- Instructions for Form 1120-IC-DISC - Introductory Material
- General Instructions
- Purpose of Form
- Who Must File
- When To File
- Where To File
- Who Must Sign
- Other Forms and Statements That May Be Required
- Informing Sharehholders
- Assembling the Return
- Accounting Methods
- Accounting Periods
- Rounding Off to Whole Dollars
- Section 993
- Qualified export receipts.
- Qualified export assets.
- Export property.
- A producer's loan.
- A related foreign export corporation.
- Gross receipts.
- Section 994, Intercompany Pricing Rules
- Section 994(c), Export Promotion Expenses
- Deficits in Earnings and Profits
- Specific Instructions
- Entity Information
- Period Covered
- Item CEmployer Identification Number (EIN)
- Item ETotal Assets
- Item FInitial Return, Final Return, Name Change, Address Change, or Amended Return
- Question G(1)
- Taxable Income
- Schedule A
- Cost of Goods Sold
- Schedule B
- Gross Income
- Line-by-Line Instructions
- Schedule C
- Dividends and Dividends-Received Deduction
- Schedule E
- Limitations on Deductions
- Section 263A uniform capitalization rules.
- Transactions between related taxpayers.
- Golden parachute payments.
- Business start-up and organizational costs.
- Limitations on deductions related to property leased to tax-exempt entities.
- Line 1. Export Promotion Expenses
- Line 1d. Salaries and Wages
- Line 1h. Freight
- Line 1i. Compensation of Officers
- Line 1m. Other Export Promotion Expenses
- Line 2b. Taxes and Licenses
- Line 2c. Interest
- Line 2d. Charitable Contributions
- Line 2e. Freight
- Line 2g. Other Expenses
- Schedule J
- Part IDeemed Distributions Under Section 995(b)(1)
- Line 2. Recognized Gain on Section 995(b)(1)(B) Property
- Line 3. Recognized Gain on Section 995(b)(1)(C) Property
- Line 4. Income Attributable to Military Property
- Line 9. Deemed Distributions to C Corporations
- Line 10. International Boycott Income
- Line 11. Illegal Bribes, etc.
- Line 14. Earnings and Profits
- Line 17. Foreign Investment Attributable to Producer Loans
- Part IISection 995(b)(1)(E) Taxable Income
- Line 1. Export Receipts
- Line 3. Controlled Group Allocation
- Lines 4 and 5. Proration of $10 Million Limit
- Line 7. Taxable Income
- Part IIIDeemed Distributions Under Section 995(b)(2)
- Part IVActual Distributions
- Line 1. Distributions To Meet Qualification Requirements Under Section 992(c)
- Line 4a. Previously Taxed Income
- Part VDeferred DISC Income Under Section 995(f)(3)
- Schedule K
- Schedule L
- Balance Sheets per Books
- Schedule N
- Export Gross Receipts of the IC-DISC and Related U.S. Persons
- Schedule O
- Other Information
- Schedule P
- Instructions for Form 1120-IC-DISC - Notices
- Instructions for Form 1120-IC-DISC - Additional Material
Instructions for Form 1120-IC-DISC (09/2017)
Interest Charge Domestic International Sales Corporation Return
The list of designated private delivery companies taxpayers may use to file returns and have the assurance that a timely mailing will be treated as a timely filing has been updated. For more information, see Private delivery services (PDSs) under When To File, later.
The information on how to apply for an EIN has been updated. See Item C— Employer Identification Number (EIN) under Entity Information, later.
For the latest information about developments related to Form 1120–IC-DISC and its instructions, such as legislation enacted after they were published, go to IRS.gov/Form1120ICDISC.
The IRS is a proud partner with the National Center for Missing & Exploited Children® (NCMEC). Photographs of missing children selected by the Center can appear in instructions on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.
Form 1120-IC-DISC is an information return filed by interest charge domestic international sales corporations (IC-DISCs), former DISCs, and former IC-DISCs.
An IC-DISC is a domestic corporation that has elected to be an IC-DISC and its election is still in effect. The IC-DISC election is made by filing Form 4876-A, Election To Be Treated as an Interest Charge DISC.
Generally, an IC-DISC is not taxed on its income. Shareholders of an IC-DISC are taxed on its income when the income is actually (or deemed) distributed. In addition, section 995(f) imposes an interest charge on shareholders for their share of DISC-related deferred tax liability. See Form 8404, Interest Charge on DISC-Related Deferred Tax Liability, for details.
To be an IC-DISC, a corporation must be organized under the laws of a state or the District of Columbia and meet the following tests.
At least 95% of its gross receipts during the tax year are qualified export receipts.
At the end of the tax year, the adjusted basis of its qualified export assets is at least 95% of the sum of the adjusted basis of all of its assets.
It has only one class of stock, and its outstanding stock has a par or stated value of at least $2,500 on each day of the tax year (or, for a new corporation, on the last day to elect IC-DISC status for the year and on each later day).
It maintains separate books and records.
It is not a member of any controlled group of which a foreign sales corporation (FSC) is a member.
Its tax year must conform to the tax year of the principal shareholder who has the highest percentage of voting power. If two or more shareholders have the highest percentage of voting power, the IC-DISC must elect a tax year that conforms to that of any one of the principal shareholders. See section 441(h) and its regulations for more information.
Its election to be treated as an IC-DISC is in effect for the tax year.
See Definitions, later, and section 992 and related regulations for details.
Distribution to meet qualification requirements.
An IC-DISC that does not meet the gross receipts test or qualified export asset test during the tax year will still be considered to have met them if, after the tax year ends, the IC-DISC makes a pro rata property distribution to its shareholders and specifies at the time that this is a distribution to meet the qualification requirements.
If the IC-DISC did not meet the gross receipts test, the distribution equals the part of its taxable income attributable to gross receipts that are not qualified export gross receipts.
If it did not meet the qualified export asset test, the distribution equals the fair market value (FMV) of the assets that are not qualified export assets on the last day of the tax year.
If the IC-DISC did not meet either test, the distribution equals the sum of both amounts.
Regulations section 1.992-3 explains how to figure the distribution.
Interest on late distribution.
If the IC-DISC makes a distribution after Form 1120-IC-DISC is due, interest must be paid to the United States Treasury. The interest charge is 4½% of the distribution times the number of tax years that begin after the tax year to which the distribution relates until the date the IC-DISC made the distribution.
If the IC-DISC must pay this interest, send the payment to the Internal Revenue Service Center where you filed Form 1120-IC-DISC within 30 days of making the distribution. On the payment, write the IC-DISC's name, address, and employer identification number; the tax year; and a statement that the payment represents the interest charge under Regulations section 1.992-3(c)(4).
The corporation must file Form 1120-IC-DISC if it elected, by filing Form 4876-A, to be treated as an IC-DISC and its election is in effect for the tax year.
If the corporation is a former DISC or former IC-DISC, it must file Form 1120-IC-DISC in addition to any other return required.
A former DISC is a corporation that was a DISC on or before December 31, 1984, but failed to qualify as a DISC after December 31, 1984, or did not elect to be an IC-DISC after 1984; and at the beginning of the current tax year, it had undistributed income that was previously taxed or it had accumulated DISC income.
A former IC-DISC is a corporation that was an IC-DISC in an earlier year but did not qualify as an IC-DISC for the current tax year; and at the beginning of the current tax year, it had undistributed income that was previously taxed or accumulated IC-DISC income. See section 992 and related regulations.
