2003 HTML Instructions for Form 1120-FSC,

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.

Period covered. File the 2003 return for calendar year 2003 and fiscal years that begin in 2003 and end in 2004. For a fiscal year return, fill in the tax year space at the top of the form.

Note:

The 2003 Form 1120-FSC may also be used if:

The FSC has a tax year of less than 12 months that begins and ends in 2004 and
The 2004 Form 1120-FSC is not available at the time the FSC is required to file its return.

The FSC must show its 2004 tax year on the 2003 Form 1120-FSC and take into account any tax law changes that are effective for tax years beginning after December 31, 2003.

Name. Print or type the FSC's true name (as set forth in the charter or other legal document creating it).

Address. Enter the U.S. address where the FSC maintains the records required under section 6001. 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 FSC has a P.O. box, show the box number instead.

Item A. Foreign country or U.S. possession of incorporation. See Definition of a Foreign Sales Corporation (FSC) on page 2.

Item E. Total assets. Enter the FSC's total assets (as determined by the accounting method regularly used in keeping the FSC's books and records) at the end of the tax year from page 6, Schedule L, column (d), line 15. If there are no assets at the end of the tax year, enter -0-.

Item F. Final return, name change, address change, or amended return.

If the corporation ceases to exist, file Form 1120-FSC and check the “Final return” box.
If the FSC changed its name since it last filed a return, check the box for “Name change.” Generally, a FSC also must have amended its articles of incorporation and filed the amendment with the jurisdiction in which it was incorporated.
If the FSC has changed its address since it last filed a return, check the box for “Address Change.”

Note:

If a change of address occurs after the return is filed, use Form 8822, Change of Address, to notify the IRS of the new address.
If the FSC is amending its return, check the box for “Amended return.”

FSC Information

Line 1. Principal shareholder. Complete lines 1a through 1h for the shareholder (individual, corporation, partnership, trust, or estate) that was the principal shareholder at the beginning of the FSC's tax year. See the note on page 6 under Accounting Periods.

Foreign address. Enter the information in the following order: city, province or state, and country. Follow the country's practice for entering the postal code. Do not abbreviate the country name.

Line 2. Parent-subsidiary controlled group. If the FSC is a subsidiary in a parent-subsidiary controlled group and the principal shareholder is not the common parent of the group, complete lines 2a through 2g for the common parent. Enter the consolidated total assets on line 2d for a group that files a consolidated return; otherwise, enter only the common parent's total assets.

Note:

Check the “Yes” box on line 2 if the FSC is a subsidiary in a parent-subsidiary controlled group. This applies even if the FSC is a subsidiary member of one group and the parent corporation of another.

The term “parent-subsidiary controlled group” means one or more chains of corporations connected through stock ownership (sections 927(d)(4) and 1563(a)(1)). Both of the following requirements must be met.

More than 50% of the total combined voting power of all classes of stock entitled to vote or more than 50% of the total value of all classes of stock of each corporation in the group (except the parent) must be owned by one or more of the other corporations in the group.
The common parent must own more than 50% of the total combined voting power of all classes of stock entitled to vote or more than 50% of the total value of all classes of stock of at least one of the other corporations in the group.

Stock owned directly by other members of the group is not counted when computing the voting power or value.

See sections 927(d)(4) and 1563(d)(1) for the definition of “stock” for purposes of determining stock ownership above.

Tax and Payments

Line 2h. Backup withholding. If the FSC had income tax withheld from any payments it received due to backup withholding, include the amount withheld in the total for line 2h. Show the amount withheld in the blank space in the right-hand column between lines 1 and 2h, and write “backup withholding.”

Note:

Do not include backup withholding amounts on line 2g (i.e., include on line 2g only amounts withheld under Chapter 3 of the Code).

Line 3. Estimated tax penalty. A FSC that does not make estimated tax payments when due may be subject to an underpayment penalty for the period of underpayment. Generally, a FSC is subject to the penalty if its tax liability is $500 or more and it did not timely pay the smaller of:

Its tax liability for 2003 or
Its prior year's tax.

