Table of Contents
- Purpose of Form
- FSC Repeal and Extraterritorial Income Exclusion
- Pre-Repeal FSC Rules
- Who Must File
- When To File
- Where To File
- Who Must Sign
- Paid Preparer Authorization
- Other Forms That May Be Required
- Assembling the Return
- Accounting Methods
- Accounting Period
- Rounding Off toWhole Dollars
- Tax Payments
- Estimated Tax Payments
- Interest and Penalties
Use Form 1120-FSC to report the income, gains, losses, deductions, credits, and to figure the income tax liability of a FSC.
In general, the FSC Repeal and Extraterritorial Income Exclusion
Act of 2000:
Repealed the FSC rules,
Provided taxpayers with an exclusion, which is figured on Form 8873, Extraterritorial Income Exclusion, and
Provided transition rules for existing FSCs. These rules are included in Rules for Existing FSCs below.
The American Jobs Creation Act of 2004 repealed the extraterritorial income exclusion provisions generally for transactions after 2004, subject to a transition rule. See the Instructions for Form 8873 for more information.
The Tax Increase Prevention and Reconciliation Act of 2005 repealed the FSC binding contract exception. See Binding contract exception below for details.
In general, a FSC that was in existence on September 30, 2000, and at all times thereafter may continue to use the FSC rules for any transaction in the ordinary course of business that is (a) before January 1, 2002, or (b) after December 31, 2001, if such transaction is pursuant to a binding contract that meets the requirements described in Binding contract exception below.
The mere entering into of a single transaction, such as a lease, would not, in and of itself, prevent the transaction from being in the ordinary course of business.
Taxpayers may elect to apply the extraterritorial income exclusion rules instead of the FSC rules for transactions occurring during the transition period. The election is:
Made by checking the box on line 2 of Form 8873,
Made on a transaction-by-transaction basis,
Effective for the tax year for which it is made and for all subsequent tax years, and
Revocable only with the consent of the IRS.
Taxpayers use Form 8873 to determine their extraterritorial income exclusion.
A FSC that was in existence on September 30, 2000, and at all times thereafter may elect to be treated as a domestic corporation if substantially all of its gross receipts are foreign trading gross receipts. A FSC that elects to be treated as a domestic corporation ceases to be a FSC for any tax year for which the election applies (and for any subsequent tax year).
The election is made by checking the box on line 3 of Form 8873. An electing corporation files Form 1120, U.S. Corporation Income Tax Return. Once made, the election applies to the tax year for which it is made and remains in effect for all subsequent years unless the election is revoked or terminated. If the election is revoked or terminated, the corporation would be a foreign corporation that files Form 1120-F, U.S. Income Tax Return of a Foreign Corporation. Furthermore, the foreign corporation would not be eligible to reelect to be treated as a domestic corporation for 5 tax years beginning with the first tax year for which the original election is not in effect as a result of the revocation or termination.
No corporation may elect to be a FSC or a small FSC (defined below) after
September 30, 2000.
If a FSC has no foreign trade income (see definition under Tax Treatment of a FSC on page 2) for any 5 consecutive tax years beginning after December 31, 2001, the FSC will no longer be treated as a FSC for any tax year beginning after that 5-year period.
Under section 922(a), a FSC is defined as a corporation that has met all of the following rules:
It must be a corporation created or organized under the laws of a qualifying foreign country or any U.S. possession other than Puerto Rico.
Qualifying U.S. possessions include Guam, American Samoa, the Commonwealth of the Northern Mariana Islands, and the U.S. Virgin Islands.
A qualifying foreign country is a foreign country that meets the exchange of information rules of section 927(e)(3)(A) or (B). All U.S. possessions other than Puerto Rico are also certified to have met these rules.
The following countries are qualifying foreign countries that have met the exchange of information rules of section 927(e)(3)(A) or 927(e)(3)(B): Australia, Austria, Barbados, Belgium, Bermuda, Canada, Costa Rica, Cyprus, Denmark, Dominica, the Dominican Republic, Egypt, Finland, France, Germany, Grenada, Guyana, Honduras, Iceland, Ireland, Jamaica, Korea, Malta, the Marshall Islands, Mexico, Morocco, the Netherlands, New Zealand, Norway, Pakistan, Peru, the Philippines, St. Lucia, Sweden, and Trinidad and Tobago.
It had no more than 25 shareholders at any time during the tax year.
