Specific Instructions

Table of Contents

Period Covered

File the 2013 return for calendar year 2013 and fiscal years that begin in 2013 and end in 2014. For a fiscal or short tax year return, fill in the tax year space at the top of the form.

The 2013 Form 1120-C can also be used if:

  • The cooperative has a tax year of less than 12 months that begins and ends in 2014, and

  • The 2014 Form 1120-C is not available at the time the cooperative is required to file its return.

The cooperative must show its 2014 tax year on the 2013 Form 1120-C and take into account any tax law changes that are effective for tax years beginning after December 31, 2013.

Name and Address

Enter the cooperative's true name (as set forth in the charter or other legal document creating it), address, and EIN on the appropriate lines. Enter the address of the cooperative's principal office or place of business. Include the suite, room, or other unit number after the street address. If the post office does not deliver mail to the street address and the cooperative has a P.O. box, show the box number instead.

Note.

Do not use the address of the registered agent for the state in which the cooperative is incorporated. For example, if the cooperative is incorporated in Delaware or Nevada and the cooperative's principal office is located in Little Rock, AR, the cooperative should enter the Little Rock address.

If the cooperative receives its mail in care of a third party (such as an accountant or an attorney), enter on the street address line “C/O” followed by the third party's name and street address or P.O. box.

If the cooperative has a foreign address, include the city or town, state or province, country, and foreign postal code. Do not abbreviate the country name. Follow the country's practice for entering the name of the state or province and postal code.

Item A. Identifying Information

Consolidated return.   Cooperatives filing a consolidated return must check box 1 and attach Form 851, Affiliations Schedule, and other supporting statements to the return. Also, for the first year a subsidiary cooperative is being included in a consolidated return, attach Form 1122, Authorization and Consent of Subsidiary Corporation To Be Included in a Consolidated Income Tax Return, to the parent's consolidated return. Attach a separate Form 1122 for each new subsidiary being included in the consolidated return.

  
If the cooperative is a farmers' tax exempt cooperative and checked Item C, box 1, it cannot file a consolidated return.

  File supporting statements for each cooperative/corporation included in the consolidated return. Do not use Form 1120-C 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.

  Enter on Form 1120-C the totals for each item of income, gain, loss, expense, or deduction, net of eliminating entries for intercompany transactions between cooperatives/corporations within the consolidated group. Attach consolidated balance sheets and a reconciliation of consolidated retained earnings.

  
The cooperative does not have to provide the information requested in (3), (4), and (5) above, if its total receipts (page 1, lines 1a plus lines 4 through 9) and its total assets at the end of the tax year (Schedule L, line 13(d)) are less than $250,000. See Schedule K, Question 14.

  For more information on consolidated returns, see the regulations under section 1502.

Schedule M-3 (Form 1120).   A cooperative with total assets (non-consolidated or consolidated for all cooperatives/corporations included with the tax consolidation group) of $10 million or more on the last day of the tax year must complete Schedule M-3 (Form 1120), Net Income (Loss) Reconciliation for Corporations With Total Assets of $10 Million or More, instead of Form 1120-C, Schedule M-1. A cooperative filing Form 1120-C that is not required to file Schedule M-3 may voluntarily file Schedule M-3 instead of Schedule M-1.

  If you are filing Schedule M-3, check Item A, box 2, to indicate that Schedule M-3 is attached. See the Instructions for Schedule M-3 (Form 1120) for more details.

Form 1120 filed previous year.   Check box 3 if the cooperative filed Form 1120 in a prior year as a subchapter T cooperative.

Item B. Employer Identification Number (EIN)

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

  • Online–Click on the Employer ID Numbers link at www.irs.gov/businesses. The EIN is issued immediately once the application information is validated.

  • By telephone at 1-800-829-4933, or at 1-800-829-4059 for individuals who are deaf, hard of hearing, or have a speech disability and who have access to TTY/TDD equipment.

  • By faxing or mailing Form SS-4, Application for Employer Identification Number.

Cooperatives located in the United States or U.S. possessions can use the online application. Foreign corporations must use one of the other methods to apply.

EIN applied for, but not received.   If the cooperative has not received its EIN by the time the return is due, enter “Applied for” and the date you applied in the space for the EIN.

  For more information, see the Instructions for Form SS-4.

Item C. Type of Cooperative

Farmers' tax exempt cooperative.   Check the “Farmers' tax exempt cooperative” box if the cooperative applied for and received status as a tax-exempt farmers', fruit growers', or like association, organized and operated on a cooperative basis as described in section 521.

  If the cooperative has submitted Form 1028, Application for Recognition of Exemption, but has not received a determination letter from the IRS, enter “Application Pending” on Form 1120-C, at the top of page 1.

Nonexempt cooperative.   All other subchapter T cooperatives including farmers' cooperatives without section 521 exempt status, organized and operated as described under Who Must File, earlier, should check the “Nonexempt cooperative” box.

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

  • If this is the cooperative's first return, check the “Initial return” box.

  • If this is the cooperative's final return and it will no longer exist, file Form 1120-C and check the “Final return” box.

  • If the cooperative changed its name since it last filed a return, check the “Name change” box. Generally, a cooperative also must have amended its articles of incorporation and filed the amendment with the state in which it was incorporated.

  • If the cooperative has changed its address since it last filed a return (including a change to an “in care of” address), check the “Address change” box.

  • If the cooperative must change its originally filed return for any year, it should file a new return including any required attachments. Use the revision of Form 990-C, Form 1120, or Form 1120-C applicable to the year being amended. The amended return must provide all the information called for by the form and instructions, not just the new or corrected information. Check the “Amended return” box.

Note.

If a change in address or responsible party occurs after the return is filed, use Form 8822-B, Change of Address or Responsible Party—Business, to notify the IRS of the new address. For more information, see the instructions for Form 8822-B.

Income

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

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

  Use Form 8902, Alternative Tax on Qualifying Shipping Activities, to figure the tax. Include the alternative tax on Schedule J, line 8.

Line 1. Gross Receipts or Sales

Enter gross receipts or sales from all business operations except those that must be reported on lines 4  
through 9. Special rules apply to certain income as discussed below.

Advance payments.   In general, advance payments are reported in the year of receipt. For exceptions to this general rule for cooperatives that use the accrual method of accounting, see the following.
  • To report income from long-term contracts, see section 460.

  • For special rules for reporting certain advance payments for goods and long-term contracts, see Regulations section 1.451-5.

  • For rules that allow a limited deferral of advance payments beyond the current tax year, see Rev. Proc. 2004-34, 2004-22 I.R.B. 991. For rules for the deferral of advance payments from the sale of certain gift cards, see Rev. Proc. 2011-18, 2011-5 I.R.B. 443, as modified and clarified by Rev. Proc. 2013-29, 2013-33 I.R.B. 141.

  • For information on adopting or changing to a permissible method for reporting certain advance payments for services and certain goods by an accrual method cooperative, see the Instructions for Form 3115.

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

  The restrictions on using the installment method do not apply to the following.
  • Dealer dispositions of property before March 1, 1986.

  • Dispositions of property used or produced in the trade or business of farming.

  • Certain dispositions of timeshares and residential lots reported under the installment method for which the corporation elects to pay interest under section 453(l)(3).

  Enter on line 1a (and carry to line 3), the gross profit on collections from installment sales. Attach a statement showing the following information for the current and the 3 preceding years: (a) gross sales, (b) cost of goods sold, (c) gross profits, (d) percentage of gross profits to gross sales, (e) amount collected, and (f) gross profit on the amount collected.

  For sales of timeshares and residential lots reported under the installment method, if the cooperative elects to pay interest under section 453(l)(3), the cooperative's income tax is increased by the interest payable under section 453(l)(3). Report this addition to tax on Schedule J, line 8.

Nonaccrual experience method for service providers.   Accrual method cooperatives 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 cooperative's average annual gross receipts have not exceeded $5 million for any prior 3-tax-year period. For more details, see Regulations sections 1.448-2(a)(2) and 1.448-1T(f)(2).

  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. See Regulations section 1.448-2 for information on the nonaccrual experience method, including information on safe harbor methods. See Rev. Proc. 2011-46, 2011-42 I.R.B. 518, for information on a book safe harbor method of accounting for corporations that use the nonaccrual experience method of accounting. Also, see Rev. Proc. 2011-46 for procedures to obtain automatic consent to change to this method or make certain changes within this method.

  Cooperatives that qualify to use the nonaccrual experience method should attach a statement showing total gross receipts, the amount not accrued as a result of the application of section 448(d)(5) and the net amount accrued. Enter the net amount on line 1a.

Line 2. Cost of Goods Sold

Complete and attach Form 1125-A, Cost of Goods Sold, if applicable. Enter on Form 1120-C, line 2, the amount from Form 1125-A, line 8. See Form 1125-A and its instructions.