See section 6655 for details and exceptions, including special rules for large corporations.

Use Form 2220, Underpayment of Estimated Tax by Corporations, to see if the FSC owes the penalty and to figure the amount of the penalty. Generally, the FSC does not have to file this form because the IRS can figure the amount of any penalty and bill the FSC for it. However, even if the FSC does not owe the penalty, complete and attach Form 2220 if:

The annualized income or adjusted seasonal installment method is used or
The FSC is a large corporation computing its first required installment based on the prior year's tax. (See the Form 2220 instructions for the definition of a large corporation.)

If Form 2220 is attached, check the box on line 3, page 1, Form 1120-FSC, and enter the amount of any penalty on this line.

Schedule A

Cost of Goods Sold Related To Foreign Trading Gross Receipts

Complete Schedule A only for the cost of goods sold deduction related to foreign trading gross receipts reported on lines 1 through 5 of Schedule B.

Complete column (a) to show the cost of goods sold for inventory acquired in transactions using the administrative pricing rules. Complete column (b) to show the cost of goods sold for inventory acquired in transactions that did not use the administrative pricing rules. For details on the administrative pricing rules, see the Instructions for Schedule P (Form 1120-FSC).

If the FSC acts as another person's commission agent on a sale, do not enter any amount on Schedule A for the sale.

Small FSCs will have to make two separate computations for cost of goods sold if their foreign trading gross receipts exceed the limitation amount on line 6e of Schedule B. In this case, a deduction for cost of goods sold will be figured separately for the income on line 6h of Schedule B, and separately for the income on line 7 of Schedule F.

Generally, inventories are required at the beginning and end of each tax year if the purchase or sale of merchandise is an income-producing factor. See Regulations section 1.471-1.

However, if the FSC 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 (unless its business is a tax shelter (as defined in section 448(d)(3))).

A qualifying taxpayer is a taxpayer that, for each prior tax year ending after December 16, 1998, has average annual gross receipts of $1 million or less for the 3-tax-year period ending with that prior year. See Rev. Proc. 2001-10, 2001-2 I.R.B. 272, for details.

A qualifying small business taxpayer is a taxpayer (a) that, for each prior tax year ending on or after December 31, 2000, has average annual gross receipts of $10 million or less for the 3-tax-year period ending with that prior tax year and (b) whose principal business activity is not an ineligible activity. See Rev. Proc. 2002-28, 2002-18 I.R.B. 815, for details.

Under this accounting method, inventory costs for merchandise purchased for resale are deductible in the year the merchandise is sold (but not before the year the FSC paid for the merchandise, if it is also using the cash method). For additional guidance on this method of accounting for inventoriable items, see Pub 538.

Enter amounts paid for merchandise during the tax year on line 2. The amount the FSC can deduct for the tax year is figured on line 8.

Note:

All FSCs not using the cash method of accounting should see Section 263A uniform capitalization rules in the instructions for Schedule G on page 12. See those instructions before completing Schedule A.

If the FSC uses intercompany pricing rules (for purchases from a related supplier), use the transfer price figured in Part II of Schedule P (Form 1120-FSC).

Line 1. Inventory at beginning of year.   If the FSC 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 FSC's section 481(a) adjustment (explained on page 6).

Line 4. Additional section 263A costs.   An entry is required on this line only for FSCs that have elected a simplified method of accounting.
  For FSCs that have elected the simplified production method, additional section 263A costs are generally those costs, other than interest, that were not capitalized under the FSC'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 FSCs 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 sections 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 FSC accounts for inventoriable items in the same manner as materials and supplies that are not incidental, enter on line 7 the portion of its merchandise purchased for resale that is included on line 6 and was not sold during the year.

Lines 9a through 9f. 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 FSC is using the cash method of accounting, it is required to use cost.
  FSCs 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.
  FSCs 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. 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, shopwear, 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 FSC changed or extended its inventory method to LIFO and had to write up the opening inventory to cost in the year of election, report the effect of the write-up as other income (as appropriate on Schedule F, line 16), 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, Accounting Periods and Methods.

