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-F may also be used if:

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

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

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

Address

Include the room, suite, or other unit number after the street address. If the post office does not deliver mail to the street address and the corporation has a P.O. box, show the box number instead.

If the corporation 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 corporation 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.

Employer Identification Number (EIN)

Enter the corporation's EIN. If the corporation does not have an EIN, it must apply for one. An EIN may 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.

Corporations 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 corporation has not received its EIN by the time the return is due, enter “Applied For” and the date the corporation applied in the space for the EIN. However, if the corporation is filing its return electronically, an EIN is required at the time the return is filed.

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

Initial Return, Name or Address Change, Final Return, First Post-Merger Return, Amended Return, Schedule M-3 Attached, Protective Return

Check all of the applicable box(es).

Address change.   If the corporation has changed its address since it last filed Form 1120-F (including a change to an “in care of” address), check the box for “Name or address change.

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. See the instructions for Form 8822-B for details.

First Post-Merger Return.   Check the “First post-merger return” box if, due to a corporate merger, the foreign corporation has acquired a new employer identification number. Check the “First post-merger return” box if the foreign corporation has merged with a foreign or domestic corporation with United States operations. Do not check the “First post-merger return” box if the foreign corporation has merged with another foreign corporation and the merger has no effect on the filer's United States operations.

Schedule M-3 attached.   A corporation with total assets reportable on Form 1120-F, Schedule L of $10 million or more on the last day of the tax year must complete Schedule M-3 (Form 1120-F), Net Income (Loss) Reconcilation for Foreign Corporations With Reportable Assets of 10 Million or More, instead of Schedule M-1. A corporation filing Form 1120-F 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 the “Schedule M-3 attached” box at the top of page 1 of Form 1120-F. See the Instructions for Schedule M-3 for more details.

Protective Return Filers.   Check the "Protective return" box if the foreign corporation is filing a protective return. See Protective return, earlier, for information concerning who should file a protective return.

  If the corporation is filing a protective return, complete Form 1120-F as follows:

Page 1.

Enter the complete name, address, and employer identification number of the corporation. Check the “Protective return” box. Provide all the information required in items A through M.

Note.

If the corporation is filing Form 1120-F to claim a refund for overwithholding reported in Section I on page 2, the return may also assert protective return status for the right to claim deductions and credits attributable to effectively connected income by also checking the “Protective return” box at the top of page 1.

Refund amount.

Enter on lines 1 and 4, page 1, the amount from line 11, page 2. Enter on lines 5i and 5j the amount from line 12, page 2. Enter the excess of line 5j over line 4 on lines 8a and 9. This is the amount to be refunded to you.

Signature.

An authorized officer of the corporation must sign and date the return. If the protective return is being filed pursuant to an income tax treaty exemption, attach a completed Form 8833 to the return.

Page 2.

At the top of page 2, provide all the information required in items N, O, Q, T, V, W, X, Y, AA, and any other applicable questions. With respect to item Y, it is not necessary for the corporation to file Schedule P, even if the answer to item Y(1) is “Yes.” However, a corporation that files a protective tax return may voluntarily file Schedules I and P to preserve certain timely elections.

At the bottom of page 2, complete all applicable portions of Section I, Income From U.S. Sources Not Effectively Connected With the Conduct of a Trade or Business in the United States.

Information Requested at Top of Page 1 of Form

Complete items A though M.

Item A.   Enter the foreign corporation’s country of incorporation or organization. If the corporation is incorporated or organized in more than one country, list all countries.

Item B.   Enter the foreign country or countries under whose laws the income reported on Form 1120-F is also subject to tax. This may include the country where the corporation is managed and controlled, as well as the country or countries in which the corporation is incorporated or organized.

Item F.   See the list of Principal Business Activity Codes at the end of these instructions. Using the list of codes and activities, determine from which activity the corporation derives the highest percentage of its total receipts. Enter on lines F(1), F(2), and F(3) the principal business activity code number, the corporation's principal business activity, and a description of the principal product or service of the corporation.

Item K(1).   If the foreign corporation was not engaged in a U.S. trade or business at any time during the tax year, or was engaged in a U.S. trade or business but did not derive any gross income effectively connected to such trade or business, answer “No” to item K(1).

  If the foreign corporation had gross income effectively connected with or treated as effectively connected with the conduct of a trade or business in the United States, answer “Yes” to item K(1).

Item L.   Skip item L (leave blank), if the foreign corporation is a resident of a country that does not have an income tax treaty with the United States. If the foreign corporation is a resident of a country that has an income tax treaty with the United States:
  • Answer “Yes” if the corporation had a permanent establishment in the United States at any time during the tax year or in any prior tax year to which income was attributable, and enter the name of the country of residence of the foreign corporation.

  • Answer “No” if the corporation does not have a permanent establishment in the United States.

   If the answer to item L is “No” and the answer to item K(1) is “Yes,” complete item W on page 2 of the form and attach a completed Form 8833 to the return, including a statement indicating the nature and amount (or reasonable estimate thereof) of gross receipts of the foreign corporation exempt by reason of not having a permanent establishment in the United States.

Item M.   See Form 5472, earlier.

Computation of Tax Due or Overpayment

Line 5b. Estimated Tax Payments

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

Beneficiaries of trusts.   If the corporation 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 corporation's share of the payment in the total for line 5b. Enter “T” and the amount on the dotted line next to the entry space.

Line 5c. 2013 Refund Applied for on Form 4466

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

Line 5f. Credit for Tax Paid on Undistributed Capital Gains

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

Line 5g. 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-F.

Credit for tax on ozone-depleting chemicals.   Include on line 5g any credit the corporation is claiming under section 4682(g)(2) for tax on ozone-depleting chemicals. Enter “ODC” on the dotted line to the left of the entry space.

Line 5h. Refundable Credits from Form 8827

If the corporation elected to claim certain unused minimum tax credits instead of claiming any additional first-year special depreciation allowance for eligible property, see the instructions for Form 8827. Enter on line 5h the amounts from Form 8827, line 8c.

Line 5j. Total Payments

Backup withholding.   If the corporation had income tax withheld from any payments it received due to backup withholding, include the amount withheld in the total for line 5j. Do not include these amounts on line 5i. (Include on line 5i only amounts withheld under Chapter 3 of the Code.) Enter the amount withheld and the words “Backup Withholding” in the blank space in the right-hand column between lines 4 and 5j.

Line 6. Estimated Tax Penalty

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

  • The annualized income or adjusted method is used, or

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

If Form 2220 is attached, check the box on line 6, and enter any penalty on this line.

Line 8b

Enter on line 8b the amount of overpayment on line 8a resulting from tax deducted and withheld under Chapter 3. This amount is computed by completing Schedule W on page 7 of Form 1120-F.

Line 9

Enter the portion of line 8a you want credited to your 2014 estimated tax and the portion of line 8a you want refunded.

Note.

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

Note.

You can credit any or all of the line 8a overpayment to your 2014 estimated tax, even those amounts on line 8b resulting from tax deducted and withheld under Chapter 3.

Note.

Refunds of certain overpayments (for example, those which pertain to tax withheld and reported on Forms 1042-S, 8805, and 8288-A) may require additional time to be processed. Therefore, please allow up to 6 months for these refunds to be issued.

Electronic deposit of refund.   If the corporation has a refund of $1 million or more and wants it electronically deposited into its checking or savings account at any U.S. bank or other financial institution instead of having a check sent to the corporation, complete Form 8302 and attach it to Form 1120-F.

Additional Information Requested at Top of Page 2 of Form

Complete items N through AA.

Item O — Personal Service Corporation

A personal service corporation is a corporation whose principal activity (defined below) for the testing period for the tax year is the performance of personal services. The services must be substantially performed by employee-owners.

Testing period.   Generally, the testing period for a tax year is the prior tax year. However, the testing period for a new corporation starts with the first day of its first tax year and ends on the earlier of:
  • The last day of its first tax year or

  • The last day of the calendar year in which the first tax year began.

Principal activity.   The principal activity of a corporation is considered to be the performance of personal services if, during the testing period, the corporation's compensation costs for the performance of personal services (defined below) are more than 50% of its total compensation costs.

Performance of personal services.   The term “performance of personal services” includes any activity involving the performance of personal services in the field of: health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting.

Accounting period.   A personal service corporation must use a calendar tax year unless:
  • It elects to use a 52-53-week tax year that ends with reference to the calendar year or tax year elected under section 444;

  • It can establish a business purpose for a different tax year and obtains the approval of the IRS (see the Instructions for Form 1128 and Pub. 538); or

  • It elects under section 444 to have a tax year other than a calendar year. To make the election, use Form 8716, Election To Have a Tax Year Other Than a Required Tax Year.

  If a corporation makes the section 444 election, its deduction for certain amounts paid to employee-owners may be limited. See Schedule H (Form 1120), Section 280H Limitations for a Personal Service Corporation (PSC), to figure the maximum deduction.

  If a section 444 election is terminated and the termination results in a short tax year, type or print at the top of the first page of Form 1120-F for the short tax year “SECTION 444 ELECTION TERMINATED.

Other rules.   For other rules that apply to personal service corporations, see Passive activity limitations, later.

Item P

Enter 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 7a, or Schedule M-3, Part II, line 4a.

Item R

If the corporation has a net operating loss (NOL), it generally may 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 R and file the tax return by its due date, including extensions. Do not attach the statement described in Temporary Regulations section 301.9100-12T. Once made, the election is irrevocable.

Item S

Enter the amount of the NOL carryover to the tax year from prior years, even if some of the loss is used to offset income on this return. The amount to enter is the total of all NOLs generated in prior years but not used to offset income (either as a carryback or carryover) to a tax year prior to 2013. Do not reduce the amount by any NOL deduction reported on page 3, Section II, line 30a.

Item T

Check the “Yes” box for item T if the corporation is a subsidiary in a parent-subsidiary controlled group. This applies even if the corporation is a subsidiary member of one group and the parent corporation of another. For a definition of a parent-subsidiary controlled group, see the Instructions for Schedule O (Form 1120).

Note.

If the corporation 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.

