Department of the Treasury 2006 Internal Revenue Service

Instructions for

Forms 1120 and 1120-A

Section references are to the Internal • The filing address for corporations whose photographs and calling 1-800-THE-LOST

Revenue Code unless otherwise noted. principal business, office, or agency is (1-800-843-5678) if you recognize a child.

located in a foreign country or U.S. Contents Page possession has changed. See Where To Photographs of Missing Children . . . ....1 File on page 3. Unresolved Tax Issues

Unresolved Tax Issues .............1 • Corporations must include in income part If the corporation has attempted to deal with Direct Deposit of Refund ............1 or all of the proceeds received from certain an IRS problem unsuccessfully, it should

How To Make a Contribution To corporate-owned life insurance contracts contact the Taxpayer Advocate. The

Reduce Debt Held by the Public ....2 Taxpayer Advocate independently issued after August 17, 2006. See section How To Get Forms and 101(j) for details. represents the corporation’s interests and

Publications ...................2 concerns within the IRS by protecting its • Certain corporate farmers and ranchers General Instructions rights and resolving problems that have not ..............2 may have an increased contribution limit Purpose of Form . . . been fixed through normal channels. ...............2 and carryover period for donations of

Who Must File ...................2 conservation property. See Suspension of While Taxpayer Advocates cannot Electronic Filing . . . ...............2 10% limitation for farmers and ranchers on change the tax law or make a technical tax When To File page 9. ....................3 decision, they can clear up problems that

Where To File ....................3 • Cash contributions made in tax years resulted from previous contacts and ensure

Who Must Sign ...................3 beginning after August 17, 2006, must be that the corporation’s case is given a

Paid Preparer Authorization ..........3 supported by a dated bank record or receipt. complete and impartial review. See Substantiation requirements on page Assembling the Return .............4 10. The corporation’s assigned personal Depository Methods of Tax advocate will listen to its point of view and • New rules and restrictions apply to certain Payment . . . ...................4 will work with the corporation to address its contributions of real property interests Estimated Tax Payments ............4 concerns. The corporation can expect the located in a registered historic district. Also, Interest and Penalties ..............4 advocate to provide: a $500 filing fee may apply to certain Accounting Methods ...............5 deductions over $10,000. See Special rules • A “fresh look” at a new or ongoing Accounting Period .................5 problem, for contributions of certain easements in

Rounding Off to Whole Dollars ........5 • Timely acknowledgment, registered historic districts on page 10. Recordkeeping ...................5 • The name and phone number of the • The larger deductions for contributions of Other Forms and Statements That individual assigned to its case, certain food inventory and qualified book May Be Required • Updates on progress, ................5 contributions to certain schools have been

Specific Instructions • Timeframes for action, ..............5 extended through December 31, 2007. See Period Covered . . . ...............5 Other special rules • Speedy resolution, and on page 10.

Name and Address • Courteous service. ................5 • Corporations that paid the federal

Identifying Information ..............6 telephone excise tax on long distance or When contacting the Taxpayer Advocate, Employer Identification Number bundled service may be able to request a the corporation should be prepared to (EIN) ........................6 credit. See the instructions for line 32g on provide the following information. Total Assets page 12. .....................6 • The corporation’s name, address, and Initial Return, Final Return, Name • Controlled groups must complete new employer identification number.

Change, Address Change ..........6 Schedule O (Form 1120), Consent Plan and • The name and telephone number of an

Income ........................6 Apportionment Schedule for a Controlled authorized contact person and the hours he

Deductions . . . ...................7 Group, before completing Schedule J. See or she can be reached.

Tax and Payments . . . . . . . . . . . . . . . 12 the Instructions for Schedule O. • The type of tax return and year(s)

Schedule A • The possessions tax credit under section involved. . . . . . . . . . . . . . . . . . . . . 13

Cost of Goods Sold Worksheet 936 or section 30A has expired for most • A detailed description of the problem. . . . . . . . 13

Schedule C . . . . . . . . . . . . . . . . . . . . 14 corporations for tax years beginning in 2006. • Previous attempts to solve the problem

Worksheet for Schedule C For guidance on certain issues that may and the office that was contacted. . . . . . . . . . . 15 arise depending on the manner in which the • A description of the hardship the Schedule J . . . . . . . . . . . . . . . . . . . . . 15 business of the corporation continues to be corporation is facing and supporting Schedule K . . . . . . . . . . . . . . . . . . . . 16 conducted after 2005, see Notice 2005-21, documentation (if applicable). Schedule L . . . . . . . . . . . . . . . . . . . . . 17 2005-11 I.R.B. 727.

Schedule M-1 . . . . . . . . . . . . . . . . . . . 18 The corporation can contact a Taxpayer • For tax years beginning in 2006, a Principal Business Activity Codes . . . . . 19 Advocate as follows. corporation that is an existing credit claimant Index . . . . . . . . . . . . . . . . . . . . . . . . . 22 with respect to American Samoa, may be • Call the Taxpayer Advocate’s toll-free

number: 1-877-777-4778. able to claim the American Samoa

economic development credit. See the • Call, write, or fax the Taxpayer Advocate What’s New office in its area (see Pub. 1546 for Instructions for Form 5735. addresses and phone numbers). • For tax years ending on or after • TTY/TDD help is available by calling December 31, 2006, certain corporations Photographs of 1-800-829-4059.

with total assets of $10 million or more at • Visit the website at www.irs.gov/advocate. the end of the corporation’s tax year, must Missing Children

electronically file Form 1120. See Electronic The Internal Revenue Service is a proud

Filing (Form 1120 Only) on page 2. partner with the National Center for Missing Direct Deposit of Refund • Subchapter T cooperatives should file and Exploited Children. Photographs of To request a direct deposit of the

Form 1120-C, U. S. Income Tax Return for missing children selected by the Center may corporation’s income tax refund into an

Cooperative Associations, instead of Form appear in instructions on pages that would account at a U.S. bank or other financial

1120 or Form 1120-A. See Form 1120-C otherwise be blank. You can help bring institution, attach Form 8050, Direct Deposit

and its instructions. these children home by looking at the of Corporate Tax Refund (see page 12).

Cat. No. 11455T
file Form 1120 or, if they qualify, Form a. Any ownership in a foreign How To Make a 1120-A, unless they are required to file a corporation or foreign partnership,

Contribution To Reduce special return. See Special Returns for b. Foreign shareholders that directly or

Certain Organizations below. indirectly own 25% or more of its stock, or Debt Held by the Public c. Any ownership in, or transactions Limited liability companies. If an entity To help reduce debt held by the public, with, a foreign trust. with more than one owner was formed as a make a check payable to “Bureau of the limited liability company (LLC) under state Public Debt.” Send it to Bureau of the Public law, it generally is treated as a partnership Electronic Filing (Form 1120 Debt, Department G, P.O. Box 2188, for federal income tax purposes and files Parkersburg, WV 26106-2188. Or, enclose a Only) Form 1065, U.S. Return of Partnership check with the income tax return. Income. Generally, a single-member LLC is Corporations can generally electronically file Contributions to reduce debt held by the disregarded as an entity separate from its (efile) Form 1120, related forms, schedules, public are deductible subject to the rules owner and reports its income and and attachments, Form 7004, Form 940 and and limitations for charitable contributions. deductions on its owner’s federal income tax 941 employment tax returns. If there is a

return. The LLC can file a Form 1120 or balance due, the corporation can authorize How To Get Forms Form 1120-A only if it has filed Form 8832, an electronic funds withdrawal while efiling.

Entity Classification Election, to elect to be Form 1099 and other information returns and Publications treated as an association taxable as a can also be electronically filed.

Internet. You can access the IRS website corporation. For more information about However, the option to efile does not 24 hours a day, 7 days a week, at www.irs. LLCs, see Pub. 3402, Tax Issues for Limited apply to certain returns, including: gov to: Liability Companies. • Returns with a name change, • Download forms, instructions, and Corporations engaged in farming. A • Returns with precomputed penalty and publications; corporation (other than a corporation that is interest, • Order IRS products online; a subchapter T cooperative) that engages in • Returns with reasonable cause for failing • Research your tax questions online; farming should use Form 1120 or, if they to file timely, • Search publications online by topic or qualify, Form 1120-A, to report the income • Returns with reasonable cause for failing keyword; and (loss) from such activities. Enter the income to pay timely, and • Sign up to receive local and national tax and deductions of the corporation according • Returns with request for overpayment to news by email. to the instructions for lines 1 through 10 and be applied to another account. IRS Tax Products CD. You can order Pub. 12 through 29 (lines 12 through 25 of Form 1796, IRS Tax Products CD, and obtain: 1120-A). Required filers. Certain corporations with

total assets of $10 million or more that file at • Current year forms, instructions, and Ownership interest in a Financial Asset least 250 returns a year are required to efile publications; Securitization Investment Trust (FASIT). Form 1120. See Temporary Regulations • Prior year forms, instructions, and Special rules apply to a FASIT in existence section 301.6011-5T. However, these publications; on October 22, 2004, to the extent that corporations can request a waiver of the • Bonus: Historical Tax Products DVD – regular interests issued by the FASIT before electronic filing requirements. See Notice Ships with the final release; October 22, 2004, continue to remain 2005-88, 2005-48 I.R.B. 1060. • Tax Map: an electronic research tool and outstanding in accordance with their original finding aid; terms. Visit www.irs.gov/efile for details. • Tax law frequently asked questions

(FAQs); If a corporation holds an ownership

interest in a FASIT to which these special Special Returns for • Tax Topics from the IRS telephone

response system; rules apply, it must report all items of Certain Organizations • Fill-in, print and save features for most tax income, gain, deductions, losses, and Instead of filing Form 1120 or Form 1120-A, forms; credits on the corporation’s income tax certain organizations, as shown below, have • return (except as provided in section 860H). Internal Revenue Bulletins; and to file special returns. • Toll-free and email technical support. Show a breakdown of the items on an

attached schedule. For more information, The CD is released twice during the year. see sections 860H and 860L. The first release will ship the beginning of If the organization is a: File Form

January and the final release will ship the

beginning of March. Who May File Form 1120-A

Buy the CD from the National Technical A corporation may file Form 1120-A if it met Exempt organization with all of the following requirements during the Information Service (NTIS) at www.irs.gov/ unrelated trade or business 990-T tax year. cdorders for $25 (no handling fee) or call income

1-877-CDFORMS (1-877-233-6767) toll free 1. Its gross receipts (line 1a on page 1)

are under $500,000. to buy the CD for $25 (plus a $5 handling Religious or apostolic 2. Its total income (line 11 on page 1) is fee). Price is subject to change. organization exempt under 1065 under $500,000. By phone and in person. You can order 3. Its total assets (Item D on page 1) are section 501(d) forms and publications by calling under $500,000. 1-800-TAX-FORM (1-800-829-3676). You 4. Its only dividend income is from Entity formed as a limited can also get most forms and publications at domestic corporations and those dividends liability company under state your local IRS office. (a) qualify for the 70% dividends-received law and treated as a 1065 deduction and (b) are not from partnership for federal debt-financed securities. income tax purposes General Instructions 5. It does not owe alternative minimum

tax.

6. It does not have any of the “write-in” Cooperative association Purpose of Form additions to tax listed in the instructions for (including a subchapter T 1120-C

Use Form 1120, U.S. Corporation Income Schedule J, line 2 or line 10. cooperative) Tax Return, or Form 1120-A, U.S. 7. It has no nonrefundable tax credits

Corporation Short-Form Income Tax Return, other than the general business credit. Entity that elects to be treated to report the income, gains, losses, 8. It is not:

deductions, credits, and to figure the income as a real estate mortgage a. A member of a controlled group, 1066 tax liability of a corporation. investment conduit (REMIC) b. A personal holding company,

c. Filing a consolidated return, under section 860D

Who Must File d. Electing to forego the entire carryback

Unless exempt under section 501, all period for any NOL, or Interest charge domestic

domestic corporations (including e. Required to file one of the returns international sales 1120-IC-DISC

corporations in bankruptcy) must file an listed under Special Returns for Certain corporation (section 992) income tax return whether or not they have Organizations.

taxable income. Domestic corporations must 9. It does not have:

-2- Instructions for Forms 1120 and 1120-A
The private delivery service can tell you must sign it and fill in the “Paid Preparer’s Foreign corporation (other how to get written proof of the mailing date. Use Only” area. than life and property and

casualty insurance company 1120-F Private delivery services cannot The paid preparer must complete the deliver items to P.O. boxes. You required preparer information and: filing Form 1120-L or Form must use the U.S. Postal Service to • Sign the return in the space provided for CAUTION

!

1120-PC) mail any item to an IRS P.O. box address. the preparer’s signature.

• Give a copy of the return to the taxpayer. Foreign sales corporation Extension of Time To File 1120-FSC Note. A paid preparer may sign original or (section 922) File Form 7004, Application for Automatic amended returns by rubber stamp, 6-Month Extension of Time To File Certain

Business Income Tax, Information, and mechanical device, or computer software Condominium management, Other Returns, to request a 6-month program. residential real estate extension of time to file. Generally file Form management, or timeshare

association that elects to be 1120-H 7004 by the regular due date of the return. Paid Preparer

treated as a homeowners Who Must Sign Authorization association under section 528 The return must be signed and dated by: If the corporation wants to allow the IRS to

• The president, vice president, treasurer, discuss its 2006 tax return with the paid Life insurance company assistant treasurer, chief accounting officer; preparer who signed it, check the “Yes” box 1120-L (section 801) or in the signature area of the return. This

• Any other corporate officer (such as tax authorization applies only to the individual

Fund set up to pay for officer) authorized to sign. whose signature appears in the “Paid

Preparer’s Use Only” section of the return. It nuclear decommissioning 1120-ND If a return is filed on behalf of a does not apply to the firm, if any, shown in costs (section 468A) corporation by a receiver, trustee, or that section. assignee, the fiduciary must sign the return,

instead of the corporate officer. Returns and Property and casualty If the “Yes” box is checked, the forms signed by a receiver or trustee in corporation is authorizing the IRS to call the insurance company 1120-PC bankruptcy on behalf of a corporation must paid preparer to answer any questions that (section 831) be accompanied by a copy of the order or may arise during the processing of its return. instructions of the court authorizing signing The corporation is also authorizing the paid Political organization of the return or form. 1120-POL preparer to: (section 527) If an employee of the corporation • Give the IRS any information that is

completes Form 1120 or Form 1120-A, the missing from the return,

Real estate investment trust paid preparer’s space should remain blank. • Call the IRS for information about the 1120-REIT Anyone who prepares Form 1120 or Form processing of the return or the status of any (section 856) 1120-A but does not charge the corporation related refund or payment(s), and

should not complete that section. Generally, • Respond to certain IRS notices about Regulated investment 1120-RIC anyone who is paid to prepare the return math errors, offsets, and return preparation. company (section 851)

S corporation (section 1361) 1120S

Where To File

Settlement fund 1120-SF (section 468B) File the corporation’s return at the applicable IRS address listed below.

If the corporation’s principal And the total assets at the Use the following Internal

When To File business, office, or agency end of the tax year (Form Revenue Service Center

Generally, a corporation must file its income is located in: 1120, page 1, item D) are: address:

tax return by the 15th day of the 3rd month Connecticut, Delaware, District after the end of its tax year. A new of Columbia, Illinois, Indiana, corporation filing a short-period return must Less than $10 million Cincinnati, OH 45999-0012 Kentucky, Maine, Maryland, generally file by the 15th day of the 3rd

month after the short period ends. A Massachusetts, Michigan, New

corporation that has dissolved must Hampshire, New Jersey, New

generally file by the 15th day of the 3rd York, North Carolina, Ohio,

month after the date it dissolved. Pennsylvania, Rhode Island,

South Carolina, Vermont, If the due date falls on a Saturday, $10 million or more Ogden, UT 84201-0012 Virginia, West Virginia, Sunday, or legal holiday, the corporation Wisconsin can file on the next business day.

Alabama, Alaska, Arizona, Private Delivery Services Arkansas, California, Colorado, Corporations can use certain private Florida, Georgia, Hawaii, delivery services designated by the IRS to Idaho, Iowa, Kansas, meet the “timely mailing as timely filing/ Louisiana, Minnesota, paying” rule for tax returns and payments. Mississippi, Missouri, Montana, Any amount Ogden, UT 84201-0012 These private delivery services include only Nebraska, Nevada, New the following. Mexico, North Dakota, • DHL Express (DHL): DHL Same Day Oklahoma, Oregon, South Service, DHL Next Day 10:30 am, DHL Next Dakota, Tennessee, Texas, Day 12:00 pm, DHL Next Day 3:00 pm, and Utah, Washington, Wyoming DHL 2nd Day Service.

• Federal Express (FedEx): FedEx Priority

Overnight, FedEx Standard Overnight, A foreign country or U.S. Any amount P.O. Box 409101 FedEx 2Day, FedEx International Priority, possession Ogden, UT 84409 and FedEx International First.

• United Parcel Service (UPS): UPS Next

Day Air, UPS Next Day Air Saver, UPS 2nd A group of corporations with members located in more than one service center area will

Day Air, UPS 2nd Day Air A.M., UPS often keep all the books and records at the principal office of the managing corporation. In

Worldwide Express Plus, and UPS this case, the tax returns of the corporations may be filed with the service center for the area

Worldwide Express. in which the principal office of the managing corporation is located.

