Instructions For Form 1120-Fsc - 2006 (Page 11 of 13) in pdf

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capitalize, or include in inventory, certain

amounts if control of the FSC changes. See

That individual is an employee of the

costs incurred in connection with:

section 280G and Regulations section

corporation and

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Personal property (tangible and certain

1.280G-1.

His or her travel is for a bona fide

intangible property) acquired for resale.

business purpose and would otherwise be

Line 1. Enter only foreign direct costs on

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The production of real property and

deductible by that individual.

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

tangible personal property by a FSC for use

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

Meals and entertainment. Generally,

in its trade or business or in an activity

(e) for definitions and rules on direct activity

the FSC may deduct only 50% of the

engaged in for profit.

costs related to foreign trade income.

amount otherwise allowable for meals and

Tangible personal property produced

Line 4. Depreciation. Include on line 4

entertainment expenses paid or incurred in

by a FSC includes a film, sound recording,

depreciation and the cost of certain property

its trade or business. In addition (subject to

videotape, book, or similar property.

that the FSC elected to expense under

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

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FSCs subject to the section 263A

section 179. See Form 4562, Depreciation

Meals must not be lavish or extravagant,

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uniform capitalization rules are required to

and Amortization, and its instructions.

A bona fide business discussion must

capitalize:

occur during, immediately before, or

Line 5. Salaries and wages. Enter the total

immediately after the meal; and

1. Direct costs and

salaries and wages paid for the tax year. Do

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An employee of the FSC must be present

2. An allocable part of most indirect

not include salaries and wages deductible

at the meal.

costs (including taxes) that (a) benefit the

elsewhere on the return, such as amounts

assets produced or acquired for resale or (b)

included in officers’ compensation, cost of

Membership dues. The FSC may

are incurred by reason of the performance

goods sold, elective contributions to a

deduct amounts paid or incurred for

of production or resale activities.

section 401(k) cash or deferred

membership dues in civic or public service

arrangement, or amounts contributed under

organizations, professional organizations

For inventory, some of the indirect

a salary reduction SEP agreement or a

(such as bar and medical associations),

expenses that must be capitalized are:

SIMPLE IRA plan.

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business leagues, trade associations,

Administration expenses.

Line 10. Compensation of officers. Enter

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chambers of commerce, boards of trade,

Taxes.

deductible officers’ compensation on line 10.

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and real estate boards. However, no

Depreciation.

Do not include compensation deductible

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deduction is allowed if a principal purpose of

Insurance.

elsewhere on the return, such as amounts

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the organization is to entertain, or provide

Compensation paid to officers attributable

included in cost of goods sold, elective

entertainment facilities for, members or their

to services.

contributions to a section 401(k) cash or

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guests. In addition, FSCs may not deduct

Rework labor.

deferred arrangement, or amounts

membership dues in any club organized for

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Contributions to pension, stock bonus,

contributed under a salary reduction SEP

business, pleasure, recreation, or other

and certain profit-sharing, annuity, or

agreement or a SIMPLE IRA plan.

social purpose. This includes country clubs,

deferred compensation plans.

golf and athletic clubs, airline and hotel

Line 11. Bad debts. Enter the total debts

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

clubs, and clubs operated to provide meals

that became worthless in whole or in part

specifies other indirect costs that relate to

under conditions favorable to business

during the tax year. A cash basis taxpayer

production or resale activities that must be

discussion.

may not claim a bad debt deduction unless

capitalized and those that may be currently

the amount was previously included in

Entertainment facilities. The FSC may

deductible.

income.

not deduct an expense paid or incurred for a

Interest expense paid or incurred

Line 14. Other deductions. Attach a

facility (such as a yacht or hunting lodge)

during the production period of designated

schedule, listing by type and amount, all

used for an activity usually considered

property must be capitalized and is

allowable deductions that are not deductible

entertainment, amusement, or recreation.

governed by special rules. For more details,

elsewhere on Form 1120-FSC. Enter the

see Regulations sections 1.263A-8 through

Amounts treated as compensation.

total on line 14.

1.263A-15.

Generally, the FSC may be able to deduct

Examples of other deductions include:

The costs required to be capitalized

otherwise nondeductible entertainment,

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Amortization (see Form 4562).

amusement, or recreation expenses if the

under section 263A are not deductible until

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Insurance premiums.

the property (to which the costs relate) is

amounts are treated as compensation to the

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Legal and professional fees.

recipient and reported on Form W-2 for an

sold, used, or otherwise disposed of by the

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Supplies used and consumed in the

FSC.

employee or on Form 1099-MISC or Form

business.

1042-S for an independent contractor.

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Exceptions. Section 263A does not apply

Utilities.

to:

However, if the recipient is an officer,

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Also see Special rules below for limits on

Personal property acquired for resale if

director, or beneficial owner (directly or

certain other deductions.

the FSC’s average annual gross receipts for

indirectly) of more than 10% of any class of

Do not deduct:

the 3 prior tax years were $10 million or

stock, the deductible expense is limited. See

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Fines or penalties paid to a government

less.

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

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for violating any law.

Inventoriable items accounted for in the

2005-24 I.R.B. 1228.

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Any amount that is allocable to a class of

same manner as materials and supplies that

exempt income. See section 265(b) for

are not incidental. See Schedule A on

Schedule J

exceptions.

page 7 for details.

Special rules apply to the following

For more details on the uniform

Tax Computation

expenses:

capitalization rules, see Regulations

sections 1.263A-1 through 1.263A-3.

Travel, meals, and entertainment. Subject

Line 1

Transactions between related taxpayers.

to limitations and restrictions discussed

If the FSC is a member of a controlled

below, the FSC may deduct ordinary and

Generally, an accrual basis taxpayer may

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

only deduct business expenses and interest

necessary travel, meals, and entertainment

must check the box on line 1 and complete

expenses paid or incurred in its trade or

owed to a related party in the year the

Schedule O (Form 1120). Members of a

payment is included in the income of the

business. Also, special rules apply to

controlled group must use Schedule O

deductions for gifts, skybox rentals, luxury

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

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

and 267 for limitations on deductions for

water travel, convention expenses, and

See Schedule O and its instructions for

unpaid interest and expenses.

entertainment tickets. See section 274 and

more information.

Pub. 463, Travel, Entertainment, Gift, and

Golden parachute payments. A portion of

Car Expenses, for more details.

the payments made by a FSC to key

Line 2

personnel that exceeds their usual

Travel. The FSC may not deduct travel

compensation may not be deductible. This

expenses of any individual accompanying a

Most FSCs should figure their tax using the

occurs when the FSC has an agreement

corporate officer or employee, including a

Tax Rate Schedule on page 12. Qualified

(golden parachute) with these key

spouse or dependent of the officer or

personal service corporations should see

employees to pay them these excess

employee, unless:

the instructions on page 12.

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Instructions For Form 1120-Fsc - 2006 Page 11

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