It had no preferred stock outstanding at any time during the tax year.
During the tax year, the FSC must maintain:
An office in one of the qualifying foreign countries or U.S. possessions listed above,
A set of permanent books of account (including invoices) at that office, and
The books and records required under section 6001 at a U.S. location to sufficiently establish the amount of gross income, deductions, credits, or other matters required to be shown on its tax return.
It must have at least one director, at all times during the tax year, who is not a resident of the United States.
It must not be a member, at any time during the tax year, of a controlled group of which a DISC is a member.
It must have elected to be a FSC or small FSC, and the election must have been in effect for the tax year.
Elected small FSC status and has kept the election in effect for the tax year and
Is not a member, at any time during the tax year, of a controlled group that includes a FSC (unless that other FSC is also a
Generally, any foreign trading gross receipts of a small FSC for the tax year that exceed $5 million are not to be considered in determining its exempt foreign trade income. The $5 million limit is reduced if the small FSC has a short tax year. It may also be reduced if the small FSC is a member of a controlled group that contains other small FSCs. See Regulations section 1.921-2(b) for more information.
A FSC is not taxed on its exempt foreign trade income. Section 923 defines foreign trade income as the gross income of a FSC attributable to foreign trading gross receipts (defined below).
The percentage of foreign trade income exempt from tax is figured differently for income determined under the administrative pricing rules (for details, see the Instructions for Schedule P (Form 1120-FSC)) and income determined without regard to the administrative pricing rules. These percentages are computed on Schedule E, page 4, Form 1120-FSC, and carried over to lines 9a and 9b of Schedule B, page 3, Form 1120-FSC, to figure taxable income or (loss).
See section 923(a)(4) for a special rule for foreign trade income allocable to a cooperative. See section 923(a)(5) for a special rule for military property.
A FSC is treated as having foreign trading gross receipts (defined in section 924) only if it has met certain foreign management and foreign economic process requirements.
Foreign trading gross receipts do not include:
Certain excluded receipts (defined in section 924(f)).
Receipts attributable to property excluded from export property under section 927(a)(2).
Investment income (defined in section 927(c)).
Carrying charges (defined in section 927(d)(1)).
Computer software licensed for reproduction abroad is not excluded from export property under section 927(a)(2). Therefore, receipts attributable to the sale, lease, or rental of computer software and services related and subsidiary to such transactions qualify as foreign trading gross receipts.
A FSC (other than a small FSC) is treated as having foreign trading gross receipts for the tax year only if the management of the FSC during the year takes place outside the United States. These management activities include:
Meetings of the board of directors and meetings of the shareholders.
Disbursing cash, dividends, legal and accounting fees, salaries of officers, and salaries or fees of directors from the principal bank account (see below).
Maintaining the principal bank account at all times during the tax year.
A FSC (other than a small FSC) has foreign trading gross receipts from any transaction only if certain economic processes for the transaction take place outside the United States. Section 924(d) and Regulations section 1.924(d)-1 set forth the rules for determining whether a sufficient amount of the economic processes of a transaction takes place outside the United States.
Generally, a transaction will qualify if the FSC satisfies two requirements:
Participation outside the United States in the sales portion of the transaction and
Satisfaction of either the 50% or the 85% foreign direct cost test.
The activities comprising these economic processes may be performed by the FSC or by any other person acting under contract with the FSC.
Solicitation (other than advertising) is any communication (including, but not limited to, telephone, telegraph, mail, or in person) by the FSC, to a specific, targeted customer or potential customer.
Negotiation is any communication by the FSC to a customer or potential customer aimed at an agreement on one or more of the terms of a transaction, including, but not limited to, price, credit terms, quantity, or time or manner of delivery.
Making a contract refers to performance by the FSC of any of the elements necessary to complete a sale, such as making or accepting an offer.
Generally, the sales activities described above are to be applied on a transaction-by-transaction basis. However, a FSC may make an annual election to apply any of the sales activities on the basis of a group. To make the election, check the applicable box on line 10a, Additional Information, on page 2 of Form 1120-FSC. See Regulations section 1.924(d)-1(c)(5) for details.
Are incident to and necessary for the performance of any activity described in section 924(e);
Include the cost of materials consumed in the performance of the activity and the cost of labor that can be identified or associated directly with the performance of the activity (but only to the extent of wages, salaries, fees for professional services, and other amounts paid for personal services actually rendered, such as bonuses or compensation paid for services on the basis of a percentage of profits); and
Include the allowable depreciation deduction for equipment or facilities (or the rental cost for its use) that can be specifically identified or associated with the activity, as well as the contract price of an activity performed on behalf of the FSC by a contractor.