Item W

If a foreign corporation claims that a treaty overrules or modifies any provision of the Internal Revenue Code and thereby effects a reduction of any tax with respect to an item reported on this Form 1120-F, check the “Yes” box. Check the “Yes” box, for example, if a treaty benefit has been claimed based on:

  • The nondiscrimination provision of a treaty.

  • The business profits article of a treaty. If expenses are claimed in determining the business profits of the foreign corporation, notwithstanding an inconsistent provision of the Code.

  • The gains article, if a treaty benefit is claimed relating to gain or loss on the disposition of a United States real property interest.

  • The branch profits tax article (or portion of the dividends article relating to the branch profits tax) and tax on excess interest.

  • A waiver of insurance excise tax under section 4371 (if the foreign corporation has not entered into a closing agreement with the IRS and has not filed an annual Form 720).

  • The interest, dividends, or royalty article, if a refund of withholding tax is due.

Item Y(1)

For more information regarding a corporation's distributive share of income from a directly owned partnership interest that is ECI or treated as ECI by the partnership or the corporation (partner), see Who Must Complete Schedule P in the separate instructions for Schedule P (Form 1120-F).

Item Y(2)

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

  • Name and EIN (if any) of the foreign partnership;

  • Identify which, if any, of the following forms the foreign partnership filed for its tax year ending with or within the corporation's tax year: Form 1042, 1065 or 1065-B, or 8804;

  • Name of tax matters partner (if any); and

  • Beginning and ending dates of the foreign partnership's tax year.

In addition, report any effectively connected income included on Schedule K-1 reported by the foreign partnership to the corporation, and the ECI apportionment of the corporation's outside basis in the foreign partnership as required in Schedule P.

Item Z(2)

If the answer to item Z(2) is “Yes,” attach a statement explaining whether the interbranch transactions are recognized under Proposed Regulations section 1.863-3(h) (Global Dealing Regulations) or some other proposed regulation. If interbranch transactions are recognized pursuant to a U.S. income tax treaty other than one that, in its text or accompanying documents (including an exchange of notes), allows for such recognition by explicitly incorporating an arm's length method applying the OECD Transfer Pricing Guidelines, then such treaty-based position should be disclosed on Form 8275-R, in addition to the treaty disclosure required on Form 8833.

Item AA

A corporation filing Form 1120-F must complete and attach Schedule UTP (Form 1120), Uncertain Tax Position Statement if:

  • For 2013, the corporation has assets that equal or exceed $50 million;

  • The corporation or a related party issued audited financial statements reporting all or a portion of the corporation's operations for all or a portion of the corporation's tax year; and

  • The corporation has one or more tax positions that must be reported on Schedule UTP.

Attach Schedule UTP to the corporation's income tax return. Do not file it separately. A taxpayer that files a protective Form 1120-F must also file Schedule UTP if it satisfies the requirements set forth above.

For details, see the Instructions for Schedule UTP.

Section I—Income From U.S. Sources Not Effectively Connected With the Conduct of a Trade or Business in the United States

Note.

Complete Section I only if you derived U.S. source income not effectively connected with the conduct of a trade or business in the United States and either your withholding tax liability was not correctly withheld at source or not correctly reported on Form 1042-S, or you are claiming a refund of an amount withheld at source.

Only report amounts on these lines if:

  • The amount received is fixed or determinable, annual or periodic (FDAP) (see definition below).

  • The amount received is includible in the gross income of the foreign corporation. Therefore, receipts that are excluded from income (e.g., interest income received on state and local bonds that is excluded under section 103) would not be included as income in Section I.

  • The amount received is from U.S. sources (see Source of Income Rules, earlier).

  • The amount received is not effectively connected with the conduct of a U.S. trade or business (see Section II, later).

  • The amount received is not exempt (by Code) from taxation. For example, interest on deposits that are exempted by section 881(d) would not be included as income in Section I. In addition, certain portfolio interest is not taxable for obligations issued after July 18, 1984. See section 881(c) for more details.

Such income (except as indicated below) will generally be subject to tax at a 30% rate. See section 881(a).

Amounts fixed or determinable, annual or periodic include:

Note.

Item 1 above includes dividend equivalents described in section 871(m).

  1. Interest (other than OID as defined in section 1273), dividends, rents, royalties, salaries, wages, premiums, annuities, compensation, and other FDAP gains, profits, and income.

  2. Gains described in section 631(b) or (c), relating to disposal of timber, coal, or domestic iron ore with a retained economic interest.

  3. On a sale or exchange of an OID obligation, the amount of the OID accruing while the obligation was held by the foreign corporation, unless this amount was taken into account on a payment.

  4. On a payment received on an OID obligation, the amount of the OID accruing while the obligation was held by the foreign corporation, if such OID was not previously taken into account and if the tax imposed on the OID does not exceed the payment received less the tax imposed on any interest included in the payment received. This rule applies to payments received for OID obligations issued after March 31, 1972.

    Certain OID is not taxable for OID obligations issued after July 18, 1984. See section 881(c) for more details.

    For rules that apply to other OID obligations, see Pub. 515.

  5. Gains from the sale or exchange of patents, copyrights, and other intangible property if the gains are from payments that are contingent on the productivity, use, or disposition of the property or interest sold or exchanged.

For more information, see section 881(a) and Regulations section 1.881-2.

Note.

For purposes of determining whether its income is taxable under section 881(a), a corporation created or organized in Guam, American Samoa, the Northern Mariana Islands, or the U.S. Virgin Islands will not be treated as a foreign corporation if it meets the rules of section 881(b). For dividends paid after October 22, 2004, a corporation created or organized in Puerto Rico will be taxed under section 881(a) at a rate of 10% with respect to such dividends received during the tax year in the circumstances outlined in section 881(b)(2).

Line 9. Gross Transportation Income

A 4% tax is imposed on a foreign corporation's U.S. source gross transportation income for the tax year. U.S. source gross transportation income generally is any gross income that is transportation income if such income is treated as from U.S. sources.

Transportation income is any income from or connected with:

  • The use (or hiring or leasing for use) of a vessel or aircraft or

  • The performance of services directly related to the use of a vessel or aircraft. For this purpose, the term “vessel or aircraft” includes any container used in connection with a vessel or aircraft.

Generally, 50% of all transportation income that is attributable to transportation that either begins or ends in the United States is treated as from U.S. sources. See section 863(c)(2)(B) for a special rule for personal service income.

Exceptions.   U.S. source gross transportation income does not include income that is:
  • Effectively connected with the conduct of a U.S. trade or business or

  • Taxable in a possession of the United States under the provisions of the Internal Revenue Code as applied to that possession.

Transportation income of the corporation will not be treated as effectively connected income unless:

  • The corporation has a fixed place of business in the United States involved in the earning of transportation income and

  • Substantially all of the corporation's U.S. source gross transportation income (determined without regard to the rule that such income does not include effectively connected income) is attributable to regularly scheduled transportation (or, in the case of income from the leasing of a vessel or aircraft, is attributable to a fixed place of business in the United States).

For more information, see section 887.

Enter the foreign corporation's U.S. source gross transportation income on line 9, column (b). Also, attach Schedule V (Form 1120-F).

See Exclusion from gross income for certain income from ships and aircraft, later.

Line 10. Other Items of Income

Include on line 10 all other income not reportable on lines 1 through 9. In addition, if the foreign corporation received a specified federal procurement payment (as defined in section 5000C(b)) that was not fully withheld upon at source, enter the payment in Section I, line 10, column (b), enter a 2% rate of tax in column (c), enter the tax liability in column (d), and enter any withholding in column (e).

Line 13

Check the “Yes” box if you received an item of income during the tax year with respect to which you are treated as fiscally transparent under the laws where you are organized. In such a case, you may not claim a reduced rate of tax under a treaty with respect to that item. See Regulations section 1.894-1(d)(1).

If the item of income has been withheld upon, your interest holders may, however, be able to claim treaty benefits, but only if the tax jurisdiction in which your interest holders qualify for treaty benefits treats you as fiscally transparent and the interest holders are not fiscally transparent with respect to that item of income. An interest holder claiming a benefit should file a separate Form 1120-F, if appropriate. See Regulations section 1.894-1(d)(3) for the definition of fiscally transparent and Regulations section 1.894-1(d)(5) for examples.

Section II—Income Effectively Connected With the Conduct of a Trade or Business in the United States

Foreign Corporations Engaged in a U.S. Trade or Business

These corporations are taxed on their effectively connected income using the same graduated tax rate schedule (see Tax Rate Schedule, later) that applies to domestic corporations. Effectively connected income can be U.S. source or foreign source income as explained below.

U.S. Source Effectively Connected Income

U.S. source income derived by a foreign corporation engaged in a U.S. trade or business other than FDAP and capital gains is effectively connected income. See Regulations section 1.864-4(b).

Note.

For purposes of the preceding paragraph, U.S. source income includes income with respect to activities related to the exploration and exploitation of natural resources in continental shelf areas (see section 638). For more information, see Industry Director's Directive #1 - United States Outer Continental Shelf Activity, which may be accessed at IRS.gov.

FDAP items are generally effectively connected income (and are therefore includible in Section II) if the asset-use test, the business-activities test, or both tests (explained below) are met.

If neither test is met, FDAP items are generally not effectively connected income (and are therefore includible in Section I instead of Section II). For more information, see section 864(c)(2) and Regulations section 1.864-4(c).

Finance business.    See Regulations section 1.864-4(c)(5) for special rules relating to banking, financing, or similar business activities. Such rules apply to certain stocks and securities of a banking, financing, or similar business in lieu of the asset use and business activities tests.

Asset-use test.   The FDAP items are from assets used in, or held for use in, the conduct of U.S. trade or business. For example, the following items are effectively connected income:
  • Income earned on a trade or note receivable acquired in the conduct of the U.S. trade or business and

  • Interest income earned from the temporary investment of funds needed in the foreign corporation's U.S. trade or business.

Business-activities test.   The activities of the U.S. trade or business were a material factor in the realization of the FDAP items.