A former DISC or former IC-DISC need not complete lines 1 through 8 on page 1 and the Schedules for figuring taxable income, but must complete Schedules J, L, and M of Form 1120-IC-DISC and Schedule K (Form 1120-IC-DISC). Write "Former DISC" or "Former IC-DISC" across the top of the return.
File Form 1120-IC-DISC by the 15th day of the 9th month after its tax year ends. No extensions are allowed. If the due date falls on a Saturday, Sunday, or a legal holiday, the corporation may file on the next business day.
Private delivery services (PDSs).
Corporations may use certain PDSs designated by the IRS to meet the "timely mailing as timely filing/paying" rule for tax returns and payments. Go to IRS.gov/PDS for the current list of designated PDSs.
The PDS can tell you how to get written proof of the mailing date.
For the IRS mailing address to use if you’re using a PDS, go to IRS.gov/PDSstreetAddresses.
PDSs can’t deliver items to P.O. boxes. You must use the U.S. Postal Service to mail any item to an IRS P.O. box address.
File Form 1120-IC-DISC at the following address: Internal Revenue Service, 201 W. Rivercenter Blvd., Covington, KY 41019.
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 corporation 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 corporation 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 corporation completes Form 1120-IC-DISC, the paid preparer's space should remain blank. Anyone who prepares Form 1120-IC-DISC but does not charge the corporation should not complete that section. Generally, anyone who is paid to prepare Form 1120-IC-DISC must sign it and fill in the "Paid Preparer Use Only" area.
The paid preparer must:
Complete the required preparer information,
Sign the return in the space provided for the preparer's signature, and
Give a copy of the return to the taxpayer.
Shareholders who are foreign persons.
The corporation should inform shareholders who are nonresident alien individuals or foreign corporations, trusts, or estates that if they have gains from disposal of stock in the IC-DISC, former DISC, or former IC-DISC, or distributions from accumulated IC-DISC income, including deemed distributions, they must treat these amounts as effectively connected with the conduct of a trade or business conducted through a permanent establishment in the United States and derived from sources within the United States.
Election to reduce basis under section 362(e)(2)(C).
The transferor may make a joint election under section 362(e)(2)(C) to limit the transferor's basis in the stock received instead of the transferee's basis in the transferred property. The transferor can make the election by including the certification as provided in Notice 2005-70, 2005-41 I.R.B. 694 on or with its tax return filed by the due date (including extensions) for the tax year in which the transaction occurred. If the transferor is a controlled foreign corporation, its controlling U.S. shareholder(s) can make the election. The common parent of a consolidated group can make the election for the group.
If the election is made as described above, no election need be made by the transferee (or any controlling U.S. shareholder thereof).
Once made, the election is irrevocable. See section 362(e)(2)(C) and Notice 2005-70.
Other forms and statements.
See the Instructions for Form 1120 and Pub. 542 for a list of other forms and statements a corporation may need to file in addition to the forms and statements discussed throughout these instructions.
To ensure that the corporation's tax return is correctly processed, attach all schedules and other forms after the last page of Form 1120-IC-DISC, and in the following order.
Schedule N (Form 1120).
Additional schedules in alphabetical order.
Additional forms in numerical order.
Complete every applicable entry space on Form 1120-IC-DISC. 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 statements 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 corporation's name and EIN on each supporting statement or attachment.
Figure taxable income using the method of accounting regularly used in keeping the IC-DISC'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.
Generally, the following rules apply.
An IC-DISC must use the accrual method of accounting if its average annual gross receipts exceed $5 million. However, see Nonaccrual experience method for service providers, later.
Unless it is a qualifying taxpayer or a qualifying small business taxpayer, an IC-DISC must use the accrual method for sales and purchases of inventory items. See Cost of Goods Sold, later.
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, an IC-DISC acts as a commission agent for property sales by a related corporation that uses the accrual method and pays the IC-DISC its commission more than 2 months after the sale. In this case, the IC-DISC should not use the cash method of accounting because that method materially distorts its income.
Change in accounting method.
To change its method of accounting used to report taxable income, for income as a whole or for the treatment of any material item, the IC-DISC must file Form 3115, Application for Change in Accounting Method.
See Form 3115 and Pub. 538, Accounting Periods and Methods, for more information on accounting methods.
An IC-DISC must figure its taxable income on the basis of a tax year. A tax year is the annual accounting period an IC-DISC uses to keep its records and report its income and expenses. Generally, IC-DISCs may use a calendar year or a fiscal year.
The tax year of an IC-DISC must be the same as the tax year of the principal shareholder which, at the beginning of the IC-DISC tax year, has the highest percentage of voting power. If two or more shareholders have the highest percentage of voting power, the IC-DISC must have a tax year that conforms to the tax year of any such shareholder. See section 441(h).
See Pub. 538 for more information on accounting periods and tax years.
The IC-DISC may round off cents to whole dollars on its return and schedules. If the IC-DISC 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 IC-DISC'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 IC-DISC's basis in property for as long as they are needed to figure the basis of the original or replacement property.
The IC-DISC should keep copies of all filed returns. They help in preparing future and amended returns and in the calculation of earnings and profits.
The following definitions are based on sections 993 and 994.
"United States," as used in the following instructions, includes Puerto Rico and U.S. possessions, as well as the 50 states and the District of Columbia.
Qualified export receipts.
Qualified export receipts are any of the following.
Gross receipts from selling, exchanging, or otherwise disposing of export property.
Gross receipts from leasing or renting export property that the lessee uses outside the United States.
Gross receipts from supporting services related to any qualified sale, exchange, lease, rental, or other disposition of export property by the IC-DISC.
Gross receipts from selling, exchanging, or otherwise disposing of qualified export assets that are not export property, but only if there is a recognized gain.
Dividends (or amounts includible in gross income under section 951) with respect to stock of a related foreign export corporation (defined later).
Interest on any obligation that is a qualified export asset.
Gross receipts for engineering or architectural services for construction projects outside the United States.
Gross receipts for the performance of managerial services in furtherance of the production of other qualified export receipts of an IC-DISC.
For more information, see Regulations section 1.993-1.
Qualified export assets.
Qualified export assets are any of the following.
Export property (defined later).
Assets used primarily in connection with the sale, lease, rental, storage, handling, transportation, packaging, assembly, or servicing of export property, or the performance of engineering or architectural services described in item 7 of Qualified export receipts, earlier, or managerial services in furtherance of the production of qualified export receipts described in items 1, 2, 3, and 7, earlier.
Accounts receivable produced by transactions listed under Qualified export receipts, items 1–4, 7, or 8, earlier.
Temporary investments, such as money and bank deposits, in an amount reasonable to meet the IC-DISC's needs for working capital.
Obligations related to a producer's loan.
Stock or securities of a related foreign export corporation (defined later).
Certain obligations that are issued or insured by the U.S. Export-Import Bank or the Foreign Credit Insurance Association and that the IC-DISC acquires from such bank or association or from the person who sold or bought the goods or services from which the obligations arose.
Certain obligations held by the IC-DISC that were issued by a domestic corporation organized to finance export property sales under an agreement with the Export-Import Bank under which the domestic corporation makes export loans that the Export-Import Bank guarantees.
Amounts (other than reasonable working capital) on deposit in the United States used to acquire qualified export assets within the time provided by Regulations section 1.993-2(j).
See Regulations section 1.993-2 for more information.
