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The costs required to be capitalized

organizations are treated as individuals

amounts contributed under a salary

under section 263A are not deductible

for purposes of this test. See section

reduction SEP agreement or a SIMPLE

until the property (to which the costs

542(a)(2). For rules of determining stock

IRA plan.

relate) is sold, used, or otherwise

ownership, see section 544 (as modified

Include only the deductible part of

disposed of by the cooperative.

by section 465(a)(3)).

each officers’ compensation on Schedule

Exceptions.

Generally, the two kinds of passive

E. (See Disallowance of deduction for

activities are:

employee compensation in excess of

Section 263A does not apply to:

•

Trade or business activities in which

$1 million below). Complete Schedule E,

Personal property acquired for resale if

the cooperative did not materially

line 1, columns (a) through (f), for all

the cooperative’s average annual gross

participate (see Temporary Regulations

officers. The cooperative determines who

receipts for the 3 prior tax years were $10

section 1.469-1T(g)(3)) and

is an officer under the laws of the state

million or less.

•

where it is incorporated.

•

Rental activities regardless of its

Timber.

•

participation.

If a consolidated return is filed, each

Most property produced under a

For exceptions, see Form 8810.

member of an affiliated group must

long-term contract.

•

furnish this information.

An activity is a trade or business

Certain property produced in a farming

activity if it is not a rental activity, and

business.

Disallowance of deduction for

•

The activity involves the conduct of a

Research and experimental costs

employee compensation in excess of

trade or business (i.e., deductions from

under section 174.

$1 million. Publicly held cooperatives

•

the activity would be allowable under

Intangible drilling costs for oil, gas, and

may not deduct compensation to a

section 162 if other limitations, such as

geothermal property.

“covered employee” to the extent that the

•

the passive loss rules, did not apply) or

Mining exploration and development

compensation exceeds $1 million.

•

The activity involves research and

costs.

For details, see section 162(m) and

•

experimental costs that are deductible

Inventoriable items accounted for in the

Regulations section 1.162-27.

under section 174 (or would be deductible

same manner as materials and supplies

Line 13. Salaries and wages. Enter the

if the cooperative chose to deduct rather

that are not incidental. See Cost of

amount of salaries and wages paid for the

than capitalize them).

Goods Sold on page 12 for details.

tax year, reduced by:

Cooperatives subject to the passive

•

For more details on the uniform

Any work opportunity credit from Form

activity limitations must complete Form

capitalization rules, see Regulations

5884,

8810 to compute their allowable passive

•

sections 1.263A-1 through 1.263A-3. See

Any empowerment zone employment

activity loss and credit. Before completing

Regulations section 1.263A-4 for rules for

credit from Form 8844,

Form 8810, see Temporary Regulations

•

property produced in a farming business.

Any Indian employment credit from

section 1.163-8T, which provides rules for

Transactions between related

Form 8845, and

allocating interest expense among

•

taxpayers. Generally, an accrual basis

Any welfare-to-work credit from Form

activities. If a passive activity is also

taxpayer may only deduct business

8861.

subject to the earnings stripping rules of

expenses and interest owed to a related

See the instructions for these forms for

section 163(j) or the at-risk rules of

party in the year payment is included in

more information. Do not include salaries

section 465, those rules apply before the

income of the related party. See sections

and wages deductible elsewhere on the

passive loss rules. For more information,

163(e)(3), 163(j), and 267 for the

return, such as amounts included in cost

see section 469, the related regulations,

limitations on deductions for unpaid

of goods sold, elective contributions to a

and Pub. 925, Passive Activity and

interest and expenses.

section 401(k) cash or deferred

At-Risk Rules.

Section 291 limitations. Cooperatives

arrangement, or amounts contributed

Reducing certain expenses for which

may be required to adjust deductions for

under a salary reduction SEP agreement

credits are allowable. For each credit

depletion of iron ore and coal, intangible

or a SIMPLE IRA plan.

listed below, the cooperative must reduce

drilling, exploration and development

If the cooperative provided taxable

the otherwise allowable deductions for

costs, and the amortizable basis of

fringe benefits to its employees,

expenses used to figure the credit by the

pollution control facilities. See section 291

such as personal use of a car, do

CAUTION

amount of the current year credit:

to determine the amount of the

•

not deduct as wages the amount

Work opportunity credit.

adjustment. Also see section 43.

•

allocated for depreciation and other

Research credit.

•

Golden parachute payments. A portion

expenses claimed on lines 20 and 26.

Enhanced oil recovery credit.

•

of the payments made by a cooperative to

Line 14. Repairs and maintenance.

Disabled access credit.

•

key personnel that exceeds their usual

Enter the cost of incidental repairs, such

Empowerment zone employment

compensation may not be deductible.

as labor and supplies, that do not add to

credit.

This occurs when the cooperative has an

•

the value of the property or appreciably

Indian employment credit.

agreement (golden parachute) with these

•

prolong its life. New buildings, machinery,

The employer credit for social security

key employees to pay them these excess

or permanent improvements that increase

and Medicare taxes paid on certain

amounts if control of the cooperative

the value of the property are not

employee tips.

changes. See section 280G.

•

deductible. They must be depreciated or

Orphan drug credit.

•

Business start-up expenses. Business

amortized.

Welfare-to-work credit.

start-up expenses must be capitalized

If the cooperative has any of these

Line 15. Bad debts. Enter the total debts

unless an election is made to amortize

credits, figure each current year credit

that became worthless in whole or in part

them over a period of 60 months. See

before figuring the deduction for

during the tax year. A cash method

section 195 and Regulations section

expenses on which the credit is based.

taxpayer may not claim a bad debt

1.195-1.

deduction unless the amount was

Line 12. Compensation of officers.

Passive activity limitations. Limitations

previously included in income.

Enter deductible officer’s compensation

on passive activity losses and credits

on line 12. Before entering an amount on

Line 17. Taxes and licenses. Enter

under section 469 apply to closely held

line 12, complete Schedule E if the

taxes paid or accrued during the tax year,

cooperatives.

cooperative’s total receipts (line 1a plus

but do not include the following:

•

For this purpose, a cooperative is a

lines 4 through 10, page 1) are $500,000

Federal income taxes.

•

closely held cooperative if at any time

or more. Do not include compensation

Foreign or U.S. possession income

during the last half of the tax year more

deductible elsewhere on the return, such

taxes if a tax credit is claimed (however,

than 50% in value of its outstanding stock

as amounts included in cost of goods

see the Instructions for Form 5735 for

is owned, directly or indirectly, by or for

sold, elective contributions to a section

special rules for possession income

not more than 5 individuals. Certain

401(k) cash or deferred arrangement, or

taxes).

-8-

Instructions For Form 990-C - Farmers' Cooperative Association Income Tax Return - 2001 Page 8

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