Line 4. Dividends

See the instructions for Schedule C, later. Then, complete Schedule C and enter on line 4, the amount from Schedule C, line 19.

Note.

Do not report patronage dividends received on Schedule C. Report income from patronage dividends and per-unit retain allocations on line 9.

Line 5. Interest

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

Note.

Report tax-exempt interest income on Schedule K, Item 10. Also, if required, include the same amount on Schedule M-1, line 7, or Schedule M-3 (Form 1120), Part II, line 13, if applicable.

Line 6. Gross Rents and Royalties

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

Line 9. Other Income

Enter any other taxable income not reported on lines 1 through 8. List the type and amount of income on an attached statement. If the cooperative has only one item of other income, describe it in parentheses on line 9.

Patronage dividends and per-unit retain allocations.   Include on line 9 the patronage dividends and per-unit retain allocations listed below. Attach a statement listing the name of each declaring association from which the cooperative received income from patronage dividends and per-unit retain allocations, and the total amount received from each association.

  Include the items listed below.
  1. Patronage dividends received in:

    • Money,

    • Qualified written notices of allocation, or

    • Other property (except nonqualified written notices of allocation).

  2. Nonpatronage distributions received on a patronage basis from tax-exempt farmers' cooperatives in:

    • Money,

    • Qualified written notices of allocation, or

    • Other property (except nonqualified written notices of allocation), based on earnings of that cooperative either from business done with or for the United States or any of its agencies (or from sources other than patronage, such as investment income).

  3. Qualified written notices of allocation at their stated dollar amounts and property at its fair market value (FMV).

  4. Amounts received on the redemption, sale, or other disposition of nonqualified written notices of allocation.

    Generally, patronage dividends from purchases of capital assets or depreciable property are not includible in income but must be used to reduce the basis of the assets. See section 1385(b) and the related regulations.

  5. Amounts received (or the stated dollar value of qualified per-unit retain certificates received) from the sale or redemption of nonqualified per-unit retain certificates.

  6. Per-unit retain allocations received (except nonqualified per-unit retain certificates). See section 1385.

Note.

Payments from the Commodity Credit Corporation to a farmers' cooperative for certain expenses of the co-op's farmers-producers under a “reseal” program of the U.S. Department of Agriculture are patronage-source income that may give rise to patronage dividends under section 1382(b)(1).

Other.   Examples of other income to report on line 9 include the following.
  • Recoveries of bad debts deducted in prior years under the specific charge-off method.

  • The amount included in income from Form 6478, Biofuel Producer Credit.

  • The amount included in income from Form 8864, Biodiesel and Renewable Diesel Fuels Credit.

  • Refunds of taxes deducted in prior years to the extent they reduced the amount of tax imposed. See section 111 and the related regulations. Do not offset current year taxes against any tax refunds.

  • Ordinary income from trade or business activities of a partnership (from Schedule K-1 (Form 1065 or 1065-B)). Do not offset ordinary losses against ordinary income. Instead, include the losses on line 23. Show the partnership's name, address, and EIN on a separate statement attached to this return. If the amount entered is from more than one partnership, identify the amount from each partnership.

  • Any net positive section 481(a) adjustment.

  • Part or all of the proceeds received from certain cooperative-owned life insurance contracts issued after August 17, 2006. See section 101(j) for details. Form 8925, Report of Employer-Owned Life Insurance Contracts, may also be required. See Form 8925 and its instructions.

  • Income from cancellation of debt (COD) for the repurchase of a debt instrument for less than its adjusted issue price. However, if a cooperative elected under section 108(i), to defer the income from COD in connection with the reacquisition of an applicable debt instrument in 2009 and 2010, the income is deferred and ratably included in income over the 5-year period beginning with:

    1. For a reacquisition that occurred in 2009, the fifth tax year following the tax year in which the reacquisition occurred; and

    2. For a reacquisition that occurred in 2010, the fourth tax year following the tax year in which the reacquisition occurred.

  Once made, the election is irrevocable and the exclusions for COD income under sections 108(a)(1)(A), (B), (C), and (D) do not apply for the tax year of the election or any later tax year.

  An annual information statement, discussed earlier under Annual information statement for elections under section 108(i), is required. Also, any deferred COD income that has been accelerated because of certain events under section 108(i)(5)(D) must be included in income in the current year.

  For more information, see section 108(i), Regulations section 1.108(i)-1, and Rev. Proc. 2009-37. If the cooperative is a direct or indirect partner in a partnership, other special rules apply. See Regulations section 1.108(i)-2.

  
  • The cooperative's share of the following income from Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund.

    1. Ordinary earnings of a qualified electing fund (QEF).

    2. Gain or loss from marking passive foreign investment company (PFIC) stock to market.

    3. Gain or loss from sale or other disposition of section 1296 stock.

    4. Excess distributions from a section 1291 fund.

    See Form 8621 and the Instructions for Form 8621 for details.

Deductions

Limitations on Deductions

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

  Cooperatives subject to the section 263A uniform capitalization rules are required to capitalize:
  1. Direct costs and

  2. An allocable part of most indirect costs (including taxes) that (a) benefit the assets produced or acquired for resale or (b) are incurred because of the performance of production or resale activities.

  The costs required to be capitalized under section 263A are not deductible until the property (to which the costs relate) is sold, used, or otherwise disposed of by the cooperative. The cooperative recovers these costs through depreciation, amortization, or costs of goods sold.

  For more details, on including exceptions to the uniform capitalization rules, see Pub. 538. Also seeRegulations sections 1.263A-1 through 1.263A-3. SeeRegulations section 1.263A-4 and Pub. 225, Farmer's Tax Guide, for rules for property produced in a farming business.

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

Cooperatives use Form 8926, Disqualified Corporate Interest Expense Disallowed Under Section 163(j) and Related Information, to figure the amount of any cooperative interest expense disallowed by section 163(j).

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

Election to deduct business start-up and organizational costs.   For 2013, a cooperative can elect to deduct up to $5,000 of business start-up and up to $5,000 of organizational costs paid or incurred after October 22, 2004. Any remaining costs must be amortized ratably over an 180-month period. The $5,000 deduction is reduced (but not below zero) by the amount the total costs exceed $50,000. If the total costs are $55,000 or more, the deduction is reduced to zero.

Time for making an election.

The cooperative generally elects to deduct start-up or organizational costs by claiming the deduction on its income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. However, for start-up or organizational costs paid or incurred before September 9, 2008, the cooperative may be required to attach a statement to its return to elect to deduct such costs.

If the cooperative timely filed its return for the year without making an election, it can still make an election by filing an amended return within 6 months of the due date of the return (excluding extensions). Clearly indicate the election on the amended return and write “Filed pursuant to section 301.9100-2” at the top of the amended return. File the amended return at the same address the cooperative filed its original return. The election applies when figuring taxable income for the current tax year and all subsequent years.

The cooperative can choose to forgo the elections above by affirmatively electing to capitalize its start-up or organizational costs on its income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins.

Note.

The election to either amortize or capitalize start-up costs is irrevocable and applies to all start-up costs that are related to the trade or business.

Report the deductible amount of start-up and organizational costs and any amortization on line 23. For amortization that begins during the 2013 tax year, complete and attach Form 4562, Depreciation and Amortization.

For more details on business start-up and organizational costs, see the Instructions for Form 4562. Also see Pub. 535, Business Expenses.

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

  Generally, the two kinds of passive activities are:
  • Trade or business activities in which the cooperative did not materially participate for the tax year, and

  • Rental activities, regardless of its participation.

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

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

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

Closely held cooperatives.

A cooperative is a “closely held cooperative” (as defined in section 469(j)(1)) if at any time during the last half of the tax year more than 50% in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals.

Certain organizations are treated as individuals for purposes of this test. See section 542(a)(2). For rules for determining stock ownership, see section 544 (as modified by section 465(a)(3)).

Reducing certain expenses for which credits are allowable.   If the cooperative claims certain credits, it may need to reduce the otherwise allowable deductions for expenses used to figure the credit. This applies to credits such as the following.
  • Work opportunity credit  
    (Form 5884).

  • Credit for increasing research activities (Form 6765).

  • Orphan drug credit (Form 8820).

  • Disabled access credit  
    (Form 8826).

  • Empowerment zone employment credit (Form 8844).

  • Indian employment credit (Form 8845).

  • Credit for employer social security and Medicare taxes paid on certain employee tips (Form 8846).

  • Credit for small employer pension plan startup costs (Form 8881).

  • Credit for employer-provided childcare facilities and services 
    (Form 8882).

  • Low sulfur diesel fuel production credit (Form 8896).

  • Mine rescue team training credit (Form 8923).

  • Credit for employer differential wage payments (Form 8932).

  • Credit for small employer health insurance premiums (Form 8941).

  If the cooperative has any of these credits, figure the current year credit before figuring the deduction for expenses on which the credit is based. If the cooperative capitalized any costs on which it figured the credit, it may need to reduce the amount capitalized by the credit attributable to these costs.