Export property must be:
Made, grown, or extracted in the United States by a person other than an IC-DISC;
Neither excluded under section 993(c)(2) nor declared in short supply under section 993(c)(3);
Held mainly for sale, lease, or rent in the ordinary course of a trade or business, by or to an IC-DISC for direct use, consumption, or disposition outside the United States;
Property not more than 50% of the FMV of which is attributable to articles imported into the United States; and
Neither sold nor leased by or to another IC-DISC that, immediately before or after the transaction, either belongs to the same controlled group (defined in section 993(a)(3)) as your IC-DISC or is related to your IC-DISC in a way that would result in losses being denied under section 267.
See Regulations section 1.993-3 for details.
A producer's loan.
A producer's loan must meet all the following terms.
Satisfy the requirements of sections 993(d)(2) and (3).
Not raise the unpaid balance due the IC-DISC on all of its producer's loans above the level of accumulated IC-DISC income it had at the start of the month in which it made the loan.
Be evidenced by a note, or other written evidence of indebtedness, with a stated maturity date no more than 5 years after the date of the loan.
Be made to a person engaged in a U.S. trade or business of making, growing, or extracting export property.
Be designated as a producer's loan when made.
For more information, see Schedule Q (Form 1120-IC-DISC), Borrower's Certificate of Compliance With the Rules for Producer's Loans, and Regulations section 1.993-4.
A related foreign export corporation.
A related foreign export corporation includes the following.
A foreign international sales corporation is a related foreign export corporation if:
The IC-DISC directly owns more than 50% of the total voting power of the foreign corporation's stock;
For the tax year that ends with or within the IC-DISC's tax year, at least 95% of the foreign corporation's gross receipts consists of the qualified export receipts described in items 1–4 of Qualified export receipts, earlier, and interest on the qualified export assets listed in items 3 and 4 of Qualified export assets, earlier; and
The adjusted basis of the qualified export assets in items 1–4 of Qualified export assets, earlier, that the foreign corporation held at the end of the tax year is at least 95% of the adjusted basis of all assets it held then.
A real property holding company is a related foreign export corporation if:
The IC-DISC directly owns more than 50% of the total voting power of the foreign corporation's stock, and
Its exclusive function is to hold title to real property located outside the United States for the exclusive use (under lease or otherwise) of the IC-DISC and applicable foreign law forbids the IC-DISC to hold title to the property.
An associated foreign corporation is a related foreign export corporation if:
The IC-DISC or a controlled group of corporations to which the IC-DISC belongs owns less than 10% of the total voting power of the foreign corporation's stock (section 1563 defines a controlled group in this sense, and sections 1563(d) and (e) define ownership), and
The IC-DISC's ownership of the foreign corporation's stock or securities reasonably furthers transactions that lead to qualified export receipts for the IC-DISC.
See Regulations section 1.993-5 for more information about related foreign export corporations.
Gross receipts are the IC-DISC's total receipts from selling, leasing, or renting property that the corporation holds for sale, lease, or rent in the ordinary course of its trade or business and gross income from all other sources. For commissions on selling, leasing, or renting property, include gross receipts from selling, leasing, or renting the property on which the commissions arose. See Regulations section 1.993-6 for more information.
If a related person described in section 482 sells export property to the IC-DISC, use the intercompany pricing rules to figure taxable income for the IC-DISC and the seller. These rules generally do not permit the related person to price at a loss. Under intercompany pricing, the IC-DISC's taxable income from the sale (regardless of the price actually charged) may not exceed the greatest of:
4% of qualified export receipts on the IC-DISC's sale of the property plus 10% of the IC-DISC's export promotion expenses attributable to the receipts;
50% of the IC-DISC's and the seller's combined taxable income from qualified export receipts on the property, derived from the IC-DISC's sale of the property plus 10% of the IC-DISC's export promotion expenses attributable to the receipts; or
Taxable income based on the sale price actually charged, provided that under section 482 the price actually charged clearly reflects the taxable income of the IC-DISC and the related person.
Schedule P (Form 1120-IC-DISC), Intercompany Transfer Price or Commission, explains the intercompany pricing rules in more detail.
These are expenses incurred to help distribute or sell export property for use or distribution outside the United States. These expenses do not include income tax, but do include 50% of the cost of shipping the export property on U.S.-owned and U.S.-operated aircraft or ships in those cases where U.S. law or regulations do not require that the export property be shipped on such aircraft or ships.
A deficit in earnings and profits is chargeable in the following order.
First, to any earnings and profits other than accumulated IC-DISC income or previously taxed income.
Second, to any accumulated IC-DISC income.
Third, to previously taxed income.
Do not apply any deficit in earnings and profits against accumulated IC-DISC income that, as a result of the corporation's revoking its election to be treated as an IC-DISC (or other disqualification), is deemed distributed to the shareholders. See section 995(b)(2)(A).
The IC-DISC may have to pay the following penalties unless it can show that it had reasonable cause for not providing information or not filing a return.
$100 for each instance of not providing required information, up to $25,000 during the calendar year.
$1,000 for not filing a return.
See section 6686 for other details.
If you receive a notice about penalty and interest after you file Form 1120-IC-DISC, send us an explanation and we will determine if you meet reasonable-cause criteria. Do not attach an explanation when you file Form 1120-IC-DISC.
Trust fund recovery penalty.
This penalty may apply if certain excise, income, social security, and Medicare taxes that must be collected or withheld are not collected or withheld, or these taxes are not paid. These taxes are generally reported on:
Form 720, Quarterly Federal Excise Tax Return;
Form 941, Employer's QUARTERLY Federal Tax Return; or
Form 945, Annual Return of Withheld Federal Income Tax.
The trust fund recovery penalty may be imposed on all persons who are determined by the IRS to have been responsible for collecting, accounting for, and paying over these taxes, and who acted willfully in not doing so. The penalty is equal to the unpaid trust fund tax. See the Instructions for Form 720 or Pub. 15 (Circular E), Employer's Tax Guide, for details, including the definition of responsible persons.
Other penalties may be imposed for negligence, substantial understatement of tax, reportable transaction understatements, and fraud. See sections 6662, 6662A, and 6663.
Enter the tax year in the space provided at the top of the form. For a calendar year, enter the last two digits of the calendar year in the first entry space. For a fiscal or short tax year return, fill in the tax year space at the top of the form.
Include the suite, room, or other unit number after the street address. If the post office does not deliver mail to the street address and the corporation has a P.O. box, show the box number instead.
Enter the corporation's EIN. If the corporation does not have an EIN, it must apply for one. An EIN may be applied for:
Online—For applicants in the United States or U.S. possessions only, you can apply for and receive an EIN free of charge on IRS.gov. Go to IRS.gov/Businesses and click on Employer ID Numbers.
By telephone—This option is available to international applicants only. If you have NO legal residence, principal place of business, or principal office or agency in the United States or U.S. possessions, you may call 267-941-1099 (not a toll-free number). For further information on how to obtain an EIN, go to IRS.gov/businesses/small-businesses-self-employed/how-to-apply-for-an-ein.
By fax or mail—Under the Fax-TIN program, you can receive your EIN by fax generally within 4 business days. Complete and fax Form SS-4 to the IRS using the appropriate fax number listed below. To apply by mail, send to the corresponding address listed below.
If your business is in one of the 50 states or the District of Columbia, fax to 859-669-5760, or mail to Internal Revenue Service, Attn: EIN Operation, Cincinnati, OH 45999.
If you have no legal residence, principal office or principal agency in any state or the District of Columbia (international/U.S. possessions), fax to 859-669-5987, or mail to Internal Revenue Service, Attn: EIN International Operation, Cincinnati, OH 45999.
If the corporation has not received its EIN by the time the return is due, enter "Applied for" and the date you applied in the space for the EIN. For more details, see the Instructions for Form SS-4.