Generally, the foreign direct cost tests under Regulations section 1.924(d)-1(d) are applied on a transaction-by-transaction basis. However, the FSC may make an annual election (on line 10d, Additional Information, on page 2 of the form) to apply the foreign direct cost tests on a customer, contract, or product or product line grouping basis. Any grouping used must be supported by adequate documentation of performance of activities and costs of activities relating to the grouping used. See Regulations section 1.924(d)-1(e) for details.
To use the administrative pricing rules to determine the FSC's (or small FSC's) profit on a transaction or group of transactions, the FSC must perform (or contract with another person to perform) all of the economic process activities relating to the transaction or group of transactions. All of the direct and indirect expenses relating to the performance of those activities must be reflected on the books of the FSC and on Form 1120-FSC.
Under Temporary Regulations section 1.925(a)-1T(b)(2)(ii), an election may be made to include on the FSC's books all expenses, other than cost of goods sold, that are necessary to figure combined taxable income for the transaction or group of transactions. The expenses must be identified on Schedule G on the applicable line.
File Form 1120-FSC if the corporation elected to be treated as a FSC or small FSC, and the election is still in effect.
A FSC that elects to be treated as a domestic corporation under section 943(e)(1) does not file Form 1120-FSC. Instead, it files Form 1120.
Generally, a corporation must file Form 1120-FSC by the 15th day of the 3rd month after the end of its tax year. A FSC that has dissolved must generally file by the 15th day of the 3rd month after the date it dissolved.
If the due date falls on a Saturday, Sunday, or legal holiday, the FSC may file on the next business day.
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|Dividends and Dividends-Received Deduction Worksheet
(See instructions that begin on page 8)
|(b) %||(c) Dividends-received deduction: (a) x (b)|
|1||Dividends from less-than-20%-owned domestic corporations that are subject to the 70% deduction (other than debt-financed stock)||70|
|2||Dividends from 20%-or-more-owned domestic corporations that are subject to the 80% deduction (other than debt-financed stock)||80|
|3||Dividends on debt-financed stock of domestic and foreign corporations (section 246A)||See Inst.|
|4||Dividends on certain preferred stock of less-than-20%-owned public utilities||42|
|5||Dividends on certain preferred stock of 20%-or-more-owned public utilities||48|
|6||Dividends from less-than-20%-owned foreign corporations that are subject to the 70% deduction||70|
|7||Dividends from 20%-or-more-owned foreign corporations that are subject to the 80% deduction||80|
|8||Total dividends-received deduction. Add lines 1 through 7. See instructions for limitation. Enter here and on line 19b, Schedule B.||▸|
|9||Other dividends from foreign corporations not included on lines 3, 6, or 7|
|10||Foreign dividend gross up (section 78)|
|12||Total dividends. Add lines 1 through 11. Enter here and on line 9, Schedule F||▸|
File Form 1120-FSC with the:
Internal Revenue Service Center
P.O. Box 409101
Ogden, UT 84409
The return must be signed and dated by:
The president, vice president, treasurer, assistant treasurer, chief accounting officer; or
Any other corporate officer (such as tax officer) authorized to sign.
If a return is filed on behalf of a FSC by a receiver, trustee, or assignee, the fiduciary must sign the return, instead of the corporate officer. Returns and forms signed by a receiver or trustee in bankruptcy on behalf of a FSC must be accompanied by a copy of the order or instructions of the court authorizing signing of the return or form.
If an employee of the FSC completes Form 1120-FSC, the paid preparer space should remain blank. Anyone who prepares Form 1120-FSC but does not charge the FSC should not complete that section. Generally, anyone who is paid to prepare the return must sign it and fill in the “Paid Preparer Use Only” area.
The paid preparer must complete the required preparer information and:
Sign the return in the space provided for the preparer's signature.
Give a copy of the return to the taxpayer.
A paid preparer may sign original or amended returns by rubber stamp, mechanical device, or computer software programs.
If the FSC wants to allow the IRS to discuss its tax return with the paid preparer who signed it, check the “Yes” box in the signature area of the return. This authorization applies only to the individual whose signature appears in the “Paid Preparer Use Only” section of the return. It does not apply to the firm, if any, shown in that section.
