to be applied to another account,
  • Short-year returns, and
  • 52-53 week tax year returns.


Notes:

  1. Visit www.irs.gov/efile for details, including a list of forms and schedules not acceptable for electronic filing. Form 1120 cannot be electronically filed if any of those forms and schedules are required to be attached to Form 1120.
  2. Form 1120-A and Form 7004, Application for Automatic Extension of Time To File Corporation Income Tax Return, cannot be electronically filed.

When To File

Generally, a corporation must file its income tax return by the 15th day of the 3rd month after the end of its tax year. A new corporation filing a short-period return must generally file by the 15th day of the 3rd month after the short period ends. A corporation that has dissolved must generally file by the 15th day of the 3rd month after the date it dissolved.

If the due date falls on a Saturday, Sunday, or legal holiday, the corporation may file on the next business day.

Private delivery services.    Corporations can use certain private delivery services designated by the IRS to meet the “timely mailing as timely filing/paying” rule for tax returns and payments. The most recent list of designated private delivery services was published by the IRS in September 2002.

  The list includes only the following.
  • Airborne Express (Airborne): Overnight Air Express Service, Next Afternoon Service, and Second Day Service.
  • DHL Worldwide Express (DHL): DHL “Same Day” Service and DHL USA Overnight.
  • Federal Express (FedEx): FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2Day, FedEx International Priority, and FedEx International First.
  • United Parcel Service (UPS): UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd Day Air A.M., UPS Worldwide Express Plus, and UPS Worldwide Express.

  The private delivery service can tell you how to get written proof of the mailing date.

Extension.   File Form 7004 to request a 6-month extension of time to file.

Who Must Sign

The return must be signed and dated by:

  • The president, vice president, treasurer, assistant treasurer, chief accounting officer or
  • Any other corporate officer (such as tax officer) authorized to sign.

Receivers, trustees, or assignees must also sign and date any return filed on behalf of a corporation.

If an employee of the corporation completes Form 1120 or Form 1120-A, the paid preparer's space should remain blank. Anyone who prepares Form 1120 or Form 1120-A but does not charge the corporation should not complete that section. Generally, anyone who is paid to prepare the return must sign it and fill in the “Paid Preparer's Use Only” area.

The paid preparer must complete the required preparer information and—

  • Sign the return in the space provided for the preparer's signature.
  • Give a copy of the return to the taxpayer.

Paid Preparer Authorization

If the corporation wants to allow the IRS to discuss its 2003 tax return with the paid preparer who signed it, check the “Yes” box in the signature area of the return. This authorization applies only to the individual whose signature appears in the “Paid Preparer's Use Only” section of the corporation's return. It does not apply to the firm, if any, shown in that section.

If the “Yes” box is checked, the corporation is authorizing the IRS to call the paid preparer to answer any questions that may arise during the processing of its return. The corporation is also authorizing the paid preparer to:

  • Give the IRS any information that is missing from the return,
  • Call the IRS for information about the processing of the return or the status of any related refund or payment(s), and
  • Respond to certain IRS notices that the corporation has shared with the preparer about math errors, offsets, and return preparation. The notices will not be sent to the preparer.

The corporation is not authorizing the paid preparer to receive any refund check, bind the corporation to anything (including any additional tax liability), or otherwise represent the corporation before the IRS. If the corporation wants to expand the paid preparer's authorization, see Pub. 947, Practice Before the IRS and Power of Attorney.

The authorization cannot be revoked. However, the authorization will automatically end no later than the due date (excluding extensions) for filing the corporation's 2004 tax return.

Other Forms and Statements That
May Be Required

Forms

The corporation may have to file some of the following forms. See the form for more information.