Enter the IC-DISC's total assets (as determined by the accounting method regularly used in keeping the IC-DISC's books and records) at the end of the tax year. If there are no assets at the end of the tax year, enter -0-.
If this is the IC-DISC's initial or final return, check the applicable box in item F at the top of the form.
If the IC-DISC has changed its address since it last filed a return, check the box for "Address change."
If the IC-DISC changed its name since it last filed a return, check the box for "Name change." Generally, an IC-DISC also must have amended its articles of incorporation and filed the amendment with the state in which it was incorporated.
To correct an error on a Form 1120-IC-DISC already filed, file an amended Form 1120-IC-DISC and check the "Amended return" box. If the amended return changes the income or distributions of income to shareholders, an amended Schedule K (Form 1120-IC-DISC) must be filed with the amended Form 1120-IC-DISC and given to each shareholder. Write "AMENDED" across the top of the corrected Schedule K you give to each shareholder.
For rules of stock attribution, see section 267(c). If the owner of the voting stock of the IC-DISC was an alien individual or a foreign corporation, partnership, trust, or estate, check the "Yes" box in the "Foreign owner" column and enter the name of the owner's country, in parentheses, in the address column. "Owner's country" for individuals is their country of residence; for other foreign entities, it is the country in which organized or otherwise created, or in which administered.
An IC-DISC must figure its taxable income although it does not pay most taxes. An IC-DISC is exempt from the corporate income tax, alternative minimum tax, and accumulated earnings tax.
An IC-DISC may not claim the general business credit or the credit for fuel produced from a nonconventional source. In addition, these credits may not be passed through to shareholders of the corporation.
The NOL deduction is the amount of the NOL carryover and carryback that may be deducted in the tax year. See section 172 for details.
If the IC-DISC uses either the gross receipts method or combined taxable income method to compute the IC-DISC's taxable income attributable to any transactions involving products or product lines, attach Schedule P (Form 1120-IC-DISC). Show in detail the IC-DISC's taxable income attributable to each such transaction or group of transactions.
Generally, inventories are required at the beginning and end of each tax year if the purchase or sale of merchandise is an income-producing factor. See Regulations section 1.471-1.
However, if the IC-DISC is a qualifying taxpayer or a qualifying small business taxpayer, it can adopt or change its accounting method to account for inventoriable items in the same manner as materials and supplies that are not incidental.
A qualifying taxpayer is a taxpayer that, for each prior tax year ending after December 16, 1998, has average annual gross receipts of $1 million or less for the 3 prior tax years.
A qualifying small business taxpayer is a taxpayer (a) that, for each prior tax year ending on or after December 31, 2000, has average annual gross receipts of $10 million or less for the 3 prior tax years; and (b) whose principal business activity is not an ineligible activity.
Under this accounting method, inventory costs for merchandise purchased for resale are deductible in the year the merchandise is sold (but not before the year the IC-DISC paid for the merchandise, if it is also using the cash method). For additional guidance on this method of accounting for inventoriable items, see Pub. 538.
Enter amounts paid for merchandise during the tax year on line 2. The amount the IC-DISC may deduct for the tax year is figured on line 8.
All filers not using the cash method of accounting should see Section 263A uniform capitalization rules, later, before completing Schedule A.
If the IC-DISC uses intercompany pricing rules (for purchases from a related supplier), use the transfer price figured in Part II of Schedule P (Form 1120-IC-DISC).
If the IC-DISC acts as another person's commission agent on a sale, do not enter any amount in Schedule A for the sale. See Schedule P (Form 1120-IC-DISC).
If the IC-DISC is changing its method of accounting for the current tax year, it must refigure last year's closing inventory using the new method of accounting and enter the result on line 1. If there is a difference between last year's closing inventory and the refigured amount, attach an explanation and take it into account when figuring the IC-DISC's section 481(a) adjustment (explained later).
For IC-DISCs that have elected the simplified production method, additional section 263A costs are generally those costs, other than interest, that were not capitalized under the IC-DISC's method of accounting immediately prior to the effective date of section 263A but are now required to be capitalized under section 263A. For details, see Regulations section 1.263A-2(b).
For IC-DISCs that have elected the simplified resale method, additional section 263A costs are generally those costs incurred with respect to the following categories.
Off-site storage or warehousing.
Handling, such as processing, assembling, repackaging, and transporting.
General and administrative costs (mixed service costs).
For details, see Regulations section 1.263A-3(d).
Enter on line 4 the balance of section 263A costs paid or incurred during the tax year not includible on lines 2, 3, and 5.
Enter on line 5 any costs paid or incurred during the tax year not entered on lines 2 through 4.
See Regulations sections 1.263A-1 through 1.263A-3 for details on figuring the amount of additional section 263A costs to be included in ending inventory. If the IC-DISC accounts for inventoriable items in the same manner as materials and supplies that are not incidental, enter on line 7 the portion of its merchandise purchased for resale that is included on line 6 and was not sold during the year.
Inventories may be valued at:
Cost or market value (whichever is lower), or
Any other method approved by the IRS that conforms to the requirements of the applicable regulations cited later.
However, if the IC-DISC is using the cash method of accounting, it is required to use cost.
IC-DISCs that account for inventoriable items in the same manner as materials and supplies that are not incidental may currently deduct expenditures for direct labor and all indirect costs that would otherwise be included in inventory costs.
The rolling average method of valuing inventories generally does not clearly reflect income for federal income tax purposes. However, if an IC-DISC uses the average cost method for financial accounting purposes, there are two safe harbors under which this method will be deemed to clearly reflect income for federal income tax purposes. See Rev. Proc. 2008-43, 2008-30 I.R.B. 186, as modified by Rev. Proc. 2008-52, 2008-36 I.R.B. 587, and as modified by Rev. Proc. 2011-14, 2011-4 I.R.B. 330, or a successor.
IC-DISCs that use erroneous valuation methods must change to a method permitted for federal income tax purposes. Use Form 3115 to make this change.
On line 9a, check the method(s) used for valuing inventories. Under lower of cost or market, the term "market" (for normal goods) means the current bid price prevailing on the inventory valuation date for the particular merchandise in the volume usually purchased by the taxpayer. If section 263A applies to the taxpayer, the basic elements of cost must reflect the current bid price of all direct costs and all indirect costs properly allocable to goods on hand at the inventory date.
Inventory may be valued below cost when the merchandise is unsalable at normal prices or unusable in the normal way because the goods are subnormal due to damage, imperfections, shopwear, etc., within the meaning of Regulations section 1.471-2(c). The goods may be valued at the current bona fide selling price, minus direct cost of disposition (but not less than scrap value) if such a price can be established.
If this is the first year the Last-in, First-out (LIFO) inventory method was either adopted or extended to inventory goods not previously valued under the LIFO method provided in section 472, attach Form 970, Application To Use LIFO Inventory Method, or a statement with the information required by Form 970. Also check the LIFO box on line 9c. On line 9d, enter the amount or the percent of total closing inventories covered under section 472. Estimates are acceptable.
If the IC-DISC changed or extended its inventory method to LIFO and had to write up the opening inventory to cost in the year of election, report the effect of the write-up as other income (Schedule B, line 2j or 3f), proportionately over a 3-year period that begins with the year of the LIFO election (section 472(d)).
For more information on inventory valuation methods, see Pub. 538.
If an income item falls into two or more categories, report each part on the applicable line. For example, if interest income consists of qualified interest from a foreign international sales corporation and nonqualifying interest from a domestic obligation, enter the qualified interest on an attached statement for line 2g and the nonqualifying interest on an attached statement for line 3f.
