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enter on line 4b, the amount from

foreign sales corporation (FSC), include

Interest expense paid or incurred

Schedule C, line 17.

the nonexempt portion of foreign trade

during the production period of

income from the sale or other disposition

designated property must be capitalized

Line 5. Interest

of agricultural or horticultural products by

and is governed by special rules. For

Enter taxable interest on U.S. obligations

the FSC for the tax year that includes the

more details, see Regulations sections

and on loans, notes, mortgages, bonds,

last day of the FSC’s tax year, even

1.263A-8 through 1.263A-15.

bank deposits, corporate bonds, tax

though the FSC is not required to

The costs required to be capitalized

refunds, etc. Do not offset interest

distribute such income until the due date

under section 263A are not deductible

expense against interest income. Special

of its income tax return.

until the property (to which the costs

rules apply to interest income from certain

7. Ordinary income from trade or

relate) is sold, used, or otherwise

below-market rate loans. See section

business activities of a partnership (from

disposed of by the cooperative.

7872 for more information.

Schedule K-1 (Form 1065 or 1065-B)). Do

Exceptions. Section 263A does not

not offset ordinary losses against ordinary

Interest income is generally

apply to:

income. Instead, include the losses on

nonpatronage income to nonexempt

•

Personal property acquired for resale if

Form 990-C, line 26. Show the

cooperatives (Regulations section

the cooperative’s average annual gross

partnership’s name, address, and EIN on

1.1382-3(c)(2)). As such, a patronage

receipts for the 3 prior tax years were $10

a separate statement attached to this

dividend deduction may not be allowable.

million or less.

return. If the amount entered is from more

•

Note. Report tax-exempt interest income

Timber.

than one partnership, identify the amount

•

on Schedule N, item 15. Also, if required,

Most property produced under a

from each partnership.

include the same amount on Schedule

long-term contract.

•

M-1, line 7.

Certain property produced in a farming

Deductions

business.

Line 6. Gross Rents

•

Research and experimental costs

Enter the gross amount received from the

Limitations on Deductions

under section 174.

rental of property. Deduct expenses such

•

Intangible drilling costs for oil, gas, and

as repairs, interest, taxes, and

Section 263A uniform capitalization

geothermal property.

depreciation on the applicable lines.

•

rules. The uniform capitalization

Mining exploration and development

(UNICAP) rules of section 263A generally

Generally, gross rents are considered

costs.

require cooperatives to capitalize, or

•

nonpatronage income to nonexempt

Inventoriable items accounted for in the

include in inventory, certain costs incurred

cooperatives (Regulations section

same manner as materials and supplies

in connection with:

1.1382(c)(2)). As such, a patronage

that are not incidental. See Cost of Goods

•

The production of real property and

dividend deduction may not be allowable.

Sold on page 14 for details.

tangible personal property held in

Line 8. Capital Gain Net Income

For more details on the UNICAP rules,

inventory or held for sale in the ordinary

see Regulations sections 1.263A-1

course of business.

Every sale or exchange of a capital asset

•

through 1.263A-3. See Regulations

Real property or personal property

must be reported in detail on Schedule D

section 1.263A-4 and Pub. 225, Farmer’s

(tangible and intangible) acquired for

(Form 1120), Capital Gains and Losses,

Tax Guide, for rules for property produced

resale.

even if there is no gain or loss. Generally,

•

in a farming business.

The production of real property and

capital gains and losses are considered

tangible personal property by a

nonpatronage source.

Transactions between related

cooperative for use in its trade or

taxpayers. Generally, an accrual basis

Line 10. Other Income

business or in an activity engaged in for

taxpayer can only deduct business

Enter any other taxable income not

profit.

expenses and interest owed to a related

reported on lines 1 through 9. List the

party in the year payment is included in

Tangible personal property produced

type and amount of income on an

the income of the related party. See

by a cooperative includes a film, sound

attached schedule. If the cooperative has

sections 163(e)(3), 163(j), and 267 for the

recording, videotape, book, or similar

only one item of other income, describe it

limitations on deductions for unpaid

property.

in parentheses on line 10. Examples of

interest and expenses.

other income to report on line 10 are:

Cooperatives subject to the UNICAP

Section 291 limitations. Cooperatives

rules are required to capitalize not only

1. Recoveries of bad debts deducted

may be required to adjust deductions for

direct costs but an allocable part of most

in prior years under the specific

depletion of iron ore and coal, intangible

charge-off method.

indirect costs (including taxes) that (a)

drilling, exploration and development

benefit the assets produced or acquired

2. The amount included in income

costs, and the amortizable basis of

for resale or (b) are incurred by reason of

from Form 6478, Credit for Alcohol Used

pollution control facilities. See section 291

the performance of production or resale

as Fuel.

to determine the amount of the

activities.

3. The amount included in income

adjustment. Also, see section 43.

from Form 8864, Biodiesel Fuels Credit.

For inventory, some of the indirect

Golden parachute payments. A portion

4. Refunds of taxes deducted in prior

expenses that must be capitalized are:

of the payments made by a cooperative to

years to the extent they reduced income

•

Administration expenses.

key personnel that exceeds their usual

subject to tax in the year deducted (see

•

Taxes.

compensation may not be deductible.

section 111). Do not offset current year

•

Depreciation.

This occurs when the cooperative has an

taxes against any tax refunds.

•

Insurance.

agreement (golden parachute) with these

5. The amount of any deduction

•

Compensation paid to officers

key employees to pay them these excess

previously taken under section 179A that

attributable to services.

amounts if control of the cooperative

is subject to recapture. The cooperative

•

Reworked labor.

changes. See section 280G and

must recapture the benefit of any

•

Contributions to pension, stock bonus,

Regulations section 1.280G-1.

allowable deduction for clean-fuel vehicle

and certain profit-sharing, annuity, or

property (or clean-fuel vehicle refueling

Business start-up and organizational

deferred compensation plans.

property) if, within 3 years of the date the

costs. Business start-up and

property was placed in service, it ceases

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

organizational costs must be capitalized

to qualify. See Regulations section

specifies other indirect costs that relate to

unless an election is made to deduct or

1.179A-1 for details.

production or resale activities that must

amortize them. For costs paid or incurred

6. For cooperatives described in

be capitalized, and those that may be

before October 23, 2004, the cooperative

section 1381 that are shareholders in a

currently deductible.

must capitalize them unless it elects to

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Instructions For Form 990-C - Farmers' Cooperative Association Income Tax Return - Internal Revenue Service - 2004 Page 9

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