Table of Contents
- Period Covered
- Address
- Employer Identification Number (EIN)
- Initial Return, Name or Address Change, Final Return, First Post-Merger Return, Amended Return, Schedule M-3 Attached, Protective Return
- Information Requested at Top of Page 1 of Form
- Computation of Tax Due or Overpayment
- Additional Information Requested at Top of Page 2 of Form
- Section I—Income From U.S. Sources Not Effectively Connected With the Conduct of a Trade or Business in the United States
- 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
- Foreign Corporations Not Engaged in a U.S. Trade or Business
- Election To Treat Real Property Income as Effectively Connected Income
- Disposition of U.S. Real Property Interest by a Foreign Corporation
- Income
- Deductions
- Schedule C—Dividends and Special Deductions
- Schedule J—Tax Computation
- Section III—Branch Profits Tax and Tax on Excess Interest
- Part II—Tax on Excess Interest
- Schedule L—Balance Sheets per Books
- Schedules M-1 and M-3
- Schedule W
File the 2012 return for calendar year 2012 and fiscal years that begin in 2012 and end in 2013. For a fiscal or short tax year return, fill in the tax year space at the top of the form.
The 2012 Form 1120-F may also be used if:
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The corporation has a tax year of less than 12 months that begins and ends in 2013 and
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The 2013 Form 1120-F is not available at the time the corporation is required to file its return.
The corporation must show its 2013 tax year on the 2012 Form 1120-F and take into account any tax law changes that are effective for tax years beginning after December 31, 2012.
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 a foreign address, enter the information in the following order: city, province or state, and country. Follow the country's practice for entering the postal code. Do not abbreviate the country's name.
Enter the corporation's EIN. If the corporation does not have an EIN, it must apply for one. An EIN may be applied for:
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Online–Click on the EIN link at www.irs.gov/businesses. The EIN is issued immediately once the application information is validated.
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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.
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By faxing or mailing Form SS-4, Application for Employer Identification Number.
Check all of the applicable box(es).
Note.
If a change in address occurs after the return is filed, use Form 8822-B, Change of Address — Business, to notify the IRS of the new address.
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.
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.
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.
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.
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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.
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Answer “No” if the corporation does not have a permanent establishment in the United States.
Enter any estimated tax payments the corporation made for the tax year.
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.
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.
Enter the total income tax credit claimed on Form 4136, Credit for Federal Tax Paid on Fuels. Attach Form 4136 to Form 1120-F.
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.
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:
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The annualized income or adjusted method is used, or
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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.
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.
Enter the portion of line 8a you want credited to your 2013 estimated tax and the portion of line 8a you want refunded.
Note.
This election to apply some or all of the overpayment amount to the corporation's 2013 estimated tax cannot be changed at a later date.
Note.
You can credit any or all of the line 8a overpayment to your 2013 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.
Complete items N through AA.
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.
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The last day of its first tax year or
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The last day of the calendar year in which the first tax year began.
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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;
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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
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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.
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.
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.
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 2012. Do not reduce the amount by any NOL deduction reported on page 3, Section II, line 30a.
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.
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:
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The nondiscrimination provision of a treaty.
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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.
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The gains article, if a treaty benefit is claimed relating to gain or loss on the disposition of a United States real property interest.
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The branch profits tax article (or portion of the dividends article relating to the branch profits tax) and tax on excess interest.
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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).
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The interest, dividends, or royalty article, if a refund of withholding tax is due.
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).
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.
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Name and EIN (if any) of the foreign partnership;
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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;
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Name of tax matters partner (if any); and
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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.
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.
A corporation filing Form 1120-F must complete and attach Schedule UTP (Form 1120) if:
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For 2012, the corporation has assets that equal or exceed $50 million;
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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
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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.
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:
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The amount received is fixed or determinable, annual or periodic (FDAP) (see definition below).
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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.
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The amount received is from U.S. sources (see Source of Income Rules, earlier).
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The amount received is not effectively connected with the conduct of a U.S. trade or business (see Section II, later).
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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).
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Interest (other than OID as defined in section 1273), dividends, rents, royalties, salaries, wages, premiums, annuities, compensation, and other FDAP gains, profits, and income.
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Gains described in section 631(b) or (c), relating to disposal of timber, coal, or domestic iron ore with a retained economic interest.
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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.
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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.
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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).
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:
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The use (or hiring or leasing for use) of a vessel or aircraft or
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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.
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Effectively connected with the conduct of a U.S. trade or business or
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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:
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The corporation has a fixed place of business in the United States involved in the earning of transportation income and
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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.
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.
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 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).
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Income earned on a trade or note receivable acquired in the conduct of the U.S. trade or business and
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Interest income earned from the temporary investment of funds needed in the foreign corporation's U.S. trade or business.
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:
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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;
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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;
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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;
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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
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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.
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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
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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).
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:
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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));
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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));
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Elected to treat real property income as effectively connected income (see below);
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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
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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).
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:
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Gains from the sale or exchange of real property or an interest therein,
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Rents or royalties from mines, wells, or other natural deposits, and
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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.
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.
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.
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To report income from long-term contracts, see section 460.
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For special rules for reporting certain advance payments for goods and long-term contracts, see Regulations section 1.451-5.
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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, as modified and clarified by Rev. Proc. 2011-18, 2011-5 I.R.B. 443, for advance payments from the sale of certain gift cards.
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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.
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.
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.
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.
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Dealer dispositions of property before March 1, 1986.
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Dispositions of property used or produced in the trade or business of farming.