For gain from selling qualified export assets, attach a separate statement in addition to the forms required for lines 2h and 2i.
Nonaccrual experience method for service providers.
Accrual method corporations are not required to accrue certain amounts to be received from the performance of certain services that, on the basis of their experience, will not be collected, if the corporation's average annual gross receipts for the 3 prior tax years does not exceed $5 million.
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. For more information, see section 448(d)(5) and Regulations section 1.448-2. Also, see Rev. Proc. 2011-46, in I.R.B. 2011-42, for information on a book safe harbor method of accounting for corporations that use the nonaccrual experience method of accounting, and procedures to obtain automatic consent to change to this method or make certain changes within this method.
Corporations that qualify to use the nonaccrual experience method should attach a statement showing total gross receipts, the amount not accrued as a result of the application of section 448(d)(5), and the net amount accrued. Enter the amount on the applicable line of Schedule B.
"United States," as used in the following instructions, includes Puerto Rico and U.S. possessions, as well as the 50 states and the District of Columbia.
If the IC-DISC received commissions on selling or renting property or furnishing services, list in column (b) the gross receipts from the sales, rentals, or services on which the commissions arose, and in column (c), list the commissions earned. In column (d), report receipts from noncommissioned sales or rentals of property or furnishing of services, as well as all other receipts.
For purposes of completing line 1a and line 1b, related purchasers are members of the same controlled group (as defined in section 993(a)(3)) as the IC-DISC. All other purchasers are unrelated.
A qualified export sale or lease must meet a use test and a destination test in order to qualify.
The use test applies at the time of the sale or lease. If the property is used predominantly outside the United States and the sale or lease is not for ultimate use in the United States, it is a qualified export sale or lease. Otherwise, if a reasonable person would believe that the property will be used in the United States, the sale or lease is not a qualified export sale or lease. For example, if property is sold to a foreign wholesaler and it is known in trade circles that the wholesaler, to a substantial extent, supplies the U.S. retail market, the sale would not be a qualified export sale, and the receipts would not be qualified export receipts.
Regardless of where title or risk of loss shifts from the seller or lessor, the property must be delivered under one of the following conditions to meet the destination test.
Within the United States to a carrier or freight forwarder for ultimate delivery outside the United States to a buyer or lessee.
Within the United States to a buyer or lessee who, within 1 year of the sale or lease, delivers it outside the United States or delivers it to another person for ultimate delivery outside the United States.
Within or outside the United States to an IC-DISC that is not a member of the same controlled group (as defined in section 993(a)(3)) as the seller or lessor.
Outside the United States by means of the seller's delivery vehicle (ship, plane, etc.).
Outside the United States to a buyer or lessee at a storage or assembly site if the property was previously shipped from the United States by the seller or lessor.
Outside the United States to a purchaser or lessee if the property was previously shipped by the seller or lessor from the United States and if the property is located outside the United States pursuant to a prior lease by the seller or lessor, and either (a) the prior lease terminated at the expiration of its term (or by the action of the prior lessee acting alone), (b) the sale occurred or the term of the subsequent lease began after the time at which the term of the prior lease would have expired, or (c) the lessee under the subsequent lease is not a related person (a member of the same controlled group as defined in section 993(a)(3) or a relationship that would result in a disallowance of losses under section 267 or section 707(b)) immediately before or after the lease with respect to the lessor, and the prior lease was terminated by the action of the lessor (acting alone or together with the lessee).
Enter the IC-DISC's qualified export receipts from export property sold to foreign, unrelated buyers for delivery outside the United States. Do not include amounts entered on line 1b.
Enter the IC-DISC's qualified export receipts from export property sold for delivery outside the United States to a related foreign entity for resale to a foreign, unrelated buyer, or an unrelated buyer when a related foreign entity acts as commission agent.
Enter the gross amount received from leasing or subleasing export property to unrelated persons for use outside the United States.
Receipts from leasing export property may qualify in some years and not in others, depending on where the lessee uses the property. Enter only receipts that qualify during the tax year. (Use Schedule E to deduct expenses such as repairs, interest, taxes, and depreciation.)
A service connected to a sale or lease is related to it if the service is usually furnished with that type of sale or lease in the trade or business where it took place. A service is subsidiary if it is less important than the sale or lease.
Include receipts from engineering or architectural services on foreign construction projects abroad or proposed for location abroad. These services include feasibility studies, design and engineering, and general supervision of construction, but do not include services connected with mineral exploration.
Include receipts for export management services provided to unrelated IC-DISCs.
Include interest received on any loan that qualifies as a producer's loan.
Enter interest on any qualified export asset other than interest on producer's loans. For example, include interest on accounts receivable from sales in which the IC-DISC acted as a principal or agent and interest on certain obligations issued, guaranteed, or insured by the Export-Import Bank or the Foreign Credit Insurance Association.
On Schedule D (Form 1120), Capital Gains and Losses, report in detail every sale or exchange of a capital asset, even if there is no gain or loss.
In addition to Schedule D (Form 1120), attach a separate statement figuring gain from the sale of qualified export assets.
Enter the net gain or loss from line 18, Part II, Form 4797, Sales of Business Property.
In addition to Form 4797, attach a separate statement figuring gain from the sale of qualified export assets.
Enter any other qualified export receipts for the tax year not reported on lines 2a through 2i.
The IC-DISC may have to make an adjustment under section 481(a) to prevent amounts of income or expense from being duplicated or omitted. This section 481(a) adjustment period is generally 1 year for a net negative adjustment and 4 years for a net positive adjustment. However, an IC-DISC may elect to use a 1-year adjustment period if the net section 481(a) adjustment for the change is less than $25,000. The IC-DISC must complete the appropriate lines of Form 3115 to make the election.
Include any net positive section 481(a) adjustment on Schedule B, line 2j or 3f (depending on whether the inventory, when sold, will generate qualified export receipts). If the net section 481(a) adjustment is negative, report it on Schedule E, line 2g.
Enter receipts from selling products subsidized under a U.S. program if they have been designated as excluded receipts.
Enter receipts from selling or leasing property or services for use by any part of the U.S. Government if law or regulations require U.S. products or services to be used.
Enter receipts from any IC-DISC that belongs to the same controlled group (as defined in section 993(a)(3)).
Include in an attached statement any nonqualifying gross receipts not reported on lines 3a through 3e. Do not offset an income item against a similar expense item.
The IC-DISC may have to report a section 481(a) adjustment on line 3f. See Section 481(a) adjustment, earlier, for additional information.
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. Preferred stock described in section 1504(a)(4) is not taken into account.
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 the following on line 1.
Taxable distributions from an IC-DISC or former DISC that are designated as being eligible for the 70% deduction and certain dividends of Federal Home Loan Banks. See section 246(a)(2).
Dividends received (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 eligible for 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 and 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 (for example, it borrowed money to buy the stock).
Dividends received from a RIC on debt-financed stock. The amount of dividends eligible for the dividends-received deduction is limited by section 854(b). The 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 statement to Form 1120-IC-DISC showing how the amount on line 3, column (c), was figured.
Enter dividends received on the preferred stock of a less-than-20%-owned public utility that is subject to income tax and is allowed the deduction provided in section 247 for dividends paid.
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 under 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).
Enter dividends received from wholly owned foreign subsidiaries that are eligible for the 100% deduction under section 245(b).
