Instructions For Form 1120-Fsc - 2007 (Page 11 of 13) in pdf

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Insurance.

elsewhere on the return, such as amounts

entertainment facilities for, members or their

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Compensation paid to officers attributable

included in cost of goods sold, elective

guests. In addition, FSCs may not deduct

to services.

contributions to a section 401(k) cash or

membership dues in any club organized for

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Rework labor.

deferred arrangement, or amounts

business, pleasure, recreation, or other

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Contributions to pension, stock bonus,

contributed under a salary reduction SEP

social purpose. This includes country clubs,

and certain profit-sharing, annuity, or

agreement or a SIMPLE IRA plan.

golf and athletic clubs, airline and hotel

deferred compensation plans.

clubs, and clubs operated to provide meals

Line 11. Bad debts. Enter the total debts

under conditions favorable to business

that became worthless in whole or in part

Regulations section 1.263A-1(e)(3)

discussion.

specifies other indirect costs that relate to

during the tax year. A cash basis taxpayer

may not claim a bad debt deduction unless

production or resale activities that must be

Entertainment facilities. The FSC may

capitalized and those that may be currently

the amount was previously included in

not deduct an expense paid or incurred for a

income.

deductible.

facility (such as a yacht or hunting lodge)

used for an activity usually considered

Interest expense paid or incurred

Line 14. Other deductions. Attach a

entertainment, amusement, or recreation.

during the production period of designated

schedule, listing by type and amount, all

property must be capitalized and is

allowable deductions that are not deductible

Amounts treated as compensation.

governed by special rules. For more details,

elsewhere on Form 1120-FSC. Enter the

Generally, the FSC may be able to deduct

see Regulations sections 1.263A-8 through

total on line 14.

otherwise nondeductible entertainment,

1.263A-15.

amusement, or recreation expenses if the

Examples of other deductions include:

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amounts are treated as compensation to the

The costs required to be capitalized

Amortization (see Form 4562).

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recipient and reported on Form W-2 for an

under section 263A are not deductible until

Insurance premiums.

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employee or on Form 1099-MISC or Form

the property (to which the costs relate) is

Legal and professional fees.

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1042-S for an independent contractor.

sold, used, or otherwise disposed of by the

Supplies used and consumed in the

FSC.

business.

However, if the recipient is an officer,

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Utilities.

director, or beneficial owner (directly or

Exceptions. Section 263A does not apply

indirectly) of more than 10% of any class of

to:

Also see Special rules below for limits on

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stock, the deductible expense is limited. See

Personal property acquired for resale if

certain other deductions.

section 274(e)(2) and Notice 2005-45,

the FSC’s average annual gross receipts for

Do not deduct:

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2005-1 C.B. 1228.

the 3 prior tax years were $10 million or

Fines or penalties paid to a government

less.

for violating any law.

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Schedule J

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Inventoriable items accounted for in the

Any amount that is allocable to a class of

same manner as materials and supplies that

exempt income. See section 265(b) for

Tax Computation

are not incidental. See Schedule A on

exceptions.

page 7 for details.

Special rules apply to the following

Line 1

For more details on the uniform

expenses:

capitalization rules, see Regulations

If the FSC is a member of a controlled

Travel, meals, and entertainment.

sections 1.263A-1 through 1.263A-3.

group, as defined in section 927(d)(4), it

Subject to limitations and restrictions

Transactions between related taxpayers.

must check the box on line 1 and complete

discussed below, the FSC may deduct

Generally, an accrual basis taxpayer may

Schedule O (Form 1120). Members of a

ordinary and necessary travel, meals, and

only deduct business expenses and interest

controlled group must use Schedule O

entertainment expenses paid or incurred in

owed to a related party in the year the

(Form 1120) to figure the tax for the group.

its trade or business. Also, special rules

payment is included in the income of the

See Schedule O and its instructions for

apply to deductions for gifts, skybox rentals,

related party. See sections 163(e)(3), 163(j),

more information.

luxury water travel, convention expenses,

and 267 for limitations on deductions for

and entertainment tickets. See section 274

Line 2

unpaid interest and expenses.

and Pub. 463, Travel, Entertainment, Gift,

Golden parachute payments. A portion of

Most FSCs should figure their tax using the

and Car Expenses, for more details.

the payments made by a FSC to key

Tax Rate Schedule on page 11. Qualified

Travel. The FSC may not deduct travel

personnel that exceeds their usual

personal service corporations should see

expenses of any individual accompanying a

compensation may not be deductible. This

the instructions on pages 11-12.

corporate officer or employee, including a

occurs when the FSC has an agreement

spouse or dependent of the officer or

Tax Rate Schedule

(golden parachute) with these key

employee, unless:

employees to pay them these excess

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That individual is an employee of the

If taxable income (Schedule B, line 20) is:

amounts if control of the FSC changes. See

corporation and

section 280G and Regulations section

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Of the

His or her travel is for a bona fide

1.280G-1.

But not

amount

business purpose and would otherwise be

Over —

over —

Tax is:

over —

Line 1. Enter only foreign direct costs on

deductible by that individual.

lines 1a through 1e. See section 924(e) and

Meals and entertainment. Generally,

$50,000

15%

Regulations sections 1.924(e)-1(a) through

the FSC may deduct only 50% of the

50,000

75,000

$ 7,500 + 25%

50,000

(e) for definitions and rules on direct activity

amount otherwise allowable for meals and

75,000

100,000

13,750 + 34%

75,000

costs related to foreign trade income.

entertainment expenses paid or incurred in

100,000

335,000

22,250 + 39%

100,000

Line 4. Depreciation. Include on line 4

its trade or business. In addition (subject to

335,000 10,000,000

113,900 + 34%

335,000

depreciation and the cost of certain property

exceptions under section 274(k)(2)):

10,000,000 15,000,000 3,400,000 + 35% 10,000,000

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that the FSC elected to expense under

Meals must not be lavish or extravagant;

15,000,000 18,333,333 5,150,000 + 38% 15,000,000

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section 179. See Form 4562, Depreciation

18,333,333

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35%

A bona fide business discussion must

and Amortization, and its instructions.

occur during, immediately before, or

Line 5. Salaries and wages. Enter the

immediately after the meal; and

Qualified personal service corporations.

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total salaries and wages paid for the tax

An employee of the FSC must be present

A qualified personal service corporation is

year. Do not include salaries and wages

at the meal.

taxed at a flat rate of 35% on its taxable

deductible elsewhere on the return, such as

Membership dues. The FSC may

income. A FSC is a qualified personal

amounts included in officers’ compensation,

deduct amounts paid or incurred for

service corporation if it meets both of the

cost of goods sold, elective contributions to

membership dues in civic or public service

following tests:

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a section 401(k) cash or deferred

organizations, professional organizations

Substantially all of the FSC’s activities

arrangement, or amounts contributed under

(such as bar and medical associations),

involve the performance of services in the

a salary reduction SEP agreement or a

business leagues, trade associations,

fields of engineering, architecture, or

SIMPLE IRA plan.

chambers of commerce, boards of trade,

management consulting and

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Line 10. Compensation of officers. Enter

and real estate boards. However, no

At least 95% of the corporation’s stock, by

deductible officers’ compensation on line 10.

deduction is allowed if a principal purpose of

value, is owned, directly or indirectly, by (1)

Do not include compensation deductible

the organization is to entertain, or provide

employees performing the services, (2)

-11-

Instructions For Form 1120-Fsc - 2007 Page 11

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