If the “Yes” box is checked, the FSC is authorizing the IRS to call the paid preparer to answer any questions that may arise during the processing of its return. The FSC is also authorizing the paid preparer to:
Give the IRS any information that is missing from the return,
Call the IRS for information about the processing of the return or the status of any related refund or payment(s), and
Respond to certain IRS notices about math errors, offsets, and return preparation.
The FSC is not authorizing the paid preparer to receive any refund check, bind the FSC to anything (including any additional tax liability), or otherwise represent the FSC before the IRS.
The authorization will automatically end no later than the due date (excluding extensions) for filing the FSC's tax return for the following year. If the FSC wants to expand the paid preparer's authorization or revoke it before it ends, see Pub. 947, Practice Before the IRS and Power of Attorney.
The FSC may have to file some of the forms listed below. See the form for more information.
For a list of additional forms the FSC may need to file (most notably, forms pertaining to the reporting of various types of income, any related withholding, to U.S. persons, foreign persons, and the IRS, and reportable transactions), see Pub. 542, Corporations.
Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. This form may have to be filed by certain U.S. officers, directors, or shareholders of a FSC to report changes in ownership (see sections 6046 and the related regulations).
If a Form 1120-FSC is filed, Form 5471 is not required to be filed to satisfy the requirements of section 6038 (see Temporary Regulations section 1.921-1T(b)(3)). However, certain U.S. shareholders may be required to file
Form 5471 and the applicable schedules to report subpart F income.
See the Instructions for Form 5471 for more information.
Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Generally, a FSC that is engaged in a trade or business in the United States that had a reportable transaction with a foreign or domestic related party during the tax year must file Form 5472.
Form 5713, International Boycott Report. FSCs that had operations in, or related to, certain “boycotting” countries file
Form 8275, Disclosure Statement, and Form 8275-R, Regulation Disclosure Statement. Disclose items or positions taken on a tax return that are not otherwise adequately disclosed on a tax return or that are contrary to Treasury regulations (to avoid parts of the accuracy-related penalty or certain preparer penalties).
Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business. Use this form to report the receipt of more than $10,000 in cash or foreign currency in one transaction or a series of related transactions.
To ensure that the FSC's tax return is correctly processed, attach all schedules and other forms after page 6, Form 1120-FSC, and in the following order:
Schedule O (Form 1120).
Additional schedules in alphabetical order.
Additional forms in numerical order.
Complete every applicable entry space on Form 1120-FSC. Do not enter “See Attached” or “Available Upon Request” instead of completing the entry spaces. If more space is needed on the forms or schedules, attach separate sheets using the same size and format as the printed forms. If there are supporting statements and attachments, arrange them in the same order as the schedules or forms they support and attach them last. Show the totals on the printed forms. Enter the FSC's name and EIN on each supporting statement or attachment.
Figure taxable income using the method of accounting regularly used in keeping the FSC's books and records. In all cases, the method used must clearly show taxable income. Permissible methods include cash, accrual, or any other method authorized by the Internal Revenue Code.
A member of a controlled group may not use an accounting method that would distort any group member's income, including its own. For example, a FSC acts as a commission agent for property sales by a related corporation that uses the accrual method and pays the FSC its commission more than 2 months after the sale. In this case, the FSC should not use the cash method because that method would materially distort its income.
Generally, the following rules apply:
A FSC (other than a qualified personal service corporation) must use the accrual method of accounting if its average annual gross receipts exceed $5 million. However, see Nonaccrual experience method on page 7.
Unless it is a qualifying taxpayer or a qualifying small business taxpayer, a FSC must use the accrual method for sales and purchases of inventory items. See Schedule A, Cost of Goods Sold Related to Foreign Trading Gross Receipts, on page 6.
The FSC may have to make an adjustment under section 481(a) to prevent amounts of income or expense from being duplicated or omitted. The section 481(a) adjustment period is generally 1 year for a net negative adjustment and 4 years for a net positive adjustment. However, a FSC can elect to use a 1-year adjustment period if the net section 481(a) adjustment for the change is less than $25,000. The FSC must complete the appropriate lines of Form 3115 to make the election.
A FSC must figure its taxable income on the basis of a tax year. A tax year is the annual accounting period a FSC uses to keep its records and report its income and expenses. Generally, FSCs may use a calendar year or a fiscal year. Personal service corporations, however, must generally use a calendar year.