In general, the deduction under section 245(b) applies to dividends paid out of the earnings and profits of a foreign corporation for a tax year during which:
All of its outstanding stock is owned (directly or indirectly) by the domestic corporation receiving the dividends, and
All of its gross income from all sources is effectively connected with the conduct of a trade or business within the United States.
Generally, line 9, column (c), may not exceed the amount from the following worksheet. However, in a year in which an NOL occurs, this limitation does not apply even if the loss is created by the dividends-received deduction. See sections 172(d) and 246(b).
Line 9, Column (c) Worksheet
|1.||Refigure line 5, page 1, Form 1120-IC-DISC, without any adjustment under section 1059 and without any capital loss carryback to the tax year under section 1212(a)(1)|
|2.||Multiply line 1 by 80% (0.80)|
|3.||Add lines 2, 5, 7, and 8, column (c), and the part of the deduction on line 3, column (c), that is attributable to dividends received from 20%-or-more-owned corporations|
|4.||Enter the smaller of line 2 or line 3. If line 3 is larger than line 2, do not complete the rest of this worksheet. Instead, enter the amount from line 4 in the margin next to line 9 of Schedule C and on line 6b, page 1, Form 1120-IC-DISC|
|5.||Enter the total amount of dividends received from 20%-or-more-owned corporations that are included on lines 2, 3, 5, 7, and 8 of column (a)|
|6.||Subtract line 5 from line 1|
|7.||Multiply line 6 by 70% (0.70)|
|8.||Subtract line 3 above from column (c) of line 9|
|9.||Enter the smaller of line 7 or line 8|
|10.||Dividends-received deduction after limitation. Add lines 4 and 9. (If this is less than line 9 of Schedule C, enter the smaller amount on line 6b, page 1, Form 1120-IC-DISC, and in the margin next to line 9 of Schedule C.)|
Include the following.
Dividends (other than capital gain distributions reported on Schedule D (Form 1120) and exempt-interest dividends) that are received from RICs and that are not subject to the 70% deduction.
Dividends from tax-exempt organizations.
Dividends (other than capital gain distributions) received from a real estate investment trust that, for the tax year of the trust in which the dividends are paid, qualifies under sections 856 through 860.
Dividends not eligible for a dividends-received deduction, 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 IC-DISC 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 IC-DISC held the stock, you may not count certain days during which the IC-DISC'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 in item 1.
Dividends on any share of stock to the extent the IC-DISC 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.
Qualified dividends are dividends that qualify as qualified export receipts. They include all dividends (or amounts) includible in gross income (under section 951) that are attributable to stock of related foreign export corporations. See Qualified export receipts and A related foreign export corporation under Section 993, earlier, for more details.
Section 263A uniform capitalization rules.
The uniform capitalization rules of section 263A generally require corporations to capitalize, or include in inventory, certain costs incurred in connection with the following.
Personal property (tangible and certain intangible property) acquired for resale.
The production of real property and tangible personal property by a corporation for use in its trade or business or in an activity engaged in for profit.
Tangible personal property produced by a corporation includes a film, sound recording, videotape, book, or similar property.
IC-DISCs subject to the section 263A uniform capitalization rules are required to capitalize:
Direct costs, and
An allocable part of most indirect costs (including taxes) that (a) benefit the assets produced or acquired for resale, or (b) are incurred by reason of the performance of production or resale activities.
For inventory, some of the indirect expenses that must be capitalized are:
Compensation paid to officers attributable to services;
Rework labor; and
Contributions to pension, stock bonus, and certain profit-sharing, annuity, or deferred compensation plans.
Regulations section 1.263A-1(e)(3) specifies other indirect costs that relate to production or resale activities that must be capitalized and those that may be currently deductible.
Interest expense paid or incurred during the production period of designated property must be capitalized and is governed by special rules. For more details, see Regulations sections 1.263A-8 through 1.263A-15.
The costs required to be capitalized under section 263A are not deductible until the property (to which the costs relate) is sold, used, or otherwise disposed of by the corporation.
Section 263A does not apply to the following.
Personal property acquired for resale if the IC-DISC's average annual gross receipts for the 3 prior tax years were $10 million or less.
Inventoriable items accounted for in the same manner as materials and supplies that are not incidental. See Cost of Goods Sold, earlier, for details.
For more details on the uniform capitalization rules, see Regulations sections 1.263A-1 through 1.263A-3.
Transactions between related taxpayers.
Generally, an accrual basis taxpayer may only deduct business expenses and interest owed to a related party in the year the payment is included in the income of the related party. See sections 163(e)(3), 163(j), and 267 for limitations on deductions for unpaid interest and expenses.
Corporations use Form 8926, Disqualified Corporate Interest Expense Under Section 163(j) and Related Information, to figure the amount of any corporate interest disallowed by section 163(j).
Golden parachute payments.
A portion of the payments made by a corporation to key personnel that exceeds their usual compensation may not be deductible. This occurs when the corporation has an agreement (golden parachute) with these key employees to pay them these excess amounts if control of the corporation changes. See section 280G and Regulations section 1.280G-1. Also, see the instructions for line 1i, later.
Business start-up and organizational costs.
Business start-up and organizational costs must be capitalized unless an election is made to deduct or amortize them. The following rules apply separately to each category of costs.
The IC-DISC may elect to deduct up to $5,000 of such costs for the year the IC-DISC begins business operations.
The $5,000 deduction is reduced (but not below zero) by the amount the total costs exceed $50,000. If the total costs are $55,000 or more, the deduction is reduced to zero.
If the election is made, any costs that are not deductible must be amortized ratably over a 180-month period beginning with the month the IC-DISC begins business operations.
Attach any statement required by Regulations section 1.195-1(b) or 1.248-1(c). Report the deductible amount of these costs and any amortization on line 2g of Schedule E. For amortization that begins during the current tax year, complete and attach Form 4562.
For more information, see Pub. 535, Business Expenses, and the Instructions for Form 4562. For more details on the election for business start-up costs, see section 195. For more details on the election for organizational costs, see section 248.
Limitations on deductions related to property leased to tax-exempt entities.
If an IC-DISC leases property to a governmental or other tax-exempt entity, it may not claim deductions related to the property to the extent that they exceed the IC-DISC's income from the lease payments (tax-exempt-use loss). Amounts disallowed may be carried over to the next tax year and treated as a deduction with respect to the property for that tax year. See section 470 for more details and exceptions.
See the Instructions for Form 1120 and Pub. 542 for limitations that apply to contributions.
Enter export promotion expenses on lines 1a through 1m. Export promotion expenses are an IC-DISC's ordinary and necessary expenses paid or incurred to obtain qualified export receipts. Do not include income taxes. Enter on lines 2a through 2g any part of an expense not incurred to obtain qualified export receipts.
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 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 1c and 1m.
Enter 50% of the freight expenses (except insurance) for shipping export property aboard U.S. flagships and U.S.-owned and U.S.-operated aircraft in those cases where you are not required to use U.S. ships or aircraft by law or regulations.
Enter deductible officers' compensation on line 1i. Attach a statement showing the name, social security number, and amount of compensation paid to all officers. 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. See the Instructions for Form 1120 for more information on officers' compensation, including any special rules and limitations that may apply.
The IC-DISC determines who is an officer under the laws of the state where it is incorporated.
Enter any other allowable export promotion expenses not claimed elsewhere on the return.
Enter taxes paid or accrued during the tax year, but do not include the following.
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 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 apportionment of taxes on real property between seller and purchaser.
Do not deduct the following interest.
Interest on indebtedness incurred or continued to purchase or carry obligations if the interest is wholly exempt from income tax. For exceptions, see section 265(b).