Additional Information

Line 2. Show any tax-exempt interest received or accrued. Include any exempt-interest dividends received as a shareholder in a mutual fund or other regulated investment company.

Line 4. See section 542 for the definition of personal holding company and section 552 for the definition of foreign personal holding company. Also, see Personal Holding Companies and Foreign Personal Holding Companies on page 5 for information and other details if the FSC meets the definition of either.

Line 6. If the FSC owned at least a 10% interest, directly or indirectly, in any foreign partnership, attach a statement listing the following information for each foreign partnership. For this purpose, a foreign partnership includes an entity treated as a foreign partnership under Regulations section 301.7701-2 or 301.7701-3.

Name and EIN (if any) of the foreign partnership;
Identify which, if any, of the following forms the foreign partnership filed for its tax year ending with or within the FSC's tax year: Form 1042, 1065 or 1065-B, or 8804;
Name of the tax matters partner (if any); and
Beginning and ending dates of the foreign partnership's tax year.

Line 7. If the FSC has a net operating loss (NOL) for its 2003 tax year, it may elect under section 172(b)(3) to waive the entire carryback period for the NOL and instead carry the NOL forward to future tax years. To do so, check the box on line 7 and file the tax return by its due date, including extensions (do not attach the statement described in Temporary Regulations section 301.9100-12T). Once made, the election is irrevocable. See Pub. 542, Corporations, section 172, and Form 1139, Corporation Application for Tentative Refund, for more details.

Line 8. Enter the amount of the NOL carryover to the tax year from prior years, even if some of the loss is used to offset income on this return. The amount to enter is the total of all NOLs generated in prior years but not used to offset income (either as a carryback or carryover) to a tax year prior to 2003. Do not reduce the amount by any NOL deduction reported on line 19a, Part II of Schedule B.

Lines 9c and 10b(2). See Definition of a Foreign Sales Corporation (FSC) on page 2 for definitions of qualifying foreign country and U.S. possession.

Line 10. All FSCs (except small FSCs) must answer these questions. For more information, see Foreign Management Rules on page 3.

Line 11. All FSCs (except small FSCs) must answer these questions. On line 11b, indicate how the FSC met the foreign direct costs requirement of section 924(d) for all transactions that generated foreign trading gross receipts reported on lines 1 through 5 of Schedule B. Also, complete line 11a and/or line 11d to make an election to use either of the annual grouping election(s) indicated. See the instructions for Foreign Economic Process Rules on page 3 for details.

Schedule B

Taxable Income or (Loss)

Use Schedule B to compute taxable income from all sources.

Part I

Use Part I to compute net income attributable to nonexempt foreign trade income. Income and expenses on lines 1 through 15 are reported in column (a) if the administrative pricing rules were used in the transaction that produced the income.

Report in column (b) all foreign trade income from all transactions in which the administrative pricing rules were not used. Attach a schedule that shows the computation of the taxable and nontaxable income included on line 15, column (b). Include only the taxable amount on line 16.

Nonaccrual experience method.   Corporations that qualify to use the nonaccrual experience method (described on page 6) 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 the applicable line of Schedule B.

Lines 1 through 5.   Enter the foreign trading gross receipts requested on lines 1 through 5. See section 924 and Foreign Trading Gross Receipts on page 3 of these instructions for receipts that are excluded and other details. Report commission income on line 1 or line 2 based on the sale, lease, or rental of property on which that commission arose.

Line 5.   If the 50% gross receipts test of section 924(a)(5) is not met, report the FSC's gross receipts that would have otherwise qualified under that section on line 16, Schedule F, instead of line 5, Schedule B.

Lines 6b through 6h.   See section 924(b)(2)(B) for the rules regarding the limitation on the amount of foreign trading gross receipts that a small FSC may take into account in determining its exempt foreign trade income.