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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 schedule 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.
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:
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The services are in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting, or
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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 schedule showing total gross receipts, the amount not accrued as a result of the application of section 448(d)(5), and the net amount accrued. Enter the net amount on line 1a.
Complete Form 1125-A, Cost of Goods Sold. Enter on Form 1120-F, line 2, the amount from Form 1125-A, line 8. See Form 1125-A and its instructions.
See the instructions for Schedule C, later. Then, complete Schedule C and enter on line 4 the amount from Schedule C, line 14.
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.
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.
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.
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:
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Recoveries of bad debts deducted in prior years under the specific charge-off method.
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The amount included in income from Form 6478, Alcohol and Cellulosic Biofuel Fuels Credit.
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The amount included in income from Form 8864, Biodiesel and Renewable Diesel Fuels Credit.
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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.
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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.
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Any net positive section 481(a) adjustment.
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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.
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Net income from notional principal contracts.
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Interest and dividend equivalents (e.g., confirmation and acceptance letter of credit fees and other guarantee fees).
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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:
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For a reacquisition that occurred in 2009, the fifth tax year following the tax year in which the reacquisition occurred, and
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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) and Rev. Proc. 2009-37. If the corporation is a direct or indirect partner in a partnership, other special rules apply. See Temporary Regulations section 1.108(i)-2T.
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.
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.
Corporations subject to the section 263A uniform capitalization rules are required to capitalize:
-
Direct costs, and
-
An allocable part of most indirect costs (including taxes) that (a) benefit the assets produced or acquired for resale, or
(b) are incurred by reason of the performance of production or resale activities.
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.
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 2012 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.
-
Trade or business activities in which the corporation did not materially participate for the tax year and
-
Rental activities, regardless of its participation.
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)).
-
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).
-
Agricultural chemicals security credit (Form 8931).
-
Mine rescue team training credit (Form 8923).
-
Credit for employer differential wage payments (Form 8932).
-
Credit for small employer health insurance premiums (Form 8941).
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 line 12 the amount from Form 1125-E, line 4.
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.
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.
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 schedule 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.
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 12/31/07 but before 1/1/13 | $18,500 | |
| Trucks and vans | ||
| After 12/31/09 but before 1/1/13 | $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 2013 will be published in the Internal Revenue Bulletin in early 2013.
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.
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.
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.
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.
-
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).
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).
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.
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, including qualified contributions of “apparently wholesome food.” See section 170(e)(3).
-
Contributions of qualified book inventory to public schools made before January 1, 2012. See section 170(e)(3)(D).
-
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.
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.
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.
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.
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.
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.
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.
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 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 during the tax year. 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:
-
Paid in cash directly to the plan participants or beneficiaries;
-
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;
-
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
-
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.
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.
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.
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.
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.
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, or beneficial owner (directly or indirectly) of more than 10% of any class of stock, the deductible expense is limited. See section 274(e)(2) and Notice 2005-45, 2005-24 I.R.B. 1228. For tax years beginning after August 1, 2012, see Regulations sections 1.274-9 and 1.274-10.
-
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.”
-
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).
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 schedule 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 ownership 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.
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.
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.
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.
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.
Dividends received on debt-financed stock acquired after July 18, 1984, are not entitled to the full 70% or 80% dividends-received deduction. The 70% or 80% deduction is reduced by a percentage that is related to the amount of debt incurred to acquire the stock. See section 246A. Also, see section 245(a) before making this computation for an additional limitation that applies to dividends received from foreign corporations. Attach a schedule to Form 1120-F showing how the amount on line 3, column (c), was figured.
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.
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.
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.
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).
| 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. |
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).
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).
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.-
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.
-
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.
-
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 schedule and attach it to Form 1120-F.
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).
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.
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.
| 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 |
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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
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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).
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.
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.
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 Plug-in Electric and Electric Vehicle Credit, line 30.
To figure the minimum tax credit and any carryforward of the credit, complete and attach Form 8827, Credit for Prior Year Minimum Tax–Corporations.
Enter the allowable credits from Form 8912, Credit to Holders of Tax Credit Bonds, line 12.
Include any of the following taxes and interest. Check the appropriate box(es) for the form, if any, used to compute the total.
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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.
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Recapture of new markets credit (see Form 8874, New Markets Credit, and Form 8874-B, Notice of Recapture Event for New Markets Credit).
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Recapture of employer-provided childcare facilities and services credit (see Form 8882).
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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 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).
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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.
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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.
Attach a schedule 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:
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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).
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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:
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Excess of percentage depletion over cost depletion,
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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
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Capital loss carrybacks and carryovers.
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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.
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Income from the operation of ships or aircraft exempt from taxation under section 883(a)(1) or (2).
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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.
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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.
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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.
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Income that is exempt from tax under section 892.
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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.
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.
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.
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.
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 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:
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.
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.
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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
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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).
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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);
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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
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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.
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.
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.
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.
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).
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).
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State and local government obligations, the interest on which is excludable from gross income under section 103(a) and
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Stock in a mutual fund or other regulated investment company that distributed exempt-interest dividends during the tax year of the corporation.
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Unrealized gains and losses on securities held “available for sale.”
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Foreign currency translation adjustments.
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The excess of additional pension liability over unrecognized prior service cost.
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Guarantees of employee stock (ESOP) debt.
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Compensation related to employee stock award plans.
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.
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.
| General guidelines for computing the amount to be entered on Schedule W, line 3. The amount to be entered on line 3 may be computed as follows: | |||
| 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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