For cash basis taxpayers, prepaid interest allocable to years following the current tax year (for example, a cash basis calendar year taxpayer who in the current tax year prepaid interest allocable to any period after the current tax year may deduct only the amount allocable to the current tax year).
Interest on debt allocable to the production of designated property by a corporation for its own use. The corporation must capitalize this interest. Also capitalize any interest on debt allocable to an asset used to produce the property. See section 263A(f) and Regulations sections 1.263A-8 through 1.263A-15 for definitions and more information.
Special rules apply to the following.
Disqualified interest on certain indebtedness under section 163(j). See Form 8926, Disqualified Corporate Interest Expense Under Section 163(j) and Related Information, and the related instructions.
Forgone interest on certain below-market-rate loans (see section 7872).
Original issue discount on certain high-yield discount obligations. See section 163(e) to figure the disqualified portion.
Interest which is allocable to unborrowed policy cash values of life insurance, endowment, or annuity contracts issued after June 8, 1997. See section 264(f). Attach a statement showing the computation of the deduction.
For more information on charitable contributions, including substantiation and recordkeeping requirements, see section 170 and the related regulations and Pub. 526, Charitable Contributions. For limitations on deduction and other special rules that apply to corporations, see the Instructions for Form 1120 and Pub. 542.
Enter any other allowable deduction not claimed on line 1 or lines 2a through 2f.
The IC-DISC may have to report a negative section 481(a) adjustment on line 2g. See Section 481(a) adjustment, earlier, for additional information.
Generally, a deduction may not be taken for any amount that is allocable to a class of exempt income. See section 265(b) for exceptions.
Enter gain recognized during the tax year on the sale or exchange of property, other than property which in the hands of the IC-DISC was a qualified export asset, previously transferred to the IC-DISC in a transaction in which the transferor realized gain but did not recognize the gain in whole or in part. See section 995(b)(1)(B). Show the computation of the gain on a separate statement. Include no more of the IC-DISC's gain than the amount of gain the transferor did not recognize on the earlier transfer.
Enter gain recognized on the sale or exchange of property described in section 995(b)(1)(C). Show the computation of the gain on a separate statement. Do not include any gain included in the computation of line 2. Include only the amount of the IC-DISC's gain that the transferor did not recognize on the earlier transfer and that would have been treated as ordinary income if the property had been sold or exchanged rather than transferred to the IC-DISC. Do not include gain on the sale or exchange of IC-DISC stock-in-trade or other property that either would be included in inventory if on hand at the end of the tax year or is held primarily for sale in the normal course of business.
Enter 50% of taxable income attributable to military property (section 995(b)(1)(D)). Show the computation of this income. To figure taxable income attributable to military property, use the gross income attributable to military property for the year and the deductions properly allocated to that income. See Regulations section 1.995-6.
Line 9 provides for the computation of the one-seventeenth deemed distribution of section 995(b)(1)(F)(i). Line 9 only applies to shareholders of the IC-DISC that are C corporations.
An IC-DISC is deemed to distribute any income that resulted from cooperating with an international boycott (section 995(b)(1)(F)(ii)). See Form 5713 to figure this deemed distribution and for reporting requirements for any IC-DISC with operations related to a boycotting country.
An IC-DISC is deemed to distribute the amount of any illegal payments, such as bribes or kickbacks, that it pays, directly or indirectly, to government officials, employees, or agents (section 995(b)(1)(F)(iii)).
Attach a computation showing the earnings and profits for the tax year. See section 312 for rules on figuring earnings and profits for the purpose of the section 995(b)(1) limitation.
Line 17a. For shareholders other than C corporations.
To figure the amount for line 17a, attach a computation showing (1) the IC-DISC's foreign investment in producer's loans during the tax year; (2) accumulated earnings and profits (including earnings and profits for the current tax year) minus the amount on line 15, Part I; and (3) accumulated IC-DISC income. Enter the smallest of these amounts (but not less than zero) on line 17a.
Line 17b. For C corporation shareholders.
To figure the amount for line 17b, attach a computation showing (1) the IC-DISC's foreign investment in producer's loans during the tax year; (2) accumulated earnings and profits (including earnings and profits for the current tax year) minus the amount on line 16, Part I; and (3) accumulated IC-DISC income. Enter the smallest of these amounts (but not less than zero) on line 17b.
For purposes of lines 17a and 17b, foreign investment in producer's loans is the smallest of (1) the net increase in foreign assets by members of the controlled group (defined in section 993(a)(3)) to which the IC-DISC belongs; (2) the actual foreign investment by the group's domestic members; or (3) the IC-DISC's outstanding producer's loans to members of the controlled group.
Net increase in foreign assets and actual foreign investment are defined in sections 995(d)(2) and (3).
See Regulations section 1.995-5 for additional information on figuring foreign investment attributable to producer's loans.
Lines 20 and 21.
The percentages on lines 20 and 21 must add up to 100%.
Allocate the line 22 amount to shareholders that are individuals, partnerships, S corporations, trusts, and estates.
Generally, any taxable income of the IC-DISC attributable to qualified export receipts that exceed $10 million will be deemed distributed.
If there were no commission sales, leases, rentals, or services for the tax year, enter on line 1, Part II, the total of lines 1c and 2k, column (e), Schedule B.
If there were commission sales, leases, rentals, or services for the tax year, the total qualified export receipts to be entered on line 1, Part II, are figured as follows (section 993(f)):
Line 1, Export Receipts Worksheet
|1.||Add lines 1c and 2k, column (b), Schedule B|
|2.||Add lines 1c and 2k, column (d), Schedule B|
|3.||Add lines 1 and 2. Enter on line 1, Part II, Schedule J|
If the IC-DISC is a member of a controlled group (as defined in section 993(a)(3)) that includes more than one IC-DISC, only one $10 million limit is allowed to the group. If an allocation is required, a statement showing each member's portion of the $10 million limit must be attached to Form 1120-IC-DISC. See Proposed Regulations section 1.995-8(f) for details.
The $10 million limit (or the controlled group member's share) is prorated on a daily basis. Thus, for example, if, for its 2011 calendar tax year, an IC-DISC has a short tax year of 73 days, and it is not a member of a controlled group, the limit that would be entered on line 5 of Part II is $2 million (73/365 times $10 million).
Enter the taxable income attributable to line 6, qualified export receipts. The IC-DISC may select the qualified export receipts to which the line 5 limitation is allocated.
See Proposed Regulations section 1.995-8 for details on determining the IC-DISC's taxable income attributable to qualified export receipts in excess of the $10 million amount. Special rules are provided for allocating the taxable income attributable to any related and subsidiary services, and for the ratable allocation of the taxable income attributable to the first transaction selected by the IC-DISC that exceeds the $10 million amount. Deductions must be allocated and apportioned according to the rules of Regulations section 1.861-8. The selection of the excess receipts by the IC-DISC is intended to permit the IC-DISC to allocate the $10 million limitation to the qualified export receipts of those transactions occurring during the tax year that permit the greatest amount of taxable income to be allocated to the IC-DISC under the intercompany pricing rules of section 994.
To avoid double counting of the deemed distribution, if an amount of taxable income for the tax year attributable to excess qualified export receipts is also deemed distributed under either line 1, 2, 3, or 4 of Part I, such amount of taxable income is only includible on that line of Part I, and must be subtracted from the amount otherwise reportable on line 7 of Part II and carried to line 5 of Part I. See Proposed Regulations section 1.995-8(d).