Line 6d.   Temporary Regulations section 1.921-1T(b)(5) indicates that, in the case of a small FSC having a short tax year, the dollar limitation reported on line 6b or 6c is to be prorated on a daily basis. A small FSC having a short tax year must divide the number of days in its short tax year by the number of days that would have made up a full tax year and enter the resulting fraction on line 6d as a decimal less than 1.00000.
Example.

For its 2003 calendar year tax year, a small FSC has a short tax year of 73 days. The FSC enters 0.200 (73/365) on line 6d.

Line 6f.   If commission income is reported in the total for line 6a of Schedule B, total receipts for purposes of line 6f are figured as follows:

1. Enter total of columns (a) and (b), line 6a, Schedule B 1.

2. Enter total commission income reported on line 1 and line 2, Schedule B 2.

3. Subtract line 2 from line 1 3.

4. With respect to the commission income reported on line 2 above, enter total gross receipts on the sale, lease, or rental of property on which the commission income arose (section 927(b)(2)) 4.

5. Add lines 3 and 4. Enter here and on line 6f, Schedule B 5.

Line 6h.   When making the line 6h allocation, allocate only the commission income from the gross receipts on line 4 above. If the small FSC's foreign trading gross receipts for the tax year (line 6f, Schedule B) exceed its allowable limitation (line 6e, Schedule B), the small FSC may select the gross receipts to which the limitation is allocated. In such a case, allocate the amount on line 6g between columns (a) and (b) on line 6h based on whether the administrative pricing rules were used for the gross receipts selected. See Regulations section 1.921-2(b) Q&A-4.

Part II

Line 19a. Net operating loss deduction.   A FSC may use the net operating loss (NOL) incurred in one tax year to reduce its taxable income in another tax year. Enter on line 19a the total NOL carryovers from other tax years, but do not enter more than the FSC's taxable income (after the dividends-received deduction). Attach a schedule showing the computation of the NOL deduction. Also complete line 8 in Additional Information on page 2 of the form.
  For details on the NOL deduction, see Pub. 542, section 172, and Form 1139.

Line 19b. Dividends-received deduction.   A FSC may be entitled to a deduction for dividends it receives from other corporations. Complete the worksheet on page 11 using the instructions that begin on that page. Attach the completed worksheet to Form 1120-FSC.

Line 20. Taxable income or (loss).   If line 20 is zero or less, the FSC may have a net operating loss (NOL) that can be carried back or forward as a deduction to other tax years. Generally, a FSC first carries back an NOL 2 tax years. However, the FSC may elect to waive the carryback period and instead carry the NOL forward to future tax years. To make the election, see the instructions for line 7 on page 9.
  See Form 1139 for details, including other elections that may be available, which must be made no later than 6 months after the due date (excluding extensions) of the FSC's tax return.

Schedule E

Exemption Percentages Used in Figuring Exempt Foreign Trade Income

For purposes of the Note at the top of Schedule E, a C corporation is a corporation other than an S corporation. Shareholders, other than C corporations, are individuals, partnerships, S corporations, trusts, and estates.

Use lines 2a through 2d to figure the exemption percentage for foreign trade income determined by not using the administrative pricing rules. See section 923(a)(2).

Use lines 3a through 3d to figure the exemption percentage for foreign trade income that was determined by using the administrative pricing rules (see section 923(a)(3)). If a qualified cooperative is a shareholder of the FSC, see section 923(a)(4).

Schedule F

Net Income From Nonexempt Foreign Trade Income and Taxable Nonforeign Trade Income

Part I

Enter net income from nonexempt foreign trade income and related expenses in Part I.

Line 2.   Enter FSC income that resulted from the FSC's cooperation with an international boycott. See section 927(e)(2) and Form 5713 and related schedules and instructions.

Line 3.   Enter the amount, if any, of illegal payments, bribes, or kickbacks that the FSC paid, directly or indirectly, to government officials, employees, or agents. See section 927(e)(2).

Line 5.   See the instructions for Schedule A before completing this line.