  See the instructions for the form used to figure the applicable credit for more details.

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

Line 11. Compensation of Officers

Enter deductible officers' compensation on line 11. 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.

If the cooperative's total receipts (line 1a plus lines 4 through 9) are $500,000 or more, complete Form 1125-E, Compensation of Officers. On Form 1120-C, enter on line 11 the amount from Form 1125-E, line 4.

Line 12. Salaries and Wages

Enter the total salaries and wages paid for the tax year. Do not include salaries and wages deductible elsewhere on the return, such as amounts included in officers' compensation, cost of goods sold, elective contributions to a section 401(k) cash or deferred arrangement, or amounts contributed under a salary reduction SEP agreement or a SIMPLE IRA plan.

If the cooperative claims a credit for any wages paid or incurred, it may need to reduce its deduction for officer's compensation and salaries and wages. See Reducing certain expenses for which credits are allowable, earlier.

If the cooperative provided taxable fringe benefits to its employees, such as personal use of a car, do not deduct as wages the amount allocated for depreciation and other expenses claimed on lines 18 and 23.

Line 13. Bad Debts

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

Line 14. Rents

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

The lease term began: And the vehicle's FMV on the first day of the lease exceeded:
Cars (excluding trucks and vans)  
After 12/31/12 but before 1/1/14 $19,000
After 12/31/07 but before 1/1/13 $18,500
Trucks and Vans  
After 12/31/09 but before 1/1/14 $19,000
After 12/31/08 but before 1/1/10 18,500
After 12/31/07 but before 1/1/09 19,000

See Pub. 463, Travel, Entertainment, Gift, and Car Expenses, for instructions on figuring the inclusion amount. The inclusion amount for lease terms beginning in 2014 will be published in the Internal Revenue Bulletin in early 2014.

Line 15. Taxes and Licenses

Enter taxes paid or accrued during the tax year, but do not include the following.

  • Federal income taxes.

  • Foreign or U.S. possession income taxes if a foreign tax credit is claimed.

  • Taxes not imposed on the cooperative.

  • Taxes, including state or local sales taxes, that are paid or incurred in connection with an acquisition or disposition of property (these taxes must be treated as part of the cost of the acquired property, or in the case of a disposition, as a reduction in the amount realized on the disposition).

  • Taxes assessed against local benefits that increase the value of the property assessed (such as for paving, etc.).

  • Taxes deducted elsewhere on the return, such as those reflected in cost of goods sold.

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

Line 16. Interest

Note.   Do not offset interest income against interest expense.

The cooperative must make an interest allocation if the proceeds of a loan were used for more than one purpose (for example, to purchase a portfolio investment and to acquire an interest in a passive activity). See Temporary Regulations section 1.163-8T for the interest allocation rules.

Do not deduct the following interest.

  • Interest on indebtedness incurred or continued to purchase or carry obligations if the interest is wholly exempt from income tax. For exceptions, see section 265(b).

  • For cash basis taxpayers, prepaid interest allocable to years following the current tax year. For example, a cash basis calendar year taxpayer who in 2013 prepaid interest allocable to any period after 2013 can deduct only the amount allocable to 2013.

  • Interest and carrying charges on straddles. Generally, these amounts must be capitalized. See section 263(g).

  • Interest on debt allocable to the production of designated property by a cooperative for its own use or for sale. The cooperative must capitalize this interest. Also capitalize any interest on debt allocable to an asset used to produce the property. See section 263A(f) and Regulations sections 1.263A-8 through 1.263A-15 for definitions and more information.

  • Interest paid or incurred on any portion of an underpayment of tax that is attributable to an understatement arising from an undisclosed listed transaction or an undisclosed reportable avoidance transaction (other than a listed transaction) entered into in tax years beginning after October 22, 2004.

Special rules apply to:

  • Disqualified interest on certain indebtedness under section 163(j). See Form 8926 and the related instructions.

  • Interest on which no tax is imposed (see section 163(j)). A cooperative that owns an interest in a partnership, directly or indirectly, must treat its distributive share of the partnership liabilities, interest income, and interest expense as liabilities, income, and expenses of the cooperative for purposes of applying the earnings stripping rules. For more details, see section 163(j)(8).

  • Forgone interest on certain below-market-rate loans (see section 7872).

  • OID on certain high yield discount obligations. See section 163(e)(5) to determine the amount of the deduction for OID that is deferred and the amount that is disallowed on a high yield discount obligation. The rules under section 163(e)(5) do not apply to certain high yield discount obligations issued after August 31, 2008, and before January 1, 2011. See section 163(e)(5)(F). Also see Notice 2010-11, 2010-4 I.R.B. 326.

  • Interest which is allocable to unborrowed policy cash values of life insurance, endowment, or annuity contracts issued after June 8, 1997. See section 264(f). Attach a statement showing the computation of the deduction.

Section 108(i) OID deduction. If the cooperative issued a debt instrument with OID that is subject to section 108(i)(2) because of an election to defer the income from COD, the interest deduction for this OID is deferred until the COD is includible in income. The accrued OID is allowed as a deduction ratably over the 5-year period that the income from COD is includible in income. The deduction is limited to the amount of COD subject to the section 108(i) election.

In addition, a deferred COD deduction may be allowed as a deduction in the current year because of an accelerated event. See section 108(i)(5)(D).

Line 17. Charitable Contributions

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

Cooperatives reporting taxable income on the accrual method can elect to treat as paid during the tax year any contributions paid by the 15th day of the 3rd month after the end of the tax year if the contributions were authorized by the board of directors during the tax year. Attach a declaration to the return stating that the resolution authorizing the contributions was adopted by the board of directors during the tax year. The declaration must include the date the resolution was adopted. See Regulations section 1.170A-11.

Limitation on deduction.   The total amount claimed cannot be more than 10% of taxable income (line 27) computed without regard to the following.
  • Any deduction for contributions.

  • The special deductions on line 26b.

  • The limitation under section 249 on the deduction for bond premium.

  • The domestic production activities deduction under section 199.

  • Any net operating loss (NOL) carryback to the tax year under section 172.

  • Any capital loss carryback to the tax year under section 1212(a)(1).

Suspension of 10% limitation for farmers and ranchers.

A cooperative that is a qualified farmer or rancher (as defined in section 170(b)(1)(E)) that does not have publicly traded stock, can deduct contributions of qualified conservation property without regard to the general 10% limit. The total amount of the contribution claimed for the qualified conservation property cannot exceed 100% of the excess of the cooperative's taxable income (as computed above substituting “100%” for “10%”) over all other allowable charitable contributions. Any excess qualified conservation contributions can be carried over to the next 15 years, subject to the 100% limitation. See section 170(b)(2)(B).

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

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

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

Cash contributions.   For contributions of cash, check, or other monetary gifts (regardless of the amount), the cooperative must maintain a bank record, or a receipt, letter, or other written communication from the donee organization indicating the name of the organization, the date of the contribution, and the amount of the contribution.

Contributions of $250 or more.   A cooperative can deduct a contribution of $250 or more only if it gets a written acknowledgment from the donee organization that shows the amount of cash contributed, describes any property contributed (but not its value), and either gives a description and a good faith estimate of the value of any goods or services provided in return for the contribution or states that no goods or services were provided in return for the contribution. The acknowledgment must be obtained by the due date (including extensions) of the cooperative's return, or, if earlier, the date the return is filed. Do not attach the acknowledgment to the tax return, but keep it with the cooperative's records.

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

Qualified conservation contributions.

Special rules apply to qualified conservation contributions, including contributions of certain easements on buildings located in a registered historic district. See section 170(h) and Pub. 526, Charitable Contributions.

Other special rules.

The cooperative must reduce its deduction for contributions of certain capital gain property. See sections 170(e)(1) and 170(e)(5).

  A larger deduction is allowed for certain contributions of:
  • Inventory and other property to certain organizations for use in the care of the ill, needy, or infants (see section 170(e)(3)), including qualified contributions of “apparently wholesome food” made before January 1, 2014 (see section 170(e)(3)(C)).

  • Scientific equipment used for research to institutions of higher learning or to certain scientific research organizations (other than by personal holding companies and service organizations) (see section 170(e)(4)).

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

Line 18. Depreciation

Include on line 18 depreciation and the cost of certain property that the cooperative elected to expense under section 179. See Form 4562 and the Instructions for Form 4562.

Line 20. Pension, Profit-sharing, etc., Plans

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

Form 5500,   Annual Return/Report of Employee Benefit Plan.

Form 5500-SF,   Short Form Annual Return/Report of Small Employee Benefit Plan, instead of Form 5500, generally if under 100 participants at the beginning of the plan year.

Note.

Form 5500 and Form 5500-SF must be filed electronically under the computerized ERISA Filing Acceptance System (EFAST2). For more information, see the EFAST2 website at www.efast.dol.gov.