After filing the IC-DISC's current year tax return, the allocation of the $10 million limitation and the computation of the line 7 deemed distribution may be changed by filing an amended Form 1120-IC-DISC only under the conditions specified in Proposed Regulations section 1.995-8(b)(1).
If the corporation is a former DISC or a former IC-DISC that revoked IC-DISC status or lost IC-DISC status for failure to satisfy one or more of the conditions specified in section 992(a)(1) for the current tax year, each shareholder is deemed to have received a distribution taxable as a dividend on the last day of the current tax year. The deemed distribution equals the shareholder's prorated share of the DISC's or IC-DISC's income accumulated during the years just before DISC or IC-DISC status ended. The shareholder will be deemed to receive the distribution in equal parts on the last day of each of the 10 tax years of the corporation following the year of the termination or disqualification of the IC-DISC (but in no case over more than twice the number of years the corporation was a DISC or IC-DISC).
If the corporation is required to pay interest under section 992(c)(2)(B) on the amount of a distribution to meet the qualification requirements of section 992(c), report this interest on line 2c, Schedule E. Also include the amount on line 1, Part IV of Schedule J, and show the computation of the interest on an attached statement.
Report on line 4a all actual distributions of previously taxed income. Also, include any distributions of pre-1985 accumulated DISC income that are nontaxable (see the instructions for Schedule L, line 12, later). Enter on the dotted line to the left of the line 4a amount the dollar amount of the distribution that is nontaxable pre-1985 DISC income and identify it as such. Do not include distributions of pre-1985 DISC income that are made under section 995(b)(2) because of prior year revocations or disqualifications.
In general, deferred DISC income is:
Accumulated IC-DISC income (for periods after 1984) of the IC-DISC as of the close of the computation year, over
The amount of distributions-in-excess-of-income for the tax year of the IC-DISC following the computation year.
For purposes of item 2, distributions-in-excess-of-income means the excess (if any) of:
Actual distributions to shareholders out of accumulated IC-DISC income, over
The amount of IC-DISC income (as defined in section 996(f)(1)) for the tax year following the computation year.
For purposes of items 1 and 2, see section 995(f) and Proposed Regulations section 1.995(f)-1 for a definition of computation year, examples, and other details on figuring deferred DISC income.
The amount on line 3, Part V, is allocated to each shareholder on line 10, Part III, of Schedule K (Form 1120-IC-DISC).
Shareholders of an IC-DISC must file Form 8404 if the IC-DISC reports deferred DISC income on line 10, Part III of Schedule K.
The balance sheet should agree with the IC-DISC's books and records. Include certificates of deposits as cash on line 1.
If the corporation was a qualified DISC as of December 31, 1984, the accumulated pre-1985 DISC income will generally be treated as previously taxed income (exempt from tax) when distributed to DISC shareholders after December 31, 1984.
The exemption does not apply to distributions of accumulated pre-1985 DISC income of an IC-DISC or former DISC that was made taxable under section 995(b)(2) because of a prior revocation of the DISC election or disqualification of the DISC. For more details on these distributions, see Temporary Regulations section 1.921-1T(a)(7).
Enter in line 1a the code number and percentage of total export gross receipts (defined under Line 2. Definitions, later) for the product or service that accounts for the largest portion of the IC-DISC's export gross receipts. The product codes are at the end of these instructions. On line 1b, enter the same information for the IC-DISC's next largest product or service.
An IC-DISC has export gross receipts of $10 million. Selling agricultural chemicals accounts for $4.5 million (45% (0.45)) of that amount, which is the IC-DISC's largest product or service. The IC-DISC should enter "287" (the product code for agricultural chemicals) and "45%" in line 1a.
Selling industrial chemicals accounts for $2 million (20% (0.20) of the $10 million total) and is the IC-DISC's second-largest product or service. The IC-DISC should enter "281" (the product code for industrial inorganic and organic chemicals) and "20%" in line 1b.
Export gross receipts are receipts from any of the following.
Providing engineering or architectural services for construction projects located outside the United States.
Selling for direct use, consumption, or disposition outside the United States, property (such as inventory) produced in the United States.
Renting this property to unrelated persons for use outside the United States.
Providing services involved in such a sale or rental.
Providing export management services.
For commission sales, export gross receipts include the total receipts on which the IC-DISC earned the commission.
For purposes of line 2, Schedule N only, no reduction is to be made for receipts attributable to military property. Therefore, an IC-DISC's export gross receipts for purposes of line 2 include the total of the amounts from Schedule B, columns (b) and (d) of lines 1c, 2a, 2b, 2c, and 2d.
Related persons are:
An individual, partnership, estate, or trust that controls the IC-DISC;
A corporation that controls the IC-DISC or is controlled by it; or
A corporation controlled by the same person or persons who control the IC-DISC.
Control means direct or indirect ownership of more than 50% of the total voting power of all classes of stock entitled to vote. See section 993(a)(3).
U.S. person is:
A citizen or resident of the United States, which includes the Commonwealth of Puerto Rico and possessions of the United States;
A domestic corporation or partnership; or
An estate or trust (other than a foreign estate or trust as defined in section 7701(a)(31)).
All IC-DISCs should complete column (a) in line 2. If two or more IC-DISCs are related persons, only the IC-DISC with the largest export gross receipts should complete columns (b) and (c). If an IC-DISC acts as a commission agent for a related person, attribute the total amount of the transaction to the IC-DISC.
Complete column (a) to report the IC-DISC's export gross receipts from all sources (including the United States) for the current tax year.
Column (b). Export gross receipts of related IC-DISCs.
Complete column (b) to report related IC-DISCs' export gross receipts from all sources (including the United States).
Column (c). Export gross receipts of all other related U.S. persons.
Complete column (c) to report other related U.S. persons' export gross receipts from all sources except the United States.
Question 6. Boycott of Israel.
If question 6a, 6b, or 6c is checked "Yes," the IC-DISC must file Form 5713 and is also deemed to distribute part of its income. See Form 5713 for more information.
Question 7. Tax-exempt interest.
Report any tax-exempt interest received or accrued. Include any exempt-interest dividends received as a shareholder in a mutual fund or other RIC.
Question 8. Foreign owner.
If the answer to question 8(a) or 8(b) is "Yes," enter on line 8(b)a the percentage owned. On line 8(b)b, enter the owner's country, and on line 8(b)c, if Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation Engaged in a U.S. Trade or Business, is filed by the corporation, enter the number of Forms 5472 attached.
We ask for the information on this form to carry out the Internal Revenue laws of the United States. You are required to give us the information. We need it to ensure that you are complying with these laws and to allow us to figure and collect the right amount of tax.
You are not required to provide the information requested on a form that is subject to the Paperwork Reduction Act unless the form displays a valid OMB control number. Books or records relating to a form or its instructions must be retained as long as their contents may become material in the administration of any Internal Revenue law. Generally, tax returns and return information are confidential, as required by section 6103.
The time needed to complete and file Form 1120-IC-DISC, Schedule K (Form 1120-IC-DISC), and Schedule P (Form 1120-IC-DISC), will vary depending on individual circumstances. The estimated burden for business taxpayers filing these forms is approved under OMB control number 1545-0123.
If you have comments concerning the accuracy of these time estimates or suggestions for making these forms simpler, we would be happy to hear from you. You can send us comments from IRS.gov/FormComment. Or you can write to: Internal Revenue Service, Tax Forms and Publications, 1111 Constitution Ave. NW, IR-6526, Washington, DC 20224. Don't send the tax forms to this address. Instead, see Where To File, earlier.