Instructions for Forms 1120 and 1120-A -3-
The corporation is not authorizing the Form 8109-B to make deposits. You can get amount of the penalty. Generally, the

paid preparer to receive any refund check, this form by calling 1-800-829-4933 or corporation does not have to file this form

bind the corporation to anything (including visiting an IRS taxpayer assistance center. because the IRS can figure the amount of

any additional tax liability), or otherwise Have your EIN ready when you call or visit. any penalty and bill the corporation for it.

represent the corporation before the IRS. However, even if the corporation does not Do not send deposits directly to an IRS

The authorization will automatically end office; otherwise, the corporation may have owe the penalty, complete and attach Form

2220 if: no later than the due date (excluding to pay a penalty. Mail or deliver the • The annualized income or adjusted extensions) for filing the corporation’s 2007 completed Form 8109 with the payment to seasonal installment method is used, or tax return. If the corporation wants to an authorized depositary (a commercial • The corporation is a large corporation expand the paid preparer’s authorization or bank or other financial institution authorized computing its first required installment revoke the authorization before it ends, see to accept federal tax deposits). Make checks based on the prior year’s tax. See the Pub. 947, Practice Before the IRS and or money orders payable to the depositary. Instructions for Form 2220 for the definition Power of Attorney. If the corporation prefers, it can mail the of a large corporation. coupon and payment to: Financial Agent, Also, see the instructions for line 33, Form Assembling the Return Federal Tax Deposit Processing, P.O. Box 1120 (line 29, Form 1120-A). To ensure that the corporation’s tax return is 970030, St. Louis, MO 63197. Make the

check or money order payable to “Financial correctly processed, attach all schedules

and other forms after page 4, Form 1120 (or Agent.” Interest and Penalties

page 2, Form 1120-A), and in the following To help ensure proper crediting, enter Interest. Interest is charged on taxes paid order. the corporation’s EIN, the tax period to late even if an extension of time to file is

1. Schedule N (Form 1120). which the deposit applies, and “Form 1120” granted. Interest is also charged on

2. Schedule O (Form 1120). on the check or money order. Darken the penalties imposed for failure to file,

3. Form 4626. “1120” box under “Type of Tax” and the negligence, fraud, substantial valuation

4. Form 8050. appropriate “Quarter” box under “Tax misstatements, substantial understatements

5. Form 4136. Period” on the coupon. Records of these of tax, and reportable transaction

6. Form 851. deposits will be sent to the IRS. For more understatements from the due date

7. Additional schedules in alphabetical information, see “Marking the Proper Tax (including extensions) to the date of

order. Period” in the instructions for Form 8109. payment. The interest charge is figured at a

8. Additional forms in numerical order. For more information on deposits, see rate determined under section 6621.

the instructions in the coupon booklet (Form Complete every applicable entry space Late filing of return. A corporation that 8109) and Pub. 583, Starting a Business does not file its tax return by the due date, on Form 1120 or Form 1120-A. Do not enter and Keeping Records. “See Attached” instead of completing the including extensions, may be penalized 5%

If the corporation owes tax when it of the unpaid tax for each month or part of a entry spaces. If more space is needed on files Form 1120 or Form 1120-A, do month the return is late, up to a maximum of the forms or schedules, attach separate

sheets using the same size and format as CAUTION not include the payment with the tax 25% of the unpaid tax. The minimum !

return. Instead, mail or deliver the payment penalty for a return that is over 60 days late the printed forms. If there are supporting with Form 8109 to an authorized depositary, is the smaller of the tax due or $100. The statements and attachments, arrange them or use EFTPS, if applicable. penalty will not be imposed if the corporation in the same order as the schedules or forms can show that the failure to file on time was they support and attach them last. Show the Estimated Tax Payments due to reasonable cause. Corporations that totals on the printed forms. Enter the file late should attach a statement explaining corporation’s name and EIN on each Generally, the following rules apply to the the reasonable cause. supporting statement or attachment. corporation’s payments of estimated tax.

• The corporation must make installment Late payment of tax. A corporation that Depository Methods payments of estimated tax if it expects its does not pay the tax when due generally

total tax for the year (less applicable credits) may be penalized 1

/2 of 1% of the unpaid tax of Tax Payment to be $500 or more. for each month or part of a month the tax is The corporation must pay any tax due in full • The installments are due by the 15th day not paid, up to a maximum of 25% of the no later than the 15th day of the 3rd month of the 4th, 6th, 9th, and 12th months of the unpaid tax. The penalty will not be imposed after the end of the tax year. The two tax year. If any date falls on a Saturday, if the corporation can show that the failure to methods of depositing taxes are discussed Sunday, or legal holiday, the installment is pay on time was due to reasonable cause. below. due on the next regular business day. Trust fund recovery penalty. This penalty • Use Form 1120-W, Estimated Tax for Electronic Deposit Requirement may apply if certain excise, income, social Corporations, as a worksheet to compute security, and Medicare taxes that must be The corporation must make electronic estimated tax. collected or withheld are not collected or deposits of all depository taxes (such as • If the corporation does not use EFTPS, withheld, or these taxes are not paid. These employment tax, excise tax, and corporate use the deposit coupons (Forms 8109) to

make deposits of estimated tax. taxes are generally reported on: income tax) using the Electronic Federal • Form 720, Quarterly Federal Excise Tax Tax Payment System (EFTPS) in 2007 if: • If the corporation overpaid estimated tax, Return; • The total deposits of such taxes in 2005 it may be able to get a quick refund by filing • Form 941, Employer’s QUARTERLY were more than $200,000 or Form 4466, Corporation Application for

Quick Refund of Overpayment of Estimated Federal Tax Return; • The corporation was required to use • Form 943, Employer’s Annual Federal EFTPS in 2006. Tax. Tax Return for Agricultural Employees; or If the corporation is required to use See the instructions for lines 32b and • Form 945, Annual Return of Withheld EFTPS and fails to do so, it may be subject 32c, Form 1120 (lines 28b and 28c, Form Federal Income Tax.

to a 10% penalty. If the corporation is not 1120-A).

required to use EFTPS, it can participate Estimated tax penalty. A corporation that The trust fund recovery penalty may be

voluntarily. To enroll in or get more imposed on all persons who are determined does not make estimated tax payments information about EFTPS, call when due may be subject to an by the IRS to have been responsible for

1-800-555-4477. To enroll online, visit www. collecting, accounting for, and paying over underpayment penalty for the period of eftps.gov these taxes, and who acted willfully in not . underpayment. Generally, a corporation is doing so. The penalty is equal to the unpaid Depositing on time. For EFTPS deposits subject to the penalty if its tax liability is

$500 or more and it did not timely pay the trust fund tax. See the Instructions for Form to be made timely, the corporation must 720, Pub. 15 (Circular E), Employer’s Tax smaller of: initiate the transaction at least 1 business Guide, or Pub. 51 (Circular A), Agricultural day before the date the deposit is due. • Its tax liability for 2006 or Employer’s Tax Guide, for details, including • Its prior year’s tax.

Deposits With Form 8109 See section 6655 for details and exceptions, the definition of responsible persons.

including special rules for large If the corporation does not use EFTPS, Other penalties. Other penalties can be corporations. deposit corporation income tax payments imposed for negligence, substantial

(and estimated tax payments) with Form Use Form 2220, Underpayment of understatement of tax, reportable

8109, Federal Tax Deposit Coupon. If you Estimated Tax by Corporations, to see if the transaction understatements, and fraud. See

do not have a preprinted Form 8109, use corporation owes a penalty and to figure the sections 6662, 6662A, and 6663.

-4- Instructions for Forms 1120 and 1120-A
Transfers to a corporation controlled by Accounting Methods Recordkeeping the transferor. If a person receives stock of

Figure taxable income using the method of Keep the corporation’s records for as long a corporation in exchange for property, and

accounting regularly used in keeping the as they may be needed for the no gain or loss is recognized under section

corporation’s books and records. In all administration of any provision of the 351, the person (transferor) and the

cases, the method used must clearly show Internal Revenue Code. Usually, records transferee must each attach to their tax

taxable income. Permissible methods that support an item of income, deduction, returns the statements required by

include cash, accrual, or any other method or credit on the return must be kept for 3 Temporary Regulations section 1.351-3T.

authorized by the Internal Revenue Code. years from the date the return is due or filed, Dual consolidated losses. If a domestic whichever is later. Keep records that verify Generally, the following rules apply. corporation incurs a dual consolidated loss the corporation’s basis in property for as (as defined in Regulations section • A corporation (other than a qualified long as they are needed to figure the basis 1.1503-2(c)(5)), the corporation (or personal service corporation) must use the of the original or replacement property. consolidated group) may need to attach an accrual method of accounting if its average The corporation should keep copies of all elective relief agreement and/or an annual annual gross receipts exceed $5 million. filed returns. They help in preparing future certification as provided in Regulations • Unless it is a qualifying taxpayer or a and amended returns. section 1.1503-2(g)(2). qualifying small business taxpayer, a

corporation must use the accrual method for Election to reduce basis under section

sales and purchases of inventory items. See Other Forms and 362(e)(2)(C). The transferor and transferee

page 13. in certain section 351 transactions can make

• A corporation engaged in farming must Statements That May Be a joint election under section 362(e)(2)(C) to

use the accrual method. For exceptions, see Required limit the transferor’s basis in the stock

section 447. received instead of the transferee’s basis in

• Special rules apply to long-term contracts. Amended return. Use Form 1120X, the transferred property. The transferor and

See section 460. Amended U.S. Corporation Income Tax transferee may make the election by

Return, to correct a previously filed Form attaching the statement as provided in • Dealers in securities must use the

mark-to-market accounting method. Dealers 1120 or Form 1120-A. Notice 2005-70, 2005-41 I.R.B. 694, to their

tax returns filed by the due date (including in commodities and traders in securities and Reportable transaction disclosure extensions) for the tax year in which the commodities can elect to use the statement. Disclose information for each

mark-to-market accounting method. See transaction occurred. Once made, the reportable transaction in which the election is irrevocable. See section section 475. corporation participated. Form 8886, 362(e)(2)(C) and Notice 2005-70. Reportable Transaction Disclosure Change in accounting method. To Statement, must be filed for each tax year Other forms and statements. See Pub. change the method of accounting used to that the federal income tax liability of the 542 for a list of other forms and statements report taxable income (for income as a corporation is affected by its participation in a corporation may need to file in addition to whole or for the treatment of any material the transaction. The corporation may have the forms and statements discussed item), the corporation must file Form 3115, to pay a penalty if it is required to file Form throughout these instructions. Application for Change in Accounting 8886 and does not do so. The following are Method. reportable transactions.

Accounting Periods and Methods, for more

See Form 3115 and Pub. 538,

transaction that is the same as or

1. Any listed transaction, which is a Specific Instructions

information on accounting methods. substantially similar to tax avoidance

transactions identified by the IRS. Period Covered

2. Any transaction offered under Accounting Period File the 2006 return for calendar year 2006 conditions of confidentiality for which the and fiscal years that begin in 2006 and end A corporation must figure its taxable income corporation paid an advisor a fee of at least in 2007. For a fiscal or short tax year return, on the basis of a tax year. A tax year is the $250,000. fill in the tax year space at the top of the annual accounting period a corporation uses 3. Certain transactions for which the form. to keep its records and report its income and corporation has contractual protection expenses. Generally, corporations can use against disallowance of the tax benefits. The 2006 Form 1120 can also be used

a calendar year or a fiscal year. Personal 4. Certain transactions resulting in a if:

service corporations, however, must use a loss of at least $10 million in any single year • The corporation has a tax year of less

calendar year unless they meet one of the or $20 million in any combination of years. than 12 months that begins and ends in

exceptions discussed on page 6. 5. Certain transactions resulting in a tax 2007, and

credit of more than $250,000, if the • The 2007 Form 1120 is not available at Change of tax year. Generally, a corporation held the asset generating the the time the corporation is required to file its corporation, including a personal service credit for 45 days or less. return. corporation, must get the consent of the IRS The corporation must show its 2007 tax before changing its tax year by filing Form Penalties. The corporation may have to year on the 2006 Form 1120 and take into 1128, Application To Adopt, Change, or

Retain a Tax Year. However, under certain pay a penalty if it is required to disclose a account any tax law changes that are reportable transaction under section 6011 effective for tax years beginning after conditions, a corporation can change its tax and fails to properly complete and file Form December 31, 2006. year without getting consent. 8886. The penalty is $50,000 ($200,000 if

See Form 1128 and Pub. 538 for more the reportable transaction is a listed Name and Address information on accounting periods and tax transaction) for each failure to file Form Print or type the corporation’s true name (as years. 8886 with its corporate return or for failure to set forth in the charter or other legal provide a copy of Form 8886 to the Office of

Tax Shelter Analysis (OTSA). Other document creating it), address, and EIN on

Rounding Off to the appropriate lines. Include the suite, penalties, such as an accuracy-related room, or other unit number after the street Whole Dollars penalty under section 6662A, may also address. If the post office does not deliver apply. See the Instructions for Form 8886 The corporation can round off cents to mail to the street address and the for details.

whole dollars on its return and schedules. If corporation has a P.O. box, show the box

the corporation does round to whole dollars, Reportable transactions by material number instead.

advisors. Until further guidance is issued, it must round all amounts. To round, drop material advisors who provide material aid, If the corporation receives its mail in care amounts under 50 cents and increase of a third party (such as an accountant or an assistance, or advice with respect to any amounts from 50 to 99 cents to the next attorney), enter on the street address line reportable transaction, must use Form 8264, dollar. For example, $1.39 becomes $1 and “C/O” followed by the third party’s name and Application for Registration of a Tax Shelter, $2.50 becomes $3. street address or P.O. box. to disclose reportable transactions in

If two or more amounts must be added to accordance with interim guidance provided If the corporation received a Form 1120

figure the amount to enter on a line, include in Notice 2004-80, 2004-50 I.R.B. 963; tax package, use the preprinted label. Cross

cents when adding the amounts and round Notice 2005-17, 2005-8 I.R.B. 606; and out any errors and print the correct

off only the total. Notice 2005-22, 2005-12 I.R.B. 756. information on the label.

Instructions for Forms 1120 and 1120-A -5-
performing arts. The services must be Item A. Identifying Item D. Total Assets substantially performed by

employee-owners. See Pub. 542 for more Enter the corporation’s total assets (as Information details. determined by the accounting method

regularly used in keeping the corporation’s Consolidated Return A personal service corporation must use books and records) at the end of the tax

(Form 1120 Only) a calendar tax year unless: year. If there are no assets at the end of the • It elects to use a 52-53-week tax year that Corporations filing a consolidated return tax year, enter -0-. ends with reference to the calendar year or must attach Form 851, Affiliations Schedule, If the corporation is required to complete tax year elected under section 444; and other supporting statements to the Schedule L, enter total assets from • It can establish a business purpose for a return. Also, for the first year a subsidiary Schedule L, line 15, column (d) on page 1, different tax year and obtains the approval corporation is being included in a item D. If filing a consolidated return, report of the IRS (see Form 1128 and Pub. 538); consolidated return, attach Form 1122, total consolidated assets for all corporations or Authorization and Consent of Subsidiary joining in the return. • It elects under section 444 to have a tax Corporation To Be Included in a year other than a calendar year. To make Consolidated Income Tax Return, to the Item E. Initial Return, Final the election, use Form 8716, Election To parent’s consolidated return. Attach a Have a Tax Year Other Than a Required separate Form 1122 for each subsidiary Return, Name Change, or Tax Year. being included in the consolidated return. Address Change File supporting statements for each If a corporation makes the section 444 • If this is the corporation’s first return, corporation included in the consolidated election, its deduction for certain amounts check the “Initial return” box. return. Do not use Form 1120 as a paid to employee-owners may be limited. • If this is the corporation’s final return and supporting statement. On the supporting See Schedule H (Form 1120), Section 280H it will no longer exist, check the “Final statement, use columns to show the Limitations for a Personal Service return” box. following, both before and after adjustments. Corporation (PSC), to figure the maximum • If the corporation changed its name since 1. Items of gross income and deduction. it last filed a return, check the box for “Name deductions. If a section 444 election is terminated change.” Generally, a corporation also must 2. A computation of taxable income. and the termination results in a short tax have amended its articles of incorporation 3. Balance sheets as of the beginning year, type or print at the top of the first page and filed the amendment with the state in and end of the tax year. of Form 1120 or Form 1120-A for the short which it was incorporated. 4. A reconciliation of income per books tax year “SECTION 444 ELECTION • If the corporation has changed its address with income per return. TERMINATED.” See Temporary since it last filed a return (including a change 5. A reconciliation of retained earnings. Regulations section 1.444-1T(a)(5) for more to an “in care of” address), check the box for

information. “Address change.” Enter on Form 1120 the totals for each

item of income, gain, loss, expense, or Note. If a change in address occurs after For more information regarding a deduction, net of eliminating entries for the return is filed, use Form 8822, Change personal service corporation, see Pub. 542. intercompany transactions between of Address, to notify the IRS of the new

corporations within the consolidated group. address. Schedule M-3 (Form 1120 Only) Attach consolidated balance sheets and a

reconciliation of consolidated retained A corporation with total assets Income earnings. (non-consolidated or consolidated for all Except as otherwise provided in the Internal corporations included within a tax The corporation does not have to Revenue Code, gross income includes all consolidation group) of $10 million or more complete (3), (4), and (5) above, if its income from whatever source derived. on the last day of the tax year must total receipts (line 1a plus lines 4 Extraterritorial income. Gross income

TIP

complete Schedule M-3, Net Income (Loss) through 10 on page 1 of the return) and its Reconciliation for Corporations With Total generally does not include extraterritorial total assets at the end of the tax year are Assets of $10 Million or More, instead of income that is qualifying foreign trade less than $250,000. Schedule M-1. A corporation filing Form income. Use Form 8873, Extraterritorial

For more information on consolidated 1120 that is not required to file Schedule Income Exclusion, to figure the exclusion.

returns, see the regulations under section M-3 may voluntarily file Schedule M-3 Include the exclusion in the total for “Other

1502. instead of Schedule M-1. deductions” on line 26, Form 1120 (line 22,

Common parent of a life-nonlife Form 1120-A). See the Instructions for Form

consolidated group. If you are filing Schedule M-3, check the 8873 for more information. If the corporation is “Schedule M-3 required” box at the top of the common parent of a consolidated group Income from qualifying shipping page 1 of Form 1120. See the Instructions that includes a life-nonlife insurance activities. Gross income does not include for Schedule M-3 for more details. company, attach a statement to the return income from qualifying shipping activities if

that includes the name and employer the corporation makes an election under

identification number (EIN) of the common Item B. Employer section 1354 to be taxed on its notional

parent and indicates that this corporation is shipping income (as defined in section

the common parent of a life-nonlife Identification Number (EIN) 1353) at the highest corporate tax rate

consolidated group. See Temporary Enter the corporation’s EIN. If the (35%). If the election is made, the

Regulations section 1.1502-47T(s) for more corporation does not have an EIN, it must corporation generally may not claim any

details. apply for one. An EIN can be applied for: loss, deduction, or credit with respect to

• Online—Click on the EIN link at www.irs. qualifying shipping activities. A corporation Personal Holding Company gov/businesses/small. The EIN is issued making this election also may elect to defer

(Form 1120 Only) immediately once the application information gain on the disposition of a qualifying

is validated. vessel. A personal holding company must attach to

Form 1120 a Schedule PH (Form 1120), • By telephone at 1-800-829-4933 from Use Form 8902, Alternative Tax on

U.S. Personal Holding Company (PHC) Tax. 7:00 a.m. to 10:00 p.m. in the corporation’s Qualifying Shipping Activities, to figure the local time zone. See the instructions for Schedule PH (Form tax. Include the alternative tax on Schedule • By mailing or faxing Form SS-4, 1120) for details. J, line 9. Application for Employer Identification

Personal Service Corporation Line 1. Gross Receipts or Sales Number.