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

Line 21. Employee Benefit Programs

Enter contributions to employee benefit programs not claimed elsewhere on the return (for example, insurance, health and welfare programs, etc.) that are not an incidental part of a pension, profit-sharing, etc., plan included on line 20.

Line 22. Domestic Production Activities Deduction

Cooperatives described in section 1381 are required to calculate the domestic production activities deduction (DPAD) on Form 8903, Domestic Production Activities Deduction, and file it with Form 1120-C. Special rules apply to certain cooperatives with both patronage and nonpatronage income and losses. See the Instructions for Form 8903.

Line 23. Other Deductions

Attach a statement, listing by type and amount, all allowable deductions that are not deductible elsewhere on Form 1120-C. Enter the total on  
line 23.

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

Examples of other deductions include the following.

  • Amortization. See Form 4562, Part VI.

  • Certain business start-up and organizational costs (discussed earlier under Election to deduct business start-up and organizational costs).

  • Certain costs of qualified film or television productions commencing before January 1, 2014, that the corporation elects to deduct. See section 181 and the related regulations.

  • Reforestation costs. The cooperative can elect to deduct up to $10,000 of qualifying reforestation expenses for each qualified timber property. The cooperative can elect to amortize over 84 months any amount not deducted. See Pub. 535.

  • Depletion.

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

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

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

    See Pub. 535 for more information on depletion.

  • Insurance premiums.

  • Legal and professional fees.

  • Repairs and maintenance (discussed later).

  • Supplies used and consumed in the business.

  • Travel, meals, and entertainment expenses. Special rules apply (discussed later).

  • Utilities.

  • Ordinary losses from trade or business activities of a partnership (from Schedule K-1 (Form 1065 or 1065-B)). Do not offset ordinary income against ordinary losses. Instead, include the income on line 9. Show the partnership's name, address, and EIN on a separate statement attached to this return. If the amount entered is from more than one partnership, identify the amount from each partnership.

  • Any extraterritorial income exclusion (from Form 8873).

  • Any negative net section 481(a) adjustment. See the instructions for line 9.

  • Deduction for certain energy efficient commercial building property placed in service before January 1, 2014. See section 179D. Also see Notice 2006-52, 2006-26 I.R.B. 1175, as amplified and clarified by Notice 2008-40, 2008-14 I.R.B. 725, and as modified by Notice 2012-26, 2012-17 I.R.B. 847.

  • Dividends paid in cash on stock held by an employee stock ownership plan.

    However, a deduction can only be taken for the dividends above if, according to the plan, the dividends are:

    1. Paid in cash directly to the plan participants or beneficiaries;

    2. Paid to the plan, which distributes them in cash to the plan participants or their beneficiaries no later than 90 days after the end of the plan year in which the dividends are paid;

    3. At the election of such participants or their beneficiaries (a) payable as provided under (1) or (2) above, or (b) paid to the plan and reinvested in qualifying employer securities; or

    4. Used to make payments on a loan described in section 404(a)(9).

    See section 404(k) for more details and the limitation on certain dividends.

Do not deduct the following.   
  • 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.

  • Lobbying expenses. However, see exceptions (discussed later).

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

Special Rules

Travel, meals, and entertainment.   Subject to limitations and restrictions discussed below, a cooperative can deduct ordinary and necessary travel, meals, and entertainment expenses paid or incurred in its trade or business. Also, special rules apply to deductions for gifts, skybox rentals, luxury water travel, convention expenses, and entertainment tickets. See section 274 and Pub. 463 for details.

Travel.

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

  • That individual is an employee of the cooperative, and

  • His or her travel is for a bona fide business purpose and would otherwise be deductible by that individual.

Meals and entertainment.

Generally, the cooperative can deduct only 50% of the amount otherwise allowable for meals and entertainment expenses paid or incurred in its trade or business. In addition (subject to exceptions under section 274(k)(2)):

  • Meals must not be lavish or extravagant;

  • A bona fide business discussion must occur during, immediately before, or immediately after the meal; and

  • An employee of the cooperative must be present at the meal.

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

Membership dues.

The cooperative can deduct amounts paid or incurred for membership dues in civic or public service organizations, professional organizations (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 guest. In addition, cooperatives cannot deduct membership dues in any club organized for business, pleasure, recreation, or other social purpose. This includes country clubs, golf and athletic clubs, airline and hotel clubs, and clubs operated to provide meals under conditions favorable to business discussion.

Entertainment facilities.

The cooperative cannot deduct an expense paid or incurred for a facility (such as a yacht or hunting lodge) used for an activity usually considered entertainment, amusement, or recreation.

Amounts treated as compensation.

Generally, the cooperative may be able to deduct otherwise nondeductible entertainment, amusement, or recreation expenses if the amounts are treated as compensation to the recipient and reported on Form W-2, Wage and Tax Statement, for an employee or on Form 1099-MISC, Miscellaneous Income, for an independent contractor.

However, if the recipient is an officer, director, beneficial owner (directly or indirectly), or other “specified individual” (as defined in section 274(e)(2)(B) and Regulations section 1.274-9(b)), special rules apply. See section 274(e)(2) and Regulations sections 1.274-9 and 1.274-10.

Lobbying expenses.   Generally, lobbying expenses are not deductible. These expenses include amounts paid or incurred in connection with:
  • Influencing federal or state legislation (but not local legislation), or

  • Any communication with certain federal executive branch officials in an attempt to influence the official actions or positions of the officials. See Regulations section 1.162-29 for the definition of “influencing legislation.

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

Line 25a. Taxable Income Before Adjustments and Special Deductions

At-risk rules.   Generally, special at-risk rules under section 465 apply to closely held cooperatives (see Passive activity limitations, earlier) engaged in any activity as a trade or business or for the production of income. These cooperatives may have to adjust the amount on line 25a. (See below.)

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

   The at-risk rules do not apply to:
  • Holding real property placed in service by the cooperative before 1987;

  • Equipment leasing under sections 465(c)(4), (5), and (6); or

  • Any qualifying business of a qualified cooperative under section 465(c)(7).

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

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

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

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

  Cooperatives are required to allocate income and deductions between patronage and nonpatronage-related business. Cooperatives with gross receipts and assets of $250,000 or more must complete Schedule G. See the instructions for Schedule G.

Line 25b. Deductions and Adjustments FromSchedule H

Complete Schedule H. Enter on line 25b the amount from Schedule H, line 5. See the instructions for  
Schedule H.

Line 25c. Taxable Income Before Net Operating Loss and Special Deductions

Subtract line 25b from line 25a and enter the result on line 25c.

Line 26a. Net Operating Loss Deduction

The cooperative must attach a statement separately accounting for patronage and nonpatronage-sourced NOLs.

Note.

Patronage-sourced NOLs cannot be used to reduce nonpatronage-sourced taxable income.

A cooperative can use the NOL incurred in one tax year to reduce its taxable income in another tax year. Enter on line 26a the total NOL carryovers from other tax years, but do not enter more than the cooperative's taxable income (after special deductions). Attach a statement showing the computation of the NOL deduction. Also complete Schedule K, Item 12.

The following special rules apply.

  • A cooperative equity reduction interest loss may not be carried back to a tax year preceding the year of the equity reduction transaction (see section 172(b)(1)(E)).

  • If an ownership change (described in section 382(g)) occurs, the amount of the taxable income of a loss cooperative that may be offset by the pre-change NOL carryovers may be limited. See section 382 and the related regulations. A loss cooperative must include the information statement as provided in Regulations section 1.382-11(a), with its income tax return for each tax year that it is a loss cooperative in which an ownership shift, equity structures shift, or other transaction described in Temporary Regulations section 1.382-2T(a)(2)(i) occurs. If the cooperative makes the closing-of-the-books election, see Regulations section 1.382-6(b).

    The limitations under section 382 do not apply to certain ownership changes after February 17, 2009, made according to a restructuring plan under the Emergency Economic Stabilization Act of 2008. See section 382(n).

    For guidance in applying section 382 to loss cooperatives whose instruments were acquired by Treasury under certain programs under the Emergency Economic Stabilization Act of 2008, see Notice 2010-2, 2010-2 I.R.B. 251.

  • If a cooperative acquires control of another cooperative (or acquires its assets in a reorganization), the amount of pre-acquisition losses that may offset recognized built-in gain may be limited (see section 384).

  • If a cooperative elects the alternative tax on qualifying shipping activities under section 1354, no deduction is allowed for an NOL attributable to the qualifying shipping activities to the extent that the loss is carried forward from a tax year preceding the first tax year for which the alternative tax election was made. See section 1358(b)(2).

  • If a cooperative has a loss attributable to a disaster, special rules apply. See the Instructions for Form 1139, Corporation Application for Tentative Refund.

For more details on the NOL deduction, see section 172 and Instructions for Form 1139.