  • Form W-2, Wage and Tax Statement, and Form W-3, Transmittal of Wage and Tax Statements. Use these forms to report wages, tips, and other compensation, and withheld income, social security, and Medicare taxes for employees.
  • Form W-2G, Certain Gambling Winnings. Use this form to report gambling winnings from horse racing, dog racing, jai alai, lotteries, keno, bingo, slot machines, sweepstakes, wagering pools, etc.
  • Form 720, Quarterly Federal Excise Tax Return. Use this form to report and pay environmental taxes, communications and air transportation taxes, fuel taxes, manufacturers taxes, ship passenger taxes, and certain other excise taxes.
  • Form 851, Affiliations Schedule. The parent corporation of an affiliated group of corporations must attach this form to its consolidated return. If this is the first year one or more subsidiaries are being included in a consolidated return, also see Form 1122, Authorization and Consent of Subsidiary Corporation To Be Included in a Consolidated Income Tax Return, on page 4.
  • Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. Use this form to report certain transfers to foreign corporations under section 6038B.
  • Form 940 or Form 940-EZ, Employer's Annual Federal Unemployment (FUTA) Tax Return. The corporation may be liable for FUTA tax and may have to file Form 940 or Form 940-EZ if it either:

    1. Paid wages of $1,500 or more in any calendar quarter in 2002 or 2003 or
    2. Had one or more employees who worked for the corporation for at least some part of a day in any 20 or more different weeks in 2002 or 20 or more different weeks in 2003.
  • Form 941, Employer's Quarterly Federal Tax Return, or Form 943, Employer's Annual Federal Tax Return for Agricultural Employees. Employers must file these forms to report income tax withheld, and employer and employee social security and Medicare taxes. Also, see Trust fund recovery penalty on page 7.
  • Form 945, Annual Return of Withheld Federal Income Tax. File Form 945 to report income tax withheld from nonpayroll distributions or payments, including pensions, annuities, IRAs, gambling winnings, and backup withholding. Also, see Trust fund recovery penalty on
    page 7.

  • Form 952, Consent To Extend the Time To Assess Tax Under Section 332(b). File Form 952 to extend the period of assessment of all income taxes of the receiving corporation on the complete liquidation of a subsidiary under section 332.
  • Form 966, Corporate Dissolution or Liquidation. Use this form to report the adoption of a resolution or plan to dissolve the corporation or liquidate any of its stock.
  • Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons;
  • Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding; and
  • Form 1042-T, Annual Summary and Transmittal of Forms 1042-S. Use these forms to report and send withheld tax on payments or distributions made to nonresident alien individuals, foreign partnerships, or foreign corporations to the extent these payments constitute gross income from sources within the United States (see sections 861 through 865).

    Also, see Pub. 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, and sections 1441 and 1442.

  • Form 1096, Annual Summary and Transmittal of U.S. Information Returns.
  • Form 1098, Mortgage Interest Statement. Use this form to report the receipt from any individual of $600 or more of mortgage interest (including points) in the course of the corporation's trade or business and reimbursements of overpaid interest.
  • Form 1098-E, Student Loan Interest Statement. Use this form to report the receipt of $600 or more of student loan interest in the course of the corporation's trade or business.
  • Forms 1099. Use these information returns to report the following.

    1. 1099-A, Acquisition or Abandonment of Secured Property.
    2. 1099-B, Proceeds From Broker and Barter Exchange Transactions.
    3. 1099-C, Cancellation of Debt.
    4. 1099-CAP, Changes in Corporate Control and Capital Structure.
    5. 1099-DIV, Dividends and Distributions.
    6. 1099-INT, Interest Income.
    7. 1099-LTC, Long-Term Care and Accelerated Death Benefits.
    8. 1099-MISC, Miscellaneous Income. Use this form to report payments: to certain fishing boat crew members, to providers of health and medical services, of rent or royalties, of nonemployee compensation, etc.


      Note:

      Every corporation must file Form 1099-MISC if it makes payments of rents, commissions, or other fixed or determinable income (see section 6041) totaling $600 or more to any one person in the course of its trade or business during the calendar year.

