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agreements to make real property loans

The $5,000 deduction is reduced (but

Part I—Investment

or to purchase or lease real property.

not below zero) by the amount the total

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Recoveries of bad debts deducted in

costs exceed $50,000. If the total costs

Company Taxable

prior years under the specific charge-off

are $55,000 or more, the deduction is

method.

reduced to zero.

Income

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Refunds of taxes deducted in prior

If the election is made, any costs not

years to the extent they reduced

deducted must be amortized ratably

Income

income subject to tax in the year

over a 180-month period beginning with

deducted (see section 111). Do not

the month the RIC begins business

Line 1. Dividends. A RIC that is the

offset current year taxes against prior

operations.

holder of record of any share of stock

year tax refunds.

on the record date for a dividend

For more details on the election for

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The recapture amount under section

payable on that stock must include the

business start-up costs and

280F if the business use of listed

dividend in gross income by the later of:

organizational costs, see Pub. 535,

property drops to 50% or less. To figure

the date the share became ex-dividend,

Business Expenses.

the recapture amount, complete Part IV

or the date the RIC acquired the share.

To make the election, attach the

of Form 4797.

Line 2. Interest. Enter taxable interest

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statements required by Regulations

Ordinary income from trade or

on U.S. obligations and on loans,

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

business activities of a partnership

notes, mortgages, bonds, bank

the deductible amount of these costs

(from Schedule K-1 (Form 1065 or

deposits, corporate bonds, tax refunds,

and any amortization on line 22. For

1065-B)). Do not offset ordinary losses

etc.

amortization that begins during the tax

against ordinary income. Instead,

year, complete and attach Form 4562.

Do not offset interest expense

include the losses on line 22. Show the

against interest income. Special rules

partnership’s name, address, and EIN

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

apply to interest income from certain

on a separate statement attached to

RIC paid exempt-interest dividends

below-market-rate loans. See section

this return. If the amount entered is

during the tax year (including those

7872 for more information on the tax

from more than one partnership,

dividends deemed paid under section

treatment of loans on which inadequate

identify the amount from each

855), no deduction is allowed for that

or no interest is charged.

partnership.

portion of otherwise deductible

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Any net positive section 481 income

expenses allocable to tax-exempt

Note. Report tax-exempt interest

adjustment. See Form 3115 and its

income. The excluded amount is

income on Schedule K, item 8. Also, if

instructions for more information.

determined by the amount tax-exempt

required, include the same amount on

income bears to total gross income

Schedule M-1, line 7.

Deductions

(including tax-exempt income but

Line 3. Net Foreign Currency Gain or

excluding capital gain net income).

(Loss) from Section 988

Limitations on Deductions

Net operating loss deduction. The

Transactions. Enter the net foreign

net operating loss deduction is not

Transactions between related

currency gain (loss) from section 988

allowed.

taxpayers. Generally, an accrual basis

transactions treated as ordinary income

taxpayer may only deduct business

or loss under section 988(a)(1)(A).

Passive activity limitations.

expenses and interest owed to a

Attach a schedule detailing each

Limitations on passive activity losses

related party in the year the payment is

separate transaction.

and credits under section 469 apply to

includible in the income of the related

RICs that are closely held (as defined

Line 4. Payments with respect to

party. See section 267 for limitations on

in section 469(j)(1)). RICs subject to the

securities loans. Enter the amount

deductions for interest and expenses

passive activity limitations must

received or accrued from a broker as

paid to a related party.

complete Form 8810, Corporate

compensation for securities loaned by

Passive Activity Loss and Credit

the RIC to the broker for use in

Golden parachute payments. A

Limitations, to compute their allowable

completing market transactions. The

portion of the payments made by a RIC

passive activity loss and credit. Before

payments must meet the requirements

to key personnel that exceeds their

completing Form 8810, see Temporary

of section 512(a)(5).

usual compensation may not be

Regulations section 1.163-8T, for rules

deductible. This occurs when the RIC

Line 5. Excess of Net Short-Term

on allocating interest expense among

has an agreement (golden parachute)

Capital Gain Over Net Long-Term

activities.

with key employees to pay them an

Capital Loss. Enter the amount from

amount substantially in excess of their

Closely held corporation. A RIC is

Schedule D (Form 1120), line 12. Every

base amount if control of the RIC

closely held if at any time during the

sale or exchange of a capital asset

changes. See section 280G and

last half of the tax year more than 50%

must be reported in detail on Schedule

Regulations section 1.280G-1 for more

in value of its outstanding stock is

D (Form 1120), even if no gain or loss

information.

directly or indirectly owned by or for not

is indicated.

more than five individuals and it is not a

Line 7. Other Income. Enter any other

Business start-up and organizational

personal service corporation.

taxable income (loss) not reported on

expenses. Business start-up and

Line 9. Compensation of Officers.

lines 1 through 6, except net capital

organizational costs must be capitalized

Complete Schedule E if total receipts

gain reported in Part II. List the type

unless an election is made to deduct or

are $500,000 or more. Total receipts

and amount of income on an attached

amortize them. The RIC can elect to

are figured by adding:

schedule. If the RIC has only one item

amortize costs paid or incurred before

of other income, describe it in

October 23, 2004, over a period of 60

1. Line 8, Part I,

parentheses on line 7. Examples of

months or more. However, for costs

2. Net capital gain from line 1, Part

other income to report on line 7 include:

paid or incurred after October 22, 2004,

II, and

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Gross rents.

the following rules apply (separately to

3. Line 9a, Form 2438.

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Recoveries of fees or expenses in

each category):

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settlement or litigation.

The RIC can elect to deduct up to

Do not include compensation

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Amounts received or accrued as

$5,000 of such costs for the year the

deductible elsewhere on the return,

consideration for entering into

RIC begins business operations.

such as elective contributions to a

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Instructions For Form 1120-Ric - U.s. Income Tax Return For Regulated Investment Companies - 2006 Page 7

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