Line 26b. Special Deductions

See the instructions for Schedule C.

Line 26c. Total NOL and Special Deductions

Combine lines 26a and 26b and enter the result on line 26c.

Tax, Refundable Credits, and Payments

Line 27. Taxable Income

See Schedule K, Question 14, to determine if the cooperative needs to complete Schedule G. Taxable income reported on page 1, line 27, cannot be less than the nonpatronage taxable income shown on Schedule G, line 10, column b.

Patronage source losses cannot be used to offset nonpatronage income. See the instructions for Schedule G.

Minimum taxable income.   The cooperative's taxable income cannot be less than the inversion gain of the cooperative for the tax year, if the cooperative is an expatriated entity or a partner in an expatriated entity. See section 7874(a).

Net operating loss (NOL).   If line 27 (figured without regard to the minimum taxable income rule stated above) is zero or less, the cooperative may have an NOL that can be carried back or forward as a deduction to other tax years.

  Generally, a cooperative first carries back an NOL 2 tax years. However, the cooperative can elect to waive the carryback period and instead carry the NOL forward to future tax years. To make the election, see the instructions for Schedule K, Item 12, later.

  Special rules and exceptions to the 2-year carryback period apply to certain NOLs. See the Instructions for Form 1139 for details on these special rules and other elections that may be available.

Merchant Marine capital construction fund.   To take a deduction for amounts contributed to a capital construction fund (CCF), reduce the amount that would otherwise be entered on line 27 by the amount of the deduction. On the dotted line next to the entry space, enter “CCF” and the amount of the deduction. For more information, see section 7518.

Line 29a. 2012 Overpayment Credited to 2013

Enter amount of overpayment credited to 2013 from the tax return filed for 2012.

Line 29b. Estimated Tax Payments

Enter any estimated tax payments the cooperative made for the tax year.

Beneficiaries of trusts.   If the cooperative is the beneficiary of a trust, and the trust makes a section 643(g) election to credit its estimated tax payments to its beneficiaries, include the cooperative's share of the payment in the total for line 29b. Enter “T” and the amount of the payment in the shaded space beside line 29b.

Line 29c. Overpaid Estimated Tax

If the cooperative overpaid estimated tax, it may be able to get a quick refund by filing Form 4466. The overpayment must be at least 10% of the cooperative's expected income tax liability and at least $500. File Form 4466 after the end of the cooperative'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 cooperative files its tax return.

Line 29d. Net Tax Payments

Combine lines 29a through 29c and enter the result on line 29d.

Line 29f

Credit from Form 2439.   Enter any credit from Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains, for the cooperative's share of the tax paid by a regulated investment company (RIC) or a real estate investment trust (REIT) on undistributed long-term capital gains included in the cooperative's income. Attach Form 2439 to Form 1120-C.

Credit for federal tax on fuels.   Enter the total income tax credit claimed on Form 4136, Credit for Federal Tax Paid on Fuels. Attach Form 4136 to Form 1120-C.

Credit for tax on ozone-depleting chemicals.   Include on line 29f any credit the cooperative is claiming under section 4682(g)(2) for tax on ozone-depleting chemicals. Enter “ODC” next to the entry space.

Line 29g. Refundable Credits From Form 8827

If the cooperative elected to claim certain unused minimum tax credits instead of claiming any additional first-year special depreciation allowance for eligible property, see Form 8827, Credit for Prior Year Minimum Tax—Corporations. Enter on line 29g the amounts from Form 8827, line 8c. See the instructions for Form 8827.

Line 29h. Section 1383 Adjustment

If the cooperative would pay less total tax by claiming the deduction for the redemption of nonqualified written notices of allocation or nonqualified per-unit retain certificates in the issue year versus the current tax year, refigure the tax for the years the nonqualified written notices or certificates were originally issued (deducting them in the issue year), then enter the amount of the reduction in the issue years' taxes on this line. Attach a statement showing how the adjustment was figured. This adjustment is treated as a payment, and any amount that is more than the tax on line 28 will be refunded.

Line 29i. Total Payments, Refundable Credits, and Section 1383 Adjustments

Add the amounts on lines 29d through 29h and enter the total on line 29i.

Backup withholding.   If the cooperative had federal income tax withheld from any payments it received because, for example, it failed to give the payer its correct EIN, include the amount withheld in the total for line 29i. Enter the amount withheld and the words “Backup withholding” in the blank space above line 29i.

Line 30. Estimated Tax Penalty

Generally, the cooperative does not have to file Form 2220 because the IRS can figure the penalty amount, if any, and bill the cooperative. However, even if the cooperative does not owe the penalty, it must complete and attach Form 2220 if:

  • The annualized income or adjusted seasonal installment method is used, or

  • The cooperative is a large corporation (as defined in the Instructions for Form 2220) computing its first required installment based on the prior year's tax. See the Instructions for Form 2220.

If Form 2220 is attached, check the box on line 30, and enter any penalty on this line.

Line 33. Refund

Enter the amount of any overpayment that should be refunded or applied to next year's estimated tax.

Note.

This election to apply some or all of the overpayment amount to the cooperative's 2014 estimated tax cannot be changed at a later date.

Direct deposit of refund.   If the cooperative has a refund of $1 million or more and wants it directly deposited into its checking or savings account at any U.S. bank or other financial institution instead of having a check sent to the cooperative, complete Form 8302 and attach it to the cooperative's tax return.

Schedule C.Dividends and Special Deductions

Note.

Do not report income from patronage dividends on Schedule C. Report income from patronage dividends and per-unit retain allocations on page 1, line 9.

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

Consolidated returns.   Cooperatives filing a consolidated return should see Regulations sections 1.1502-13, 1.1502-26, and 1.1502-27 before completing Schedule C.

  Cooperatives filing a consolidated return must not report as dividends on Schedule C any amounts received from corporations within the tax consolidation group. Such dividends are eliminated in consolidation rather than offset by the dividends-received deduction.

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

  • Qualified for the 70% deduction under section 243(a)(1).

Also include in line 1 the following.

  • Taxable distributions from an interest charge domestic international sales corporation (IC-DISC) or former domestic international sales corporation (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 cooperative 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 the following.

  • Dividends 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 cooperative acquired by incurring a debt (for example, 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 cooperative 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 statement to Form 1120-C showing how the amount on line 3, column (c), was figured.

Line 4, Column (a)

Enter dividends received on 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 cooperative must own at least 10% of the stock of the foreign corporation by vote and value.

Also include dividends received from a less-than-20%-owned foreign sales corporation (FSC) that:

  • Are attributable to income treated as effectively connected with the conduct of a trade or business within the United States (excluding foreign trade income), and

  • Qualify for the 70% deduction under section 245(c)(1)(B).

Line 7, Column (a)

Enter the U.S.-source portion of dividends that:

  • Are received from 20%-or-more-owned foreign corporations, and

  • Qualify for the 80% deduction under section 245(a).

Also include dividends received from a 20%-or-more-owned FSC that:

  • Are attributable to income treated as effectively connected with the conduct of a trade or business within the United States (excluding foreign trade income), and

  • Qualify for the 80% deduction under section 245(c)(1)(B).

Line 8, Column (a)

Enter dividends received from wholly owned foreign subsidiaries that are eligible for the 100% deduction under section 245(b).

In general, the deduction under section 245(b) applies to dividends paid out of the earnings and profits of a foreign corporation for a tax year during which:

  • All of its outstanding stock is directly or indirectly owned by the domestic cooperative receiving the dividends, and

  • All of its gross income from all sources is effectively connected with the conduct of a trade or business within the United States.

Line 9, Column (c)

Generally, line 9, column (c), cannot exceed the amount from 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).

Worksheet for Schedule C, line 9 
(keep for your records)

1. Refigure Form 1120-C, page 1, line 25a, without any domestic production activities deduction, any adjustment under section 1059, and without any capital loss carryback to the tax year under section 1212(a)(1)  
2. Complete lines 10, 11, and 12, column (c) and enter the total  
3. Subtract line 2 from line 1  
4. Multiply line 3 by 80%  
5. Add lines 2, 5, 7, and 8, column (c) and the part of the deduction on line 3, column (c), that is attributable to dividends received from 20%-or-more-owned corporations  
6. Enter the smaller of line 4 or line 5. If line 5 is greater than line 4, stop here; enter the amount from line 6 on line 9, column (c). Do not complete the rest of this worksheet  
7. Enter the total amount of dividends received from 20%-or-more-owned corporations that are included on lines 2, 3, 5, 7, and 8, column (a)  
8. Subtract line 7 from line 3  
9. Multiply line 8 by 70%  
10. Subtract line 5 from line 9, column (c)  
11. Enter the smaller of line 9 or 
line 10
 
12. Dividends-received deduction after limitation (section 246(b)). Add lines 6 and 11. Enter the result here and on line 9, column (c)  

Line 10, Columns (a) and (c)

Small business investment companies operating under the Small Business Investment Act of 1958 (see 15 U.S.C. 661 and following) must enter dividends that are received from domestic corporations subject to income tax even though a deduction is allowed for the entire amount of those dividends. To claim the 100% deduction on line 10, column (c), the cooperative must file with its return a statement that it was a federal licensee under the Small Business Investment Act of 1958 at the time it received the dividends.