A personal service corporation is a Enter gross receipts or sales from all If the corporation has not received its corporation whose principal activity for the business operations except those that must EIN by the time the return is due, enter testing period (generally the prior tax year be reported on lines 4 through 10. In “Applied for” and the date you applied in the unless the corporation has just been general, advance payments are reported in space for the EIN. For more details, see the formed) for tax year is the performance of the year of receipt. To report income from instructions for Form SS-4. personal services. Personal services include long-term contracts, see section 460. For

any activity performed in the fields of Note. The online application process is not special rules for reporting certain advance

accounting, actuarial science, architecture, yet available for corporations with addresses payments for goods and long-term

consulting, engineering, health, law, and the in foreign countries or Puerto Rico. contracts, see Regulations section 1.451-5.

-6- Instructions for Forms 1120 and 1120-A
For permissible methods for reporting which it elected to become an S corporation Line 4. Dividends advance payments for services and certain or

goods by an accrual method corporation, b. Transferred LIFO inventory assets to Form 1120 filers. See the instructions for

see Rev. Proc. 2004-34, 2004-22 I.R.B. 991. an S corporation in a nonrecognition Schedule C. Then, complete Schedule C

and enter on line 4 the amount from transaction in which those assets were Installment sales. Generally, the Schedule C, line 19. transferred basis property. installment method cannot be used for

Form 1120-A filers. Enter the total The LIFO recapture amount is the dealer dispositions of property. A “dealer dividends received (that are not from amount by which the C corporation’s disposition” is any disposition of: (a) debt-financed stock) from domestic inventory under the FIFO method exceeds personal property by a person who regularly

sells or otherwise disposes of personal corporations that qualify for the 70% the inventory amount under the LIFO

dividends-received deduction. method at the close of the corporation’s last property of the same type on the installment tax year as a C corporation (or for the year plan or (b) real property held for sale to Line 5. Interest of the transfer, if (b) above applies). For customers in the ordinary course of the more information, see Regulations section taxpayer’s trade or business. Enter taxable interest on U.S. obligations 1.1363-2 and Rev. Proc. 94-61, 1994-2 C.B. and on loans, notes, mortgages, bonds, These restrictions on using the 775. Also see the instructions for Schedule bank deposits, corporate bonds, tax refunds, installment method do not apply to J, line 10. etc. Do not offset interest expense against dispositions of property used or produced in 8. Any net positive section 481(a) interest income. Special rules apply to a farming business or sales of timeshares adjustment. The corporation may have to interest income from certain and residential lots for which the corporation make an adjustment under section 481(a) to below-market-rate loans. See section 7872 elects to pay interest under section for details. prevent amounts of income or expense from 453(l)(3). being duplicated or omitted. The section Note. Report tax-exempt interest income on For sales of timeshares and residential 481(a) adjustment period is generally 1 year

lots reported under the installment method, Schedule K, item 9 (Part II, item 3, Form for a net negative adjustment and 4 years 1120-A). Also, if required, include the same the corporation’s income tax is increased by for a net positive adjustment. However, a amount on Schedule M-1, line 7; Form corporation can elect to use a 1-year the interest payable under section 453(l)(3). 1120-A, Part IV, line 6; or Schedule M-3 Report this addition to the tax on line 9, adjustment period if the net section 481(a) (Form 1120), Part II, line 13. Schedule J, Form 1120 (Part I, line 4, Form adjustment for the change is less than

1120-A). $25,000. The corporation must complete the Line 6. Gross Rents appropriate lines of Form 3115 to make the Enter on line 1 (and carry to line 3), the Enter the gross amount received for the election. If the net section 481(a) adjustment gross profit on collections from installment rental of property. Deduct expenses such as is negative, report it on line 26, Form 1120 sales for any of the following. repairs, interest, taxes, and depreciation on (line 22, Form 1120-A). • Dealer dispositions of property before the proper lines for deductions. A rental March 1, 1986. activity held by a closely held corporation or • Dispositions of property used or produced a personal service corporation may be Deductions

in the trade or business of farming. subject to the passive activity loss rules. • Certain dispositions of timeshares and See Passive activity limitations on page 8. Limitations on Deductions residential lots reported under the

installment method. Line 10. Other Income Section 263A uniform capitalization

rules. The uniform capitalization rules of Attach a schedule showing the following Enter any other taxable income not reported section 263A generally require corporations information for the current and the 3 on lines 1 through 9. List the type and to capitalize, or include in inventory, certain preceding years: (a) gross sales, (b) cost of amount of income on an attached schedule. costs incurred in connection with: goods sold, (c) gross profits, (d) percentage If the corporation has only one item of other • The production of real property and of gross profits to gross sales, (e) amount income, describe it in parentheses on line tangible personal property held in inventory collected, and (f) gross profit on the amount 10. or held for sale in the ordinary course of collected. Examples of other income to report on business.

line 10 include the following. • Real property or personal property Nonaccrual experience method. Accrual

method corporations are not required to 1. Recoveries of bad debts deducted in (tangible and intangible) acquired for resale.

prior years under the specific charge-off • The production of real property and accrue certain amounts to be received from

method. tangible personal property by a corporation the performance of services that, on the 2. The amount included in income from for use in its trade or business or in an basis of their experience, will not be Form 6478, Credit for Alcohol Used as Fuel. activity engaged in for profit. collected, if:

• The services are in the fields of health, 3. The amount included in income from Tangible personal property produced by Form 8864, Biodiesel and Renewable Diesel law, engineering, architecture, accounting, a corporation includes a film, sound

actuarial science, performing arts, or Fuels Credit. recording, videotape, book, or similar

consulting, or 4. Refunds of taxes deducted in prior property. • The corporation’s average annual gross years to the extent they reduced income Corporations subject to the section 263A receipts for the 3 prior tax years does not subject to tax in the year deducted (see uniform capitalization rules are required to exceed $5 million. section 111). Do not offset current year capitalize: taxes against tax refunds. This provision does not apply to any 5. Any recapture amount under section 1. Direct costs and amount if interest is required to be paid on 179A for certain clean-fuel vehicle property 2. An allocable part of most indirect the amount or if there is any penalty for (or clean-fuel vehicle refueling property) that costs (including taxes) that (a) benefit the failure to timely pay the amount. For more ceases to qualify. See Regulations section assets produced or acquired for resale or (b) information, see section 448(d)(5) and 1.179A-1 for details. are incurred because of the performance of Regulations section 1.448-2. 6. Ordinary income from trade or production or resale activities.

Corporations that qualify to use the business activities of a partnership (from

nonaccrual experience method should Schedule K-1 (Form 1065 or 1065-B)). Do For inventory, some of the indirect

attach a schedule showing total gross not offset ordinary losses against ordinary expenses that must be capitalized are:

• Administration expenses; receipts, the amount not accrued as a result income. Instead, include the losses on line

of the application of section 448(d)(5), and 26, Form 1120 (line 22, Form 1120-A). • Taxes;

Show the partnership’s name, address, and • Depreciation; the net amount accrued. Enter the net

amount on line 1a. EIN on a separate statement attached to • Insurance;

this return. If the amount entered is from • Compensation paid to officers attributable

Line 2. Cost of Goods Sold more than one partnership, identify the to services;

amount from each partnership. • Rework labor; and Enter the cost of goods sold on line 2, page 7. Any LIFO recapture amount under • Contributions to pension, stock bonus, 1. Before making this entry, a Form 1120 section 1363(d). The corporation may have and certain profit-sharing, annuity, or filer must complete Schedule A on page 2 of deferred compensation plans. Form 1120. See the Schedule A instructions to include a LIFO recapture amount in

on page 13. Form 1120-A filers can use the Regulations section 1.263A-1(e)(3) income if it:

worksheet on page 13 to figure the amount a. Used the LIFO inventory method for specifies other indirect costs that relate to

to enter on line 2. its last tax year before the first tax year for production or resale activities that must be

Instructions for Forms 1120 and 1120-A -7-
capitalized and those that may be currently • The $5,000 deduction is reduced (but not • Credit for employer-provided childcare

deductible. below zero) by the amount the total costs facilities and services.

exceed $50,000. If the total costs are • Low sulfur diesel fuel production credit. Interest expense paid or incurred $55,000 or more, the deduction is reduced • Mine rescue team training credit. during the production period of designated to zero. property must be capitalized and is If the corporation has any of these • If the election is made, any costs that are governed by special rules. For more details, credits, figure each current year credit not deducted must be amortized ratably see Regulations sections 1.263A-8 through before figuring the deduction for expenses over a 180-month period. 1.263A-15. on which the credit is based. See the

In all cases, the amortization period instructions for the form used to figure the The costs required to be capitalized begins the month the corporation begins applicable credit. under section 263A are not deductible until business operations. For more details on the the property (to which the costs relate) is Limitations on deductions related to election for business start-up and sold, used, or otherwise disposed of by the property leased to tax-exempt entities. If organizational costs, see Pub. 535. corporation. a corporation leases property to a

Exceptions. Section 263A does not apply Attach any statement required by governmental or other tax-exempt entity, the

to the following. Regulations sections 1.195-1(b) or corporation can not claim deductions related

• Personal property acquired for resale if 1.248-1(c). Report the deductible amount of to the property to the extent that they

the corporation’s average annual gross these costs and any amortization on line 26 exceed the corporation’s income from the

(line 22 of Form 1120-A). For amortization lease payments (tax-exempt use loss). receipts for the 3 prior tax years were $10

million or less. that begins during the 2006 tax year, Amounts disallowed may be carried over to

• Timber. complete and attach Form 4562. the next tax year and treated as a deduction

• Most property produced under a with respect to the property for that tax year. Passive activity limitations. Limitations on

long-term contract. See section 470 for more details and passive activity losses and credits under • Certain property produced in a farming exceptions. section 469 apply to personal service business. corporations (defined on page 6) and closely • Research and experimental costs under Line 12. Compensation of held corporations (defined below). section 174. Officers Generally, the two kinds of passive • Geological and geophysical costs activities are: Enter deductible officers’ compensation on amortized under section 167(h). • Trade or business activities in which the line 12. See Employment credits on page 9 • Intangible drilling costs for oil, gas, and corporation did not materially participate for for a list of employment credits that may geothermal property. reduce your deduction for officers’ the tax year; and • Mining exploration and development • Rental activities, regardless of its compensation. Do not include compensation costs. participation. deductible elsewhere on the return, such as • Inventoriable items accounted for in the For exceptions, see Form 8810, Corporate amounts included in cost of goods sold, same manner as materials and supplies that Passive Activity Loss and Credit Limitations. elective contributions to a section 401(k) are not incidental. See Cost of Goods Sold cash or deferred arrangement, or amounts on page 13. Corporations subject to the passive contributed under a salary reduction SEP activity limitations must complete Form 8810 For more details on the uniform agreement or a SIMPLE IRA plan. to compute their allowable passive activity capitalization rules, see Regulations loss and credit. Before completing Form Form 1120 filers must complete sections 1.263A-1 through 1.263A-3. See 8810, see Temporary Regulations section Schedule E if their total receipts (line 1a, Regulations section 1.263A-4 for rules for 1.163-8T, which provides rules for allocating plus lines 4 through 10) are $500,000 or property produced in a farming business. more. Include only the deductible part of interest expense among activities. If a Transactions between related taxpayers. passive activity is also subject to the each officer’s compensation on Schedule E. Generally, an accrual basis taxpayer can earnings stripping rules of section 163(j), the See Disallowance of deduction for employee only deduct business expenses and interest at-risk rules of section 465, or the compensation in excess of $1 million below.

owed to a related party in the year the Complete Schedule E, line 1, columns (a) tax-exempt use loss rules of section 470, payment is included in the income of the those rules apply before the passive loss through (f), for all officers. The corporation related party. See sections 163(e)(3),163(j), rules. determines who is an officer under the laws

and 267 for limitations on deductions for of the state where it is incorporated. unpaid interest and expenses. For more information, see section 469,

the related regulations, and Pub. 925, If a consolidated return is filed, each Section 291 limitations. Corporations may Passive Activity and At-Risk Rules. member of an affiliated group must furnish be required to adjust deductions for this information. depletion of iron ore and coal, intangible Closely held corporations. A

drilling and exploration and development corporation is a closely held corporation if: Disallowance of deduction for employee

• At any time during the last half of the tax compensation in excess of $1 million. costs, certain deductions for financial year more than 50% in value of its Publicly held corporations cannot deduct institutions, and the amortizable basis of

pollution control facilities. See section 291 to outstanding stock is directly or indirectly compensation to a “covered employee” to

determine the amount of the adjustment. owned by or for not more than five the extent that the compensation exceeds

Also see section 43. individuals, and $1 million. Generally, a covered employee

• The corporation is not a personal service is: Golden parachute payments. A portion of corporation. • The chief executive officer of the the payments made by a corporation to key corporation (or an individual acting in that personnel that exceeds their usual Certain organizations are treated as capacity) as of the end of the tax year or compensation may not be deductible. This individuals for purposes of this test. See • An employee whose total compensation occurs when the corporation has an section 542(a)(2). For rules for determining must be reported to shareholders under the agreement (golden parachute) with these stock ownership, see section 544 (as Securities Exchange Act of 1934 because key employees to pay them these excess modified by section 465(a)(3)). the employee is among the four highest amounts if control of the corporation Reducing certain expenses for which compensated officers for that tax year (other changes. See section 280G and credits are allowable. If the corporation than the chief executive officer). Regulations section 1.280G-1. claims any of the following credits, it may For this purpose, compensation does not Business start-up and organizational need to reduce the otherwise allowable include the following. costs. Business start-up and organizational deductions for expenses used to figure the • Income from certain employee trusts, costs must be capitalized unless an election credit. annuity plans, or pensions. is made to deduct or amortize them. The • Employment credits. See the instructions • Any benefit paid to an employee that is corporation can elect to amortize costs paid for line 13 on page 9. excluded from the employee’s income. or incurred before October 23, 2004, over a • Research credit.

period of 60 months or more. For costs paid • Orphan drug credit. The deduction limit does not apply to:

or incurred after October 22, 2004, the • Disabled access credit. • Commissions based on individual

following rules apply separately to each • Employer credit for social security and performance,

category of costs. Medicare taxes paid on certain employee • Qualified performance-based • The corporation can elect to deduct up to tips. compensation, and

$5,000 of such costs for the year the • Credit for small employer pension plan • Income payable under a written, binding

corporation begins business operations. startup costs. contract in effect on February 17, 1993.

-8- Instructions for Forms 1120 and 1120-A
The $1 million limit is reduced by transaction (other than a listed transaction) After 12/31/03 but before 1/1/05 . . $17,500 amounts disallowed as excess parachute entered into in tax years beginning after

payments under section 280G. October 22, 2004. After 12/31/02 but before 1/1/04 . . $18,000

For details, see section 162(m) and After 12/31/98 but before 1/1/03 . . $15,500 Special rules apply to: Regulations section 1.162-27. If the lease term began before January 1, 1999, see • Interest on which no tax is imposed (see

Pub. 463, Travel, Entertainment, Gift, and Car section 163(j)). For tax years beginning after Line 13. Salaries and Wages Expenses, to find out if the corporation has an May 16, 2006, a corporation that owns an Enter the total salaries and wages paid for inclusion amount. The inclusion amount for lease interest in a partnership, directly or the tax year. Do not include salaries and terms beginning in 2007 will be published in the indirectly, must treat its distributive share of wages deductible elsewhere on the return, Internal Revenue Bulletin in early 2007. the partnership liabilities, interest income, such as amounts included in officers’ and interest expense as liabilities, income, compensation, cost of goods sold, elective See Pub. 463 for instructions on figuring and expenses of the corporation for contributions to a section 401(k) cash or the inclusion amount. purposes of applying the earnings stripping deferred arrangement, or amounts rules. For more details, see section contributed under a salary reduction SEP Line 17. Taxes and Licenses 163(j)(8). agreement or a SIMPLE IRA plan. Enter taxes paid or accrued during the tax • Foregone interest on certain

year, but do not include the following. below-market-rate loans (see section 7872). If the corporation provided taxable • Federal income taxes. • Original issue discount on certain fringe benefits to its employees, such • Foreign or U.S. possession income taxes high-yield discount obligations. (See section CAUTION as personal use of a car, do not

!

if a foreign tax credit is claimed. 163(e) to figure the disqualified portion.) deduct as wages the amount allocated for • Taxes not imposed on the corporation. • Interest which is allocable to unborrowed depreciation and other expenses claimed on • Taxes, including state or local sales policy cash values of life insurance, lines 20 and 26, Form 1120 (lines 20 and taxes, that are paid or incurred in connection endowment, or annuity contracts issued 22, Form 1120-A). with an acquisition or disposition of property after June 8, 1997. See section 264(f). Employment credits. If the corporation (these taxes must be treated as a part of the Attach a statement showing the computation claims a credit on any of the following forms, cost of the acquired property or, in the case of the deduction. it may need to reduce its deduction for of a disposition, as a reduction in the officer’s compensation and salaries and amount realized on the disposition). Line 19. Charitable wages. See the applicable form for details.

• Form 5884, Work Opportunity Credit; • Taxes assessed against local benefits Contributions that increase the value of the property • Form 5884-A, Credits for Employers Enter contributions or gifts actually paid assessed (such as for paving, etc.). Affected by Hurricane Katrina, Rita, or within the tax year to or for the use of • Taxes deducted elsewhere on the return, Wilma; charitable and governmental organizations such as those reflected in cost of goods • Form 8844, Empowerment Zone and described in section 170(c) and any unused sold. Renewal Community Employment Credit; contributions carried over from prior years. • Form 8845, Indian Employment Credit; See section 164(d) for apportionment of Special rules and limits apply to and taxes on real property between seller and contributions to organizations conducting • Form 8861, Welfare-to-Work Credit. purchaser. lobbying activities. See section 170(f)(9).