Foreign Source Effectively Connected Income

Foreign source income is generally not effectively connected income. However, if the foreign corporation has an office or other fixed place of business in the United States, the following types of foreign source income it receives from that U.S. office are effectively connected income:

  • Rents or royalties received for the use outside the United States of intangible personal property described in section 862(a)(4) if derived from the active conduct of a U.S. trade or business;

  • Gains or losses on the sale or exchange of intangible personal property located outside the United States or from any interest in such property, if such gains or losses are derived in the active conduct of the trade or business in the United States;

  • Dividends, interest, amounts received for the provision of a guarantee of indebtedness, issued after September 27, 2010, from any transaction, or gains or losses on the sale or exchange of stock or securities from foreign sources if derived from the active conduct of a U.S. banking, financing, or similar business or if the principal business of the foreign corporation is trading in stocks or securities for its own account;

  • Income from the sale or exchange of inventory outside the United States through the U.S. office, unless the property is sold or exchanged for use, consumption, or disposition outside the United States and an office of the foreign corporation in a foreign country materially participated in the sale; or

  • Any income or gain that is equivalent to any item of income or gain listed above must be treated in the same manner as such item for purposes of determining whether that income is foreign source effectively connected income.

See section 864(c)(5)(A) and Regulations section 1.864-7 for the definition of office or other fixed place of business in the United States. See sections 864(c)(5)(B) and (C) and Regulations section 1.864-6 for special rules for determining when foreign source income received by a foreign corporation is from an office or other fixed place of business in the United States.

Foreign insurance companies.   Foreign source income of a foreign insurance company that is attributable to its U.S. trade or business is effectively connected income. See section 864(c)(4)(C) and Regulations section 1.864-5(c).

Excluded foreign source income.   Foreign source income that would otherwise be effectively connected income under any of the above rules for foreign source income is excluded if:
  • It is foreign source dividends, interest, or royalties paid by a foreign corporation in which the taxpayer owns or is considered to own (within the meaning of section 958) more than 50% of the total combined voting power of all classes of stock entitled to vote or

  • The taxpayer is a controlled foreign corporation (as defined in section 957) and the foreign source income is subpart F income (as defined in section 952).

  For more information, see section 864(c)(4)(D) and Regulations section 1.864-5(d).

Foreign Corporations Not Engaged in a U.S. Trade or Business

If a foreign corporation is not engaged in a U.S. trade or business during the tax year, it will complete Section II only if such corporation:

  • Had current year income or gain from a sale or exchange of property or from performing services (or any other transaction) in any other tax year that would have been effectively connected income in that other tax year (see section 864(c)(6));

  • Had current year income or gain from a disposition of property that is no longer used or held for use in conducting a U.S. trade or business within the 10-year period before the disposition that would have been effectively connected income immediately before such cessation (see section 864(c)(7));

  • Elected to treat real property income as effectively connected income (see below);

  • Was created or organized and was conducting a banking business in a U.S. possession, and received interest on U.S. obligations that is not portfolio interest (see section 882(e)); or

  • Had gain or loss from disposing of a U.S. real property interest (see Disposition of U.S. Real Property Interest by a Foreign Corporation, later).

Election To Treat Real Property Income as Effectively Connected Income

A foreign corporation that derives, during the tax year, any income from real property located in the United States, or from any interest in such real property, may elect, for the tax year, to treat all such income as effectively connected income. See section 871(d). Income to which this election applies includes:

  • Gains from the sale or exchange of real property or an interest therein,

  • Rents or royalties from mines, wells, or other natural deposits, and

  • Gain described in sections 631(b) or (c).

The election may be made whether or not the corporation is engaged in a U.S. trade or business during the tax year for which the election is made or whether or not the corporation has income from real property that, for the tax year, is effectively connected with the conduct of a U.S. trade or business.

To make the election, attach a statement that includes the information required in Regulations section 1.871-10(d)(1)(ii) to Form 1120-F for the first tax year for which the election is to apply. Use Section II to figure the tax on this income.

Disposition of U.S. Real Property Interest by a Foreign Corporation

A foreign corporation that disposes of a U.S. real property interest (as defined in section 897(c)) must treat the gain or loss from the disposition as effectively connected income, even if the corporation is not engaged in a U.S. trade or business. Figure this gain or loss on Schedule D (Form 1120), Capital Gains and Losses. Carry the result to Section II, line 8, on page 3 of Form 1120-F.

A foreign corporation may elect to be treated as a domestic corporation for purposes of sections 897 and 1445. See section 897(i).

See Temporary Regulations section 1.897-5T for the applicability of section 897 to reorganizations and liquidations.

If the corporation had income tax withheld on Form 8288-A, include the amount withheld on line 5i, page 1.

Income

Line 1. Gross Receipts or Sales

Line 1a.   Enter gross income effectively connected with the conduct of a U.S. trade or business (except for those income items that must be reported on lines 4 through 10). Include on line 1a effectively connected gross receipts or sales.

  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 corporations 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 advance payments for services and certain goods by an accrual method corporation, see the Instructions for Form 3115.

Exclusion from gross income for certain income from ships and aircraft.

A foreign corporation engaged in the international operation of ships or aircraft and organized in a qualified foreign country may exclude qualified income from its gross income, provided that the corporation can satisfy certain ownership requirements. See Schedule S (Form 1120-F) and its separate instructions for additional information.

Income from qualifying shipping activities (tonnage tax).

The corporation's gross income does not include income from qualifying shipping activities (as defined in section 1356) if the corporation makes an election under section 1354 to be taxed on its notional shipping income (as defined in section 1353) at the highest corporate tax rate (35%). If the election is made, the corporation generally may not claim any loss, deduction, or credit with respect to qualifying shipping activities. A corporation making this election also may elect to defer gain on certain dispositions of qualifying vessels under section 1359.

  Use Form 8902, Alternative Tax on Qualifying Shipping Activities, to figure the tax. Include the alternative tax from Form 8902, line 30, on Schedule J, line 8, and be sure to check the “Form 8902” box on that line.

Installment sales.

Generally, the installment method may not 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 these 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 corporation elects to pay interest under section 453(l)(3), the corporation's income tax is increased by the interest payable under section 453(l)(3). Report this addition to the tax on Schedule J, line 8, and be sure to check the “Other” box.

Nonaccrual experience method for service providers.

Accrual method corporations are not required to accrue certain amounts to be received from the performance of services that, on the basis of their experience, will not be collected, if:

  • The services are in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting, or

  • The corporation's average annual gross receipts 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.

Corporations 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 1b. Returns and allowances.    Enter cash and credit refunds the corporation made to customers for returned merchandise, rebates, and other allowances made on gross receipts or sales.

Line 2. Cost of Goods Sold

Complete and attach Form 1125-A, Cost of Goods Sold, if applicable. Enter on Form 1120-F, 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 14.

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 Form 1120-F, page 2, item P. Also, if required, include the same amount on Schedule M-1, line 7a, or Schedule M-3, Part II, line 4a.

Line 6. Gross Rents

Enter the gross amount received for the rental of property. Deduct expenses such as repairs, interest, taxes, and depreciation on the proper lines for deductions. A rental activity held by a closely held corporation or a personal service corporation may be subject to the passive activity loss rules. See Passive activity limitations, later.

Line 8. Capital Gain Net Income

Every effectively connected sale or exchange of a capital asset must be reported in detail on Schedule D (Form 1120), Capital Gains and Losses, even if there is no gain or loss.

Line 10. Other Income

Enter any other taxable income not reported on lines 1 through 9. List the type and amount of income on an attached statement. If the corporation has only one item of other income, describe it in parentheses on line 10.

Examples of other income to report on line 10 are:

  • 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 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 Section II, line 27. Show the partnership's name, address, and EIN on Schedule P (Form 1120-F). If the amount entered is from more than one partnership, identify the amount from each partnership on Schedule P.

  • Any net positive section 481(a) adjustment.

  • Part or all of the proceeds received from certain corporate-owned life insurance contracts issued after August 17, 2006. Corporations that own one or more employer-owned life insurance contracts issued after this date must file Form 8925, Report of Employer-Owned Life Insurance Contracts. See section 101(j) for details.

  • Net income from notional principal contracts.

  • Interest and dividend equivalents (e.g., confirmation and acceptance letter of credit fees and other guarantee fees).

  • Income from cancellation of debt (COD) for the repurchase of a debt instrument for less than its adjusted issue price. However, if a corporation 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 section 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 corporation is a direct or indirect partner in a partnership, other special rules apply. See Regulations section 1.108(i)-2.

Deductions

Important.

In computing the taxable income of a foreign corporation engaged in a U.S. trade or business, deductions are allowed only if they are connected with income effectively connected with the conduct of a trade or business in the United States. Charitable contributions, however, may be deducted whether or not they are so connected. See section 882(c) and Regulations section 1.882-4(b) for more information.

Apportionment of Expenses

In general, expenses that are definitely related to a class of gross income (including tax-exempt income) must be allocated to that class of gross income. Expenses not definitely related to a class of gross income should be allocated to all classes of income based on the ratio of gross income in each class of income to total gross income, or some other ratio that clearly relates to the classes of income. See Regulations section 1.861-8 and Temporary Regulations section 1.861-8T for more information.

Attach Schedule H (Form 1120-F) to show the definitely related and indirect allocation and apportionment of expenses to effectively connected income. The amount on Schedule H, Part II, line 20 is reportable on Form 1120-F, Section II, line 26.

Note.

The allocation and apportionment of bad debt deductions is not included on Schedule H but is reported only on Form 1120-F, Section II, line 15.

Limitations on Deductions

Uniform capitalization rules.   The uniform capitalization rules of section 263A require corporations to capitalize, or include in inventory, certain costs.

Corporations 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 by reason 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 corporation. You recover these costs through depreciation, amortization, or costs of goods sold. See the Instructions for Schedule I (Form 1120-F), line 24c.

For more details, including exceptions to the uniform capitalization rules, see Pub. 538. Also, see Regulations sections 1.263A-1 through 1.263A-3. See Regulations section 1.263-4 for rules for property produced in a farming business.

Transactions between related taxpayers.   Generally, an accrual basis taxpayer may only deduct business expenses and interest owed to a related party in the year the payment is included in the income of the related party. See sections 163(e)(3), 163(j), and 267 for limitations on deductions for unpaid interest and expenses. See the Instructions for Schedule I (Form 1120-F), line 24b for limitations under these sections of the interest expense allocable under Regulations section 1.882-5.