    9. 1099-MSA, Distributions From an Archer MSA or Medicare+Choice MSA.
    10. 1099-OID, Original Issue Discount.
    11. 1099-PATR, Taxable Distributions Received From Cooperatives.
    12. 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
    13. 1099-S, Proceeds From Real Estate Transactions.

    Also use these returns to report amounts received as a nominee for another person.

  • Form 1122, Authorization and Consent of Subsidiary Corporation To Be Included in a Consolidated Income Tax Return. For the first year a subsidiary corporation is being included in a consolidated return, attach the form to the parent's consolidated return. Attach a separate Form 1122 for each subsidiary being included in the consolidated return.
  • Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Use this form to report a distribution received from a foreign trust; or, if the corporation was the grantor of, transferor of, or transferor to, a foreign trust that existed during the tax year. See Question 5 of Schedule N (Form 1120).
  • Form 5452, Corporate Report of Nondividend Distributions. Use this form to report nondividend distributions.
  • Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. This form is required if the corporation controls a foreign corporation; acquires, disposes of, or owns 10% or more in value or vote of the outstanding stock of a foreign corporation; or had control of a foreign corporation for an uninterrupted period of at least 30 days during the annual accounting period of the foreign corporation. See Question 4 of Schedule N (Form 1120).
  • Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. This form is filed if the corporation is 25% or more foreign-owned. See Question 7 on page 19.
  • Form 5498, IRA Contribution Information. Use this form to report contributions (including rollover contributions) to any IRA, including a SEP, SIMPLE, or Roth IRA, and to report Roth IRA conversions, IRA recharacterizations, and the fair market value of the account.
  • Form 5498-ESA, Coverdell ESA Contribution Information. Use this form to report contributions (including rollover contributions) to and the fair market value of a Coverdell education savings account (ESA).
  • Form 5498-MSA, Archer MSA or Medicare+Choice MSA Information. Use this form to report contributions to an Archer MSA and the fair market value of an Archer MSA or Medicare+Choice MSA.

    For more information, see the general and specific Instructions for Forms 1099, 1098, 5498, and W-2G.

  • Form 5713, International Boycott Report. Corporations that had operations in, or related to, certain “boycotting” countries file Form 5713.
  • Form 8023, Elections Under Section 338 for Corporations Making Qualified Stock Purchases. Corporations file this form to make elections under section 338 for a “target” corporation if the purchasing corporation has made a qualified stock purchase of the target corporation.
  • Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips. Use this form to report receipts from large food or beverage operations, tips reported by employees, and allocated tips.
  • Form 8050, Direct Deposit of Corporate Tax Refund. File Form 8050 to request that the IRS deposit a corporate tax refund (including a refund of $1 million or more) directly into an account at any U.S. bank or other financial institution (such as a mutual fund or brokerage firm) that accepts direct deposits.
  • Form 8264, Application for Registration of a Tax Shelter. Tax shelter organizers use this form to receive a tax shelter registration number from the IRS.
  • Form 8271, Investor Reporting of Tax Shelter Registration Number. Corporations, which have acquired an interest in a tax shelter that is required to be registered, use this form to report the tax shelter's registration number. Attach Form 8271 to any tax return (including an application for tentative refund (Form 1139) and an amended return) on which a deduction, credit, loss, or other tax benefit attributable to a tax shelter is taken or any income attributable to a tax shelter is reported.
  • Form 8275, Disclosure Statement, and Form 8275-R, Regulation Disclosure Statement. Disclose items or positions taken on a tax return that are not otherwise adequately disclosed on a tax return or that are contrary to Treasury regulations (to avoid parts of the accuracy-related penalty or certain preparer penalties).
  • Form 8281, Information Return for Publicly Offered Original Issue Discount Instruments. Use this form to report the issuance of public offerings of debt instruments (obligations).
  • Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, and Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests. Use these forms to report and transmit withheld tax on the purchase of a U.S. real property interest from a foreign person. See section 1445 and the related regulations for more information.
  • Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business. Use this form to report the receipt of more than $10,000 in cash or foreign currency in one transaction or a series of related transactions.
  • Form 8594, Asset Acquisition Statement Under Section 1060. Corporations file this form to report the purchase or sale of a group of assets that make up a trade or business if goodwill or going concern value attaches or could attach to the assets and if the buyer's basis is determined only by the amount paid for the assets.
  • Form 8621, Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund. Use this form to make certain elections by shareholders in a passive foreign investment company and to figure certain deferred taxes.
  • Form 8697, Interest Computation Under the Look-Back Method for Completed Long-Term Contracts. Use this form to figure the interest due or to be refunded under the look-back method of section 460(b)(2). The look-back method applies to certain long-term contracts accounted for under either the percentage of completion method or the percentage of completion-capitalized cost method.
  • Form 8810, Corporate Passive Activity Loss and Credit Limitations. Closely held corporations (and corporations that are personal service corporations) must use this form to compute the passive activity loss and credit allowed under section 469.
  • Form 8817, Allocation of Patronage and Nonpatronage Income and Deductions. Use this form to figure and report patronage and nonpatronage income and deductions (used by taxable cooperatives).
  • Form 8842, Election To Use Different Annualization Periods for Corporate Estimated Tax. Corporations use Form 8842 for each year they want to elect one of the annualization periods in section 6655(e)(2) for figuring estimated tax payments under the annualized income installment method.
  • Form 8849, Claim for Refund of Excise Taxes. Corporations use this form to claim a refund of certain excise taxes.
  • Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. A domestic corporation may have to file Form 8865 if it:

    1. Controlled a foreign partnership (i.e., owned more than a 50% direct or indirect interest in the partnership).
    2. Owned at least a 10% direct or indirect interest in a foreign partnership while U.S. persons controlled that partnership.
    3. Had an acquisition, disposition, or change in proportional interest in a foreign partnership that:

      1. Increased its direct interest to at least 10% or reduced its direct interest of at least 10% to less than 10%.
      2. Changed its direct interest by at least a 10% interest.
    4. Contributed property to a foreign partnership in exchange for a partnership interest if:

      1. Immediately after the contribution, the corporation owned, directly or indirectly, at least a 10% interest in the foreign partnership or
      2. The fair market value of the property the corporation contributed to the foreign partnership, when added to other contributions of property made to the foreign partnership during the preceding 12-month period, exceeds $100,000.

        Also, the domestic corporation may have to file Form 8865 to report certain dispositions by a foreign partnership of property it previously contributed to that partnership if it was a partner at the time of the disposition.

        For more details, including penalties for failing to file Form 8865, see Form 8865 and its separate instructions.

  • Form 8866, Interest Computation Under the Look-Back Method for Property Depreciated Under the Income Forecast Method. Figure the interest due or to be refunded under the look-back method of section 167(g)(2) for property placed in service after September 13, 1995, that is depreciated under the income forecast method.
  • Form 8876, Excise Tax on Structured Settlement Factoring Transactions. Use this form to report and pay the 40% excise tax imposed under section 5891.
  • Form 8883, Asset Allocation Statement Under Section 338. Corporations file this form to report information about transactions involving the deemed sale of corporate assets under section 338.
  • Form 8886, Reportable Transaction Disclosure Statement. Use this form to disclose information for each reportable transaction in which the corporation participated. Form 8886 must be filed for each tax year that the Federal income tax liability of the corporation is affected by its participation in the transaction. The following are reportable transactions.

    1. Any transaction that is the same as or substantially similar to tax avoidance transactions identified by the IRS.
    2. Any transaction offered under conditions of confidentiality.
    3. Any transaction for which the corporation has contractual protection against disallowance of the tax benefits.
    4. Any transaction resulting in a loss of at least $10 million in any single year or $20 million in any combination of years.
    5. Any transaction resulting in a book-tax difference of more than $10 million on a gross basis.
    6. Any transaction resulting in a tax credit of more than $250,000, if the corporation held the asset generating the credit for 45 days or less.