Line 14. Repairs and Line 18. Interest Corporations reporting taxable income on

Maintenance Note. Do not offset interest income against the accrual method can elect to treat as paid

interest expense. during the tax year any contributions paid by Enter the cost of incidental repairs and the 15th day of the 3rd month after the end maintenance not claimed elsewhere on the The corporation must make an interest of the tax year if the contributions were return, such as labor and supplies, that do allocation if the proceeds of a loan were authorized by the board of directors during not add to the value of the property or used for more than one purpose (for the tax year. Attach a declaration to the appreciably prolong its life. New buildings, example, to purchase a portfolio investment return stating that the resolution authorizing machinery, or permanent improvements that and to acquire an interest in a passive the contributions was adopted by the board increase the value of the property are not activity). See Temporary Regulations of directors during the tax year. The deductible. They must be depreciated or section 1.163-8T for the interest allocation declaration must include the date the amortized. rules. resolution was adopted. See Regulations Mutual savings banks, building and loan section 1.170A-11. Line 15. Bad Debts associations, and cooperative banks can

Enter the total debts that became worthless deduct the amounts paid or credited to the Limitation on deduction. The total amount

claimed cannot be more than 10% of in whole or in part during the tax year. A accounts of depositors as dividends,

small bank or thrift institution using the interest, or earnings. See section 591. taxable income (line 30, Form 1120, or line

reserve method of section 585 should attach 26, Form 1120-A) computed without regard Do not deduct the following interest. a schedule showing how it figured the to the following. • Interest on indebtedness incurred or current year’s provision. A cash basis • Any deduction for contributions. continued to purchase or carry obligations if taxpayer cannot claim a bad debt deduction • The special deductions on line 29b, Form the interest is wholly exempt from income unless the amount was previously included 1120 (line 25b, Form 1120-A). tax. For exceptions, see section 265(b). • The deduction allowed under section 249. in income. • For cash basis taxpayers, prepaid interest • The domestic production activities allocable to years following the current tax Line 16. Rents deduction under section 199. year. For example, a cash basis calendar • Any net operating loss (NOL) carryback to If the corporation rented or leased a vehicle, year taxpayer who in 2006 prepaid interest the tax year under section 172. enter the total annual rent or lease expense allocable to any period after 2006 can • Any capital loss carryback to the tax year paid or incurred during the year. Also deduct only the amount allocable to 2006. under section 1212(a)(1). complete Part V of Form 4562, Depreciation • Interest and carrying charges on and Amortization. If the corporation leased a straddles. Generally, these amounts must Suspension of 10% limitation for vehicle for a term of 30 days or more, the be capitalized. See section 263(g). farmers and ranchers. For tax years deduction for vehicle lease expense may • Interest on debt allocable to the beginning in 2006, a corporation that is a have to be reduced by an amount called the production of designated property by a qualified farmer or rancher (as defined in inclusion amount. The corporation may have corporation for its own use or for sale. The section 170(b)(1)(E)) that does not have an inclusion amount if: corporation must capitalize this interest. publicly traded stock, can deduct And the Also capitalize any interest on debt allocable contributions of qualified conservation vehicle’s to an asset used to produce the property. property without regard to the general 10% FMV on See section 263A(f) and Regulations limit. The total amount of the contribution the first sections 1.263A-8 through 1.263A-15 for claimed for the qualified conservation day of definitions and more information. property cannot exceed 100% of the excess the lease • Interest paid or incurred on any portion of of the corporation’s taxable income (as The lease term began: exceeded: an underpayment of tax that is attributable computed above substituting “100%” for

to an understatement arising from an “10%”) over all other allowable charitable After 12/31/04 but before 1/1/07 . . $15,200 undisclosed listed transaction or an contributions. Any excess qualified

undisclosed reportable avoidance conservation contributions can be carried

Instructions for Forms 1120 and 1120-A -9-
over to the next 15 years subject to the building (including the front, side, rear, and See Pub. 535 for more information on

100% limitation. See section 170(b)(2)(B). space above the building) is preserved and depletion.

no portion of the exterior is changed in a For contributions made after August 17, manner that is inconsistent with its historical Line 23. Pension, 2006, contributed conservation property that

is used in agriculture or livestock production character. For more details, see section Profit-Sharing, etc., Plans

must remain available for such production. 170(h)(4)(B). (Form 1120 Only) • For contributions made after August 17, Carryover. Charitable contributions over 2006, a deduction is allowed for the building Enter the deduction for contributions to

the 10% limitation cannot be deducted for only (no deduction is allowed for a structure qualified pension, profit-sharing, or other the tax year but can be carried over to the or land) if located in a registered historic funded deferred compensation plans.

next 5 tax years. district. However, if listed in the National Employers who maintain such a plan

Special rules apply if the corporation has Register, a deduction is also allowed for generally must file one of the forms listed

an NOL carryover to the tax year. In figuring structures or land areas. For more below, even if the plan is not a qualified plan

the charitable contributions deduction for the information, see section 170(h)(4)(C). under the Internal Revenue Code. The filing

current tax year, the 10% limit is applied • For contributions made in tax years requirement applies even if the corporation

using the taxable income after taking into beginning after August 17, 2006, the does not claim a deduction for the current

account any deduction for the NOL. corporation must also include the following tax year. There are penalties for failure to

information with the tax return. file these forms on time and for overstating To figure the amount of any remaining the pension plan deduction. See sections NOL carryover to later years, taxable 1. A qualified appraisal (as defined in 6652(e) and 6662(f). income must be modified (see section section 170(f)(11)(E)) of the qualified

property interest, Form 5500, Annual Return/Report of 172(b)). To the extent that contributions are 2. Photographs of the entire exterior of Employee Benefit Plan. File this form for a used to reduce taxable income for this

the building, and plan that is not a one-participant plan (see purpose and increase an NOL carryover, a 3. A description of all restrictions on the below). contributions carryover is not allowed. See

section 170(d)(2)(B). development of the building. See section Form 5500-EZ, Annual Return of

170(h)(4)(B)(iii). One-Participant (Owners and Their Substantiation requirements. Generally, • The corporation’s deduction may be Spouses) Retirement Plan. File this form for no deduction is allowed for any contribution reduced if rehabilitation credits were claimed a plan that only covers the owner (or the of $250 or more unless the corporation gets on the building. See section 170(f)(14). owner and his or her spouse) but only if the a written acknowledgment from the donee • A $500 filing fee may apply to certain owner (or the owner and his or her spouse) organization that shows the amount of cash deductions over $10,000. See section owns the entire business. contributed, describes any property 170(f)(13). contributed, and, either gives a description Other special rules. Line 24. Employee Benefit and a good faith estimate of the value of any The corporation

goods or services provided in return for the must reduce its deduction for contributions Programs (Form 1120 Only)

contribution or states that no goods or of certain capital gain property. See sections Enter contributions to employee benefit

services were provided in return for the 170(e)(1) and 170(e)(5). programs not claimed elsewhere on the

contribution. The acknowledgment must be A larger deduction is allowed for certain return (for example, insurance, health and

obtained by the due date (including contributions of: welfare programs, etc.) that are not an

extensions) of the corporation’s return, or, if • Inventory and other property to certain incidental part of a pension, profit-sharing,

earlier, the date the return is filed. Do not organizations for use in the care of the ill, etc., plan included on line 23.

attach the acknowledgment to the tax return, needy, or infants (section 170(e)(3)),

but keep it with the corporation’s records. including contributions of “apparently Line 26, Form 1120

wholesome food” (section 170(e)(3)(C)) and (Line 22, Form 1120-A). Note. For contributions of cash, check,

or other monetary gifts (regardless of the contributions of qualified book inventory to Other Deductions public schools (section 170(e)(3)(D)), and amount), made in tax years beginning after • Scientific equipment used for research to Attach a schedule, listing by type and August 17, 2006, the corporation must institutions of higher learning or to certain amount, all allowable deductions that are maintain a bank record, or a receipt, letter, not deductible elsewhere on Form 1120 or scientific research organizations (other than or other written communication from the by personal holding companies and service Form 1120-A. Form 1120-A filers should

donee organization indicating the name of organizations (section 170(e)(4)). include amounts described in the

the organization, the date of the • Computer technology and equipment for instructions above for lines 21, 23, and 24 of contribution, and the amount of the educational purposes (section 170(e)(6)). Form 1120. Enter the total of other

contribution. deductions on line 26, Form 1120 (line 22, For more information on charitable Contributions of property other than Form 1120-A). contributions, including substantiation and cash. If a corporation (other than a closely recordkeeping requirements, see section Examples of other deductions include the held or personal service corporation) 170 and the related regulations and Pub. following. See Pub. 535 for details on other contributes property other than cash and 526, Charitable Contributions. For other deductions that may apply to corporations. claims over a $500 deduction for the special rules that apply to corporations, see • Amortization. See Form 4562.

property, it must attach a schedule to the Pub. 542. • Certain costs of qualified film or television return describing the kind of property productions. See section 181.

contributed and the method used to Line 20. Depreciation • Certain business start-up and determine its fair market value (FMV). organizational costs the corporation elects Include on line 20 depreciation and the cost Closely held corporations and personal to deduct. See page 8. of certain property that the corporation service corporations must complete Form • Reforestation costs. The corporation can elected to expense under section 179. See 8283, Noncash Charitable Contributions, elect to deduct up to $10,000 of qualifying Form 4562 and its instructions. and attach it to their returns. All other reforestation expenses for each qualified

corporations generally must complete and Line 21. Depletion timber property. The corporation can elect to attach Form 8283 to their returns for amortize over 84 months any amount not (Form 1120 Only) contributions of property (other than money) deducted. See Pub. 535.

if the total claimed deduction for all property See sections 613 and 613A for percentage The limit for a small timber producer is contributed was more than $5,000. Special depletion rates applicable to natural increased by the smaller of $10,000 or the rules apply to the contribution of certain deposits. Also see section 291 for the amount of qualified reforestation expenses property. See the Instructions for Form limitation on the depletion deduction for iron paid or incurred during the tax year, for (a) 8283. ore and coal (including lignite). qualified timber property any portion of

Special rules for contributions of Attach Form T (Timber), Forest Activities which is located in the Gulf Opportunity

certain easements in registered historic Schedule, if a deduction for depletion of Zone (GO Zone), (b) qualified timber

districts. The following rules apply to property any portion of which is located in timber is taken.

certain contributions of real property Foreign intangible drilling costs and the Rita GO Zone and no portion is located

interests located in a registered historic foreign exploration and development costs in the GO Zone, and (c) qualified timber

district. must either be added to the corporation’s property any portion of which is located in

• For contributions made after July 25, basis for cost depletion purposes or be the Wilma GO Zone. See Pub. 4492,

2006, a deduction is allowed for the qualified deducted ratably over a 10-year period. See Information for Taxpayers Affected by

real property interest, if the exterior of the sections 263(i), 616, and 617 for details. Hurricanes Katrina, Rita, and Wilma, for a

-10- Instructions for Forms 1120 and 1120-A
list of areas included in the GO Zone, the accompanying a corporate officer or Line 28, Form 1120 Rita GO Zone, and the Wilma GO Zone. employee, including a spouse or dependent

of the officer or employee, unless: (Line 24, Form 1120-A). Taxable The increased limit does not apply to any

timber producer who (a) held more than 500 • That individual is an employee of the Income Before NOL Deduction

acres of qualified timber property at any time corporation, and and Special Deductions during the tax year, (b) is a corporation with • His or her travel is for a bona fide

business purpose and would otherwise be At-risk rules. Generally, special at-risk stock publicly traded on an established deductible by that individual. rules under section 465 apply to closely held securities market, or (c) is a real estate corporations (see Passive activity limitations investment trust. See section 1400N(i) for Meals and entertainment. Generally, on page 8) engaged in any activity as a details. the corporation can deduct only 50% of the trade or business or for the production of • Insurance premiums. amount otherwise allowable for meals and income. These corporations may have to • Legal and professional fees. entertainment expenses paid or incurred in adjust the amount on line 28, Form 1120, or • Supplies used and consumed in the its trade or business. In addition (subject to line 24, Form 1120-A. (See below.) business. exceptions under section 274(k)(2)): • Travel and entertainment expenses. • Meals must not be lavish or extravagant; The at-risk rules do not apply to:

Special rules apply (discussed below). • A bona fide business discussion must • Holding real property placed in service by

• Utilities. occur during, immediately before, or the taxpayer before 1987;

• Ordinary losses from trade or business immediately after the meal; and • Equipment leasing under sections

activities of a partnership (from Schedule • An employee of the corporation must be 465(c)(4), (5), and (6); or

K-1 (Form 1065 or 1065-B)). Do not offset present at the meal. • Any qualifying business of a qualified

ordinary income against ordinary losses. corporation under section 465(c)(7). See section 274(n)(3) for a special rule Instead, include the income on line 10. that applies to expenses for meals However, the at-risk rules do apply to the Show the partnership’s name, address, and consumed by individuals subject to the holding of mineral property. EIN on a separate statement attached to hours of service limits of the Department of If the at-risk rules apply, adjust the this return. If the amount is from more than Transportation. amount on this line for any section 465(d) one partnership, identify the amount from Membership dues. The corporation can losses. These losses are limited to the each partnership. deduct amounts paid or incurred for amount for which the corporation is at risk • Any extraterritorial income exclusion (from membership dues in civic or public service for each separate activity at the close of the Form 8873, line 54). organizations, professional organizations tax year. If the corporation is involved in one • Any negative net section 481(a) (such as bar and medical associations), or more activities, any of which incurs a loss adjustment. See the instructions for line 10. business leagues, trade associations, for the year, report the losses for each • Deduction for certain energy efficient chambers of commerce, boards of trade, activity separately. Attach Form 6198, commercial building property. See section and real estate boards. However, no At-Risk Limitations, showing the amount at 179D and Notice 2006-52, 2006-26 I.R.B. deduction is allowed if a principal purpose of risk and gross income and deductions for 1175. the activities with the losses. the organization is to entertain, or provide • GO Zone clean-up cost. The corporation entertainment facilities for, members or their If the corporation sells or otherwise can elect to deduct certain costs paid or guests. In addition, corporations cannot disposes of an asset or its interest (either incurred during the tax year for the removal deduct membership dues in any club total or partial) in an activity to which the of debris from, or the demolition of organized for business, pleasure, recreation, at-risk rules apply, determine the net profit structures on certain real property located in or other social purpose. This includes or loss from the activity by combining the the GO Zone. See section 1400N(f). country clubs, golf and athletic clubs, airline gain or loss on the sale or disposition with • Dividends paid in cash on stock held by and hotel clubs, and clubs operated to the profit or loss from the activity. If the an employee stock ownership plan. provide meals under conditions favorable to corporation has a net loss, it may be limited However, a deduction can only be taken for business discussion. because of the at-risk rules. the dividends above if, according to the

plan, the dividends are: Entertainment facilities. The Treat any loss from an activity not corporation cannot deduct an expense paid allowed for the tax year as a deduction 1. Paid in cash directly to the plan or incurred for a facility (such as a yacht or allocable to the activity in the next tax year. participants or beneficiaries; hunting lodge) used for an activity usually 2. Paid to the plan, which distributes considered entertainment, amusement, or Line 29a, Form 1120 them in cash to the plan participants or their recreation. (Line 25a, Form 1120-A). beneficiaries no later than 90 days after the

end of the plan year in which the dividends Amounts treated as compensation. Net Operating Loss Deduction are paid; Generally, the corporation may be able to A corporation can use the NOL incurred in 3. At the election of such participants or deduct otherwise nondeductible one tax year to reduce its taxable income in their beneficiaries (a) payable as provided entertainment, amusement, or recreation another tax year. Enter on line 29a (line 25a, under 1or 2 above or (b) paid to the plan expenses if the amounts are treated as Form 1120-A), the total NOL carryovers and reinvested in qualifying employer compensation to the recipient and reported from other tax years, but do not enter more securities; or on Form W-2 for an employee or on Form than the corporation’s taxable income (after 4. Used to make payments on a loan 1099-MISC for an independent contractor. special deductions). Attach a schedule described in section 404(a)(9). However, if the recipient is an officer, showing the computation of the NOL

See section 404(k) for more details and the director, or beneficial owner (directly or deduction. Form 1120 filers must also indirectly) of more than 10% of any class of complete item 12 on Schedule K. limitation on certain dividends. stock, the deductible expense is limited. See Do not deduct the following. The following special rules apply. section 274(e)(2) and Notice 2005-45, • A personal service corporation may not • Fines or penalties paid to a government 2005-24 I.R.B. 1228. carry back an NOL to or from any tax year to for violating any law. Lobbying expenses. Generally, lobbying which an election under section 444 to have • Any amount that is allocable to a class of expenses are not deductible. These a tax year other than a required tax year exempt income. See section 265(b) for expenses include: applies. exceptions. • Amounts paid or incurred in connection • A corporate equity reduction interest loss • Lobbying expenses. However, see with influencing federal or state legislation may not be carried back to a tax year exceptions (discussed below). (but not local legislation) or preceding the year of the equity reduction Travel, meals, and entertainment. • Amounts paid or incurred in connection transaction (see section 172(b)(1)(E)). Subject to limitations and restrictions with any communication with certain federal • If an ownership change occurs, the discussed below, a corporation can deduct executive branch officials in an attempt to amount of the taxable income of a loss ordinary and necessary travel, meals, and influence the official actions or positions of corporation that may be offset by the entertainment expenses paid or incurred in the officials. See Regulations section pre-change NOL carryovers may be limited. its trade or business. Also, special rules 1.162-29 for the definition of “influencing See section 382 and the related regulations. apply to deductions for gifts, skybox rentals, legislation.” A loss corporation must include the luxury water travel, convention expenses, Dues and other similar amounts paid to information statement as provided in and entertainment tickets. See section 274 certain tax-exempt organizations may not be Temporary Regulations section and Pub. 463 for details. deductible. See section 162(e)(3). If certain 1.382-11T(a), with its income tax return for

Travel. The corporation cannot deduct in-house lobbying expenditures do not each tax year that certain ownership shifts

travel expenses of any individual exceed $2,000, they are deductible. described in Temporary Regulations section