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

Section 291 limitations.   Corporations may be required to adjust deductions for depletion of iron ore and coal, intangible drilling and exploration and development costs, certain deductions for financial institutions, 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 corporation 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 corporation 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 corporation may be required to attach a statement to its return to elect to deduct such costs.

If the corporation 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 corporation filed its original return. The election applies when figuring taxable income for the current tax year and all subsequent years.

The corporation 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 27. 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 personal service corporations (for definition, see Item O–Personal Service Corporation, earlier) and closely held corporations (see definition below).

  Generally, the two kinds of passive activities are:
  • Trade or business activities in which the corporation 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.

  Corporations 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 corporations.

A corporation is a closely held corporation if:

  • At any time during the last half of the tax year more than 50% in value of its outstanding stock is directly or indirectly owned by or for not more than five individuals and

  • The corporation is not a personal service corporation.

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 corporation 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 corporation has any of these credits, figure the current year credit before figuring the deduction for expenses on which the credit is based. If the corporation 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 corporation leases property to a governmental or other tax-exempt entity and the lease does not meet the requirements of section 470(d), the corporation may not claim deductions related to the property to the extent that they exceed the corporation's income from the lease payments. This disallowed tax-exempt use loss may 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.

Contributions.   See the instructions for line 19, later, for limitations that apply to contributions.

Line 12. Compensation of Officers

Enter deductible officers' compensation on line 12. 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 corporation's total receipts (line 1a, plus lines 4 through 10) are $500,000 or more, complete Form 1125-E, Compensation of Officers. Enter on Form 1120-F, line 12, the amount from Form 1125-E, line 4.

Line 13. 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 corporation claims a credit for any wages paid or incurred, it may need to reduce its deduction for officers' compensation and salaries and wages. See Reducing certain expenses for which credits are allowable, earlier.

If the corporation 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 20 and 27.

Line 14. Repairs and Maintenance

Enter 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.

Line 15. Bad Debts

Enter the total debts that became worthless in whole or in part during the tax year. A small bank or thrift institution using the reserve method of section 585 should attach a statement showing how it figured the current year's provision. A corporation that uses the cash method of accounting cannot claim a bad debt deduction unless the amount was previously included in income.

Specific Charge Off Method.    Attach to the return a list of each debtor and the amount of the bad debt deduction where the amount of the loans charged off (or treated as charged off under Regulations section 1.166-2) for that debtor total in excess of $500,000 in the tax year.

Line 16. Rents

If the corporation rented or leased a vehicle, enter the total annual rent or lease expense paid or incurred during the year. Also complete Part V of Form 4562, Depreciation and Amortization. If the corporation 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 corporation 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 17. 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 corporation.

  • 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 a 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 information on apportionment of taxes on real property between seller and purchaser.

See section 906(b)(1) for rules concerning certain foreign taxes imposed on income from U.S. sources that may not be deducted or credited.

Line 18. Interest Expense from Schedule I, line 25

Enter the interest expense from Schedule I (Form 1120-F), line 25. Attach Schedule I to the Form 1120-F. See Schedule I and its separate instructions for additional information relating to the allocation of interest expense to effectively connected income and the amount that may be claimed as a deduction on Form 1120-F, Section II, line 18.

Treaty-based interest expense allocation methods.    Except as expressly provided by or pursuant to a U.S. income tax treaty or accompanying documents (such as an exchange of notes), the three-step formula under Regulations section 1.882-5 provides the exclusive rules for determining the interest expense attributable to the business profits of a permanent establishment under a U.S. income tax treaty. U.S. income tax treaties that expressly provide the right to determine the attribution of business profits to a U.S. permanent establishment by application of the OECD Transfer Pricing Guidelines, by analogy, are those with the United Kingdom (2004), Japan (2005), Germany (2008), Belgium (2008), Canada (2009), Bulgaria (2009), and Iceland (2009). See Article 7 (Business Profits) of these treaties and the relevant Exchange of Notes and Treasury Department Technical Explanations for guidance on how to attribute capital to a permanent establishment under these treaties.

Protective elections under section 1.882-5.

If a taxpayer uses the provisions of an applicable treaty to allocate interest expense rather than Regulations section 1.882-5, it remains subject to the time, place, and manner provisions of Regulations section 1.882-5(a)(7) for making its interest expense allocation elections for any subsequent year that it chooses to use the three-step allocation formula of the regulations instead of the treaty. Protective interest expense allocation elections under Regulations section 1.882-5(a)(7) may be made for a year in which a treaty method is used in lieu of the rules of Regulations section 1.882-5 by completing and filing Schedule I on a timely filed income tax return for any year that the election would be required to be made under the rules of Regulations section 1.882-5. If a corporation uses an applicable treaty, rather than the rules of Regulations section 1.882-5, to allocate interest expense and does not file Schedule I, then the taxpayer has forfeited its right to make the Regulations section 1.882-5 method elections for such applicable year or years. In this case, under certain circumstances, the Director of Field Operations may make any or all of the binding elections provided under Regulations section 1.882-5 in accordance with Regulations section 1.882-5(a)(7)(ii) (and may make the binding partnership basis apportionments election under Regulations section 1.884-1(d)(3)(v)) on behalf of the corporation.

Line 19. Charitable Contributions

Note.

This deduction is allowed for all contributions, whether or not connected with income that is effectively connected with the conduct of a trade or business in the United States. See section 882(c)(1)(B).

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).

Corporations reporting taxable income on the accrual method may 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 may not exceed 10% of taxable income (line 31) computed without regard to the following:
  • Any deduction for contributions.

  • The special deductions on line 30b.

  • 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 corporation 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 corporation'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 may not be deducted for the tax year but may be carried over to the next 5 tax years.

  Special rules apply if the corporation 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 corporation's 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 corporation 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 corporation 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 corporation'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 corporation's records.

Contributions of property other than cash.   If a corporation (other than a closely held or personal service corporation) contributes property other than cash and claims a deduction of more than $500 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). Closely held corporations and personal service corporations must complete Form 8283, Noncash Charitable Contributions, and attach it to their returns. All other corporations generally must complete and attach Form 8283 to their returns 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 corporation 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, including the following.

  • 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 other special rules that apply to corporations, see Pub. 542.

Line 20. Depreciation

Include on line 20 depreciation and the cost of certain property that the corporation elected to expense under section 179. See Form 4562 and the Instructions for Form 4562.

Line 21. Depletion

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).

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

Foreign intangible drilling costs and foreign exploration and development costs must either be added to the corporation'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.

Line 23. 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 corporation does not claim a deduction for the current tax year. There are penalties for failure to file these forms on time 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 24. Employee Benefit Programs

Enter contributions to employee benefit programs not claimed elsewhere on the return (e.g., insurance, health, and welfare programs, etc.) that are not an incidental part of a pension, profit-sharing, etc., plan included on line 23.

Line 26. Deductions Allocated and Apportioned to ECI from Schedule H, line 20

Enter the total home office deductions allocated and apportioned to ECI from Schedule H (Form 1120-F), line 20. See Schedule H and its separate instructions for additional information. Attach Schedule H to the Form 1120-F.

Deductions definitely related and indirectly allocated and apportioned to effectively connected income that are not includible on Form 1120-F, Section II, lines 12 through 14, 16 and 17, 19 through 25, and 27 are reported on Schedule H, line 20 and on Form 1120-F, line 26. Deductions that are includible on Form 1120-F, Section II, lines 12 through 14, 16 and 17, 19 through 25, and 27 are those derived from set(s) of books and records required to be reported on Form 1120-F, Schedule L.

Note.

The books and records of a U.S. office where a trade or business is carried on do not necessarily constitute all of the books and records required to be reported on Schedule L. See the instructions for Schedule L, later. Deductions that are reported on Form 1120-F, Section II, lines 12 through 14, lines 16 and 17, lines 19 through 25, and line 27 are also reconciled to effectively connected income on Schedule H (Form 1120-F), Part IV, lines 38 through 41.

Line 27. Other Deductions

Attach a statement, listing by type and amount, all allowable deductions that are not deductible elsewhere on Form 1120-F. Enter the total on line 27.

Examples of other deductions include the following. See Pub. 535 for details on other deductions that may apply to corporations.

  • Amortization (see Part VI of Form 4562).

  • 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.

  • Certain business start-up and organizational costs (discussed under Limitations on Deductions, earlier).

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

  • Insurance premiums.

  • Legal and professional fees.

  • Supplies used and consumed in the business.

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

  • 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 10. Show the partnership's name, address, and EIN on Schedule P (Form 1120-F). If the amount is from more than one partnership, identify the amount from each partnership on Schedule P.

  • Any negative net section 481(a) adjustment. See Section 481(a) adjustment, earlier.

  • 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 may only be taken for these dividends 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).

Special rules apply to the following expenses.

Travel, meals, and entertainment.   Subject to limitations and restrictions discussed below, a corporation may 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 corporation may not deduct travel expenses of any individual accompanying a corporate officer or employee, including a spouse or dependent of the officer or employee, unless:

  • That individual is an employee of the corporation, and

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

Meals and entertainment.

Generally, the corporation may 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 corporation 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 corporation 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 guests. In addition, corporations may not deduct membership dues in any club organized for business, pleasure, recreation, or other social purpose. This includes country clubs, golf and athletic clubs, airline and hotel clubs, and clubs operated to provide meals under conditions favorable to business discussion.

Entertainment facilities.

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

Amounts treated as compensation.

Generally, the corporation 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 for an employee or on Form 1099-MISC 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

  • Amounts paid or incurred in connection with 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 lobbying expenditures do not exceed $2,000, they are deductible.

Line 29. Taxable Income Before NOL Deduction and Special Deductions

At-risk rules.   Generally, special at-risk rules under section 465 apply to closely held corporations (see Passive activity limitations, earlier) engaged in any activity as a trade or business or for the production of income. These corporations may have to adjust the amount on line 29 (see below).

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

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

  • Any qualifying business of a qualified corporation described in 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 line 29 for any section 465(d) losses. These losses are limited to the amount for which the corporation is at risk for each separate activity at the close of the tax year. If the corporation is involved in one or more activities, any of which incurs a loss for the year, report the loss 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 corporation 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 corporation has a net loss, it may be limited because of the at-risk rules.

