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tax in the year deducted (see section 111).

To make the election, attach the

Do not offset current year taxes against prior

statements required by Regulations sections

Part I—Investment

year tax refunds.

1.195-1 and 1.248-1(c). Report the

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Any recapture amount under section

deductible amount of these costs and any

Company Taxable Income

179A for qualified clean-fuel vehicle property

amortization on line 22. For amortization

(or clean-fuel vehicle refueling property) if

that begins during the tax year, complete

Income

the property, later, ceases to qualify. See

and attach Form 4562.

Regulations section 1.179A-1 for details.

Line 1. Dividends. A RIC that is the holder

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

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The recapture amount under section 280F

paid exempt-interest dividends during the

of record of any share of stock on the record

if the business use of listed property drops

tax year (including those dividends deemed

date for a dividend payable on that stock

to 50% or less. To figure the recapture

must include the dividend in gross income

paid under section 855), no deduction is

amount, complete Part IV of Form 4797.

allowed for that portion of otherwise

by the later of: the date the share became

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Ordinary income from trade or business

ex-dividend, or the date the RIC acquired

deductible expenses allocable to tax-exempt

activities of a partnership (from Schedule

income. The excluded amount is determined

the share.

K-1 (Form 1065 or 1065-B)). Do not offset

by the amount tax-exempt income bears to

Line 2. Interest. Enter taxable interest on

ordinary losses against ordinary income.

total gross income (including tax-exempt

U.S. obligations and on loans, notes,

Instead, include the losses on line 22. Show

income but excluding capital gain net

mortgages, bonds, bank deposits, corporate

the partnership’s name, address, and EIN

income).

bonds, tax refunds, etc.

on a separate statement attached to this

Net operating loss deduction. The net

Do not offset interest expense against

return. If the amount entered is from more

operating loss deduction is not allowed.

interest income. Special rules apply to

than one partnership, identify the amount

Passive activity limitations. Limitations on

interest income from certain

from each partnership.

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passive activity losses and credits under

below-market-rate loans. See section 7872

Any net positive section 481 income

section 469 apply to RICs that are closely

for more information on the tax treatment of

adjustment. See Form 3115, Application for

held (as defined in section 469(j)(1)). RICs

loans on which inadequate or no interest is

Change in Accounting Method, and its

subject to the passive activity limitations

charged.

instructions for more information.

must complete Form 8810, Corporate

Note. Report tax-exempt interest income on

Deductions

Passive Activity Loss and Credit Limitations,

Schedule K, item 8. Also, if required, include

to compute their allowable passive activity

the same amount on Schedule M-1, line 7.

loss and credit. Before completing Form

Limitations on Deductions

Line 3. Net Foreign Currency Gain or

8810, see Temporary Regulations section

Direct and indirect costs (including

(Loss) from Section 988 Transactions.

1.163-8T, for rules on allocating interest

taxes) allocable to real or tangible

Enter the net foreign currency gain (loss)

expense among activities.

personal property constructed or

from section 988 transactions that is treated

Closely-held corporation. A RIC is

improved by the taxpayer. These costs

as ordinary income or loss under section

closely-held if at any time during the last half

must be capitalized. See section 263A for

988(a)(1)(A). Attach a schedule detailing

of the tax year more than 50% in value of its

more information.

each separate transaction.

outstanding stock is directly or indirectly

Transactions between related taxpayers.

Line 4. Payments with respect to

owned, by or for, not more than five

Generally, an accrual basis taxpayer may

securities loans. Enter the amount

individuals and it is not a personal service

only deduct business expenses and interest

corporation.

received or accrued from a broker as

owed to a related party in the year the

compensation for securities loaned by the

Reducing certain expenses for which

payment is included in the income of the

RIC to the broker for use in completing

credits are allowable. For each credit

related party. See section 267 for limitations

market transactions. The payments must

listed below, the RIC must reduce the

on deductions for interest and expenses

meet the requirements of section 512(a)(5).

otherwise allowable deduction for expenses,

paid to a related party.

or basis where applicable, used to figure the

Line 5. Excess of Net Short-Term Capital

Golden parachute payments. A portion of

credit by the amount of the current year

Gain Over Net Long-Term Capital Loss.

the payments made by a RIC to key

credit. See the applicable form instructions

Enter the excess of net short-term capital

personnel that exceeds their usual

for more details.

gain over net long-term capital loss from

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compensation may not be deductible. This

Employment credits. See the instructions

Schedule D (Form 1120), line 12. Every sale

occurs when the RIC has an agreement

for line 10.

or exchange of a capital asset must be

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(golden parachute) with key employees to

Research credit.

reported in detail on Schedule D (Form

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pay them an amount substantially in excess

Orphan drug credit.

1120), even though no gain or loss is

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of their base amount if control of the RIC

Disabled access credit.

indicated.

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changes. See section 280G and

Enhanced oil recovery credit.

Line 7. Other Income. Enter any other

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Regulations section 1.280G-1.

Employer credit for social security and

taxable income (loss) not reported on lines 1

Medicare taxes paid on certain employee

Business start-up and organizational

through 6, except net capital gain that is

tips.

expenses. Business start-up and

reported in Part II. List the type and amount

•

Credit for small employer pension plan

organizational costs must be capitalized

of income on an attached schedule. If the

startup costs.

unless an election is made to deduct or

RIC has only one item of other income,

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Credit for employer-provided childcare

amortize them. However, for costs paid or

describe it in parentheses on line 7.

facilities and services.

incurred after October 22, 2004, the

Examples of other income to report on line 7

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Low sulfur diesel fuel production credit.

following rules apply (separately to each

include:

•

category):

If the RIC has any of these credits, figure

Gross rents.

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The RIC can elect to deduct up to $5,000

each current year credit before figuring the

Recoveries of fees or expenses in

of such costs for the year the RIC begins

deduction for expenses on which the credit

settlement or litigation.

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business operations.

is based.

Amounts received or accrued as

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The $5,000 deduction is reduced (but not

consideration for entering into agreements

Line 9. Compensation of Officers.

below zero) by the amount the total costs

to make real property loans or to purchase

Complete Schedule E if total receipts are

exceed $50,000. If the total costs are

or lease real property.

$500,000 or more. Total receipts are figured

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$55,000 or more, the deduction is reduced

Recoveries of bad debts deducted in prior

by adding:

to zero.

years under the specific charge-off method.

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1. Line 8, Part I,

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If the election is made, any costs that are

The amount included in income from

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

not deducted must be amortized ratably

Form 6478, Credit for Alcohol Used as Fuel.

and

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over a 180-month period beginning with the

The amount included in income from

3. Line 9a, Form 2438.

month the RIC begins business operations.

Form 8864, Biodiesel and Renewable Diesel

Fuels Credit.

For more details on the election for

Do not include compensation deductible

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Refunds of taxes deducted in prior years

business start-up costs and organizational

elsewhere on the return, such as elective

to the extent they reduced income subject to

costs, see Pub. 535, Business Expenses.

contributions to a section 401(k) cash or

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Instructions For Form 1120-Ric - U.s. Income Tax Return For Regulated Investment Companies - 2005 Page 6

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