Instructions For Form 1120-Ic-Disc - 2005 (Page 6 of 15) in pdf

Line 7. Taxable Income

the refigured amount, attach an explanation

IC-DISCs that use erroneous valuation

and take it into account when figuring the

methods must change to a method

If the IC-DISC uses either the gross receipts

IC-DISC’s section 481(a) adjustment

permitted for Federal income tax purposes.

method or combined taxable income method

(explained on page 7).

Use Form 3115 to make this change.

to compute the IC-DISC’s taxable income

attributable to any transactions involving

On line 9a, check the method(s) used for

Line 4. Additional Section 263A

products or product lines, attach Schedule P

valuing inventories. Under lower of cost or

Costs

(Form 1120-IC-DISC). Show in detail the

market, the term “market” (for normal goods)

An entry is required on this line only for

means the current bid price prevailing on the

IC-DISC’s taxable income attributable to

IC-DISCs that have elected a simplified

each such transaction or group of

inventory valuation date for the particular

method of accounting.

transactions.

merchandise in the volume usually

For IC-DISCs that have elected the

purchased by the taxpayer. If section 263A

Line 8. Refundable Credit for

applies to the taxpayer, the basic elements

simplified production method, additional

Federal Tax Paid on Fuels

of cost must reflect the current bid price of

section 263A costs are generally those

Enter the credit from Form 4136.

costs, other than interest, that were not

all direct costs and all indirect costs properly

capitalized under the IC-DISC’s method of

allocable to goods on hand at the inventory

Schedule A

accounting immediately prior to the effective

date.

date of section 263A but are now required to

Inventory may be valued below cost

be capitalized under section 263A. For

Cost of Goods Sold

when the merchandise is unsalable at

details, see Regulations section

normal prices or unusable in the normal way

Generally, inventories are required at the

1.263A-2(b).

because the goods are subnormal due to

beginning and end of each tax year if the

For IC-DISCs that have elected the

damage, imperfections, shopwear, etc.,

purchase or sale of merchandise is an

simplified resale method, additional

within the meaning of Regulations section

income-producing factor. See Regulations

section 263A costs are generally those

1.471-2(c). The goods may be valued at the

section 1.471-1.

current bona fide selling price, minus direct

costs incurred with respect to the following

However, if the IC-DISC is a qualifying

categories.

cost of disposition (but not less than scrap

•

taxpayer or a qualifying small business

Off-site storage or warehousing.

value) if such a price can be established.

•

taxpayer, it may adopt or change its

Purchasing.

If this is the first year the Last-in,

•

accounting method to account for

Handling, such as processing,

First-out (LIFO) inventory method was either

inventoriable items in the same manner as

assembling, repackaging, and transporting.

adopted or extended to inventory goods not

•

materials and supplies that are not

General and administrative costs (mixed

previously valued under the LIFO method

incidental.

service costs).

provided in section 472, attach Form 970,

A qualifying taxpayer is a taxpayer that,

For details, see Regulations section

Application To Use LIFO Inventory Method,

for each prior tax year ending after

1.263A-3(d).

or a statement with the information required

December 16, 1998, has average annual

by Form 970. Also check the LIFO box on

Enter on line 4 the balance of section

gross receipts of $1 million or less for the

line 9c. On line 9d, enter the amount or the

263A costs paid or incurred during the tax

3-tax-year period ending with that prior tax

percent of total closing inventories covered

year not includible on lines 2, 3, and 5.

year.

under section 472. Estimates are

A qualifying small business taxpayer

Line 5. Other Costs

acceptable.

is a taxpayer (a) that, for each prior tax year

Enter on line 5 any costs paid or incurred

If the IC-DISC changed or extended its

ending on or after December 31, 2000, has

during the tax year not entered on lines 2

inventory method to LIFO and had to write

average annual gross receipts of $10 million

through 4.

up the opening inventory to cost in the year

or less for the 3-tax-year period ending with

of election, report the effect of the write-up

Line 7. Inventory at End of Year

that prior tax year and (b) whose principal

as other income (on page 2, Schedule B,

business activity is not an ineligible activity.

See Regulations sections 1.263A-1 through

line 2j or 3f), proportionately over a 3-year

1.263A-3 for details on figuring the amount

Under this accounting method, inventory

period that begins with the year of the LIFO

of additional section 263A costs to be

costs for merchandise purchased for resale

election (section 472(d)).

included in ending inventory. If the IC-DISC

are deductible in the year the merchandise

For more information on inventory

accounts for inventoriable items in the same

is sold (but not before the year the IC-DISC

valuation methods, see Pub. 538.

manner as materials and supplies that are

paid for the merchandise, if it is also using

not incidental, enter on line 7 the portion of

the cash method). For additional guidance

Schedule B

its merchandise purchased for resale that is

on this method of accounting for

included on line 6 and was not sold during

inventoriable items, see Pub. 538.

Gross Income

the year.

Enter amounts paid for merchandise

If an income item falls into two or more

during the tax year on line 2. The amount

Lines 9a through 9f. Inventory

categories, report each part on the

the IC-DISC may deduct for the tax year is

Valuation Methods

applicable line. For example, if interest

figured on line 8.

Inventories may be valued at:

income consists of qualified interest from a

All filers not using the cash method of

•

Cost;

foreign international sales corporation and

accounting should see Section 263A

•

Cost or market value (whichever is lower);

nonqualifying interest from a domestic

uniform capitalization rules on page 8 before

obligation, enter the qualified interest on an

completing Schedule A.

•

Any other method approved by the IRS

attached schedule for line 2g and the

If the IC-DISC uses intercompany pricing

that conforms to the requirements of the

nonqualifying interest on an attached

rules (for purchases from a related supplier),

applicable regulations cited below.

schedule for line 3f.

use the transfer price figured in Part II of

However, if the IC-DISC is using the

For gain from selling qualified export

Schedule P (Form 1120-IC-DISC).

cash method of accounting, it is required to

assets, attach a separate schedule in

If the IC-DISC acts as another person’s

use cost.

addition to the forms required for lines 2h

commission agent on a sale, do not enter

and 2i.

IC-DISCs that account for inventoriable

any amount in Schedule A for the sale. See

items in the same manner as materials and

Nonaccrual experience method. Accrual

Schedule P (Form 1120-IC-DISC).

supplies that are not incidental may

method corporations are not required to

Line 1. Inventory at Beginning

currently deduct expenditures for direct

accrue certain amounts to be received from

of Year

the performance of certain services that, on

labor and all indirect costs that would

the basis of their experience, will not be

otherwise be included in inventory costs.

If the IC-DISC is changing its method of

collected, if the corporation’s average

accounting for the current tax year, it must

The average cost (rolling average)

annual gross receipts for the 3 prior tax

refigure last year’s closing inventory using

method of valuing inventories generally

years does not exceed $5 million.

the new method of accounting and enter the

does not conform to the requirements of the

result on line 1. If there is a difference

regulations. See Rev. Rul. 71-234, 1971-1

This provision does not apply to any

between last year’s closing inventory and

C.B. 148.

amount if interest is required to be paid on

-6-

Instructions for Form 1120-IC-DISC

Instructions For Form 1120-Ic-Disc - 2005 Page 6

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