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

Line 30a. Net Operating Loss Deduction

A corporation may use the NOL incurred in one tax year to reduce its taxable income in another tax year. Enter on line 30a the total NOL carryovers from other tax years, but do not enter more than the corporation's taxable income (after special deductions). Attach a statement showing the computation of the NOL deduction. Also complete Item S at the top of page 2 of the form.

The following special rules apply.

  • A personal service corporation may not carry back or forward an NOL to or from any tax year to which an election under section 444 (to have a tax year other than a required tax year) applies.

  • A corporate 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 corporation that may be offset by the pre-change NOL carryovers may be limited. See section 382 and the related regulations. A loss corporation 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 corporation in which an owner shift, equity structure shift, or other transaction described in Temporary Regulations section 1.382-2T(a)(2)(i) occurs. If the corporation 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 pursuant to a restructuring plan under the Emergency Economic Stabilization Act of 2008. See section 382(n).

    For guidance in applying section 382 to loss corporations 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 corporation acquires control of another corporation (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 corporation 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 corporation has a loss attributable to a disaster, special rules apply. See the Instructions for Form 1139.

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

Line 30b. Special Deductions

See the instructions for Schedule C.

Line 31. Taxable Income or (Loss)

Net operating loss (NOL).   If line 31 is zero or less, the corporation may have an NOL that may be carried back or forward as a deduction to other tax years.

   Generally, a corporation first carries back an NOL 2 tax years. However, the corporation may elect to waive the carryback period and instead carry the NOL forward to future tax years. See the instructions for Item R, earlier.

  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.

Schedule C—Dividends and Special Deductions

For purposes of the 20% ownership test on lines 1 through 7, the percentage of stock owned by the corporation is based on voting power and value of the stock.

Line 1, Column (a)

Enter dividends (except those received on debt-financed stock acquired after July 18, 1984–see section 246A) that:

  • Are received from less-than-20%-owned domestic corporations subject to income tax, and

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

Also include on line 1 the following:

  • Taxable distributions from an IC-DISC or former DISC that are designated as eligible for the 70% deduction and certain dividends of Federal Home Loan Banks. See section 246(a)(2).

  • Dividends (except those received on debt-financed stock acquired after July 18, 1984) from a regulated investment company (RIC). The amount of dividends eligible for the dividends-received deduction under section 243 is limited by section 854(b). The corporation should receive a notice from the RIC specifying the amount of dividends that qualify for the deduction.

Report so-called dividends or earnings received from mutual savings banks, etc., as interest. Do not treat them as dividends.

Line 2, Column (a)

Enter on line 2:

  • Dividends (except those received on debt-financed stock acquired after July 18, 1984) that are received from 20%-or-more-owned domestic corporations subject to income tax and that are subject to the 80% deduction under section 243(c) and

  • Taxable distributions from an IC-DISC or former DISC that are considered eligible for the 80% deduction.

Line 3, Column (a)

Enter 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 corporation acquired by incurring a debt (e.g., it borrowed money to buy the stock).

  • Dividends received from a RIC on debt-financed stock. The amount of dividends eligible for the dividends-received deduction is limited by section 854(b). The corporation should receive a notice from the RIC specifying the amount of dividends that qualify for the deduction.

Line 3, Columns (b) and (c)

Dividends received on debt-financed stock acquired after July 18, 1984, are not entitled to the full 70% or 80% dividends-received deduction. The 70% or 80% deduction is reduced by a percentage that is related to the amount of debt incurred to acquire the stock. See section 246A. Also, see section 245(a) before making this computation for an additional limitation that applies to dividends received from foreign corporations. Attach a statement to Form 1120-F 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 corporation must own at least 10% of the stock of the foreign corporation by vote and value.

Line 7, Column (a)

Enter the U.S.-source portion of dividends that are received from 20%-or-more-owned foreign corporations and that qualify for the 80% deduction under section 245(a).

Line 8, Column (c)

Limitation on dividends-received deduction.   Generally, line 8, column (c), may not exceed the amount from the worksheet 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 8

1. Refigure Section II, line 29, without any domestic production activities deduction, without any adjustment under section 1059, and without any capital loss carryback to the tax year under section 1212(a)(1) 1.  
2. Multiply line 1 by 80% 2.  
3. Add lines 2, 5, and 7, column (c), and the part of the deduction on line 3, column (c), that is attributable to dividends from 20%-or-more-owned corporations 3.  
4. Enter the smaller of line 2 or 3. If line 3 is greater than line 2, stop here; enter the amount from line 4 on line 8, column (c), and do not complete the rest of this worksheet 4.  
5. Enter the total amount of dividends from 20%-or-more-owned corporations that are included on lines 2, 3, 5, and 7, column (a) 5.  
6. Subtract line 5 from line 1 6.  
7. Multiply line 6 by 70% 7.  
8. Subtract line 3 above from line 8, column (c) 8.  
9. Enter the smaller of line 7 or line 8 9.  
10. Dividends-received deduction after limitation (sec. 246(b)). Add lines 4 and 9. Enter the result here and on line 8, column (c) 10.  

Line 10, Column (a)

If the corporation claims the foreign tax credit, include the tax that is deemed paid under sections 902 and 960. See sections 78 and 906(b)(4).

Line 11, Column (a)

Enter taxable distributions from an IC-DISC or former DISC that are designated as not eligible for a dividends-received deduction.

No deduction is allowed under section 243 for a dividend from an IC-DISC or former DISC (as defined in section 992(a)) to the extent the dividend:

  • Is paid out of the corporation's accumulated IC-DISC income or previously taxed income or

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

Line 12, Column (a)

Include the following:

  • Dividends (other than capital gain distributions reported on Schedule D (Form 1120) and exempt-interest dividends) that are received from RICs and that are not subject to the 70% deduction.

  • Dividends from tax-exempt organizations.

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

  • 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 corporation held the stock, you may not count certain days during which the corporation'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 corporation 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 corporation held the stock, you may not count certain days during which the corporation's risk of loss was diminished. See section 246(c)(4) and Regulations section 1.246-5 for more details. Preferred dividends attributable to periods totaling less than 367 days are subject to the 46-day holding period rule discussed above.

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

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

If patronage dividends or per-unit retain allocations are included on line 12, identify the total of these amounts in a statement and attach it to Form 1120-F.

Line 13, Column (c)

Section 247 allows public utilities a deduction of 40% of the smaller of:

  • Dividends paid on their preferred stock during the tax year or

  • Taxable income computed without regard to this deduction.

In a year in which an NOL occurs, compute the deduction without regard to section 247(a)(1)(B). See section 172(d).

Schedule J—Tax Computation

Line 1

If the corporation is a member of a controlled group, check the box on line 1 and 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 corporation is a member of a controlled group and is filing Schedule O (Form 1120), enter the corporation's tax from Part III of Schedule O. Most corporations that are not members of a controlled group should figure their tax using the Tax Rate Schedule below. Qualified personal service corporations should see the instructions below.

Tax Rate Schedule

If taxable income (Section II, line 31) on page 3 is:
Over— But not over— Tax is: Of the amount over—
$0 $50,000 15% $0
50,000 75,000 $ 7,500 + 25% 50,000
75,000 100,000 13,750 + 34% 75,000
100,000 335,000 22,250 + 39% 100,000
335,000 10,000,000 113,900 + 34% 335,000
10,000,000 15,000,000 3,400,000 + 35% 10,000,000
15,000,000 18,333,333 5,150,000 + 38% 15,000,000
18,333,333 - - - - - 35% 0
Qualified personal service corporation.   A qualified personal service corporation is taxed at a flat rate of 35% on its taxable income. If the corporation is a qualified personal service corporation, check the box on line 2, even if the corporation has no tax liability.

  A corporation is a qualified personal service corporation if it meets both of the following tests:
  • Substantially all of the corporation's activities involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting, and

  • At least 95% of the corporation's stock, by value, is owned, directly or indirectly, by (a) employees performing the services, (b) retired employees who had performed the services listed above, (c) any estate of an employee or retiree described above, or (d) any person who acquired the stock of the corporation as a result of the death of an employee or retiree (but only for the 2-year period beginning on the date of the employee's or retiree's death).

Additional tax under section 197(f).   A corporation that elects to recognize gain and pay tax on the sale of a section 197 intangible under the related person exception to the anti-churning rules should include any additional tax due in the total for line 2. On the dotted line next to line 2, enter “Section 197” and the amount. See section 197(f)(9)(B)(ii).

Line 3. Alternative Minimum Tax (AMT)

A corporation that is not a small corporation exempt from the AMT may be required to file Form 4626, Alternative Minimum Tax—Corporations, if it claims certain credits, even though it does not owe any AMT. See the Instructions for Form 4626 for details.

Unless the corporation 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. The corporation must file Form 4626 if its taxable income (or loss) before the NOL deduction, combined with these adjustments and tax preference items is more than the smaller of $40,000 or the corporation's allowable exemption amount (from Form 4626). 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

A foreign corporation engaged in a U.S. trade or business during the tax year may take a credit for income, war profits, and excess profits taxes paid, accrued, or deemed paid to any foreign country or U.S. possession for income effectively connected with the conduct of a trade or business in the United States. See section 906 and Form 1118, Foreign Tax Credit—Corporations.

Line 5b. General Business Credit

Include on line 5b the corporation's allowable credit from Form 3800, Part II, line 38.

The corporation is required to file Form 3800, General Business Credit, 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.

Also include on line 5b the amount of 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.

Line 5c. Credit for Prior Year Minimum Tax

To figure the minimum tax credit and any carryforward of the credit, complete and attach Form 8827, Credit for Prior Year Minimum Tax–Corporations.

Line 5d. Bond Credits from Form 8912

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

Line 8. Other Taxes

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

Recapture of investment credit.   If the corporation 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 corporation 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 corporation 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.

Interest due under the look-back method-completed long-term contracts.   If the corporation used the look-back method under section 460(b)(2) for certain long-term contracts, use Form 8697, Interest Computation Under the Look-Back Method for Completed Long-Term Contracts, to figure the interest the corporation may have to include. See the Instructions for Form 8697.