Instructions for Forms 1120 and 1120-A -11-
1.382-2T(a)(2)(i) occur. If the corporation See Form 1139 for details, including claiming under section 4682(g)(2) for tax on

makes the closing-of-the-books election, other elections that may be available, which ozone-depleting chemicals. Enter “ODC” see Regulations section 1.382-6(b). must be made no later than 6 months after next to the entry space. • If a corporation acquires control of the due date (excluding extensions) of the

another corporation (or acquires its assets in corporation’s tax return. Line 32g, Form 1120 a reorganization), the amount of

pre-acquisition losses that may offset Capital construction fund. To take a (Line 28g, Form 1120-A). deduction for amounts contributed to a recognized built-in gain may be limited (see Credit for Federal Telephone capital construction fund (CCF), reduce the section 384). amount that would otherwise be entered on Excise Tax Paid • If a corporation elects the alternative tax

on qualifying shipping activities under line 30 (line 26, Form 1120-A) by the If the corporation was billed after February amount of the deduction. On the dotted line section 1354, no deduction is allowed for an 28, 2003, and before August 1, 2006, for the next to the entry space, enter “CCF” and the NOL attributable to the qualifying shipping federal telephone excise tax on long amount of the deduction. For more activities to the extent that the loss is carried distance or bundled service, the corporation information, see section 7518. forward from a tax year preceding the first may be able to request a credit for the tax tax year for which the alternative tax election paid. The corporation had bundled service if was made. See section 1358(b)(2). Line 32b, Form 1120 its local and long distance service was • Certain qualified GO Zone losses are (Line 28b, Form 1120-A). provided under a plan that does not eligible for a special 5-year carryback Estimated Tax Payments separately state the charge for local service. period. See section 1400N(k). The corporation cannot request the credit if • A corporation may elect to treat any Go Enter any estimated tax payments the it has already received a credit or refund Zone public utility casualty loss as a corporation made for the tax year. from its service provider. If the corporation specified liability loss to which the 10-year Beneficiaries of trusts. If the corporation requests the credit, it cannot ask its service carryback period applies. See the provider for a credit or refund and must is the beneficiary of a trust, and the trust Instructions for Form 1139. makes a section 643(g) election to credit its withdraw any request previously submitted

For more details on the NOL deduction, estimated tax payments to its beneficiaries, to its provider.

see section 172, the Instructions for Form include the corporation’s share of the

payment in the total for line 32b (line 28b, The corporation can request the credit by 1139, and Pub. 542. Form 1120-A). Enter “T” and the amount on attaching Form 8913, Credit for Federal

the dotted line next to the entry space. Telephone Excise Tax Paid, showing the Line 29b, Form 1120 actual amount the corporation paid. The (Line 25b, Form 1120-A). Special estimated tax payments for corporation also may be able to request the

Special Deductions certain life insurance companies. If the credit based on an estimate of the amount corporation is required to make or apply paid. See Form 8913 for details. In either Form 1120 filers. See the instructions for special estimated tax payments (SETP) case, the corporation must keep records to Schedule C on page 14. under section 847 in addition to its regular substantiate the amount of the credit estimated tax payments, enter on line 32b Form 1120-A filers. Generally, enter 70% requested. (line 28b, Form 1120-A), the corporation’s of line 4, page 1, on line 25b. However, this total estimated tax payments. In the margin deduction cannot be more than 70% of line near line 32b, enter “Form 8816” and the Line 32h, Form 1120 24, page 1. Compute line 24 without regard amount. Attach a schedule showing your to any adjustment under section 1059 and (Line 28h, Form 1120-A). computation of estimated tax payments. See without regard to any capital loss carryback sections 847(2) and 847(8) and Form 8816, Total Payments to the tax year under section 1212(a)(1). Special Loss Discount Account and Special On Form 1120, add the amounts on lines

In a year in which an NOL occurs, this Estimated Tax Payments for Insurance 32d through 32g and enter the total on line

70% limitation does not apply even if the Companies, for more information. 32h. On Form 1120-A, add the amounts on

loss is created by the dividends-received lines 28d through 28g and enter the total on

deduction. See sections 172(d) and 246(b). Line 32c, Form 1120 line 28h.

Tax and Payments (Line 28c, Form 1120-A). Backup withholding. If the corporation had

Overpaid estimated tax federal income tax withheld from any

payments it received because, for example, Line 30, Form 1120 If the corporation overpaid estimated tax, it

may be able to get a quick refund by filing it failed to give the payer its correct EIN, (Line 26, Form 1120-A). Form 4466. The overpayment must be at include the amount withheld in the total for Taxable Income least 10% of the corporation’s expected line 32h (line 28h, Form 1120-A). On Form

Minimum taxable income. The income tax liability and at least $500. File 1120, enter the amount withheld and the

corporation’s taxable income cannot be less Form 4466 after the end of the corporation’s words “Backup Withholding” in the blank than the largest of the following amounts. tax year, and no later than the 15th day of space above line 32h. On Form 1120-A, • The inversion gain of the corporation for the third month after the end of the tax year. show the amount withheld on the dotted line

the tax year, if the corporation is an Form 4466 must be filed before the to the left of line 28h, and enter “Backup expatriated entity or a partner in an corporation files its tax return. Withholding.” expatriated entity. For details, see section

7874. Line 32f, Form 1120 Line 33, Form 1120 • The sum of the corporation’s excess (Line 28f, Form 1120-A) inclusions from Schedules Q (1066), line 2c, (Line 29, Form 1120-A).

and the corporation’s taxable income Credit from Form 2439. Enter any credit Estimated Tax Penalty determined solely with respect to its from Form 2439, Notice to Shareholder of If Form 2220 is attached, check the box on ownership and high-yield interests in Undistributed Long-Term Capital Gains, for line 33 (line 29, Form 1120-A), and enter the FASITs. For details, see sections 860E(a) the corporation’s share of the tax paid by a amount of any penalty on this line. and 860J. regulated investment company (RIC) or a

real estate investment trust (REIT) on Net operating loss (NOL). If line 30 undistributed long-term capital gains Line 36, Form 1120 (figured without regard to the items listed included in the corporation’s income. Attach above under minimum taxable income), is (Line 32, Form 1120-A). Form 2439 to Form 1120 or Form 1120-A. zero or less, the corporation may have an Direct Deposit of Refund NOL that can be carried back or forward as Credit for federal tax on fuels. Enter any If the corporation wants its refund directly a deduction to other tax years. Generally, a credit from Form 4136, Credit for Federal deposited into its checking or savings corporation first carries back an NOL 2 tax Tax Paid on Fuels. Attach Form 4136 to account at any U.S. bank or other financial years. However, the corporation can elect to Form 1120 or Form 1120-A.

waive the carryback period and instead institution instead of having a check sent to

the corporation, complete Form 8050 and carry the NOL forward to future tax years. Credit for tax on ozone-depleting

To make the election, see the instructions chemicals. attach it to the corporation’s tax return. Include on line 32f (line 28f,

for Schedule K, item 11 on page 17. Form 1120-A) any credit the corporation is

-12- Instructions for Forms 1120 and 1120-A
For corporations that have elected the regulations. See Rev. Rul. 71-234, 1971-1

Schedule A, Form 1120 simplified resale method, additional section C.B. 148.

263A costs are generally those costs Corporations that use erroneous (Worksheet, Form 1120-A) incurred with respect to the following valuation methods must change to a method categories. permitted for federal income tax purposes. Cost of Goods Sold • Off-site storage or warehousing. Use Form 3115 to make this change. • Purchasing. Generally, inventories are required at the On line 9a, check the method(s) used for • Handling, such as processing, beginning and end of each tax year if the valuing inventories. Under lower of cost or assembling, repackaging, and transporting. production, purchase, or sale of market, the term “market” (for normal goods) • General and administrative costs (mixed merchandise is an income-producing factor. means the current bid price prevailing on the service costs). See Regulations section 1.471-1. inventory valuation date for the particular

However, if the corporation is a qualifying For details, see Regulations section merchandise in the volume usually

taxpayer or a qualifying small business 1.263A-3(d). purchased by the taxpayer. For a

taxpayer, it can adopt or change its Enter on line 4 the balance of section manufacturer, market applies to the basic

accounting method to account for 263A costs paid or incurred during the tax elements of cost—raw materials, labor, and

inventoriable items in the same manner as year not includible on lines 2, 3, and 5. burden. If section 263A applies to the

materials and supplies that are not taxpayer, the basic elements of cost must

incidental (unless its business is a tax Line 5. Other Costs reflect the current bid price of all direct costs

shelter (as defined in section 448(d)(3))). and all indirect costs properly allocable to Enter on line 5 any costs paid or incurred goods on hand at the inventory date. A qualifying taxpayer is a taxpayer that, during the tax year not entered on lines 2

for each prior tax year ending after through 4. Inventory may be valued below cost

December 16, 1998, has average annual when the merchandise is unsalable at

gross receipts of $1 million or less for the 3 Line 7. Inventory at End of Year normal prices or unusable in the normal way

prior tax years. See Regulations sections 1.263A-1 through because the goods are subnormal due to

A qualifying small business taxpayer is a 1.263A-3 for details on figuring the amount damage, imperfections, shopwear, etc.,

of additional section 263A costs to be within the meaning of Regulations section taxpayer (a) that, for each prior tax year included in ending inventory. If the 1.471-2(c). The goods may be valued at the ending on or after December 31, 2000, has corporation accounts for inventoriable items current bona fide selling price, minus direct average annual gross receipts of $10 million in the same manner as materials and cost of disposition (but not less than scrap or less for the 3 prior tax years, and (b)

whose principal business activity is not an supplies that are not incidental, enter on line value) if such a price can be established.

ineligible activity. 7 the portion of its raw materials and If this is the first year the Last-in,

Under this accounting method, inventory merchandise purchased for resale that is First-out (LIFO) inventory method was either

costs for raw materials purchased for use in included on line 6 and was not sold during adopted or extended to inventory goods not

producing finished goods and merchandise the year. previously valued under the LIFO method

purchased for resale are deductible in the provided in section 472, attach Form 970,

year the finished goods or merchandise are Lines 9a Through 9f. Application To Use LIFO Inventory Method,

sold (but not before the year the corporation Inventory Valuation Methods or a statement with the information required

paid for the raw materials or merchandise, if by Form 970. Also check the LIFO box on Inventories can be valued at:

it is also using the cash method). For line 9c. On line 9d, enter the amount or the • Cost; additional guidance on this method of percent of total closing inventories covered • Cost or market value (whichever is lower); accounting for inventoriable items, see Pub. under section 472. Estimates are or

538 and the Instructions for Form 3115. acceptable. • Any other method approved by the IRS

Enter amounts paid for all raw materials that conforms to the requirements of the If the corporation changed or extended

and merchandise during the tax year on line applicable regulations cited below. its inventory method to LIFO and had to

2. The amount the corporation can deduct write up the opening inventory to cost in the However, if the corporation is using the for the tax year is figured on line 8. year of election, report the effect of the cash method of accounting, it is required to write-up as other income (line 10, page 1), All filers not using the cash method of use cost. proportionately over a 3-year period that accounting should see Section 263A Corporations that account for begins with the year of the LIFO election uniform capitalization rules on page 7 before inventoriable items in the same manner as (section 472(d)). completing Schedule A (Form 1120) or the materials and supplies that are not worksheet of Form 1120-A. The instructions Note. Corporations using the LIFO method incidental can currently deduct expenditures for lines 1 through 7 that follow apply to that make an S corporation election or for direct labor and all indirect costs that Schedule A and the worksheet below. transfer LIFO inventory to an S corporation would otherwise be included in inventory in a nonrecognition transaction may be Line 1. Inventory at Beginning costs. subject to an additional tax attributable to

of Year The average cost (rolling average) the LIFO recapture amount. See the

method of valuing inventories generally instructions for line 10, Schedule J, on page If the corporation is changing its method of does not conform to the requirements of the 16, and line 10, Other Income, on page 7. accounting for the current tax year, it must

refigure last year’s closing inventory using

its new method of accounting and enter the

result on line 1. If there is a difference Cost of Goods Sold Worksheet between last year’s closing inventory and (Form 1120-A) Keep for Your Records the refigured amount, attach an explanation

and take it into account when figuring the

corporation’s section 481(a) adjustment.

1. Inventory at beginning of year. Enter here and in Part III, line 3, Line 4. Additional Section 263A column (a), Form 1120-A ............................. 1.

Costs 2. Purchases. Enter here and in Part II, line 5a(1), Form 1120-A ..... 2.

An entry is required on this line only for 3. Cost of labor. Enter here and include in total in Part II, line 5a(3),

corporations that have elected a simplified Form 1120-A ...................................... 3.

method of accounting. 4. Additional section 263A costs. Enter here and in Part II, line 5a(2),

For corporations that have elected the Form 1120-A (see instruction for line 4) .................... 4.

simplified production method, additional 5. Other costs. Enter here and include in Part II, line 5a(3), Form section 263A costs are generally those 1120-A .......................................... 5.

costs, other than interest, that were not 6. Total. Add lines 1 through 5 ........................... 6. capitalized under the corporation’s method 7. Inventory at end of year. Enter here and in Part III, line 3, column (b), of accounting immediately prior to the Form 1120-A ...................................... 7. effective date of section 263A but are now 8. Cost of goods sold. Subtract line 7 from line 6. Enter the result required to be capitalized under section

263A. For details, see Regulations section here and on page 1, line 2, Form 1120-A ................... 8.

1.263A-2(b).

Instructions for Forms 1120 and 1120-A -13-
For more information on inventory RIC specifying the amount of dividends that Line 9, Column (c) valuation methods, see Pub. 538. qualify for the deduction. Generally, line 9, column (c), cannot exceed

the amount from the worksheet on page 15. Line 3, Columns (b) and (c) However, in a year in which an NOL occurs, Schedule C Dividends received on debt-financed stock this limitation does not apply even if the loss acquired after July 18, 1984, are not entitled is created by the dividends-received (Form 1120 Only) to the full 70% or 80% dividends-received deduction. See sections 172(d) and 246(b). For purposes of the 20% ownership test on deduction. The 70% or 80% deduction is

lines 1 through 7, the percentage of stock reduced by a percentage that is related to Line 10, Columns (a) and (c) owned by the corporation is based on voting the amount of debt incurred to acquire the

power and value of the stock. Preferred stock. See section 246A. Also see section Small business investment companies

stock described in section 1504(a)(4) is not 245(a) before making this computation for operating under the Small Business

taken into account. Corporations filing a an additional limitation that applies to Investment Act of 1958 (see 15 U.S.C. 661

consolidated return should see Regulations dividends received from foreign and following) must enter dividends that are

sections 1.1502-13, 1.1502-26, and corporations. Attach a schedule to Form received from domestic corporations subject

1.1502-27 before completing Schedule C. 1120 showing how the amount on line 3, to income tax even though a deduction is

column (c), was figured. allowed for the entire amount of those Corporations filing a consolidated return dividends. To claim the 100% deduction on must not report as dividends on Schedule C Line 4, Column (a) line 10, column (c), the company must file any amounts received from corporations Enter dividends received on preferred stock with its return a statement that it was a within the tax consolidation group. Such of a less-than-20%-owned public utility that federal licensee under the Small Business dividends are eliminated in consolidation Investment Act of 1958 at the time it rather than offset by the dividends-received is subject to income tax and is allowed the

deduction provided in section 247 for received the dividends. deduction.

dividends paid.

Line 1, Column (a) Line 11, Columns (a) and (c)

Enter dividends (except those received on Line 5, Column (a) Enter only dividends that qualify under

debt-financed stock acquired after July 18, Enter dividends received on preferred stock section 243(b) for the 100%

1984–see section 246A) that are: of a 20%-or-more-owned public utility that is dividends-received deduction described in

• Received from less-than-20%-owned subject to income tax and is allowed the section 243(a)(3). Corporations taking this

domestic corporations subject to income tax, deduction provided in section 247 for deduction are subject to the provisions of

and dividends paid. section 1561.

• Qualified for the 70% deduction under Line 6, Column (a) The 100% deduction does not apply to section 243(a)(1). affiliated group members that are joining in Enter the U.S.-source portion of dividends Also include on line 1 the following. the filing of a consolidated return. that: • Taxable distributions from an IC-DISC or • Are received from less-than-20%-owned former DISC that are designated as eligible foreign corporations, and Line 12, Column (a) for the 70% deduction and certain dividends • Qualify for the 70% deduction under Enter dividends from FSCs that are of Federal Home Loan Banks. See section section 245(a). To qualify for the 70% attributable to foreign trade income and that 246(a)(2). deduction, the corporation must own at least are eligible for the 100% deduction provided • Dividends (except those received on 10% of the stock of the foreign corporation in section 245(c)(1)(A). debt-financed stock acquired after July 18, by vote and value. 1984) from a regulated investment company

(RIC). The amount of dividends eligible for Also include dividends received from a Line 13, Column (a)

the dividends-received deduction under less-than-20%-owned FSC that: Enter foreign dividends not reportable on section 243 is limited by section 854(b). The • Are attributable to income treated as lines 3, 6, 7, 8, 11, or 12 of column (a). corporation should receive a notice from the effectively connected with the conduct of a Include on line 13 the corporation’s share of RIC specifying the amount of dividends that trade or business within the United States the ordinary earnings of a qualified electing qualify for the deduction. (excluding foreign trade income), and fund from line 1c of Form 8621, Return by a

Report so-called dividends or earnings • Qualify for the 70% deduction under Shareholder of a Passive Foreign section 245(c)(1)(B). received from mutual savings banks, etc., as Investment Company or Qualifying Electing

interest. Do not treat them as dividends. Fund. Exclude distributions of amounts Line 7, Column (a) constructively taxed in the current year or in

Line 2, Column (a) Enter the U.S.-source portion of dividends prior years under subpart F (sections 951

that: through 964). Enter on line 2: • Are received from 20%-or-more-owned • Dividends (except those received on

debt-financed stock acquired after July 18, foreign corporations, and Line 14, Column (a) • Qualify for the 80% deduction under 1984) that are received from Include income constructively received from section 245(a). 20%-or-more-owned domestic corporations CFCs under subpart F. This amount should subject to income tax and that are subject to Also include dividends received from a equal the total subpart F income reported on the 80% deduction under section 243(c), 20%-or-more-owned FSC that: Schedule I, Form 5471, Information Return

and of U.S. Persons With Respect to Certain • Are attributable to income treated as • Taxable distributions from an IC-DISC or Foreign Corporations. effectively connected with the conduct of a former DISC that are considered eligible for trade or business within the United States the 80% deduction. (excluding foreign trade income), and Line 15, Column (a)

Line 3, Column (a) • Qualify for the 80% deduction under Include gross-up for taxes deemed paid section 245(c)(1)(B). under sections 902 and 960. Enter the following.