Statements

Consolidated returns.   File supporting statements for each corporation included in the consolidated return. Do not use Form 1120 as a supporting statement. On the supporting statement, use columns to show the following, both before and after adjustments:
  1. Items of gross income and deductions.
  2. A computation of taxable income.
  3. Balance sheets as of the beginning and end of the tax year.
  4. A reconciliation of income per books with income per return.
  5. A reconciliation of retained earnings.

  
Caution

  The corporation does not have to complete items 3, 4, and 5, if its total receipts (line 1a plus lines 4 through 10 on page 1 of the return) and its total assets at the end of the tax year are less than $250,000.

  Enter the totals for the consolidated group on Form 1120. Attach consolidated balance sheets and a reconciliation of consolidated retained earnings. For more information on consolidated returns, see the regulations under section 1502.

Stock ownership in foreign corporations.   Attach the statement required by section 551(c) if:
  • The corporation owned 5% or more in value of the outstanding stock of a foreign personal holding company and
  • The corporation was required to include in its gross income any undistributed foreign personal holding company income from a foreign personal holding company.

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.

Dual consolidated losses.   If a domestic corporation incurs a dual consolidated loss (as defined in Regulations section 1.1503-2(c)(5)), the corporation (or consolidated group) may need to attach an elective relief agreement and/or an annual certification as provided in Temporary Regulations section 1.1503-2T(g)(2).

Amended Return

Use Form 1120X, Amended U.S. Corporation Income Tax Return, to correct a previously filed Form 1120 or Form 1120-A.

Assembling the Return

To ensure that the corporation's tax return is correctly processed, attach all schedules and other forms after page 4, Form 1120 (or page 2, Form 1120-A), and in the following order.

  1. Schedule N (Form 1120).
  2. Form 8050.
  3. Form 4136.
  4. Form 4626.
  5. Form 851.
  6. Additional schedules in alphabetical order.
  7. Additional forms in numerical order.

Complete every applicable entry space on Form 1120 or Form 1120-A. 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.

Accounting Methods

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 corporation's books and records. In all cases, the method used must clearly show taxable income.

Generally, permissible methods include:

  • Cash,
  • Accrual, or
  • Any other method authorized by the Internal Revenue Code.

Accrual method.   Generally, a corporation (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). A corporation engaged in farming operations also must use the accrual method. For exceptions, see section 447.

  If inventories are required, the accrual method generally 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 for eligible trades or businesses and may account for inventoriable items as materials and supplies that are not incidental. For details, see Cost of Goods Sold on page 14.

  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.

Nonaccrual experience method.   Accrual method corporations are not required to accrue certain amounts to be received from the performance of services that, on the basis of their experience, will not be collected, if:
  • The services are in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting or
  • The corporation's average annual gross receipts for the 3 prior tax years does not exceed $5 million.

  This provision does not apply to any amount if interest is required to be paid on the amount or if there is any penalty for failure to timely pay the amount. For more information, see section 448(d)(5) and Temporary Regulations section 1.448-2T. For reporting requirements, see the instructions for line 1 on page 8.

Percentage-of-completion method.   Long-term contracts (except for certain real property construction contracts) must generally be accounted for using the percentage of completion method described in section 460. See section 460 and the related regulations for rules on long-term contracts.

Mark-to-market accounting method.   Generally, dealers in securities must use the mark-to-market accounting method described in section 475. Under this method, any security that is inventory to the dealer must be included in inventory at its fair market value (FMV). Any security held by a dealer that is not inventory and that is held at the close of the tax year is treated as sold at its FMV on the last business day of the tax year. Any gain or loss must be taken into account in determining gross income. The gain or loss taken into account is generally treated as ordinary gain or loss. For details, including exceptions, see section 475, the related regulations, and Rev. Rul. 94-7, 1994-1 C.B. 151.

