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If the RIC is a direct or indirect partner

If the RIC timely filed its return for the

reduction SEP agreement or a SIMPLE

in a partnership, other special rules apply.

year without making an election, it can

IRA plan.

See Temporary Regulations section

still make an election by filing an

Include only the deductible part of

1.108(i)-2T

amended return within 6 months of the

officers’ compensation on Form 1125-E.

•

The RIC’s share of the following

due date of the return (excluding

Complete Form 1125-E, columns (a)

income from Form 8621, Information

extensions). Clearly indicate the election

through (f), for all officers. The RIC

Return by a Shareholder of a Passive

on the amended return and write ‘‘Filed

determines who is an officer under the

Foreign Investment Company or Qualified

pursuant to section 301.9100-2’’ at the

laws of the state where incorporated.

Electing Fund.

top of the amended return. File the

Disallowance of deduction for

amended return at the same address the

1. Ordinary earnings of a qualified

employee compensation in excess of

RIC filed its original return. The election

electing fund (QEF)(from Part II, line 1c).

$1 million. Publicly held corporations

applies when figuring taxable income for

2. Gain or loss from marking passive

cannot deduct compensation to a

the current tax year and all subsequent

foreign investment company income

“covered employee” to the extent that the

years.

(PFIC) stock to market (from Part III, line

compensation exceeds $1 million.

5c or 7).

Note. The RIC can choose to forgo the

Generally, a covered employee is:

3. Gain or loss from sale or other

elections above by clearly electing to

•

The principal executive officer (or an

disposition of Section 1296 stock (from

capitalize its start-up or organizational

individual acting in that capacity) as of the

Part III, line 8c or 9b).

costs on an income tax return filed by the

end of the tax year; or

4. Excess distributions from a section

due date (including extensions) for the tax

•

A principal employee whose total

1291 fund (from Part IV, line 11b).

year in which the active trade or business

compensation must be reported to

begins.

See the Instructions for Form 8621.

shareholders under the Securities

Exchange Act of 1934 because the

Report the deductible amount of such

Deductions

employee is among the three highest

costs and any amortization on line 22. For

compensated officers for that tax year

amortization that begins during the 2011

Limitations on Deductions

(other than the principal executive officer).

tax year, complete and attach Form 4562.

Transactions between related

For this purpose, compensation does

For more details on business start-up

taxpayers. Generally, an accrual basis

not include:

and organizational costs, see Pub. 535,

taxpayer may only deduct business

•

Income from certain employee trusts,

Business Expenses.

expenses and interest owed to a related

annuity plans, or pensions.

Section 265(a)(3) limitation. If the RIC

party in the year the payment is includible

•

Any benefit paid to an employee that is

paid exempt-interest dividends during the

in the income of the related party. See

excluded from the employee’s income.

tax year (including those dividends

section 267 for limitations on deductions

The deduction limit does not apply to:

deemed paid under section 855), no

for interest and expenses paid to a

•

Commissions based on individual

deduction is allowed for that portion of

related party.

performance;

otherwise deductible expenses allocable

Also see the instructions for Form

•

Qualified performance-based

to tax-exempt income. The excluded

8926, Disqualified Corporate Interest

compensation; and

amount is determined by the amount

Expense Disallowed Under Section 163(j)

•

Income payable under a written,

tax-exempt income bears to total gross

and Related Information, with respect to

binding contract in effect on February 17,

income (including tax-exempt income but

section 163(j).

1993.

excluding capital gain net income).

Golden parachute payments. A portion

The $1 million limit is reduced by

Net operating loss deduction. The net

of the payments made by a RIC to key

amounts disallowed as excess parachute

operating loss deduction is not allowed.

personnel that exceeds their usual

payments under section 280G.

Passive activity limitations. Limitations

compensation may not be deductible.

For details, see section 162(m) and

on passive activity losses and credits

This occurs when the RIC has an

Regulations section 1.162-27. Also, see

under section 469 apply to RICs that are

agreement (golden parachute) with key

Notice 2007-49, 2007-25 I.R.B. 1429.

closely held (as defined in section

employees to pay them an amount

469(j)(1)). RICs subject to the passive

substantially in excess of their base

Line 10. Salaries and Wages. Enter the

activity limitations must complete Form

amount if control of the RIC changes. See

salaries and wages paid for the tax year,

8810, Corporate Passive Activity Loss

section 280G and Regulations section

reduced by the amount claimed on:

•

and Credit Limitations, to compute their

1.280G-1 for more information. Also, see

Form 5884, Work Opportunity Credit,

•

allowable passive activity loss and credit.

the instructions for line 9.

Form 8844, Empowerment Zone and

Before completing Form 8810, see

Renewal Community Employment Credit,

Business start-up and organizational

•

Temporary Regulations section 1.163-8T,

Form 8845, Indian Employment Credit,

costs. A RIC can elect to deduct up to

for rules on allocating interest expense

and

$5,000 of business start-up and up to

•

among activities.

Form 8932, Credit for Employer

$5,000 of organizational costs paid or

Differential Wage Payments.

Closely held corporation. A RIC is

incurred after October 22, 2004. Any

closely held if at any time during the last

remaining cost must be amortized. The

See the instructions for these forms for

half of the tax year more than 50% in

$5,000 deductions is reduced (but not

more information.

value of its outstanding stock is directly or

below zero) by the amount the total costs

Do not include salaries and wages

indirectly owned by or for not more than

exceed $50,000. If the total costs are

deductible elsewhere on the return, such

five individuals and it is not a personal

$55,000 or more, the deduction is

as amounts included in officer’s

service corporation.

reduced to zero. See sections 195(b) and

compensation, elective contributions to a

248(a).

Line 9. Compensation of Officers.

section 401(k) cash or deferred

Time for making an election. The

Complete and attach Form 1125-E if total

arrangement, or amounts contributed

receipts are $500,000 or more. Total

RIC generally elects to deduct start-up or

under a salary reduction SEP agreement

receipts are figured by adding:

organizational costs by claiming the

or a SIMPLE IRA plan.

deduction on its income tax return filed by

1. Line 8, Part I,

If the RIC provided taxable fringe

the due date (including extensions) for the

2. Net capital gain from line 1, Part II,

benefits to its employees, such as

tax year in which the active trade or

and

personal use of a car, do not

business begins. However, for start-up or

CAUTION

3. Line 9a, Form 2438.

deduct as wages any amounts deducted

organizational costs paid or incurred

elsewhere.

before September 9, 2008, the RIC may

Do not include compensation

Line 11. Rents. If the RIC rented or

be required to attach a statement to its

deductible elsewhere on the return, such

return to elect to deduct such costs. See

as elective contributions to a section

leased a vehicle, enter the total annual

Regulations sections 1.195-1 and 1.248-1

401(k) cash or deferred arrangement, or

rent or lease expense paid or incurred

for details.

amounts contributed under a salary

during the year. Also, complete Part V of

-8-

Instructions For Form 1120-Ric - U.s. Income Tax Return For Regulated Investment Companies - Internal Revenue Service - 2011 Page 8

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