• Dividends received on debt-financed Line 8, Column (a) Line 16, Column (a) stock acquired after July 18, 1984, from Enter dividends received from wholly owned domestic and foreign corporations subject to Enter taxable distributions from an IC-DISC foreign subsidiaries that are eligible for the income tax that would otherwise be subject or former DISC that are designated as not 100% deduction under section 245(b). to the dividends-received deduction under eligible for a dividends-received deduction.

section 243(a)(1), 243(c), or 245(a). In general, the deduction under section

Generally, debt-financed stock is stock that 245(b) applies to dividends paid out of the No deduction is allowed under section

243 for a dividend from an IC-DISC or the corporation acquired by incurring a debt earnings and profits of a foreign corporation former DISC (as defined in section 992(a)) (for example, it borrowed money to buy the for a tax year during which: to the extent the dividend: stock). • All of its outstanding stock is directly or

• Dividends received from a RIC on indirectly owned by the domestic corporation • Is paid out of the corporation’s

debt-financed stock. The amount of receiving the dividends, and accumulated IC-DISC income or previously

dividends eligible for the dividends-received • All of its gross income from all sources is taxed income, or

deduction is limited by section 854(b). The effectively connected with the conduct of a • Is a deemed distribution under section

corporation should receive a notice from the trade or business within the United States. 995(b)(1).

-14- Instructions for Forms 1120 and 1120-A
Line 17, Column (a) Line 18, Column (c) on line 2 (line 1, Part I, Form 1120-A) even if

the corporation has no tax liability. Include the following. Section 247 allows public utilities a

deduction of 40% of the smaller of A corporation is a qualified personal 1. Dividends (other than capital gain (a) dividends paid on their preferred stock service corporation if it meets both of the distributions reported on Schedule D (Form during the tax year, or (b) taxable income following tests. 1120) and exempt-interest dividends) that

are received from RICs and that are not computed without regard to this deduction. 1. Substantially all of the corporation’s

subject to the 70% deduction. In a year in which an NOL occurs, compute activities involve the performance of

2. Dividends from tax-exempt the deduction without regard to section services in the fields of health, law,

organizations. 247(a)(1)(B). See section 172(d). engineering, architecture, accounting,

actuarial science, performing arts, or 3. Dividends (other than capital gain consulting. distributions) received from a REIT that, for 2. At least 95% of the corporation’s the tax year of the trust in which the Schedule J, Form 1120 stock, by value, is directly or indirectly dividends are paid, qualifies under sections (Part I, Form 1120-A) owned by 856 through 860.

4. Dividends not eligible for a a. Employees performing the services,

dividends-received deduction, which include Line 1 (Form 1120 Only) b. Retired employees who had

performed the services listed above, the following. If the corporation is a member of a

controlled group, it must check the box on c. Any estate of an employee or retiree a. Dividends received on any share of described above, or stock held for less than 46 days during the line 1 and complete Schedule O (Form

1120). Members of a controlled group must d. Any person who acquired the stock of 91-day period beginning 45 days before the use Schedule O (Form 1120) to figure the the corporation as a result of the death of an ex-dividend date. When counting the employee or retiree (but only for the 2-year number of days the corporation held the tax for the group. See Schedule O and its

instructions for more information. period beginning on the date of the stock, you cannot count certain days during employee’s or retiree’s death). which the corporation’s risk of loss was

diminished. See section 246(c)(4) and Line 2, Form 1120 Mutual savings bank conducting life Regulations section 1.246-5 for more (Line 1, Form 1120-A) insurance business. The tax under section details. Most corporations not filing a consolidated 594 consists of the sum of (a) a partial tax b. Dividends attributable to periods return figure their tax by using the Tax Rate computed on Form 1120 on the taxable totaling more than 366 days that the Schedule below. Qualified personal service income of the bank determined without corporation received on any share of corporations should see the instructions regard to income or deductions allocable to preferred stock held for less than 91 days below. the life insurance department, and (b) a during the 181-day period that began 90 partial tax on the taxable income computed days before the ex-dividend date. When Tax Rate Schedule on Form 1120-L of the life insurance counting the number of days the corporation If taxable income (line 30, Form 1120, or line 26, department. Enter the combined tax on line held the stock, you cannot count certain Form 1120-A) on page 1 is: 2. Attach Form 1120-L as a schedule (and days during which the corporation’s risk of identify it as such), together with the annual loss was diminished. See section 246(c)(4) Of the statements and schedules required to be and Regulations section 1.246-5 for more But not amount filed with Form 1120-L. See Temporary details. Preferred dividends attributable to Over — over — Tax is: over — Regulations section 1.6012-2T(c)(1)(ii). An periods totaling less than 367 days are exception applies for insurance companies subject to the 46-day holding period rule $0 $50,000 15% $0 that electronically file their returns. See above. 50,000 75,000 $ 7,500 + 25% 50,000 Temporary Regulations section c. Dividends on any share of stock to 75,000 100,000 13,750 + 34% 75,000 1.6012-2T(c)(4). the extent the corporation is under an 100,000 335,000 22,250 + 39% 100,000

335,000 10,000,000 113,900 + 34% 335,000 Deferred tax under section 1291. If the obligation (including a short sale) to make

10,000,000 15,000,000 3,400,000 + 35% 10,000,000 corporation was a shareholder in a passive related payments with respect to positions in

15,000,000 18,333,333 5,150,000 + 38% 15,000,000 foreign investment company (PFIC) and substantially similar or related property.

18,333,333 - - - - - 35% 0 received an excess distribution or disposed 5. Any other taxable dividend income of its investment in the PFIC during the year, not properly reported above. it must include the increase in taxes due Qualified personal service corporation. A under section 1291(c)(2) in the total for line If patronage dividends or per-unit retain qualified personal service corporation is 2. On the dotted line next to line 2, enter allocations are included on line 17, identify taxed at a flat rate of 35% on taxable “Section 1291” and the amount. the total of these amounts in a schedule income. If the corporation is a qualified

attached to Form 1120. personal service corporation, check the box Do not include on line 2 any interest due

under section 1291(c)(3). Instead, show the

amount of interest owed in the bottom

margin of page 1, Form 1120, and enter

Worksheet for Schedule C, line 9 Keep for Your Records “Section 1291 interest.” For details, see

Form 8621.

Additional tax under section 197(f). A

1. Refigure line 28, page 1, Form 1120, without any domestic production corporation that elects to pay tax on the gain

activities deduction, any adjustment under section 1059, and without from the sale of an intangible under the

any capital loss carryback to the tax year under section 1212(a)(1) . . . 1. related person exception to the

anti-churning rules should include any 2. Complete lines 10, 11 and 12, column (c), and enter the total here .... 2.

additional tax due under section 197(f)(9)(B) 3. Subtract line 2 from line 1 .............................. 3. in the total for line 2. On the dotted line next 4. Multiply line 3 by 80% ................................ 4. to line 2, enter “Section 197” and the 5. Add lines 2, 5, 7, and 8, column (c), and the part of the deduction on amount. line 3, column (c), that is attributable to dividends from

20%-or-more-owned corporations ......................... 5. Line 3 (Form 1120 Only) 6. Enter the smaller of line 4 or 5. If line 5 is greater than line 4, stop here;

enter the amount from line 6 on line 9, column (c), and do not complete A corporation that is not a small the rest of this worksheet .............................. 6. corporation exempt from the AMT 7. Enter the total amount of dividends from 20%-or-more-owned CAUTION may be required to file Form 4626 if

!

corporations that are included on lines 2, 3, 5, 7, and 8, column (a) . . . 7. it claims certain credits, even though it does 8. Subtract line 7 from line 3 .............................. 8. not owe any AMT. See Form 4626 for

9. Multiply line 8 by 70% ................................ 9. details.

10. Subtract line 5 above from line 9, column (c) .................. 10. Unless the corporation is treated as a 11. Enter the smaller of line 9 or line 10 ....................... 11. small corporation exempt from the AMT, it 12. Dividends-received deduction after limitation (sec. 246(b)). Add may owe the AMT if it has any of the lines 6 and 11. Enter the result here and on line 9, column (c) ....... 12. adjustments and tax preference items listed

on Form 4626. The corporation must file

Instructions for Forms 1120 and 1120-A -15-
Form 4626 if its taxable income (or loss) showing the computation of each item Line 9, Form 1120 before the NOL deduction, combined with included in the total for line 9 (Form 1120-A, (Line 4, Form 1120-A) these adjustments and tax preference items Part I, line 4) and identify the applicable

is more than the smaller of $40,000 or the Code section and the type of tax or interest. Include any of the following taxes and

corporation’s allowable exemption amount interest in the total on line 9 (Form 1120-A,

(from Form 4626). For this purpose, taxable Part I, line 4). Check the appropriate box(es) Line 10 (Form 1120 Only)

income does not include the NOL deduction. for the form, if any, used to compute the Include any deferred tax on the termination total. of a section 1294 election applicable to See Form 4626 for definitions and details

Recapture of investment credit. If the shareholders in a qualified electing fund in on how to figure the tax. corporation disposed of investment credit the amount entered on line 10. See Form

Line 5a (Form 1120 Only) property or changed its use before the end 8621, Part V, and How to report, below.

of its useful life or recovery period, it may Subtract the following amounts from the To find out when a corporation can take the owe a tax. See Form 4255, Recapture of total for line 10. credit for payment of income tax to a foreign Investment Credit. • Deferred tax on the corporation’s share of country or U.S. possession, see Form 1118. Recapture of low-income housing credit. undistributed earnings of a qualified electing

fund (see Form 8621, Part II). Line 5b (Form 1120 Only) If the corporation disposed of property (or

there was a reduction in the qualified basis • Deferred LIFO recapture tax (section Use Form 8834, Qualified Electric Vehicle of the property) for which it took the 1363(d)). This tax is the part of the LIFO Credit, if the corporation can claim a credit low-income housing credit, it may owe a tax. recapture tax that will be deferred and paid for a qualified electric vehicle placed in See Form 8611, Recapture of Low-Income with Form 1120S in the future. To figure the service in 2006. Housing Credit. deferred tax, first figure the total LIFO

recapture tax. Follow the steps below to Line 5c, Form 1120 Interest due under the look-back figure the total LIFO recapture tax and the (Line 2, Form 1120-A) methods. If the corporation used the deferred amount. Also see the instructions look-back method for certain long-term Enter on line 5c (line 2 of Form 1120-A) the regarding LIFO recapture amount under contracts, see Form 8697, Interest corporation’s total general business credit. Line 10. Other Income. Computation Under the Look-Back Method The corporation is required to file Form Step 1. Figure the tax on the for Completed Long-Term Contracts, for 3800, General Business Credit, to claim information on figuring the interest the corporation’s income including the LIFO

certain business credits. For a list of recapture amount. (Complete Schedule J corporation may have to include. allowable credits, see Form 3800. Check the through line 9, but do not enter a total on The corporation may also have to include line 10 yet.) “Form 3800” box and include the allowable interest due under the look-back method for credit from Part II, line 19 of Form 3800, on Step 2. Using a separate worksheet, property depreciated under the income line 5c of Form 1120 (line 2 of Form complete Schedule J again, but do not forecast method. See Form 8866, Interest 1120-A). Also, see the applicable credit form include the LIFO recapture amount in the Computation Under the Look-Back Method and its instructions . corporation’s taxable income. for Property Depreciated Under the Income

However, if the corporation is filing any of Forecast Method. Step 3. Compare the tax in Step 2 to the

the following forms, check the applicable tax in Step 1. (The difference between the Alternative tax on qualifying shipping box, and include the allowable credit on line two is the LIFO recapture tax.) activities. Enter any alternative tax on 5c (line 2 of Form 1120-A). qualifying shipping activities from Form Step 4. Multiply the amount figured in • Form 6478, Credit for Alcohol Used as 8902. Check the box for Form 8902. Step 3 by 75%. (The result is the deferred Fuel, LIFO recapture tax.) Other. Additional taxes and interest • Form 8835, Renewable Electricity, How to report. Attach a schedule showing amounts can be included in the total entered Refined Coal, and Indian Coal Production the computation of each item included in, or on line 9 (Form 1120-A, Part I, line 4). Credit, with a credit from Section B, or Check the box for “Other” if the corporation subtracted from, the total for line 10. On the • Form 8844, Empowerment Zone and dotted line next to line 10, specify (a) the includes any additional taxes and interest Renewal Community Employment Credit. applicable Code section, (b) the type of tax, such as the items discussed below. See

How to report and (c) enter the amount of tax. For below for details on reporting See the instructions of the applicable form. example, if the corporation is deferring a these amounts on an attached schedule. $100 LIFO recapture tax, subtract this Line 5d (Form 1120 Only) • Recapture of qualified electric vehicle amount from the total on line 10, then enter (QEV) credit. The corporation must To figure the minimum tax credit and any “Section 1363-Deferred Tax-$100” on the recapture part of the QEV credit it claimed in carryforward of that credit, use Form 8827, dotted line next to line 10. a prior year if, within 3 years of the date the Credit for Prior Year Minimum Tax— vehicle was placed in service, it ceases to Corporations. Also see Form 8827 if any of qualify for the credit. See Regulations the corporation’s 2005 nonconventional section 1.30-1 for details on how to figure Schedule K, Form 1120 source fuel credit or qualified electric vehicle the recapture. credit was disallowed solely because of the (Part II, Form 1120-A) • Recapture of Indian employment credit. tentative minimum tax limitation. See section Generally, if an employer terminates the The following instructions apply to Form 53(d). employment of a qualified employee less 1120, page 3, Schedule K, or Form 1120-A,

than 1 year after the date of initial page 2, Part II. Complete all items that apply Line 5e (Form 1120 Only) employment, any Indian employment credit to the corporation. Enter the amount of any credit from Form allowed for a prior tax year because of 8860, Qualified Zone Academy Bond Credit Question 4 (Form 1120 Only) wages paid or incurred to that employee or from Form 8912, Credit for Clean must be recaptured. For details, see Form Check the “Yes” box for question 4 if: Renewable Energy and Gulf Tax Credit 8845 and section 45A. • The corporation is a subsidiary in an Bonds. Check the applicable box(es) and • Recapture of new markets credit (see affiliated group (defined below), but is not include the amount of the credit in the total Form 8874). filing a consolidated return for the tax year for line 5e. • Recapture of employer-provided childcare with that group, or

facilities and services credit (see Form • The corporation is a subsidiary in a Line 8 (Form 1120 Only) 8882). parent-subsidiary controlled group. For a

A corporation is taxed as a personal holding • Tax and interest on a nonqualified definition of a parent-subsidiary controlled

company under section 542 if: withdrawal from a capital construction fund group, see the instructions for Schedule O

• At least 60% of its adjusted ordinary gross (section 7518). (Form 1120).

income for the tax year is personal holding • Interest on deferred tax attributable to (a) Any corporation that meets either of the company income, and installment sales of certain timeshares and requirements above should check the “Yes” • At any time during the last half of the tax residential lots (section 453(l)(3)) and (b) box. This applies even if the corporation is a year more than 50% in value of its certain nondealer installment obligations subsidiary member of one group and the outstanding stock is directly or indirectly (section 453A(c)). parent corporation of another. owned by five or fewer individuals. • Interest due on deferred gain (section Note. If the corporation is an “excluded

See Schedule PH (Form 1120) for member” of a controlled group (see section 1260(b)).

definitions and details on how to figure the How to report. If the corporation 1563(b)(2)), it is still considered a member

tax. checked the “Other” box, attach a schedule of a controlled group for this purpose.

-16- Instructions for Forms 1120 and 1120-A
Affiliated group. An affiliated group is one corporation is foreign owned. See section of the loss is used to offset income on this

or more chains of includible corporations 6038A(c)(5) and the related regulations. return. The amount to enter is the total of all

(section 1504(a)) connected through stock NOLs generated in prior years but not used

ownership with a common parent to offset income (either as a carryback or Enter on line 7a the percentage owned corporation. The common parent must be an carryover) to a tax year prior to 2006. Do not by the foreign person specified in question includible corporation and the following reduce the amount by any NOL deduction 7. On line 7b, enter the name of the owner’s requirements must be met. reported on line 29a. country. 1. The common parent must own

directly stock that represents at least 80% of Note. If there is more than one the total voting power and at least 80% of 25%-or-more foreign owner, complete lines the total value of the stock of at least one of

the other includible corporations. 7a and 7b for the foreign person with the Schedule L, Form 1120 highest percentage of ownership. 2. Stock that represents at least 80% of (Part III, Form 1120-A) the total voting power and at least 80% of The balance sheet should agree with the Foreign person. The term “foreign person” the total value of the stock of each of the

means: corporation’s books and records. other corporations (except for the common • A foreign citizen or nonresident alien, parent) must be owned directly by one or

more of the other includible corporations. • An individual who is a citizen of a U.S. Corporations with total receipts (line 1a possession (but who is not a U.S. citizen or plus lines 4 through 10 on page 1) and total resident), assets at the end of the tax year less than

For this purpose, the term “stock” • A foreign partnership, $250,000 are not required to complete

generally does not include any stock that • A foreign corporation, Schedules L, M-1, and M-2 (Parts III and IV,

(a) is nonvoting, (b) is nonconvertible, • Any foreign estate or trust within the Form 1120-A) if the “Yes” box on Schedule

(c) is limited and preferred as to dividends meaning of section 7701(a)(31), or K, question 13 (Part II, question 7, Form

and does not participate significantly in • A foreign government (or one of its 1120-A), is checked. If the corporation is

corporate growth, and (d) has redemption agencies or instrumentalities) to the extent required to complete Schedule L, include

and liquidation rights that do not exceed the that it is engaged in the conduct of a total assets reported on Schedule L, line 15,

commercial activity as described in column (d), on page 1, item D. issue price of the stock (except for a section 892. reasonable redemption or liquidation

premium). See section 1504(a)(4). See If filing a consolidated return, report total section 1563(d)(1) for the definition of stock Owner’s country. For individuals, the term consolidated assets, liabilities, and for purposes of determining stock ownership “owner’s country” means the country of shareholder’s equity for all corporations above. residence. For all others, it is the country joining in the return. See Consolidated

where incorporated, organized, created, or Return on page 6 of these instructions. administered. Question 6 (Form 1120-A Only) Corporations with total assets Foreign financial accounts. Check the Requirement to file Form 5472. If the non-consolidated (or consolidated for all “Yes” box for question 6 if either 1 or 2 corporation checked “Yes,” it may have to corporations included within the tax below applies to the corporation. Otherwise, file Form 5472, Information Return of a 25% consolidation group) of $10 million or more check the “No” box. Foreign Owned U.S. Corporation or a on the last day of the tax year must Foreign Corporation Engaged in a U.S. 1. At any time during the 2006 calendar complete Schedule M-3 (Form 1120)

year, the corporation had an interest in or Trade or Business. Generally, a 25% instead of Schedule M-1. See the separate

signature or other authority over a bank, foreign-owned corporation that had a instructions for Schedule M-3 (Form 1120) reportable transaction with a foreign or securities, or other financial account in a for provisions also affecting Schedule L. domestic related party during the tax year foreign country (see Form TD F 90-22.1,