Line 11, Columns (a) and (c)

Enter only dividends that qualify under section 243(b) for the 100% dividends-received deduction described in section 243(a)(3). Cooperatives taking this deduction are subject to the provisions of section 1561.

The 100% deduction does not apply to affiliated group members that are joining in the filing of a consolidated return.

Line 12, Columns (a) and (b)

Enter in column (a) dividends from FSCs that are attributable to foreign trade income and that are eligible for the 100% deduction provided in section 245(c)(1)(A).

For cooperatives described in section 1381 that are engaged in the marketing of agricultural or horticultural products and are shareholders in a FSC, multiply the total dividends reported in column (a) by 15/23, for the exempt portion of the dividends that are attributable to foreign trade income, and enter the amount in column (c). See sections 245(c)(2) and 923(a)(4)(repealed) for additional information.

Line 13, Column (a)

Enter foreign dividends not reportable on lines 3, 6, 7, 8, 11, or 12 of column (a). Include on line 13 the cooperative's share of distributions from a section 1291 fund from Form 8621, to the extent that the amounts are taxed as dividends under section 301. See Form 8621 and the Instructions for Form 8621.

Line 14, Column (a)

Include income constructively received from controlled foreign corporations (CFCs) under subpart F. This amount should equal the total subpart F income reported on Schedule I of Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations.

Line 15, Column (a)

Include gross-up for taxes deemed paid under sections 902 and 960.

Line 16, 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 cooperative's accumulated IC-DISC income or previously taxed income, or

  • Is a deemed distribution under section 995(b)(1).

Line 17, Column (a)

Include the following:

  1. 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.

  2. Dividends from tax-exempt organizations.

  3. Dividends (other than capital gain distributions) received from a REIT that, for the tax year of the trust in which the dividends are paid, qualifies under sections 856 through 860.

  4. Dividends not eligible for a dividends-received deduction, which include the following.

    1. Dividends received on any share of stock held for less than 46 days during the 91-day period beginning 45 days before the ex-dividend date. When counting the number of days the cooperative held the stock, you cannot count certain days during which the cooperative's risk of loss was diminished. See section 246(c)(4) and Regulations section 1.246-5 for more details.

    2. Dividends attributable to periods totaling more than 366 days that the cooperative received on any share of preferred stock held for less than 91 days during the 181-day period that began 90 days before the ex-dividend date. When counting the number of days the cooperative held the stock, you cannot count certain days during which the cooperative's risk of loss was diminished. See section 264(c)(4) and Regulations section 1.264-5 for more details. Preferred dividends attributable to periods totaling less than 367 days are subject to the 46-day holding period rule above.

    3. Dividends on any share of stock to the extent the cooperative is under an obligation (including a short sale) to make related payments with respect to positions in substantially similar or related property.

  5. Any other taxable dividend income not properly reported elsewhere on Schedule C.

Line 18, Column (c)

Section 247 allows public utilities a deduction of 40% of the smaller of (a) dividends paid on their preferred stock during the tax year, or (b) 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 G.Allocation of Patronage and Nonpatronage Income and Deductions

If the cooperative's total receipts (page 1, line 1a plus lines 4 through 9) for the tax year and its total assets at the end of the tax year are less than $250,000, the cooperative is not required to complete Schedule G. See Schedule K, Question 14.

Cooperatives are required to allocate income and deductions between patronage and nonpatronage business. If the transaction producing the income merely enhances the overall profitability of the cooperative, being merely incidental to the cooperative's operation, the income is from a nonpatronage source. But if the source of income or loss is from an activity that is an integral part of the cooperative's business (such as inventory), then the source may be patronage.

Special rules also apply if a cooperative has acquired the assets of another cooperative under a section 381(a) transaction. Cooperatives may net earnings and losses under section 1388(j) and still be eligible for tax-exempt treatment.

Line 6

Special rules apply in determining and reporting the domestic production activities deduction (DPAD) for agricultural and horticultural cooperatives. Also, since cooperatives are not permitted to net patronage losses with nonpatronage income, cooperatives must calculate the DPAD separately to determine unused patronage and nonpatronage losses on Schedule G, lines 12 and 13, respectively. See Form 8903 and the Instructions for Form 8903. Complete and attach Form 8903 as indicated in the instructions.

Line 8 (columns a and b)

Complete Schedule H before entering an amount on this line. Allocate the amount on Schedule H, line 5, between patronage and nonpatronage. Only farmers' cooperatives exempt under section 521 are allowed to take a deduction in column (b) for nonpatronage distributions under section 1382(b).

Line 9a (columns a and b)

Compute and carryback or carry over patronage and nonpatronage NOLs separately. Under section 1388(j)(1), cooperatives can use losses from one or more allocation units to offset earnings of one or more other allocation units, as permitted by their bylaws, but only to the extent that the earnings and losses are from business done with or for patrons. If a cooperative exercises this option, it must provide the information specified in section 1388(j)(3) in a written notice to its patrons.

Line 9b (columns a and b)

Allocate the amount of total special deductions reported on Schedule C, line 20, between patronage and nonpatronage business.

Line 10 (columns a and b)

The taxable income reported on page 1, line 27, may not be less than the nonpatronage taxable income shown on Schedule G, line 10 (column b).

Line 11 (column a)

Combine lines 10(a) and 10(b).

Note.

Any patronage source losses (line 10, column (a)) cannot be used to offset nonpatronage income (line 10, column (b)).

Line 12 (column a)

Enter any unused patronage loss from line 10, column (a).

Line 13 (column b)

Enter any unused nonpatronage loss from line 10, column (b).

Schedule H.Deductions and Adjustments Under Section 1382

Note.

Cooperatives engaged in the marketing of agricultural or horticultural products may be eligible to exclude applicable extraterritorial income if the cooperative sells qualifying foreign trade property. No deduction is allowed for patronage dividends, per-unit retain allocations, and nonpatronage distributions related to the excluded foreign trade income. Any patronage dividends or per-unit retain allocations that are allocated to qualifying foreign trade income of the cooperative may be treated as qualifying foreign trade income of the patron. In order to qualify, the amount must be designated by the cooperative in a written notice mailed to its patrons not later than the 15th day of the 9th month following the close of the tax year.

Line 1. Dividends Paid on Capital Stock (Section 521 Cooperatives Only)

Enter the amount actually or constructively paid as dividends during the tax year on:

  • Common stock (whether voting or nonvoting),

  • Preferred stock,

  • Capital retain certificates,

  • Revolving fund certificates,

  • Letters of advice, or

  • Other documentary evidence of a proprietary interest in the cooperative association.

See Regulations section 1.1382-3(b) for more information.

Line 2. Nonpatronage Income Allocated to Patrons (Section 521 Cooperatives Only)

Enter nonpatronage income allocated to patrons. Payment may be in:

  • Money,

  • Qualified written notices of allocation, or

  • Other property (except nonqualified written notices of allocation).

The amounts must be paid during the payment period that begins on the first day of the tax year and ends on the 15th day of the 9th month after the end of the tax year in which the income was earned.

Nonpatronage income.

Nonpatronage income includes incidental income from sources not directly related to:

  • Marketing,

  • Purchasing,

  • Service activities of the cooperative, or

  • Income from business done with or for the U.S. Government, or any of its agencies.

See the instructions for line 3b below for a definition of “qualified written notice of allocation.” See section 1382(c)(2)(B) for deductibility of amounts paid in redemption of nonqualified written notices of allocation. See section 1388(d) for a definition of a nonqualified written notice of allocation.

Line 3. Patronage Dividends

To be deductible, patronage dividends must be paid during the payment period that begins on the first day of the tax year in which the patronage occurs and ends on the 15th day of the 9th month after the end of that tax year.

See sections 1382(e) and (f) for special rules for the time when patronage occurs if products are marketed under a pooling arrangement, or if earnings are includible in the gross income of the cooperative for a tax year after the year in which the patronage occurred.

Patronage dividends include any amount paid to a patron by a cooperative based on the quantity or value of business done with or for that patron under a pre-existing obligation to pay that amount. The amount is determined by reference to the net earnings of the organization from business done with or for its patrons.

Note.

Net earnings are not reduced by dividends paid on capital stock of the organization if there is a legally enforceable agreement that such dividends are in addition to amounts otherwise payable to patrons derived from business done with or for patrons.

Patronage dividends may be paid in:

  • Money,

  • Qualified written notices of allocation, or

  • Other property (except nonqualified written notices of allocation).