  Dealers in commodities and traders in securities and commodities may elect to use the mark-to-market accounting method. To make the election, the corporation must file a statement describing the election, the first tax year the election is to be effective, and, in the case of an election for traders in securities or commodities, the trade or business for which the election is made. Except for new taxpayers, the statement must be filed by the due date (not including extensions) of the income tax return for the tax year immediately preceding the election year and attached to that return, or if applicable, to a request for an extension of time to file that return. For more details, see sections 475(e) and (f) and Rev. Proc. 99-17, 1999-1 C.B. 503.

Change in accounting method.   To change its method of accounting used to report taxable income (for income as a whole or for any material item), the corporation must file Form 3115, Application for Change in Accounting Method. For more information, see Form 3115 and Pub. 538, Accounting Periods and Methods.

Section 481(a) adjustment.   The corporation 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 corporation may elect to use a 1-year adjustment period if the net section 481(a) adjustment for the change is less than $25,000. The corporation must complete the appropriate lines of Form 3115 to make the election.

  Include any net positive section 481(a) adjustment on page 1, line 10. If the net section 481(a) adjustment is negative, report it on Form 1120, line 26 (Form 1120-A, line 22).

Accounting Periods

A corporation must figure its taxable income on the basis of a tax year. A tax year is the annual accounting period a corporation uses to keep its records and report its income and expenses. Generally, corporations can use a calendar year or a fiscal year. Personal service corporations, however, must use a calendar year unless they meet one of the exceptions discussed in Accounting period on page 8.

For more information about accounting periods, see Regulations sections 1.441-1 and 1.441-2 and Pub. 538.

Calendar year.   If the calendar year is adopted as the annual accounting period, the corporation must maintain its books and records and report its income and expenses for the period from January 1 through December 31 of each year.

Fiscal 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.   A corporation 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 of tax year.   Generally, a corporation 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, a corporation may change its tax year without getting the consent.

   For more information on change of tax year, see Form 1128, Regulations section 1.442-1, and Pub. 538. Personal service corporations should also see Accounting period on page 8.

Rounding Off to
Whole Dollars

The corporation may round off cents to whole dollars on its return and schedules. If the corporation does round to whole dollars, it must round all amounts. To round, drop amounts under 50 cents and increase amounts from 50 to 99 cents to the next dollar (for example, $1.39 becomes $1 and $2.50 becomes $3).

If two or more amounts must be added to figure the amount to enter on a line, include cents when adding the amounts and round off only the total.

Recordkeeping

Keep the corporation'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 corporation's basis in property for as long as they are needed to figure the basis of the original or replacement property.

The corporation should keep copies of all filed returns. They help in preparing future and amended returns.

Depository Method
of Tax Payment

The corporation must pay the tax due in full no later than the 15th day of the 3rd month after the end of the tax year. The two methods of depositing corporate income taxes are discussed below.

Electronic Deposit Requirement

The corporation must make electronic deposits of all depository taxes (such as employment tax, excise tax, and corporate income tax) using the Electronic Federal Tax Payment System (EFTPS) in 2004 if:

  • The total deposits of such taxes in 2002 were more than $200,000 or
  • The corporation was required to use EFTPS in 2003.

If the corporation is required to use EFTPS and fails to do so, it may be subject to a 10% penalty. If the corporation is not required to use EFTPS, it may participate voluntarily. To enroll in or get more information about EFTPS, call 1-800-555-4477 or 1-800-945-8400. To enroll online, visit www.eftps.gov.

Depositing on time.    For EFTPS deposits to be made timely, the corporation must initiate the transaction at least 1 business day before the date the deposit is due.

Deposits With Form 8109

If the corporation does not use EFTPS, deposit corporation income tax payments (and estimated tax payments) with Form 8109, Federal Tax Deposit Coupon. If you do not have a preprinted Form 8109, use Form 8109-B to make deposits. You can get this form by calling 1-800-829-4933. Be sure to have your EIN ready when you call.