Interest due under the look-back method-income forecast method.   If the corporation used the look-back method for property depreciated under the income forecast method, use Form 8866, Interest Computation Under the Look-Back Method for Property Depreciated Under the Income Forecast Method, to figure any interest due or to be refunded. See the Instructions for Form 8866.

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

Other.   Include on line 8 additional taxes and interest such as the following. 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)).

Section III—Branch Profits Tax and Tax on Excess Interest

Part I—Branch Profits Tax

Section 884(a) imposes a 30% branch profits tax on the after-tax earnings of a foreign corporation's U.S. trade or business (i.e., effectively connected earnings and profits (ECEP)) that are not reinvested in a U.S. trade or business by the close of the tax year, or are disinvested in a later tax year. Changes in the value of the equity of the foreign corporation's U.S. trade or business (i.e., U.S. net equity) are used as a measure of whether earnings have been reinvested in, or disinvested from, a U.S. trade or business. An increase in U.S. net equity during the tax year is generally treated as a reinvestment of earnings for the current tax year. A decrease in U.S. net equity is generally treated as a disinvestment of prior year's earnings that have not previously been subject to the branch profits tax.

The amount subject to the branch profits tax for the tax year is the dividend equivalent amount. See Regulations section 1.884-1(b).

Other entities subject to the branch profits tax.   
  • A foreign corporate partner of a partnership engaged in a U.S. trade or business is subject to the branch profits tax on its ECEP attributable to its distributive share of effectively connected income.

  • A foreign government is subject to both the branch profits tax and the branch-level interest taxes. However, no branch profits tax or branch-level interest tax will be imposed on ECEP and interest accrued prior to September 11, 1992. See Regulations section 1.884-0.

Line 2

Attach a statement showing the following adjustments (based on the principles of section 312) to the corporation's line 1 effectively connected taxable income (ECTI) (before the NOL deduction and special deductions) to get ECEP:

  • Positive adjustments for certain effectively connected income items that are excluded from ECTI but that must be included in computing ECEP (such as tax-exempt interest income).

  • Positive adjustments for certain items deducted in computing ECTI but that may not be deducted in computing ECEP. Include adjustments for certain deductions claimed in computing ECTI, such as:  

    1. Excess of percentage depletion over cost depletion,

    2. Excess of accelerated depreciation over straight line depreciation (but only if 20% or more of the foreign corporation's gross income from all sources is U.S. source), and

    3. Capital loss carrybacks and carryovers.

  • Negative adjustments for certain deductible items (that are allocable to effectively connected income) that may not be deducted in computing ECTI but that must be deducted in computing ECEP (e.g., federal income taxes, capital losses in excess of capital gains, and interest and expenses that are not deductible under section 265).

Note.

Do not reduce ECEP by any dividends or other distributions made by the foreign corporation to its shareholders during the year.

See Temporary Regulations section 1.884-2T for any adjustments to ECEP due to a reorganization, liquidation, or incorporation.

Exceptions.   Do not include the following types of income when computing ECEP:
  • Income from the operation of ships or aircraft exempt from taxation under section 883(a)(1) or (2).

  • FSC income and distributions treated as effectively connected income under section 921(d) or 926(b), as in effect before their repeal, that are not otherwise effectively connected income.

  • Gain on the disposition of an interest in a domestic corporation that is a U.S. real property interest under section 897(c)(1)(A)(ii) if the gain is not otherwise effectively connected income.

  • Related person insurance company income that a taxpayer elects to treat as effectively connected income under section 953(c)(3)(C) if the income is not otherwise effectively connected income.

  • Income that is exempt from tax under section 892.

  • Interest income derived by a possession bank from U.S. obligations if the interest is treated as effectively connected income under section 882(e) and is not otherwise effectively connected income.

Note.

Deductions and other adjustments attributable (under the principles of Regulations section 1.861-8) to the types of income not includible in ECEP listed above do not reduce ECEP.

Lines 4a and 4b. U.S. Net Equity

U.S. net equity is U.S. assets reduced by U.S. liabilities. U.S. net equity may be less than zero. See Temporary Regulations section 1.884-2T for specific rules regarding the computation of the foreign corporation's U.S. net equity due to a reorganization, liquidation, or incorporation.

U.S. assets.   In general, property is a U.S. asset if all income from its use and all gain from its disposition (if used or sold on the last day of the tax year) are or would be effectively connected income. The amount of property taken into account as a U.S. asset is the adjusted basis (for purposes of computing earnings and profits) of the property. Special rules exist for specific types of property, such as depreciable property, inventory, and installment obligations. Special rules also exist to determine the amount of a partnership interest that is treated as a U.S. asset. See Regulations section 1.884-1(d).

U.S. liabilities.   In general, U.S. liabilities are U.S.-connected liabilities of a foreign corporation (determined under Regulations section 1.882-5), computed as of the end of the tax year, rather than as an average, as required under Regulations section 1.882-5. Special rules may apply to foreign insurance companies. For more details, see Regulations section 1.884-1(e).

  If the corporation is electing to reduce liabilities under Regulations section 1.884-1(e)(3), attach a statement that it is making the election and indicate the amount of the reduction of U.S. liabilities and the corresponding reduction in interest expense. The aggregate amount of the corporation's liability reduction elections is also required to be reported on Schedule I (Form 1120-F), line 7b.

Reporting requirements.   In the statements required for lines 4a and 4b, report U.S. assets according to the categories of U.S. assets in Regulations section 1.884-1(d). For U.S. liabilities, show the formula used to calculate the U.S. liabilities figure.

Line 6. Branch Profits Tax

Qualification for treaty benefits.   In general, a foreign corporation must be a qualified resident (see definition later) in the tax year in which it has a dividend equivalent amount to obtain treaty benefits for the branch profits tax. It must also meet the requirements of any limitation on benefits article in the treaty. However, a foreign corporation is not required to be a qualified resident if it meets the requirements of a limitation on benefits article of an income tax treaty that entered into force after December 31, 1986. Treaties other than income tax treaties do not exempt a foreign corporation from the branch profits tax.

Foreign corporations that meet the requirements of the limitation on benefits article of an income tax treaty that entered into force after December 31, 1986.   Most limitation on benefits articles of treaties that entered into force after December 31, 1986, include a series of objective tests including ownership tests (generally describing the circumstances under which individuals, publicly-traded corporations, subsidiaries of publicly traded corporations, etc., will be treated as qualified residents under a treaty), a base erosion test and a trade or business test. These tests are self-executing. A person that does not meet these objective tests may still be granted benefits under the treaty (and may be treated as a qualified resident for branch profits tax purposes) at the discretion of the competent authority. See Rev. Proc. 2006-54, 2006-49 I.R.B. 1035, or its successor.

Foreign corporations that do not meet the requirements of a limitation on benefits article of an income tax treaty that entered into force after December 31, 1986.   A foreign corporation that does not meet the requirements of a limitation on benefits article of an income tax treaty that entered into force after December 31, 1986, is a qualified resident of a country if it meets one of the three tests explained in the regulations under section 1.884-5. See these regulations for details on these tests and certain circumstances in which a foreign corporation that does not meet these tests may request a ruling to be treated as a qualified resident.

Rate of tax.   If treaty benefits apply, the rate of tax is the rate on branch profits specified in the treaty. If the treaty does not specify a rate for branch profits, the rate of tax is the rate specified in the treaty for dividends paid by a wholly owned domestic corporation to the foreign corporation. See Regulations section 1.884-1(g) for applicable rates of tax. Benefits other than a rate reduction may be available under certain treaties, such as the Canadian income tax treaty.

Note.

Many treaties listed in Regulations section 1.884-1(g)(3) and (g)(4) are no longer in force and have been replaced by more recently ratified treaty agreements. The corporation should use the applicable rate of tax specified in the treaty agreement currently in force with the United States.

Effect of complete termination.   If the foreign corporation has completely terminated its U.S. trade or business (within the meaning of Temporary Regulations section 1.884-2T(a)) during the tax year, enter zero on line 6, and complete line 11 at the bottom of page 5 of Form 1120-F.

  In general, a foreign corporation has terminated its U.S. trade or business if it no longer has any U.S. assets, except those retained to pay off liabilities. The foreign corporation (or a related corporation) may not use assets from the terminated U.S. trade or business or the proceeds from their sale in a U.S. trade or business within 3 years after the complete termination. The foreign corporation must also attach Form 8848 extending the period for assessment for the year of complete termination to a date not earlier than the close of the 6th year following the close of that tax year.

Effect of complete liquidation or reorganization.   If a foreign corporation transfers its U.S. assets in a liquidation or reorganization described in section 381(a), see Temporary Regulations section 1.884-2T(c). If the transferee is a domestic corporation, the foreign corporation must also file Form 8848. See Temporary Regulations section 1.884-2T(c) and Regulations section 1.884-2(c)(2)(iii).

Effect of incorporation under section 351.   If a foreign corporation transfers all or a part of its U.S. assets to a domestic corporation in a transaction that qualifies under section 351, see Temporary Regulations section 1.884-2T(d) for the rules for determining the foreign corporation's branch profits tax liability in the year of the transfer, and other rules applicable to the domestic transferee corporation. If a foreign corporation transfers its U.S. assets to another foreign corporation, the foreign corporation must compute its branch profits tax liability under Regulations section 1.884-1.

Coordination with withholding tax.   If a foreign corporation is subject to the branch profits tax in a tax year, it will not be subject to withholding at source (sections 871(a), 881(a), 1441, or 1442) on dividends paid out of earnings and profits for the tax year.

Part II—Tax on Excess Interest

If a foreign corporation is engaged in a U.S. trade or business, has effectively connected gross income, or has U.S. assets for purposes of Regulations section 1.882-5, it is subject to the tax on excess interest.

Excess interest is the interest apportioned to effectively connected income of the foreign corporation (including capitalized and nondeductible interest) under Regulations section 1.882-5, less branch interest. Branch interest is the interest paid by the U.S. trade or business of the foreign corporation (including capitalized and other nondeductible interest).