Line 3b. Qualified written notices of allocation.   A written notice of allocation means:
  • Any capital stock,

  • Revolving fund certificate,

  • Retain certificate,

  • Certificate of indebtedness,

  • Letter of advice, or

  • Other written notice, which states the dollar amount allocated to the patron by the cooperative and the part, if any, which is a patronage dividend.

  In general, a qualified written notice of allocation is a written notice of allocation that is:
  • Paid as part of a patronage dividend, in money or by qualified check equal to at least 20% of the patronage dividend, and

  • One of the following conditions is met:

  1. The patron must have at least 90 days from the date the written notice of allocation is paid to redeem it in cash, and must receive written notice of the right of redemption at the time the patron receives the allocation; or

  2. The patron must agree to have the allocation treated as constructively received and reinvested in the cooperative. See section 1388(c)(2) and the related regulations for information on how this consent must be made.

Line 3d. Nonqualified written notices of allocation.   If a written notice of allocation does not qualify, no deduction is allowable at the time it is issued. However, the cooperative is entitled to a deduction or refund of tax when the nonqualified written notice of allocation is finally redeemed, if that notice was paid as a patronage dividend during the payment period for the tax year during which the patronage occurred. The deduction or refund is allowed, but only to the extent that amounts paid to redeem the nonqualified written notices of allocation are paid in money or other property (other than written notices of allocation) which do not exceed the stated dollar amounts of the nonqualified written notices of allocation. See section 1382(b), Regulations section 1.1382-2, and section 1383.

  See section 1383 for special rules for figuring the cooperative's tax in the year nonqualified written notices of allocation are redeemed. The cooperative is entitled to:
  1. A deduction in the tax year the nonqualified written notices of allocation are redeemed (if permitted under section 1382(b)(2) or (4) or section 1382(c)(2)(B)), or

  2. A tax credit based on a recomputation of tax for the year(s) the nonqualified written notices of allocation were issued. See the instructions for page 1, line 29h.

  Amounts paid to patrons are not patronage dividends if paid:
  1. Out of earnings not from business done with or for patrons;

  2. Out of earnings from business done with or for other patrons to whom no amounts or smaller amounts are paid for substantially identical transactions;

  3. To redeem capital stock, certificates of indebtedness, revolving fund certificates, retain certificates, letters of advice, or other similar documents; or

  4. Without reference to the net earnings of the cooperative organization from business done with or for its patrons.

Line 4. Domestic production activities deduction allocation (section 199).   An agricultural or horticultural cooperative (as defined in Regulations section 1.199-6(f)) must reduce its section 1382 deduction by the amount of the domestic production activities deduction that was allocated to patrons.

Note.

Only include on line 4 the portion of the domestic production activities deduction attributable to the amounts reported on this schedule. Marketing cooperatives that distribute patronage as per-unit retain allocations must attach a statement showing the amount of the section 199(a) deduction attributable to the per-unit retain allocations.

Schedule J.Tax Computation

Line 1. Members of a Controlled Group

If the cooperative is a member of a controlled group, check the box on line 1. Complete and attach Schedule O (Form 1120), Consent Plan and Apportionment Schedule for a Controlled Group. Component members of a controlled group must use Schedule O, to report the apportionment of taxable income, income tax, and certain tax benefits between the members of the group. See Schedule O and the Instructions for Schedule O for more information.

Line 2. Income Tax

If the cooperative is a member of a controlled group and is filing Schedule O (Form 1120), enter the cooperative's tax from Part III of Schedule O (Form 1120). Most cooperatives that are not members of a controlled group and not filing a consolidated return figure their tax by using the Tax Rate Schedule below.

Tax Rate Schedule

If taxable income (Form 1120-C, line 27 ) on page 1 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

Deferred tax under section 1291.   If the cooperative was a shareholder in a PFIC and received an excess distribution or disposed of its investment in the PFIC during the year, it must include the increase in taxes due under section 1291(c)(2) (from Form 8621) in the total for line 2. On the dotted line next to line 2, enter “Section 1291” and the amount.

  Do not include on line 2 any interest due under section 1291(c)(3). Instead, include the amount of interest owed on Schedule J, line 8, as other interest.

  For more information on reporting the deferred tax and interest, see the Instructions for Form 8621.

Line 3. Alternative Minimum Tax (AMT)

Unless the cooperative 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 cooperative 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 cooperative's allowable exemption amount (from Form 4626). For this purpose, taxable income does not include the NOL deduction.

See the Instructions for Form 4626 for definitions and details on how to figure the tax.

Line 5a. Foreign Tax Credit

To find out when a cooperative can take the credit for payment of income tax to a foreign country or U.S. possession, see Form 1118, Foreign Tax Credit—Corporations.

Line 5b. Qualified Electric Vehicle Credit

Enter any qualified electric vehicle passive activity credits from prior years allowed for the current tax year from Form 8834, Qualified Electric Vehicle Credit, line 7. Attach Form 8834. Include on line 5b any credits from Form 5735, American Samoa Economic Development Credit. See the Instructions for Form 5735. Attach Form 5735.

Line 5c. General Business Credit

Enter on line 5c the allowable credit from Form 3800, Part II, line 38.

The cooperative is required to file Form 3800 to claim any of the business credits. See the Instructions for Form 3800 for exceptions. For a list of allowable credits, see Form 3800. Also, see the applicable credit form and its instructions.

Elective allocations to patrons of subchapter T cooperatives.   The cooperative may elect to allocate any or all of certain credits among the patrons based on the quantity or value of business done with or for such patrons. This includes the following:
  • Biofuel producer credit (Form 6478);

  • Renewable electricity, refined coal, and Indian coal production credit (Form 8835);

  • Biodiesel and renewable diesel fuels credit (Form 8864); and

  • Low sulfur diesel fuel production credit (Form 8896).

  For the allocation to take effect, the cooperative must designate the apportionment in a written notice mailed to its patrons before the due date of the cooperative's return. The credit amount allocated to patrons cannot be included on line 5c. Once made, the election cannot be revoked. For more information, see the instructions for the applicable credit form. Also, see the Instructions for Form 3800. For tax associated with a decrease in the credit allocated to patrons, see Other Taxes, later.

Required allocations to patrons of subchapter T cooperatives.   Any excess of the certain credits that are not used by the cooperative because of the tax liability limitation must be passed through to the patrons. This includes the following credits.
  • Work opportunity credit (Form 5884).

  • Empowerment zone employment credit (Form 8844).

  • Indian employment credit (Form 8845).

  • Energy efficient appliance credit (Form 8909).

  • Credit for employer differential wage payments (Form 8932).

  • Credit for small employer health insurance premiums (Form 8941).

These credits cannot be carried back or over by the cooperative. See the applicable form and related instructions for details. For tax associated with a recapture of credit, see Other Taxes, later.

Line 5d. Credit for Prior Year Minimum Tax

To figure the minimum tax credit and any carryforward of that credit, use Form 8827.

Line 5e. Bond Credits

Enter allowable credits from Form 8912, Credit to Holders of Tax Credit Bonds, line 12.

Line 6. Total Credits

Add lines 5a through 5e and enter the total on line 6.

Line 8. Other Taxes

Include any of the following taxes and interest in the total on line 8. Check the appropriate box(es) for the form, if any, used to compute the total.

Recapture of investment credit.   If the cooperative disposed of investment credit property or changed its use before the end of its useful life or recovery period, or is required to recapture a qualifying therapeutic discovery project grant, enter the increase in tax from Form 4255, Recapture of Investment Credit.

Recapture of low-income housing credit.   If the cooperative disposed of property (or there was a reduction in the qualified basis of the property) for which it took the low-income housing credit and the cooperative did not follow the procedures that would have prevented recapture of the credit, it may owe a tax. See Form 8611, Recapture of Low-Income Housing Credit.

Alternative tax on qualifying shipping activities.   Enter any alternative tax on qualifying shipping activities from Form 8902. Check the box for Form 8902.

Other.   Check the box for “Other” if the cooperative includes any additional taxes and interest such as the items discussed below. If the cooperative checked the “Other” box, attach a statement showing the computation of each item included in the total for line 8 and identify the applicable Code section and the type of tax or interest.
  • Recapture of Indian employment credit. Generally, if an employer terminates the employment of a qualified employee less than 1 year after the date of initial employment, any Indian employment credit allowed for a prior tax year because of wages paid or incurred to that employee must be recaptured. For details, see Form 8845 and section 45A.

  • Recapture of new markets credit (see Form 8874, New Markets Credit, and Form 8874-B, Notice of Recapture Event for New Markets Credit).

  • Recapture of employer-provided childcare facilities and services credit (see Form 8882).

  • Interest on deferred tax attributable to (a) installment sales of certain timeshares and residential lots (section 453(l)(3)) and (b) certain nondealer installment obligations (section 453A(c)).

  • Interest due on deferred gain (section 1260(b)).