Report of Foreign Bank and Financial must file Form 5472. See Form 5472 for

Accounts); and filing instructions and penalties for failure to Line 1

file. a. The combined value of the accounts was Include certificates of deposit as cash on

more than $10,000 at any time during the this line.

calendar year and Item 9, Form 1120 b. The account was not with a U.S. military (Item 3, Form 1120-A) Line 5 banking facility operated by a U.S. Show any tax-exempt interest received or Include on this line: financial institution. accrued. Including any exempt-interest The corporation owns more than 50% of the • State and local government obligations, dividends received as a shareholder in a stock in any corporation that would answer mutual fund or other RIC. Also, if required, the interest on which is excludable from

“Yes” to item 1 above. gross income under section 103(a) and include the same amount on Schedule M-1,

line 7; Form 1120-A, Part IV, line 6; or • Stock in a mutual fund or other RIC that

Schedule M-3, Part II, line 13. distributed exempt-interest dividends during If the “Yes” box is checked: the tax year of the corporation. • Enter the name of the foreign country or

countries. Attach a separate sheet if more Item 11 (Form 1120 Only) space is needed. If the corporation has an NOL for its 2006 Line 26, Form 1120 • File Form TD F 90-22.1 by June 30, 2007, tax year, it can elect to waive the entire (Line 21, Form 1120-A) with the Department of the Treasury at the carryback period for the NOL and instead Some examples of adjustments to report on address shown on the form, do not file it carry the NOL forward to future tax years. with Form 1120-A. You can order Form TD this line include: To do so, check the box on line 11 and file

F 90-22.1 by calling 1-800-TAX-FORM the tax return by its due date, including • Unrealized gains and losses on securities (1-800-829-3676) or you can download it extensions. Do not attach the statement held “available for sale.”

from the IRS website at www.irs.gov. described in Temporary Regulations section • Foreign currency translation adjustments. 301.9100-12T. Once made, the election is

irrevocable. See Pub. 542 and Form 1139 • The excess of additional pension liability Question 7 (Form 1120 Only) for more details. over unrecognized prior service cost.

Check the “Yes” box if one foreign person • Guarantees of employee stock (ESOP) owned at least 25% of (a) the total voting Corporations filing a consolidated return debt. power of all classes of stock of the must also attach the statement required by corporation entitled to vote, or (b) the total Regulations section 1.1502-21(b)(3). • Compensation related to employee stock

value of all classes of stock of the award plans.

corporation.

Item 12 (Form 1120 Only) If the total adjustment to be entered on

The constructive ownership rules of Enter the amount of the NOL carryover to line 26 (line 21, Form 1120-A) is a negative

section 318 apply in determining if a the tax year from prior years, even if some amount, enter the amount in parentheses.

Instructions for Forms 1120 and 1120-A -17-
voluntarily file Schedule M-3 instead of • The cost of skyboxes over the face value

Schedule M-1, Form 1120 Schedule M-1. See the Instructions for of nonluxury box seat tickets.

Schedule M-3 for more information. • The part of luxury water travel expenses (Part IV, Form 1120-A) not deductible under section 274(m).

Corporations with total receipts (line 1a plus Line 5c, Form 1120 • Expenses for travel as a form of

lines 4 through 10 on page 1) and total education. (Line 5, Form 1120-A) assets at the end of the tax year less than • Other nondeductible travel and Include any of the following. $250,000 are not required to complete entertainment expenses. Schedules L, M-1, and M-2 (Parts III and IV, • Meal and entertainment expenses not

Form 1120-A) if the “Yes” box on Schedule deductible under section 274(n).

• Expenses for the use of an entertainment For more information, see Pub. 542. K, question 13 (Part II, question 7, Form

1120-A) , is checked. facility.

Corporations with total assets • The part of business gifts over $25. Line 7, Form 1120 non-consolidated (or consolidated for all • Expenses of an individual over $2,000,

which are allocable to conventions on cruise (Line 6, Form 1120-A) corporations included within the tax

consolidation group) of $10 million or more ships. Report any tax exempt interest received or

on the last day of the tax year must • Employee achievement awards over accrued, including any exempt-interest

complete Schedule M-3 instead of Schedule $400. dividends received as a shareholder in a

M-1. See Schedule M-3 (Form 1120 Only) • The cost of entertainment tickets over mutual fund or other RIC. Also report this

on page 6. A corporation filing Form 1120 face value (also subject to 50% limit under same amount on Schedule K, item 9 (item 3,

that is not required to file Schedule M-3 may section 274(n)). Form 1120-A).

Privacy Act and Paperwork Reduction Act Notice. We ask for the information on these forms 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. Section 6109 requires return preparers to provide their identifying numbers on the return.

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 the following forms will vary depending on individual circumstances. The estimated average times

are:

Copying,

assembling,

Learning about and sending the

Form Recordkeeping the law or the form Preparing the form form to the IRS

1120 70 hr., 47 min. 42 hr., 1 min. 72 hr., 56 min. 8 hr., 2 min.

1120-A 43 hr., 30 min. 24 hr., 13 min. 42 hr., 33 min. 4 hr., 49 min.

Sch. D (1120) 6 hr., 56 min. 3 hr., 55 min. 6 hr., 3 min. 32 min.

Sch. H (1120) 5 hr., 58 min. 35 min. 43 min. - - - - -

Sch. M-3 (1120) 76 hr., 3 min. 3 hr., 40 min. 5 hr., 4 min. - - - - -

Sch. N (1120) 3 hr., 49 min. 1 hr., 30 min. 4 hr., 25 min. 48 min.

Sch. O (1120) 6 hr., 42 min. 2 hr., 5 min. 2 hr., 16 min. - - - - -

Sch. PH (1120) 15 hr., 18 min. 6 hr., 12 min. 8 hr., 35 min. 32 min.

If you have comments concerning the accuracy of these time estimates or suggestions for making this form and related schedules

simpler, we would be happy to hear from you. You can write to Internal Revenue Service, Tax Products Coordinating Committee,

SE:W:CAR:MP:T:T:SP, 1111 Constitution Ave. NW, IR-6406, Washington, DC 20224. Do not send the tax form to this address. Instead, see

Where To File on page 3.

-18- Instructions for Forms 1120 and 1120-A
Using the list of activities and codes below, Once the principal business activity is determined, Forms 1120 and 1120-A determine from which activity the company derives entries must be made on Form 1120, Schedule K,

the largest percentage of its “total receipts.” Total lines 2a, 2b, and 2c, or on Form 1120-A, Part II, Principal Business Activity Codes receipts is defined as the sum of gross receipts or lines 1a, 1b, and 1c. For the business activity code

This list of principal business activities and their sales (page 1, line 1a) plus all other income (page 1, number, enter the six digit code selected from the list

associated codes is designed to classify an lines 4 through 10). If the company purchases raw below. On the next line (Form 1120, Schedule K, line

enterprise by the type of activity in which it is materials and supplies them to a subcontractor to 2b, or Form 1120-A, Part II, line 1b), enter a brief

engaged to facilitate the administration of the produce the finished product, but retains title to the description of the company’s business activity.

Internal Revenue Code. These principal business product, the company is considered a manufacturer Finally, enter a description of the principal product or

activity codes are based on the North American and must use one of the manufacturing codes service of the company on Form 1120, Schedule K,

Industry Classification System. (311110-339900). line 2c, or Form 1120-A, Part II, line 1c.

Code Code Code Code

Agriculture, Forestry, Fishing Specialty Trade Contractors Printing and Related Support 333900 Other General Purpose

238100 Foundation, Structure, & Activities Machinery Mfg and Hunting Building Exterior Contractors 323100 Printing & Related Support Computer and Electronic Product Crop Production (including framing carpentry, Activities Manufacturing 111100 Oilseed & Grain Farming masonry, glass, roofing, & Petroleum and Coal Products 334110 Computer & Peripheral 111210 Vegetable & Melon Farming siding) Manufacturing Equipment Mfg (including potatoes & yams) 238210 Electrical Contractors 324110 Petroleum Refineries 334200 Communications Equipment 111300 Fruit & Tree Nut Farming 238220 Plumbing, Heating, & (including integrated) Mfg 111400 Greenhouse, Nursery, & Air-Conditioning Contractors 324120 Asphalt Paving, Roofing, & 334310 Audio & Video Equipment Floriculture Production 238290 Other Building Equipment Saturated Materials Mfg Mfg 111900 Other Crop Farming Contractors 324190 Other Petroleum & Coal 334410 Semiconductor & Other (including tobacco, cotton, 238300 Building Finishing Products Mfg Electronic Component Mfg sugarcane, hay, peanut, Contractors (including Chemical Manufacturing 334500 Navigational, Measuring, sugar beet & all other crop drywall, insulation, painting, 325100 Basic Chemical Mfg Electromedical, & Control farming) wallcovering, flooring, tile, & Instruments Mfg Animal Production finish carpentry) 325200 Resin, Synthetic Rubber, &

Artificial & Synthetic Fibers & 334610 Manufacturing & 112111 Beef Cattle Ranching & 238900 Other Specialty Trade Filaments Mfg Reproducing Magnetic & Farming Contractors (including site Optical Media 325300 Pesticide, Fertilizer, & Other 112112 Cattle Feedlots preparation) Agricultural Chemical Mfg Electrical Equipment, Appliance, and 112120 Dairy Cattle & Milk Component Manufacturing Manufacturing 325410 Pharmaceutical & Medicine Production Mfg 335100 Electric Lighting Equipment 112210 Hog & Pig Farming Food Manufacturing Mfg 325500 Paint, Coating, & Adhesive 112300 Poultry & Egg Production 311110 Animal Food Mfg Mfg 335200 Household Appliance Mfg

112400 Sheep & Goat Farming 311200 Grain & Oilseed Milling 325600 Soap, Cleaning Compound, & 335310 Electrical Equipment Mfg

112510 Animal Aquaculture (including 311300 Sugar & Confectionery Toilet Preparation Mfg 335900 Other Electrical Equipment & shellfish & finfish farms & Product Mfg 325900 Other Chemical Product & Component Mfg hatcheries) 311400 Fruit & Vegetable Preserving Preparation Mfg Transportation Equipment 112900 Other Animal Production & Specialty Food Mfg Plastics and Rubber Products Manufacturing

Forestry and Logging 311500 Dairy Product Mfg Manufacturing 336100 Motor Vehicle Mfg

113110 Timber Tract Operations 311610 Animal Slaughtering and 326100 Plastics Product Mfg 336210 Motor Vehicle Body & Trailer

113210 Forest Nurseries & Gathering Processing 326200 Rubber Product Mfg Mfg

of Forest Products 311710 Seafood Product Preparation Nonmetallic Mineral Product 336300 Motor Vehicle Parts Mfg

113310 Logging & Packaging Manufacturing 336410 Aerospace Product & Parts

Fishing, Hunting and Trapping 311800 Bakeries & Tortilla Mfg 327100 Clay Product & Refractory Mfg

114110 Fishing 311900 Other Food Mfg (including Mfg 336510 Railroad Rolling Stock Mfg

114210 Hunting & Trapping coffee, tea, flavorings & 327210 Glass & Glass Product Mfg 336610 Ship & Boat Building seasonings) Support Activities for Agriculture 327300 Cement & Concrete Product 336990 Other Transportation

and Forestry Beverage and Tobacco Product Mfg Equipment Mfg Manufacturing 115110 Support Activities for Crop 327400 Lime & Gypsum Product Mfg Furniture and Related Product

Production (including cotton 312110 Soft Drink & Ice Mfg 327900 Other Nonmetallic Mineral Manufacturing

ginning, soil preparation, 312120 Breweries Product Mfg 337000 Furniture & Related Product planting, & cultivating) 312130 Wineries Primary Metal Manufacturing Manufacturing

115210 Support Activities for Animal 312140 Distilleries 331110 Iron & Steel Mills & Ferroalloy Miscellaneous Manufacturing Production 312200 Tobacco Manufacturing Mfg 339110 Medical Equipment & 115310 Support Activities For Textile Mills and Textile Product 331200 Steel Product Mfg from Supplies Mfg Forestry Mills Purchased Steel 339900 Other Miscellaneous

313000 Textile Mills 331310 Alumina & Aluminum Manufacturing Mining 314000 Textile Product Mills Production & Processing

211110 Oil & Gas Extraction Apparel Manufacturing 331400 Nonferrous Metal (except Wholesale Trade

212110 Coal Mining 315100 Apparel Knitting Mills Aluminum) Production & Merchant Wholesalers, Durable

212200 Metal Ore Mining Processing Goods 315210 Cut & Sew Apparel 212310 Stone Mining & Quarrying Contractors 331500 Foundries 423100 Motor Vehicle & Motor

212320 Sand, Gravel, Clay, & Fabricated Metal Product Vehicle Parts & Supplies 315220 Men’s & Boys’ Cut & Sew Ceramic & Refractory Apparel Mfg Manufacturing 423200 Furniture & Home

Minerals Mining & Quarrying 332110 Forging & Stamping Furnishings 315230 Women’s & Girls’ Cut & Sew

212390 Other Nonmetallic Mineral Apparel Mfg 332210 Cutlery & Handtool Mfg 423300 Lumber & Other Construction

Mining & Quarrying 332300 Architectural & Structural Materials 315290 Other Cut & Sew Apparel Mfg 213110 Support Activities for Mining Metals Mfg 423400 Professional & Commercial 315990 Apparel Accessories & Other

Apparel Mfg 332400 Boiler, Tank, & Shipping Equipment & Supplies

Utilities Container Mfg 423500 Metal & Mineral (except Leather and Allied Product

332510 Hardware Mfg Petroleum) 221100 Electric Power Generation, Manufacturing

Transmission & Distribution 332610 Spring & Wire Product Mfg 423600 Electrical & Electronic Goods 316110 Leather & Hide Tanning &

221210 Natural Gas Distribution Finishing 332700 Machine Shops; Turned 423700 Hardware, & Plumbing &

221300 Water, Sewage & Other Product; & Screw, Nut, & Bolt Heating Equipment & 316210 Footwear Mfg (including

Systems Mfg Supplies rubber & plastics)

221500 Combination Gas & Electric 332810 Coating, Engraving, Heat 423800 Machinery, Equipment, & 316990 Other Leather & Allied

Treating, & Allied Activities Supplies Product Mfg

Construction Wood Product Manufacturing 332900 Other Fabricated Metal 423910 Sporting & Recreational

Product Mfg Goods & Supplies Construction of Buildings 321110 Sawmills & Wood

Machinery Manufacturing 423920 Toy & Hobby Goods & Preservation 236110 Residential Building Supplies Construction 321210 Veneer, Plywood, & 333100 Agriculture, Construction, &

Mining Machinery Mfg 423930 Recyclable Materials Engineered Wood Product 236200 Nonresidential Building Mfg 423940 Jewelry, Watch, Precious Construction 333200 Industrial Machinery Mfg Stone, & Precious Metals Heavy and Civil Engineering 321900 Other Wood Product Mfg 333310 Commercial & Service 423990 Other Miscellaneous Durable Construction Paper Manufacturing Industry Machinery Mfg Goods 237100 Utility System Construction 322100 Pulp, Paper, & Paperboard 333410 Ventilation, Heating,

Mills Air-Conditioning, & Merchant Wholesalers, Nondurable 237210 Land Subdivision Commercial Refrigeration Goods

237310 Highway, Street, & Bridge 322200 Converted Paper Product Mfg Equipment Mfg 424100 Paper & Paper Products Construction 333510 Metalworking Machinery Mfg 424210 Drugs & Druggists’ Sundries 237990 Other Heavy & Civil 333610 Engine, Turbine & Power 424300 Apparel, Piece Goods, & Engineering Construction Transmission Equipment Mfg Notions

Instructions for Forms 1120 and 1120-A -19-
Forms 1120 and 1120-A (continued)

Code Code Code Code

424400 Grocery & Related Products 448190 Other Clothing Stores 488490 Other Support Activities for 523120 Securities Brokerage

424500 Farm Product Raw Materials 448210 Shoe Stores 523130 Commodity Contracts Road Transportation

424600 Chemical & Allied Products 448310 Jewelry Stores 488510 Freight Transportation Dealing

424700 Petroleum & Petroleum 448320 Luggage & Leather Goods Arrangement 523140 Commodity Contracts

Products Stores 488990 Other Support Activities for Brokerage

424800 Beer, Wine, & Distilled Sporting Goods, Hobby, Book, and Transportation 523210 Securities & Commodity

Alcoholic Beverages Music Stores Couriers and Messengers Exchanges

424910 Farm Supplies 451110 Sporting Goods Stores 492110 Couriers 523900 Other Financial Investment

492210 Local Messengers & Local Activities (including portfolio 424920 Book, Periodical, & 451120 Hobby, Toy, & Game Stores Delivery management & investment Newspapers 451130 Sewing, Needlework, & Piece advice) 424930 Flower, Nursery Stock, & Goods Stores Warehousing and Storage Insurance Carriers and Related Florists’ Supplies 451140 Musical Instrument & 493100 Warehousing & Storage Activities 424940 Tobacco & Tobacco Products Supplies Stores (except lessors of

miniwarehouses & 524140 Direct Life, Health, & Medical 424950 Paint, Varnish, & Supplies 451211 Book Stores self-storage units) Insurance & Reinsurance 424990 Other Miscellaneous 451212 News Dealers & Newsstands Carriers Nondurable Goods 451220 Prerecorded Tape, Compact 524150 Direct Insurance &