Important:

See the instructions for line 10 on page 26 to determine if the foreign corporation is exempt from the tax on excess interest. If it is exempt from the tax, and not simply subject to a reduced rate of tax, do not complete Part II of Section III. However, be sure to complete Item W at the top of page 2 of Form 1120-F.

Line 7a

Enter the amount of interest expense deduction allocable to effectively connected income under Regulations section 1.882-5, from Section II, line 18.

Lines 7b and 7c

Lines 7b and 7c reconcile the deduction claimed in Section II, line 18 with the amount of interest expense allocable to effectively connected income under Regulations section 1.882-5. Amounts that increase or decrease the amount allocable to effectively connected income are reported on line 7b from Schedule I (Form 1120-F), line 24d. Line 7c reconciles to the amount of interest expense reported on Schedule I (Form 1120-F), line 23. Lines 7b and 7c are completed as follows:

Line 7b.

Enter the inverse of the amount reported on Schedule I (Form 1120-F), line 24d. For example, if line 24d is negative, enter as a positive number. If line 24d is positive, enter as a negative number. This is the total amount of interest expense included in the amount allocable under Regulations section 1.882-5 that is deferred, capitalized, and disallowed under other sections after application of the interest expense allocation rules. The number on line 24d will be negative if the corporation has only disallowed and capitalized expense on lines 24a and 24c. If the corporation has currently deductible interest in the current year reportable on Schedule I (Form 1120-F), line 24b, that was deferred in a prior year (e.g., under section 163(j)), line 24d may be positive.

Line 7c.

Combine lines 7a and 7b. The combined amount is the amount of interest expense allocable to effectively connected income for the year under Regulations section 1.882-5. The amount on line 7c must equal the amount on Schedule I (Form 1120-F), line 23.

Line 8. Branch Interest

Foreign banks.   Enter from Schedule I (Form 1120-F), the sum of line 9, column (c), and line 22, which is the amount of interest expense included on books that give rise to U.S. booked liabilities and that which is directly allocable to effectively connected income under Regulations section 1.882-5(a)(1)(ii). The sum of these two amounts is the amount of book interest expense paid or accrued on U.S. booked liabilities defined in Regulations section 1.882-5(d)(2).

Definition of branch interest.   The term “branch interest” means interest that is:
  1. Paid by a foreign corporation with respect to a liability that is (A) a U.S. booked liability within the meaning of Regulations section 1.882-5(d)(2) (other than a U.S. booked liability of a partner within the meaning of Regulations section 1.882-5(d)(2)(vii)); or (B) described in Regulations section 1.884-1(e)(2) (relating to insurance liabilities on U.S. business and liabilities giving rise to interest expense that is directly allocated to income from a U.S. asset); or

  2. In the case of a foreign corporation other than a bank (as defined in section 585(a)(2)(B) without regard to the second sentence thereof), a liability specifically identified as a liability of a U.S. trade or business of the foreign corporation on or before the earlier of the date on which the first payment of interest is made with respect to the liability or the due date (including extensions) of the foreign corporation's income tax return for the tax year provided that (A) the amount of such interest does not exceed 85% of the amount of interest of the foreign corporation that would be excess interest before taking into account interest treated as branch interest; (B) certain recipient notification requirements are satisfied; and (C) the liability was not incurred in the ordinary course of a foreign business or secured by foreign assets, or is not a U.S. booked liability, or is not an insurance liability on a U.S. business, or is not a liability giving rise to interest expense that is directly allocated to income from a U.S. asset. See Regulations section 1.884-4(b).

All other foreign corporations.   In general, branch interest of foreign corporations (other than banks) includes:
  1. Interest on liabilities shown on the books and records of the U.S. trade or business for purposes of Regulations section 1.882-5(d)(2);

  2. Interest on liabilities that are secured predominantly by U.S. assets or that cause certain nondeductible interest (such as capitalized interest) related to U.S. assets; and

  3. Interest on liabilities identified as liabilities of the U.S. trade or business on or before the earlier of the date on which the first interest payment is made or the due date (including extensions) of the foreign corporation's income tax return for the tax year.

  However, a liability may not be identified under 3 above if the liability is incurred in the ordinary course of the foreign corporation's trade or business, or if the liability is secured predominantly by assets that are not U.S. assets. The interest on liabilities identified in 3 above that will be treated as interest paid by the U.S. trade or business is capped at 85% of the interest of the foreign corporation that would be excess interest before considering interest on liabilities identified in 3 above. See Regulations section 1.884-4.

Interbranch interest.   Any interest paid for interbranch liabilities is disregarded in computing branch interest of any corporation.

Eighty-percent rule.   If 80% or more of a foreign corporation's assets are U.S. assets, the foreign corporation's branch interest will generally equal the interest reported on line 7c. However, any interest included on line 7c that has accrued but has not been paid will not be treated as branch interest on line 8 unless an election is made under Regulations section 1.884-4(c)(1) to treat such interest as paid in that year for all purposes of the Code.

  If this 80% rule applies, check the box on line 8.

Note.

Branch interest of a foreign corporation is treated as if paid by a domestic corporation. A foreign corporation is thus required to withhold on interest paid by its U.S. trade or business to foreign persons (unless the interest is exempt from withholding under a treaty or the Code) and is required to file Forms 1042 and 1042-S for the payments.

Special treaty shopping rules apply if the recipient of the interest paid by the U.S. trade or business is a foreign corporation.

Line 9b

A foreign bank may treat a percentage of its excess interest as if it were interest on deposits and thus exempt from tax. Multiply the amount on line 9a by the greater of 85% or the ratio of the foreign bank's worldwide interest-bearing deposits to its worldwide interest-bearing liabilities as of the close of the tax year.

Line 10. Tax on Excess Interest

The rate of tax on excess interest is the same rate that would apply to interest paid to the foreign corporation by a wholly owned domestic corporation. The tax on excess interest is not prohibited by any provision in any treaty to which the United States is a party. The corporation may qualify for treaty benefits if it meets certain requirements. See Line 6, Branch Profits Tax, earlier. The corporation is exempt from the tax on excess interest if the rate of tax that would apply to interest paid to the foreign corporation by a wholly owned domestic corporation is zero and the foreign corporation qualifies for treaty benefits.

Schedule L—Balance Sheets per Books

The balance sheet assets, liabilities and equity amounts required to be reported on Schedule L are either the worldwide assets, liabilities and equity of the corporation, or, at the taxpayer's election, the set(s) of books that contain assets located in the United States and other assets used in the trade or business conducted in the United States. See Regulations section 1.6012-2(g)(1)(iii). If a corporation (including a foreign bank) chooses worldwide reporting on Schedule L, the profit and loss results from the same set(s) of books must be used to report the adjusted worldwide net income (loss) results in Part I, line 11 of Schedule M-3 (Form 1120-F).

Set(s) of books based on Regulations section 1.882-5(d)(2).   If the corporation chooses to limit the Schedule L reporting to the books that give rise to effectively connected income from assets located in the United States and other assets used in the trade or business conducted in the United States, the total assets, liabilities and equity on the sets of books that contain these characteristics must be reported on Schedule L. These are the total assets, liabilities, and equity amounts reflected on the same set(s) of books that give rise to U.S. effectively connected income and U.S. booked liabilities (as defined in Regulations sections 1.882-5(d)(2)(ii)(A) (foreign corporations other than banks) and 1.882-5(d)(2)(iii) (foreign banking corporations)).

  The set(s) of books required to be reported on Schedule L by a foreign bank are the same set(s) of books the foreign bank must use to derive the net book income on Schedule M-3 (Form 1120-F), Part I, line 11. The total assets and liabilities required to be reported include the interbranch assets and liabilities and the noneffectively connected assets reflected on such books. The set(s) of books that give rise to U.S. booked liabilities under Regulations section 1.882-5(d)(2) generally will be the set(s) of books maintained within the United States by the corporation's U.S. trade or business. However, one or more sets of books required to be reported on Schedule L do not have to be maintained within the United States so long as the totality of the books reflects a substantial effectively connected income activity that gives rise to inclusion of the books' third party liabilities as U.S. booked liabilities under Regulations section 1.882-5(d)(2). This determination is made under the facts and circumstances pertaining to materiality of the effectively connected income activities reflected on the set of books in accordance with the requirements of the interest expense allocation regulations. See Regulations section 1.882-5(d)(6), example 5. This standard is used to determine U.S. booked liability qualification regardless of whether the foreign corporation uses the Adjusted U.S. Booked Liabilities Method or the Separate Currency Pools Method to allocate interest expense under Regulations section 1.882-5.

A Schedule L set of books does not include a book whose only assets are those that give rise to effectively connected income under section 864(c)(6) or (c)(7). A set of books that has only ECI assets under section 864(c)(6) and (c)(7) is not a set of books that gives rise to U.S. booked liabilities under the applicable test for a bank or a corporation other than a bank in Regulations section 1.882-5(d)(2). Books and records of this type are generally books maintained in a foreign location that include assets either originated through the material activities of the U.S. trade or business or assets formerly held in connection with a U.S. trade or business that are no longer held or used for that purpose. Transferred assets from a set of books of the U.S. trade or business generally will reflect assets described in section 864(c)(6) or (c)(7). See Regulations section 1.884-1(d)(2)(xi), example 5. Securities that are attributable to a U.S. office of a banking, financing, or similar business that are transferred to a foreign location of a continuing U.S. banking office remain attributable to such U.S. office under Regulations section 1.864-4(c)(5)(iii) and do not constitute assets described in section 864(c)(6) or (c)(7). However, a foreign set of books and records that reflects securities of a banking, financing, or similar business that gives rise to ECI, may or may not constitute books that give rise to U.S. booked liabilities under the facts and circumstances. Generally, a relatively small number of securities reflected on the books and records of the home office of a foreign bank that reflects predominantly noneffectively connected assets of the same type will not cause the foreign book to give rise to U.S. booked liabilities under Regulations section 1.882-5(d)(2)(iii).