Do not send deposits directly to an IRS office; otherwise, the corporation may have to pay a penalty. Mail or deliver the completed Form 8109 with the payment to an authorized depositary (i.e., a commercial bank or other financial institution authorized to accept Federal tax deposits). Make checks or money orders payable to the depositary.

If the corporation prefers, it may mail the coupon and payment to: Financial Agent, Federal Tax Deposit Processing, P.O. Box 970030, St. Louis, MO 63197. Make the check or money order payable to “Financial Agent.”

To help ensure proper crediting, write the corporation's EIN, the tax period to which the deposit applies, and "Form 1120" on the check or money order. Be sure to darken the "1120" box on the coupon. Records of these deposits will be sent to the IRS.

For more information on deposits, see the instructions in the coupon booklet (Form 8109) and Pub. 583, Starting a Business and Keeping Records.

Caution

If the corporation owes tax when it files Form 1120 or Form 1120-A, do not include the payment with the tax return. Instead, mail or deliver the payment with Form 8109 to an authorized depositary, or use EFTPS, if applicable.

Estimated Tax Payments

Generally, the following rules apply to the corporation's payments of estimated tax.

  • The corporation must make installment payments of estimated tax if it expects its total tax for the year (less applicable credits) to be $500 or more.
  • The installments are due by the 15th day of the 4th, 6th, 9th, and 12th months of the tax year. If any date falls on a Saturday, Sunday, or legal holiday, the installment is due on the next regular business day.
  • Use Form 1120-W, Estimated Tax for Corporations, as a worksheet to compute estimated tax.
  • If the corporation does not use EFTPS, use the deposit coupons (Forms 8109) to make deposits of estimated tax.

For more information on estimated tax payments, including penalties that apply if the corporation fails to make required payments, see the instructions for line 33 on page 14.

Overpaid estimated tax.    If the corporation overpaid estimated tax, it may be able to get a quick refund by filing Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax. The overpayment must be at least 10% of the corporation's expected income tax liability and at least $500. File Form 4466 after the end of the corporation's tax year, and no later than the 15th day of the third month after the end of the tax year. Form 4466 must be filed before the corporation files its tax return.

Interest and Penalties

Interest.   Interest is charged on taxes paid late even if an extension of time to file is granted. Interest is also charged on penalties imposed for failure to file, negligence, fraud, substantial valuation misstatements, and substantial understatements of tax from the due date (including extensions) to the date of payment. The interest charge is figured at a rate determined under section 6621.

Penalty for late filing of return.   A corporation that does not file its tax return by the due date, including extensions, may be penalized 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. The minimum penalty for a return that is over 60 days late is the smaller of the tax due or $100. The penalty will not be imposed if the corporation can show that the failure to file on time was due to reasonable cause. Corporations that file late must attach a statement explaining the reasonable cause.

Penalty for late payment of tax.   A corporation that does not pay the tax when due generally may be penalized ½ of 1% of the unpaid tax for each month or part of a month the tax is not paid, up to a maximum of 25% of the unpaid tax. The penalty will not be imposed if the corporation can show that the failure to pay on time was due to reasonable cause.

Trust fund recovery penalty.   This penalty may apply if certain excise, income, social security, and Medicare taxes that must be collected or withheld are not collected or withheld, or these taxes are not paid. These taxes are generally reported on Forms 720, 941, 943, or 945 (see Other Forms and Statements That May Be Required on page 3). The trust fund recovery penalty may be imposed on all persons who are determined by the IRS to have been responsible for collecting, accounting for, and paying over these taxes, and who acted willfully in not doing so. The penalty is equal to the unpaid trust fund tax. See the Instructions for Form 720, Pub. 15 (Circular E), Employer's Tax Guide, or Pub. 51 (Circular A), Agricultural Employer's Tax Guide, for details, including the definition of responsible persons.

Other penalties.   Other penalties can be imposed for negligence, substantial understatement of tax, and fraud. See sections 6662 and 6663.

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