Wholesale Electronic Markets and Disc, & Record Stores Information Reinsurance (except Life, Agents and Brokers General Merchandise Stores Publishing Industries (except Health & Medical) Carriers Internet) 425110 Business to Business 452110 Department Stores 524210 Insurance Agencies & Electronic Markets 511110 Newspaper Publishers 452900 Other General Merchandise Brokerages 425120 Wholesale Trade Agents & 511120 Periodical Publishers Stores 524290 Other Insurance Related

Brokers Miscellaneous Store Retailers 511130 Book Publishers Activities (including

511140 Directory & Mailing List third-party administration of 453110 Florists Retail Trade Publishers insurance and pension funds) 453210 Office Supplies & Stationery Motor Vehicle and Parts Dealers 511190 Other Publishers Funds, Trusts, and Other Financial Stores

441110 New Car Dealers 511210 Software Publishers Vehicles 453220 Gift, Novelty, & Souvenir 441120 Used Car Dealers Motion Picture and Sound 525100 Insurance & Employee Stores

Recording Industries Benefit Funds 441210 Recreational Vehicle Dealers 453310 Used Merchandise Stores

512100 Motion Picture & Video 525910 Open-End Investment Funds 441221 Motorcycle Dealers 453910 Pet & Pet Supplies Stores (Form 1120-RIC) Industries (except video 441222 Boat Dealers 453920 Art Dealers rental) 525920 Trusts, Estates, & Agency 441229 All Other Motor Vehicle 453930 Manufactured (Mobile) Home 512200 Sound Recording Industries Accounts Dealers Dealers Broadcasting (except Internet) 525930 Real Estate Investment 441300 Automotive Parts, 453990 All Other Miscellaneous Store Trusts (Form 1120-REIT) Accessories, & Tire Stores Retailers (including tobacco, 515100 Radio & Television

Broadcasting 525990 Other Financial Vehicles Furniture and Home Furnishings candle, & trophy shops) (including closed-end Stores 515210 Cable & Other Subscription Nonstore Retailers investment funds) Programming 442110 Furniture Stores 454110 Electronic Shopping & “Offices of Bank Holding Companies” Mail-Order Houses Internet Publishing and 442210 Floor Covering Stores and “Offices of Other Holding Broadcasting 442291 Window Treatment Stores 454210 Vending Machine Operators Companies” are located under

442299 All Other Home Furnishings 454311 Heating Oil Dealers 516110 Internet Publishing & Management of Companies (Holding

Stores Broadcasting Companies) on page 22. 454312 Liquefied Petroleum Gas Telecommunications Electronics and Appliance Stores (Bottled Gas) Dealers

443111 Household Appliance Stores 454319 Other Fuel Dealers 517000 Telecommunications Real Estate and Rental and (including paging, cellular, 443112 Radio, Television, & Other 454390 Other Direct Selling Leasing satellite, cable & other Electronics Stores Establishments (including program distribution, Real Estate

door-to-door retailing, frozen 443120 Computer & Software Stores resellers, & other 531110 Lessors of Residential food plan providers, party 443130 Camera & Photographic telecommunications) Buildings & Dwellings plan merchandisers, & Supplies Stores Internet Service Providers, Web 531114 Cooperative Housing coffee-break service Building Material and Garden providers) Search Portals, and Data Processing 531120 Lessors of Nonresidential

Equipment and Supplies Dealers Services Buildings (except

444110 Home Centers 518111 Internet Service Providers Miniwarehouses) Transportation and 444120 Paint & Wallpaper Stores Warehousing 518112 Web Search Portals 531130 Lessors of Miniwarehouses &

518210 Data Processing, Hosting, & Self-Storage Units 444130 Hardware Stores Air, Rail, and Water Transportation Related Services 531190 Lessors of Other Real Estate 444190 Other Building Material

Dealers 481000 Air Transportation Other Information Services Property

482110 Rail Transportation 519100 Other Information Services 531210 Offices of Real Estate Agents 444200 Lawn & Garden Equipment & 483000 Water Transportation (including news syndicates & & Brokers Supplies Stores Truck Transportation libraries) 531310 Real Estate Property Food and Beverage Stores Managers 484110 General Freight Trucking, 445110 Supermarkets and Other Local Finance and Insurance 531320 Offices of Real Estate Grocery (except Appraisers Convenience) Stores 484120 General Freight Trucking, Depository Credit Intermediation Long-distance 531390 Other Activities Related to 445120 Convenience Stores 522110 Commercial Banking Real Estate 484200 Specialized Freight Trucking 445210 Meat Markets 522120 Savings Institutions Transit and Ground Passenger Rental and Leasing Services 445220 Fish & Seafood Markets 522130 Credit Unions Transportation 532100 Automotive Equipment Rental 445230 Fruit & Vegetable Markets 522190 Other Depository Credit 485110 Urban Transit Systems & Leasing 445291 Baked Goods Stores Intermediation

485210 Interurban & Rural Bus 532210 Consumer Electronics & 445292 Confectionery & Nut Stores Nondepository Credit Intermediation Transportation Appliances Rental 445299 All Other Specialty Food 522210 Credit Card Issuing 485310 Taxi Service 532220 Formal Wear & Costume Stores 522220 Sales Financing Rental 485320 Limousine Service 445310 Beer, Wine, & Liquor Stores 522291 Consumer Lending 532230 Video Tape & Disc Rental 485410 School & Employee Bus Health and Personal Care Stores Transportation 522292 Real Estate Credit (including 532290 Other Consumer Goods

446110 Pharmacies & Drug Stores mortgage bankers & Rental 485510 Charter Bus Industry originators) 446120 Cosmetics, Beauty Supplies, 532310 General Rental Centers 485990 Other Transit & Ground & Perfume Stores 522293 International Trade Financing Passenger Transportation 532400 Commercial & Industrial

446130 Optical Goods Stores 522294 Secondary Market Financing Machinery & Equipment Pipeline Transportation 446190 Other Health & Personal 522298 All Other Nondepository Rental & Leasing

Care Stores 486000 Pipeline Transportation Credit Intermediation Lessors of Nonfinancial Intangible

Gasoline Stations Scenic & Sightseeing Transportation Activities Related to Credit Assets (except copyrighted works)

447100 Gasoline Stations (including 487000 Scenic & Sightseeing Intermediation 533110 Lessors of Nonfinancial

convenience stores with gas) Transportation 522300 Activities Related to Credit Intangible Assets (except

Support Activities for Transportation Intermediation (including loan copyrighted works) Clothing and Clothing Accessories 488100 Support Activities for Air brokers, check clearing, & Stores

448110 Men’s Clothing Stores Transportation money transmitting) Professional, Scientific, and

448120 Women’s Clothing Stores 488210 Support Activities for Rail Securities, Commodity Contracts, Technical Services

Transportation and Other Financial Investments and

448130 Children’s & Infants’ Clothing Legal Services Related Activities 488300 Support Activities for Water Stores 541110 Offices of Lawyers Transportation 523110 Investment Banking & 448140 Family Clothing Stores Securities Dealing 541190 Other Legal Services 488410 Motor Vehicle Towing 448150 Clothing Accessories Stores

-20- Instructions for Forms 1120 and 1120-A
Forms 1120 and 1120-A (continued)

Code Code Code Code

Accounting, Tax Preparation, 561430 Business Service Centers Home Health Care Services Other Services Bookkeeping, and Payroll Services (including private mail centers 621610 Home Health Care Services Repair and Maintenance 541211 Offices of Certified Public & copy shops) Other Ambulatory Health Care 811110 Automotive Mechanical & Accountants 561440 Collection Agencies Services Electrical Repair & 541213 Tax Preparation Services 561450 Credit Bureaus 621900 Other Ambulatory Health Maintenance

541214 Payroll Services 561490 Other Business Support Care Services (including 811120 Automotive Body, Paint, 541219 Other Accounting Services Services (including ambulance services & blood Interior, & Glass Repair repossession services, court & organ banks) Architectural, Engineering, and 811190 Other Automotive Repair & Related Services reporting, & stenotype Hospitals Maintenance (including oil services) 541310 Architectural Services 622000 Hospitals change & lubrication shops & 561500 Travel Arrangement & Nursing and Residential Care car washes) 541320 Landscape Architecture Reservation Services Services Facilities 811210 Electronic & Precision

541330 Engineering Services 561600 Investigation & Security 623000 Nursing & Residential Care Equipment Repair & Services Facilities Maintenance 541340 Drafting Services 561710 Exterminating & Pest Control Social Assistance 811310 Commercial & Industrial 541350 Building Inspection Services Services Machinery & Equipment 541360 Geophysical Surveying & 624100 Individual & Family Services 561720 Janitorial Services (except Automotive & Mapping Services 561730 Landscaping Services 624200 Community Food & Housing, Electronic) Repair & 541370 Surveying & Mapping (except 561740 Carpet & Upholstery Cleaning & Emergency & Other Relief Maintenance

Geophysical) Services Services Services 811410 Home & Garden Equipment & 541380 Testing Laboratories 561790 Other Services to Buildings & 624310 Vocational Rehabilitation Appliance Repair &

Specialized Design Services Dwellings Services Maintenance

624410 Child Day Care Services 541400 Specialized Design Services 561900 Other Support Services 811420 Reupholstery & Furniture

(including interior, industrial, Repair (including packaging & graphic, & fashion design) labeling services, & Arts, Entertainment, and 811430 Footwear & Leather Goods

Computer Systems Design and convention & trade show Recreation Repair

Related Services organizers) Performing Arts, Spectator Sports, 811490 Other Personal & Household

541511 Custom Computer Waste Management and and Related Industries Goods Repair & Maintenance

Programming Services Remediation Services 711100 Performing Arts Companies Personal and Laundry Services

541512 Computer Systems Design 562000 Waste Management & 711210 Spectator Sports (including 812111 Barber Shops Services Remediation Services sports clubs & racetracks) 812112 Beauty Salons 541513 Computer Facilities 711300 Promoters of Performing Arts, 812113 Nail Salons Management Services Educational Services Sports, & Similar Events 812190 Other Personal Care 541519 Other Computer Related 611000 Educational Services 711410 Agents & Managers for Services (including diet & Services (including schools, colleges, Artists, Athletes, Entertainers, weight reducing centers)

Other Professional, Scientific, and & universities) & Other Public Figures 812210 Funeral Homes & Funeral

Technical Services 711510 Independent Artists, Writers, Services

541600 Management, Scientific, & Health Care and Social & Performers 812220 Cemeteries & Crematories

Technical Consulting Assistance Museums, Historical Sites, and 812310 Coin-Operated Laundries & Services Offices of Physicians and Dentists Similar Institutions Drycleaners 541700 Scientific Research & 621111 Offices of Physicians (except 712100 Museums, Historical Sites, & 812320 Drycleaning & Laundry Development Services mental health specialists) Similar Institutions Services (except 541800 Advertising & Related 621112 Offices of Physicians, Mental Amusement, Gambling, and Coin-Operated) Services Recreation Industries Health Specialists 812330 Linen & Uniform Supply 541910 Marketing Research & Public 713100 Amusement Parks & Arcades 621210 Offices of Dentists 812910 Pet Care (except Veterinary) Opinion Polling Offices of Other Health Practitioners 713200 Gambling Industries Services

541920 Photographic Services 621310 Offices of Chiropractors 713900 Other Amusement & 812920 Photofinishing 541930 Translation & Interpretation Recreation Industries 621320 Offices of Optometrists 812930 Parking Lots & Garages Services (including golf courses, skiing 621330 Offices of Mental Health 812990 All Other Personal Services 541940 Veterinary Services facilities, marinas, fitness Practitioners (except Religious, Grantmaking, Civic, 541990 All Other Professional, centers, & bowling centers) Physicians) Professional, and Similar Scientific, & Technical 621340 Offices of Physical, Organizations Services Accommodation and Food Occupational & Speech 813000 Religious, Grantmaking,

Therapists, & Audiologists Services Civic, Professional, & Similar Management of Companies 621391 Offices of Podiatrists Accommodation Organizations (including (Holding Companies) 721110 Hotels (except Casino Hotels) condominium and 621399 Offices of All Other 551111 Offices of Bank Holding Miscellaneous Health & Motels homeowners associations)

Companies Practitioners 721120 Casino Hotels

551112 Offices of Other Holding Outpatient Care Centers 721191 Bed & Breakfast Inns

Companies 621410 Family Planning Centers 721199 All Other Traveler

Accommodation 621420 Outpatient Mental Health & Administrative and Support Substance Abuse Centers 721210 RV (Recreational Vehicle) and Waste Management and Parks & Recreational Camps 621491 HMO Medical Centers Remediation Services 721310 Rooming & Boarding Houses 621492 Kidney Dialysis Centers Administrative and Support Services Food Services and Drinking Places 621493 Freestanding Ambulatory 561110 Office Administrative 722110 Full-Service Restaurants Surgical & Emergency Services Centers 722210 Limited-Service Eating

561210 Facilities Support Services Places 621498 All Other Outpatient Care

561300 Employment Services 722300 Special Food Services Centers

561410 Document Preparation Medical and Diagnostic Laboratories (including food service

Services contractors & caterers) 621510 Medical & Diagnostic 561420 Telephone Call Centers Laboratories 722410 Drinking Places (Alcoholic

Beverages)

Instructions for Forms 1120 and 1120-A -21-
Index

A E Valuation methods . . . . . . . . . 13 R

Accounting methods ........... 5 Electronic Federal Tax Payment Recapture taxes . . . . . . . . . . . . . . 16

Accounting period (Tax System (EFTPS) ............ 4 Reconciliation of income . . . . . . 18 L

Year) ....................... 5 Electronic filing ................ 2 Recordkeeping ................ 5 LIFO recapture: Address change ............... 6 Employee benefit Tax on . . . . . . . . . . . . . . . . . . . . . 16 Related party transactions ..... 8

Affiliated group . . . . . . . . . . . . . . . 17 programs . . . . . . . . . . . . . . . . . . 10 Where to report ............. 7 Rents (expense) ............... 9

Amended return ............... 5 Employer identification number Limitations on deductions . . . . 7, 9 Rents (income) ................ 7

Amortization .................. 8 (EIN) ....................... 6 Lobbying expenses, Repairs and maintenance ...... 9

Assembling the return Estimated tax: ......... 4 nondeductibility . . . . . . . . . . . . 11

Penalty . . . . . . . . . . . . . . . . . . 4, 12 At-risk rules . . . . . . . . . . . . . . . . . . 11 S Estimated tax payments ....... 4

M Salaries and wages ............ 9 Extension of time to file ........ 3 B Minimum tax: Schedule: Extraterritorial income . . . . . . 6, 11 Backup withholding . . . . . . . . . . . 12 Alternative . . . . . . . . . . . . . . . . . 15 A . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Bad debts ..................... 9 Prior year, credit for . . . . . . . . 16 C . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Balance sheets . . . . . . . . . . . . . . . 17 F Mutual savings banks conducting J . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Farming, corporations engaged K life insurance business . . . . . 15 . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Business startup expenses ..... 8 in . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 L . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Final return .................... 6 M-1 . . . . . . . . . . . . . . . . . . . . . . . . 18

C N Financial asset securitization M-3 . . . . . . . . . . . . . . . . . . . . . . 6, 18

Capital construction fund: investment trust (FASIT) ..... 2 Name change ................. 6 O . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Deduction for Foreign financial accounts . . . . 17 Net operating loss ........ 11, 17 Section 263A costs . . . . . . . . . 7, 13

contributions . . . . . . . . . . . . . 12 Foreign person (defined) . . . . . . 17 Nonaccrual experience Shareholders’ equity Tax on nonqualified method ..................... 7 adjustments . . . . . . . . . . . . . . . . 17 Foreign tax credit . . . . . . . . . . . . . 16 withdrawal . . . . . . . . . . . . . . . 16 Signature ..................... 3 Form 1120-A requirements ..... 2 Closely held corporations ...... 8 O Special returns for certain Forms and publications, how to Compensation of officers ....... 8 Other deductions . . . . . . . . . . . . . 10 organizations ............... 2 get . . . . . . . . . . . . . . . . . . . . . . . . . 2 Consolidated return . . . . . . . . . 6, 17 Other income ................. 7

Contributions to reduce debt held

G Other taxes . . . . . . . . . . . . . . . . . . 16 T by the public ................ 2

General business credit Overpaid estimated tax . . . . . . . 12 Tax issues, unresolved ........ 1 Contributions, charitable ....... 9 . . . . . . . 16

Golden parachute Tax rate schedule . . . . . . . . . . . . 15 Controlled group . . . . . . . . . . . . . 15

payments ................... 8 P Tax-exempt securities . . . . . . . . 17 Cost of goods sold . . . . . . . . . . 7, 13

Gross receipts ................. 6 Partnership income (loss) . . . . . . 7, Taxes and licenses ............ 9 Credits against tax . . . . . . . . . . . . 16 11 Travel, meals, and

Passive activity limitations ...... 8 entertainment . . . . . . . . . . . . . . 11

D I Penalties . . . . . . . . . . . . . . . . . . . 4, 12 Deductions .................... 7 Income ....................... 6

Installment sales .............. 7 Pension, profit-sharing, etc. W Depletion . . . . . . . . . . . . . . . . . . . . 10 plans . . . . . . . . . . . . . . . . . . . . . . 10 When to file ................... 3 Depository methods of tax Interest due:

Late payment of tax ......... 4 Personal holding company ..... 6 Where to file .................. 3 payment .................... 4

Look-back method . . . . . . . . . . 16 Personal holding company Who must file ................. 2 Depreciation . . . . . . . . . . . . . . . . . 10

Interest expense (relating to tax . . . . . . . . . . . . . . . . . . . . . . . . 16 Who must sign ................ 3 Direct deposit of refund . . . . . 1, 12 Personal service section 263A) ............... 8 Worksheets: Disclosure statement .......... 5 corporation ................. 6 Interest expense .............. 9 Cost of goods sold . . . . . . . . . 13 Dividend income .............. 7 Interest income: Preparer, tax return ............ 3 Schedule C . . . . . . . . . . . . . . . . 14

Dividends-received Private delivery services ....... 3 Tax-exempt ............ 17, 18 deduction ............... 14-15 Taxable ..................... 7 ■

Dues, membership and Inventory: Q other . . . . . . . . . . . . . . . . . . . . . . 11 Section 263A uniform Qualified personal service

capitalization rules . . . . . 7, 13 corporation . . . . . . . . . . . . . . . . 15

-22- Instructions for Forms 1120 and 1120-A