If the foreign corporation has more than one set of books and records that give rise to U.S. booked liabilities under Regulations section 1.882-5(d)(2), it must report the combined amounts shown on all such books and records on Schedule L. For example, the books and records of a foreign insurance company required to file Form 1120-F include, but are not limited to, amounts reported on statements (e.g., NAIC statements) filed with a domestic state insurance authority. If a foreign bank maintains a consolidation of two or more sets of books that collectively give rise to U.S. booked liabilities, the corporation may report the financial consolidation of such set of books on Schedule L. See Regulations section 1.882-5(d)(6), example 5. However, if the foreign corporation has a set of books from a disregarded entity that is not included in a U.S. trade or business consolidation and such other set of books gives rise to U.S. booked liabilities under Regulations section 1.882-5(d)(2), then such set of books must be included in the consolidation of books reported on Schedule L. Combined books reported on Schedule L must be adjusted to eliminate transactions recorded between the reportable books. However, amounts recorded between the set(s) of books and other divisions of the foreign corporation or disregarded entities whose books do not give rise to U.S. booked liabilities, are not eliminated unless the taxpayer chooses worldwide reporting under the general rule in Regulations section 1.6012-2(g)(1)(iii).

Line 1. Cash.   Corporations other than banks include certificates of deposit as cash on line 1. Foreign banks include certificates of deposit as current or non-current assets, as the case may be, in their appropriate interbranch, U.S. asset or non-U.S. asset categories.

Line 5. Tax-exempt securities.   Include:
  • 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 regulated investment company that distributed exempt-interest dividends during the tax year of the corporation.

Line 6. Current Assets.   On line 6a, enter all current interbranch assets (in accordance with the corporation's accounting practices) reflected on the combined sets of books that are transacted with other books of the corporation that are not reportable on Schedule L (including books of disregarded entities, if applicable). On line 6b, enter the current non-U.S. assets on the sets of books reportable on Schedule L. Non-U.S. assets are third-party assets (whether with related or unrelated parties) that give rise only to noneffectively connected income. On line 6c, enter the current U.S. assets on the Schedule L reportable books. U.S. assets are assets that give rise to effectively connected income and constitute U.S. assets in whole or in part under Regulations section 1.884-1(d). Enter assets held for trading or dealing to customers in the applicable category on line 6. Attach a statement to indicate the amount for each category of current assets included in line 6, such as money market deposits of banks, trading assets held for the taxpayer's own account, dealing assets held for customers including amounts recorded on the books of a global dealing operation that are allocated between ECI and non-ECI under Proposed Regulations section 1.863-3(h) and Proposed Regulations section 1.864-4(c)(2)(iv).

Line 9. Other loans and investments.   On line 9a, enter the amount of other non-U.S. asset loans and investments to third parties (whether related or unrelated parties). Non-U.S. assets in this category are loans and investments that give rise to non-effectively connected income. If a taxpayer has investments that give rise to ECI in part and non-ECI in part, enter the proportionate amount of the investment asset that gives rise to non-ECI on line 9a. Do not include interbranch amounts on line 9a. On line 9b, report the U.S. asset loans and investments to third parties (whether related or unrelated parties). U.S. asset loans and investments are assets that give rise to ECI. If an investment asset gives rise to ECI in part and non-ECI in part, enter the proportionate amount of the investment asset that gives rise to ECI on line 9b. See Regulations section 1.884-1(d)(2)(vii). Attach a statement indicating the amount for each category of loans and investment assets held by the corporation that give rise to non-ECI (line 9a) and ECI (line 9b) (e.g., loans to customers, securities described in Regulations section 1.864-4(c)(5)(ii)(b)(3)).

Line 15. Other non-current interbranch assets.   Include on line 15 non-current interbranch amounts on the Schedule L books recorded with other non-Schedule L books of the corporation (including disregarded entities whose books are not reportable on Schedule L). Non-current assets are determined in accordance with the accounting practices of the corporation on its books and records.

Line 16. Other non-current third-party assets.   Report on line 16a, other non-current, non-U.S. assets on the Schedule L books with third-parties (whether related or unrelated parties). Non-U.S. assets are those that give rise to noneffectively connected income. Attach a statement to indicate the amount for each category of non-U.S. assets (e.g., foreign-related party assets that give rise to non-ECI under section 864(c)(4)(D)). Report on line 16b, other non-current U.S. assets on the Schedule L books with third parties (whether related or unrelated parties). U.S. assets are those that give rise to effectively connected income in accordance with Regulations section 1.884-1(d). Attach a statement indicating the amount for each category of assets that give rise to ECI.

Line 19. Mortgages, notes, bonds payable in less than 1 year.   Enter on line 19a, interbranch liabilities on the Schedule L books that are payable in less than one year to books of the corporation that are not reportable on Schedule L (including books of disregarded entities that are not reportable on Schedule L). Report only interbranch liabilities that accrue or pay interest on the Schedule L books and records to other books of the corporation in accordance with the corporation's internal accounting practices. Attach a statement indicating the amount for each category of interbranch liabilities (e.g., money market deposit liabilities, other short-term liabilities, etc.). On line 19b, enter liabilities on the Schedule L books that are payable in less than one year to third parties (whether related or unrelated). Attach a statement indicating the amount for each category of liability owed to third parties (e.g., money market deposit liabilities, other short-term borrowings, Vostro accounts, etc.).

Line 22. Mortgages, notes, bonds payable in 1 year or more.   Enter on line 22a, interbranch liabilities on the Schedule L books that are payable in one year or more to books of the corporation that are not reportable on Schedule L (including books of disregarded entities that are not reportable on Schedule L). Report only interbranch liabilities that accrue or pay interest on the Schedule L books and records to other books of the corporation in accordance with the corporation's internal accounting practices. Attach a statement indicating the amounts for each category of liability (e.g., long-term interbranch borrowings). Enter on line 22b, liabilities on the Schedule L books that are payable in one year or more to third parties (whether related or unrelated parties). Attach a statement indicating the amounts for each category of liability (e.g., long-term certificates of deposit, other long-term borrowings, etc.).

Line 24. Other liabilities.   Enter on line 24a, other interbranch liability amounts on the Schedule L books owed to other books of the corporation (including to books of disregarded entities) not reportable on Schedule L, including amounts that do not give rise to interest accruals or payments in accordance with the corporation's internal accounting practices. Attach a statement indicating the amount for each category of interbranch liability reported on line 24a. Enter on line 24b, other liability amounts on the Schedule L books owed to third parties (whether related or unrelated parties) including amounts that do not give rise to interest accruals or payments in accordance with the corporation's accounting practices. Attach a statement indicating the amount for each category of third-party liability reported on line 24b.

Line 29. 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 29 is a negative amount, enter the amount in parentheses.

Adaptation of Schedule L for treaty-based reporting.

The set(s) of books reported on Schedule L for treaty-based reporting purposes will generally be the same set(s) of books reported on Schedule L as described below. However, certain books that give rise to effectively connected income might not necessarily give rise to treaty-based reporting. For example, the assets on a set of books could still be attributed to a U.S. office for effectively connected income reporting purposes even when transferred away from the U.S. permanent establishment for treaty reporting purposes (see, for example, Regulations section 1.864-4(c)(5)(iii)) if under the facts and circumstances, such assets also constitute a set of books that give rise to U.S. booked liabilities under Regulations section 1.882-5(d)(2). Under such circumstances, the set of books would remain reportable on Schedule L for Code-based reporting purposes, but for treaty-based reporting purposes, such transfer may effect attribution to another part of the corporate enterprise under a functional and factual analysis and no longer be reportable on Schedule L as part of the U.S. permanent establishment after the transfer is made. Additionally, a set of books having no effectively connected income or U.S. booked liabilities under Regulations section 1.882-5(d)(2) might still constitute a set of books of the U.S. permanent establishment because the items recorded thereon are primarily attributable to the U.S. permanent establishment under the application by analogy of the OECD Transfer Pricing Guidelines as authorized by the relevant treaty (e.g., see Article 7 (Business Profits) and the accompanying Exchange of Notes to the U.S. income tax treaties with the United Kingdom (2004), Japan (2005), Germany (2008), Belgium (2008), Canada (2009), Bulgaria (2009), and Iceland (2009), each of which provides for application of the OECD Transfer Pricing Guidelines in the determination of the attribution of business profits to a U.S. permanent establishment). In such cases, the set(s) of books that must be reported on Schedule L are those of the U.S. permanent establishment as determined under the OECD Transfer Pricing Guidelines.

Schedules M-1 and M-3

A corporation with total assets of $10 million or more on the last day of the tax year that are reportable on Schedule L, must complete Schedule M-3 (Form 1120-F) instead of Schedule M-1. A corporation filing Form 1120-F 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-F) for more information.

Note.

If Schedule M-3 is completed in lieu of Schedule M-1, the corporation is still required to complete Schedule M-2.

If Schedule M-3 is not required, the foreign corporation must report on line 1 of Schedule M-1 the net income (loss) per the set of books taken into account on Schedule L.

The foreign corporation must report on line 1 of Schedule M-2 the balance of unappropriated retained earnings per the set(s) of books taken into account on Schedule L.

Do not complete Schedules M-1 and M-2 (Form 1120-F) if total assets at the end of the tax year (line 17, column (d) of Schedule L) are less than $25,000.

Schedule W

Complete Schedule W to determine the portion of the foreign corporation's overpayment (on Form 1120-F, page 1, line 8a) resulting from tax deducted and withheld under Chapter 3.

Line 3.   The amount to be entered on Schedule W, line 3 may be computed using the general guidelines set forth in the following table.

       
a. Tax on ECI per the tax return. Enter the amount from Form 1120-F, page 1, line 2. a.  
b. Refigure the taxable income on Form 1120-F, Section II, line 31, by excluding from Section II, line 8 any amount from the disposition of a U.S. real property interest necessary to properly compute the overpayment described in section 6611(e)(4), and by excluding from Section II, line 10 any partnership ECTI allocable to the corporation under the rules of Regulations section 1.1446-2 necessary to properly reflect the overpayment described in section 6611(e)(4) (attach explanation of amounts excluded). b.  
c. Refigured tax on ECI. Using the refigured taxable income from line b, refigure the tax for Schedule II of Form 1120-F on Schedule J and enter the refigured tax from Schedule J, line 9 here. c.  
d. Subtract line c from line a. Enter the result here and on Schedule W, line 3 d.  


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