  • Interest due under section 1291(c)(3). See Form 8621 and the Instructions for Form 8621.

Recapture of elective allocation of credit to patrons.

If the amount of any of the following elective credits apportioned to any patron is decreased, there is a tax imposed on the cooperative, not the patron.

  • Small ethanol producer credit (Form 6478). See section 40(g)(6)(B)(iii).

  • Renewable electricity, refined coal, and Indian coal production credit (Form 8835). See section 45(e)(11)(C).

  • Small agri-biodiesel producer credit (Form 8864). See section 40A(e)(6)(B)(iii).

  • Low sulfur diesel fuel production credit (Form 8896). See section 45H(f)(3).

For details on the recapture of the credits, see the instructions for the applicable form.

Recapture of required excess credit allocated to patrons.

If the cooperative allocated excess credit to patrons, any credit recapture applies as if the cooperative had claimed the entire credit. For details, see section 46(h) (as in effect prior to enactment of the Revenue Reconciliation Act of 1990). This applies to the following credits.

  • Investment credit (Form 3468).

  • Work opportunity credit (Form 5884).

  • Empowerment zone employment credit (Form 8844).

  • Indian employment credit (Form 8845).

  • Energy efficient appliance credit (Form 8909).

  • Credit for small employer health insurance premiums (Form 8941).

Line 9. Total Tax

Include any deferred tax on the termination of a section 1294 election applicable to shareholders in a qualified electing fund in the amount entered on line 9. See the Instructions for Form 8621.

Subtract any deferred tax on the cooperative's share of undistributed earnings of a qualified electing fund. See the Instructions for Form 8621.

How to report.   If deferring tax, attach a statement showing the computation of each item included in, or subtracted from, the total for line 9. On the dotted line next to line 9, specify (a) the applicable Code section, (b) the type of tax, and (c) the amount of tax.

Schedule K.Other Information

Complete all items and questions that apply to the cooperative.

Item 2

See the list of Principal Business Activity Codes, later. Using the list of codes and activities, determine from which activity the cooperative derives the highest percentage of its total receipts. Enter on lines 2a, 2b, and 2c the principal business activity code number, the cooperative's business activity, and a description of the principal product or service of the cooperative.

Question 5

Check the “Yes” box for Question 5 if:

  1. The cooperative is a subsidiary in an affiliated group (defined later), but is not filing a consolidated return for the tax year with that group, or

  2. The cooperative is a subsidiary in a parent-subsidiary controlled group. For a definition of a parent-subsidiary controlled group, see the Instructions for Schedule O (Form 1120).

Any cooperative that meets either of the above requirements should check the “Yes” box. This applies even if the cooperative is a subsidiary member of one group and the parent corporation of another.

Note.

If the cooperative is an “excluded member” of a controlled group (see definition in the Instructions for Schedule O (Form 1120)), it is still considered a member of a controlled group for this purpose.

Affiliated group.

An affiliated group is one or more chains of includible corporations (section 1504(a)) connected through stock ownership with a common parent corporation. The common parent must be an includible corporation and the following requirements must be met.

  1. The common parent must own directly stock that represents at least 80% of the total voting power and at least 80% of the total value of the stock of at least one of the other includible corporations, and

  2. Stock that represents at least 80% of the total voting power and at least 80% of the total value of the stock of each of the other corporations (except for the common parent) must be owned directly by one or more of the other includible corporations.

For this purpose, “stock” generally does not include any stock that (a) is nonvoting, (b) is nonconvertible, (c) is limited and preferred as to dividends and does not participate significantly in corporate growth, and (d) has redemption and liquidation rights that do not exceed the issue price of the stock (except for a reasonable redemption or liquidation premium). See section 1504(a)(4).

Item 7

Enter the cooperative's total assets (as determined by the accounting method regularly used in keeping the cooperative's books and records) at the end of the tax year. If there are no assets at the end of the tax year,  
enter -0-.

If the cooperative is required to complete Schedule L, enter total assets from Schedule L, line 13, column (d). If filing a consolidated return, report total consolidated assets for all cooperatives and corporations joining in the return.

Question 8

Check the “Yes” box if one foreign person owned at least 25% of (a) the total voting power of all classes of stock of the cooperative entitled to vote, or (b) the total value of all classes of stock of the cooperative.

The constructive ownership rules of section 318 apply in determining if a cooperative is foreign owned. See section 6038A(c)(5) and the related regulations.

Enter on line 8a the percentage owned by the foreign person specified in Question 8. On line 8b, enter the name of the owner's country.

Note.

If there is more than one 25%-or-more foreign owner, complete lines 8a and 8b for the foreign person with the highest percentage of ownership.

Foreign person.   The term “foreign person” means:
  • An individual who is not a citizen or resident of the United States;

  • An individual who is a citizen or resident of a U.S. possession who is not otherwise a citizen or resident of the United States;

  • Any partnership, association, company, or corporation that is not created or organized in the United States;

  • Any foreign estate or trust within the meaning of section 7701(a)(31); or

  • A foreign government (or one of its agencies or instrumentalities) to the extent that it is engaged in the conduct of a commercial activity as described in section 892.

    However, the term “foreign person” does not include any foreign person who consents to the filing of a joint income tax return.

Owner's country.   For individuals, the term “owner's country” means the country of residence. For all others, it is the country where incorporated, organized, created, or administered.

Requirement to file Form 5472.   If the cooperative checked “Yes,” it may have to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Generally, a 25% foreign-owned cooperative that had a reportable transaction with a foreign or domestic related party during the tax year must file Form 5472. See the Instructions for Form 5472 for filing instructions and penalties for failure to file.

Item 10

Show any tax-exempt interest received or accrued. Include any exempt-interest dividends received as a shareholder in a mutual fund or other RIC. Also, if required, include the same amount on Schedule M-1, line 7 (or Schedule M-3 (Form 1120), Part II, line 13, if applicable).

Item 12

If the cooperative has an NOL, it generally can elect 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 in Item 12 and file the 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.

Cooperatives filing a consolidated return that elect to waive the entire carryback period for the group must check the box in Item 12 and attach the statement required by Regulations section 1.1502-21(b)(3) or the election will not be valid.

Item 13

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) in a tax year prior to 2013. Do not reduce the amount by any NOL deduction reported on line 26a.

Schedule L.Balance Sheets per Books

The balance sheets should agree with the cooperative's books and records.

Cooperatives with total receipts (page 1, line 1a plus lines 4 through 9) and total assets at the end of the tax year less than $250,000 are not required to complete Schedules L, M-1, and M-2 if the “Yes” box on Schedule K, Question 14, is checked.

Cooperatives with total assets non-consolidated (or consolidated for all cooperatives and corporations included within the tax consolidation group) of $10 million or more on the last day of the tax year must complete Schedule M-3 (Form 1120) instead of Schedule M-1. See the separate Instructions for Schedule M-3 (Form 1120) for provisions that also affect Schedule L.

If filing a consolidated return, report total consolidated assets, liabilities, and shareholder's equity for all cooperatives and corporations joining in the return. See Consolidated return, earlier.

Line 1. Cash

Include certificates of deposit as cash on this line.

Line 5. Investments

Include on this line:

  • State and local government obligations, the interest on which is excludable from gross income under section 103(a); and

  • Stock in a mutual fund or other RIC that distributed exempt-interest dividends during the tax year of the cooperative.

Line 26. Adjustments to Shareholders' Equity

Some examples of adjustments to report on this line include:

  • Unrealized gains and losses on securities held “available for sale.

  • Foreign currency translation adjustments.

  • The excess of additional pension liability over unrecognized prior service cost.

  • Guarantees of employee stock (ESOP) debt.

  • Compensation related to employee stock award plans.

If the total adjustment to be entered on line 26 is a negative amount, enter the amount in parentheses.

Schedule M-1.Reconciliation of Income (Loss) per Books With Income per Return

Cooperatives with total receipts (page 1, line 1a plus lines 4 through 9) and total assets at the end of the tax year less than $250,000 are not required to complete Schedules L, M-1, and M-2 if the “Yes” box on Schedule K, Question 14, is checked.

Cooperatives with total assets non-consolidated (or consolidated for all cooperatives/corporations included with the tax consolidation group) of $10 million or more on the last day of the tax year must complete Schedule M-3 (Form 1120) instead of Schedule M-1. A cooperative filing Form 1120-C that is not required to file Schedule M-3 may voluntarily file Schedule M-3 instead of Schedule M-1. See the Instructions for Schedule M-3 (Form 1120) for more information.

Line 5c. Travel and Entertainment

Include any of the following:

  • Meals 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 the 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 expenses for travel and entertainment.

Line 7. Tax-exempt Interest

Report any tax-exempt interest received or accrued, including any exempt-interest dividends received as a shareholder in a mutual fund or other RIC. Also report this same amount on Schedule K, Item 10.


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