Part II

Enter the taxable portion of gross income of the FSC that was not derived from foreign trading gross receipts. This type of income includes:

Small FSCs only. Amounts specifically excluded from foreign trade income because of the small FSC limitation (the amount by which line 6f of Schedule B exceeds line 6e of Schedule B). (Enter the excess, if any, on line 7 of Schedule F.)
Investment type income. (Enter on lines 8 through 12 of Schedule F.)
Income from property that is subsidized, deemed in short supply, or destined for use in the United States. (Enter on lines 13 and 14 of Schedule F.)
Amounts from transactions that did not meet the foreign economic process requirements. (Enter on line 15 of Schedule F.)
Other nonforeign trade income. (Enter on line 16 of Schedule F.)

For more details, see sections 924(f) and 927(a)(2) and (3).

Line 9.   Complete the worksheet below to figure the total dividends to report on line 9. Attach the completed worksheet to Form 1120-FSC.

Line 18.   Enter the deductions allocated or apportioned to line 17 income. Attach to Form 1120-FSC a schedule listing each type of deduction. Show deductions related to cost of goods sold separately. See the instructions for Schedule A on page 8 before completing this line.

Passive activity limitations.   Section 469 generally limits the deduction of passive activity losses for closely held FSCs and FSCs that are personal service corporations. See section 469 and the Instructions for Form 8810 for details.

Instructions for Dividends
and Dividends-Received
Deduction Worksheet

For purposes of the 20% ownership test on lines 1 through 7, the percentage of stock owned by the FSC is based on voting power and the value of the stock. Preferred stock described in section 1504(a)(4) is not taken into account.

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 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 FSC 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 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).

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 FSC acquired by incurring a debt (e.g., it borrowed money to buy the stock).
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 FSC 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 to Form 1120-FSC showing 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 FSC 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 on line 10 of the worksheet below. 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).

1. Refigure line 18, Part II, Schedule B (page 3 of Form 1120-FSC) without any adjustment under section 1059 and without any capital loss carryback to the tax year under section 1212(a)(1) 1.

2. Multiply line 1 by 80% 2.

3. 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 3.

4. 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 lines 5-10 below 4.

5. Enter the total amount of dividends from 20%-or-more-owned corporations that are included on lines 2, 3, 5, and 7, column (a) 5.

6. Subtract line 5 from line 1 6.

7. Multiply line 6 by 70% 7.

8. Subtract line 3 above from line 8, column (c) 8.

9. Enter the smaller of line 7 or
line 8 9.

10. Dividends-received deduction after limitation (sec. 246(b)). Add lines 4 and 9. Enter the result here and on line 8, column (c) 10.

Line 10, Column (a)

If the FSC 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)

Include the following:

Dividends (other than capital gain distributions reported on Schedule D (Form 1120) and exempt-interest dividends) that are received from RICs and that are not subject to the 70% deduction.
Dividends from tax-exempt organizations.
Dividends (other than capital gain distributions) received from a real estate investment trust that, for the tax year of the trust in which the dividends are paid, qualifies under sections 856 through 860.
Dividends not eligible for a dividends-received deduction because of the holding period of the stock or an obligation to make corresponding payments with respect to similar stock.

Two situations in which the dividends-received deduction will not be allowed on any share of stock are:

If the FSC held the stock less than 46 days during the 90-day period beginning 45 days before the stock became ex-dividend with respect to the dividend (see section 246(c)(1)(A)) or
To the extent the FSC is under an obligation to make related payments for substantially similar or related property.

Any other taxable dividend income not properly reported above (including distributions under section 936(h)(4)).

If patronage dividends or per-unit retain allocations are included on line 11, identify the total of these amounts in a schedule attached to Form 1120-FSC.

Schedule G

Deductions Allocated or Apportioned 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 includes 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:

Administration 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 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 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 property placed in service during tax year 2003 or carried over from 2002. 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.

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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. 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 or Form 1042-S 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 on page 14) 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:

Over— But not over— Tax is: Of the amount 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 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 (or 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 2003 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 2003 did not exceed $7.5 million.

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. 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:

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.

Specific Instructions