Instructions For Form 1120-Fsc - 2006 (Page 7 of 13) in pdf

The term “parent-subsidiary controlled

See section 6655 for details and

are deductible in the year the merchandise

group” means one or more chains of

exceptions, including special rules for large

is sold (but not before the year the FSC paid

corporations connected through stock

corporations.

for the merchandise, if it is also using the

ownership (sections 927(d)(4) and

cash method). For additional guidance on

Use Form 2220, Underpayment of

1563(a)(1)). Both of the following

this method of accounting for inventoriable

Estimated Tax by Corporations, to see if the

requirements must be met:

items, see Pub. 538, and the Instructions for

FSC owes the penalty and to figure the

Form 3115.

1. More than 50% of the total combined

amount of the penalty. Generally, the FSC

voting power of all classes of stock entitled

does not have to file this form because the

Enter amounts paid for merchandise

to vote or more than 50% of the total value

IRS can figure the amount of any penalty

during the tax year on line 2. The amount

of all classes of stock of each corporation in

and bill the FSC for it. However, even if the

the FSC may deduct for the tax year is

the group (except the parent) must be

FSC does not owe the penalty, complete

figured on line 8.

owned by one or more of the other

and attach Form 2220 if:

•

All FSCs not using the cash method of

corporations in the group.

The annualized income or adjusted

accounting should see Section 263A

2. The common parent must own more

seasonal installment method is used or

•

uniform capitalization rules in the

than 50% of the total combined voting power

The FSC is a large corporation computing

instructions for Schedule G on page 10. See

of all classes of stock entitled to vote or

its first required installment based on the

those instructions before completing

more than 50% of the total value of all

prior year’s tax. (See the Form 2220

Schedule A.

classes of stock of at least one of the other

instructions for the definition of a large

corporations in the group.

corporation.)

If the FSC uses intercompany pricing

rules (for purchases from a related supplier),

If Form 2220 is attached, check the box

Stock owned directly by other members

use the transfer price figured in Part II of

on line 3 and enter the amount of any

of the group is not counted when computing

Schedule P (Form 1120-FSC).

penalty on this line.

the voting power or value.

Line 1. Inventory at beginning of year. If

Schedule A

See sections 927(d)(4) and 1563(d)(1)

the FSC is changing its method of

for the definition of “stock” for purposes of

accounting for the current tax year, it must

Cost of Goods Sold Related To

determining stock ownership above.

refigure last year’s closing inventory using

Foreign Trading Gross Receipts

its new method of accounting and enter the

result on line 1. If there is a difference

Tax and Payments

Complete Schedule A only for the cost of

between last year’s closing inventory and

goods sold deduction related to foreign

Line 2h. Credit for federal telephone

the refigured amount, attach an explanation

trading gross receipts reported on lines 1

excise tax paid. If the FSC was billed after

and take it into account when figuring the

through 5 of Schedule B.

February 28, 2003, and before August 1,

FSC’s section 481(a) adjustment (explained

Complete column (a) to show the cost of

2006, for the federal telephone excise tax on

on page 5).

goods sold for inventory acquired in

long distance or bundled service, the FSC

transactions using the administrative pricing

Line 4. Additional section 263A costs. An

may be able to request a credit for the tax

rules. Complete column (b) to show the cost

entry is required on this line only for FSCs

paid. The FSC had bundled service if its

of goods sold for inventory acquired in

that have elected a simplified method of

local and long distance service was

transactions that did not use the

accounting.

provided under a plan that does not

administrative pricing rules. For details on

For FSCs that have elected the simplified

separately state the charge for local service.

the administrative pricing rules, see the

The FSC may not request the credit if it has

production method, additional section 263A

Instructions for Schedule P (Form

costs are generally those costs, other than

already received a credit or refund from its

1120-FSC).

service provider. If the FSC requests the

interest, that were not capitalized under the

If the FSC acts as another person’s

FSC’s method of accounting immediately

credit, it may not ask its service provider for

commission agent on a sale, do not enter

a credit or refund and must withdraw any

prior to the effective date of section 263A

any amount on Schedule A for the sale.

request previously submitted to its provider.

but are now required to be capitalized under

Small FSCs will have to make two

section 263A. For details, see Regulations

The FSC may request the credit by

separate computations for cost of goods

section 1.263A-2(b).

attaching Form 8913, Credit for Federal

sold if their foreign trading gross receipts

For FSCs that have elected the simplified

Telephone Excise Tax Paid, showing the

exceed the limitation amount on line 6e of

resale method, additional section 263A

actual amount the FSC paid. The FSC also

Schedule B. In this case, a deduction for

costs are generally those costs incurred with

may be able to request the credit based on

cost of goods sold will be figured separately

respect to the following categories:

an estimate of the amount paid. See Form

for the income on line 6h of Schedule B, and

•

Off-site storage or warehousing.

8913 for details. In either case, the FSC

separately for the income on line 7 of

•

Purchasing.

must keep records to substantiate the

Schedule F.

•

Handling, such as processing,

amount of the credit requested.

Generally, inventories are required at the

assembling, repackaging, and transporting.

•

Line 2i. Backup withholding. If the FSC

beginning and end of each tax year if the

General and administrative costs (mixed

had income tax withheld from any payments

purchase or sale of merchandise is an

service costs).

it received due to backup withholding,

income-producing factor. See Regulations

For details, see Regulations section

include the amount withheld in the total for

section 1.471-1.

1.263A-3(d).

line 2i. Show the amount withheld in the

However, if the FSC is a qualifying

blank space in the right-hand column

Enter on line 4 the balance of section

taxpayer or a qualifying small business

between lines 1 and 2i, and write “backup

263A costs paid or incurred during the tax

taxpayer, it may adopt or change its

withholding.”

year not includible on lines 2, 3, and 5.

accounting method to account for

inventoriable items in the same manner as

Note. Do not include backup withholding

Line 5. Other costs. Enter on line 5 any

materials and supplies that are not

amounts on line 2g. Include on line 2g only

costs paid or incurred during the tax year

incidental (unless its business is a tax

amounts withheld under Chapter 3 of the

not entered on lines 2 through 4.

shelter (as defined in section 448(d)(3)).

Code.

Line 7. Inventory at end of year. See

A qualifying taxpayer is a taxpayer that

Regulations sections 1.263A-1 through

has average annual gross receipts of $1

Line 3. Estimated tax penalty. A FSC that

1.263A-3 for details on figuring the amount

million or less for the 3 prior years.

does not make estimated tax payments

of additional section 263A costs to be

A qualifying small business taxpayer is a

when due may be subject to an

included in ending inventory. If the FSC

taxpayer (a) that has average annual gross

underpayment penalty for the period of

accounts for inventoriable items in the same

receipts of $10 million or less for the 3 prior

underpayment. Generally, a FSC is subject

manner as materials and supplies that are

tax years and (b) whose principal business

to the penalty if its tax liability is $500 or

not incidental, enter on line 7 the portion of

activity is not an ineligible activity.

more and it did not timely pay the smaller of:

its merchandise purchased for resale that is

•

Its tax liability for 2006 or

Under this accounting method, inventory

included on line 6 and was not sold during

•

Its prior year’s tax.

costs for merchandise purchased for resale

the year.

-7-

Instructions For Form 1120-Fsc - 2006 Page 7

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