The tax year of a FSC must be the same as the tax year of the principal shareholder which, at the beginning of the FSC tax year, has the highest percentage of voting power. If two or more shareholders have the highest percentage of voting power, the FSC must have a tax year that conforms to the tax year of any such shareholder. See section 441(h).
The FSC may round off cents to whole dollars on its return and schedules. If the FSC does round to whole dollars, it must round all amounts. To round, drop amounts under 50 cents and increase amounts from 50 to 99 cents to the next dollar (for example, $1.39 becomes $1 and $2.50 becomes $3).
If two or more amounts must be added to figure the amount to enter on a line, include cents when adding the amounts and round off only the total.
Keep the FSC's records for as long as they may be needed for the administration of any provision of the Internal Revenue Code. Usually, records that support an item of income, deduction, or credit on the return must be kept for 3 years from the date the return is due or filed, whichever is later. Keep records that verify the FSC's basis in property for as long as they are needed to figure the basis of the original or replacement property.
The FSC should keep copies of all filed returns. They help in preparing future and amended returns.
The FSC must pay the tax due in full no later than the 15th day of the 3rd month after the end of the tax year. The method for payment of the tax due depends upon whether the FSC has an office or place of business in the United States.
FSCs that do not maintain an office or place of business in the United States can use Electronic Federal Tax Payment System (EFTPS) to pay the tax due providing the FSC has a U.S. bank account. If the FSC does not have a U.S. bank account, it may also arrange for a financial institution to initiate a same-day wire payment on its behalf or it can arrange for either a qualified intermediary, tax professional, payroll service, or other trusted third party to make a deposit on its behalf using a master account. In addition, the FSC still has the option to pay by check or money order, payable to the United States Treasury. To help ensure proper crediting, write the FSC's employer identification number (EIN), “Form 1120-FSC,” and the tax period to which the payment applies on the check or money order. Enclose the payment when Form 1120-FSC is filed.
FSCs that do maintain an office or place of business in the United States must pay the tax due by electronic funds transfer. The FSC can pay the tax using EFTPS or it can arrange for its tax professional, financial institution, payroll service, or other trusted third party to make deposits on its behalf. In addition, the FSC also has the option to arrange for its financial institution to initiate a same-day wire payment. See Electronic Deposit Requirement next.
Forms 8109 and 8109-B can no longer be used after December 31, 2010. As a result, beginning January 1, 2011, FSCs with an office or place of business in the United States must use electronic funds transfers to make all federal tax deposits. Generally, electronic funds transfers are made using EFTPS; however, if the corporation does not want to use EFTPS, it can arrange for its tax professional, financial institution, payroll service, or other trusted third party to make deposits on its behalf. Also, it can arrange for its financial institution to initiate a same-day wire payment on its behalf. EFTPS is a free service provided by the Department of the Treasury. Services provided by a tax professional, financial institution, payroll service, or other third party may have a fee.
For more information about EFTPS or to enroll in EFTPS, visit the EFTPS website at www.eftps.gov, or call 1-800-555-4477. You can also get Pub. 966, The Secure Way to Pay Your Federal Taxes.
Generally, the following rules apply to the FSC's payments of estimated tax:
The FSC must make installment payments of estimated tax if it expects its total tax for the year (less applicable credits) to be $500 or more.
The installments are due by the 15th day of the 4th, 6th, 9th, and 12th months of the tax year. If any date falls on a Saturday, Sunday, or legal holiday, the installment is due on the next regular business day.
Use Form 1120-W, Estimated Tax for Corporations, as a worksheet to compute estimated tax.
If the FSC maintains an office or place of business in the United States, it must use electronic funds transfers to make installment payments of estimated tax.
If the FSC does not maintain an office or place of business in the United States, it can pay the estimated tax by EFTPS providing it has a U.S. bank account. The foreign corporation can also arrange for its financial institution to initiate a same-day wire payment on its behalf or can arrange for its qualified intermediary, tax professional, payroll service, or other trusted third party to make a deposit on its behalf using a master account. In addition, the foreign corporation still has the option to pay the estimated tax due by check or money order.
If the FSC 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.
For more information on estimated tax payments, including penalties that apply if the FSC fails to make required payments,
see Line 3, Estimated tax penalty,
on page 6.
$100 for each failure to supply information, up to $25,000 during the calendar year.
$1,000 for not filing a return.
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