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section 855), no deduction is allowed for that

The deduction limit does not apply to:

the interest is wholly exempt from income tax.

•

portion of otherwise deductible expenses,

Commissions based on individual

For exceptions, see section 265(b).

•

which bears the same ratio as the amount of

performance;

For cash basis taxpayers, prepaid interest

•

tax-exempt interest income bears to total gross

Qualified performance-based compensation;

allocable to years following the current tax

income (including tax-exempt income but

and

year. (For example, a cash basis calendar year

•

excluding capital gain net income).

Income payable under a written, binding

taxpayer who in 2003 prepaid interest allocable

contract in effect on February 17, 1993.

to any period after 2003 can deduct only the

Net operating loss deduction. The net

The $1-million limit is reduced by amounts

amount allocable to 2003).

operating loss deduction is not allowed.

•

disallowed as excess parachute payments

Interest and carrying charges on straddles.

Passive activity limitations. Limitations on

under section 280G.

Generally, these amounts must be capitalized.

passive activity losses and credits under

See section 263(g).

For details, see section 162(m) and

section 469 apply to funds that are closely held

Special rules apply to:

Regulations section 1.162-27.

•

(as defined in section 469(j)(1)). Funds subject

Interest on which no tax is imposed (see

to the passive activity limitations must

section 163(j)).

Line 10 –Salaries and Wages

•

complete Form 8810, Corporate Passive

Foregone interest on certain

Activity Loss and Credit Limitations, to

Enter the amount of salaries and wages paid

below-market-rate loans (see section 7872).

•

compute their allowable passive activity loss

for the tax year, reduced by any:

Original issue discount on certain high-yield

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and credit.

Work opportunity credit from Form 5884,

discount obligations (see section 163(e) to

•

Empowerment zone and renewal community

figure the disqualified portion).

Reducing certain expenses for which

employment credit from Form 8844,

credits are allowable. For each credit listed

•

Line 14 –Depreciation

Indian employment credit from Form 8845,

below, the fund must reduce the otherwise

•

Welfare-to-work credit from Form 8861, and

Besides depreciation, include on line 14 the

allowable deductions for expenses used to

•

New York Liberty Zone business employee

part of the cost that the fund elected to

figure the credit by the amount of the current

credit from Form 8884.

expense under section 179 for certain property

year credit.

•

See the instructions for these forms for

placed in service during tax year 2003 or

Work opportunity credit.

•

more information. Do not include salaries and

carried over from 2002. See Form 4562,

Research credit.

•

wages deductible elsewhere on the return,

Depreciation and Amortization, and its

Enhanced oil recovery credit.

•

such as elective contributions to a section

instructions.

Disabled access credit.

•

401(k) cash or deferred arrangement, or

Empowerment zone and renewal community

Line 22 –Other Deductions

amounts contributed under a salary reduction

employment credit.

•

SEP agreement or a SIMPLE IRA plan.

Note: Do not deduct fines or penalties paid to

Indian employment credit.

•

a government for violating any law.

Employer credit for social security and

If the fund provided taxable fringe

Medicare taxes paid on certain employee tips.

Attach a schedule, listing by type and

•

benefits to its employees, such as

Orphan drug credit.

amount, all allowable deductions that are not

personal use of a car, do not deduct as

•

CAUTION

Welfare-to-work credit.

deductible elsewhere on Form 1120-RIC,

wages the amount allocated for depreciation

•

New York Liberty Zone business employee

including amortization of organization

and other expenses claimed on lines 14 and

credit.

expenses. Enter the total of other deductions

22.

If the fund has any of these credits, be sure

on this line.

to figure each current year credit before

Line 12 –Taxes and Licenses

Also include ordinary losses from trade or

figuring the deduction for expenses on which

business activities of a partnership (from

Enter taxes paid or accrued during the tax

the credit is based.

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

year, but do not include the following:

•

offset ordinary income against ordinary losses.

Line 9 –Compensation of Officers

Federal income taxes (except for the tax

Instead, include the income on line 7. If the

imposed on net recognized built-in gain

Enter deductible officers’ compensation on line

amount entered is from more than one

allocable to ordinary income).

9. Complete Schedule E if total receipts are

•

partnership, identify the amount from each

Foreign or U.S. possession income taxes if a

$500,000 or more. Total receipts are figured by

partnership.

foreign tax credit is claimed, or if the fund

adding: (a) line 8, Part I, (b) net capital gain

made an election under section 853.

Generally, a deduction may not be taken for

from line 1, Part II, and (c) line 9a, Form 2438.

•

Excise taxes imposed under section 4982 on

any amount that is allocable to a class of

Do not include compensation deductible

undistributed RIC income.

exempt income. See section 265(b) for

elsewhere on the return, such as elective

•

Taxes not imposed on the fund.

exceptions.

contributions to a section 401(k) cash or

•

Taxes, including state or local sales taxes,

Charitable contributions. Enter contributions

deferred arrangement, or amounts contributed

that are paid or incurred in connection with an

or gifts actually paid within the tax year to or for

under a salary reduction SEP agreement or a

acquisition or disposition of property (these

the use of charitable and governmental

SIMPLE IRA plan.

taxes must be treated as a part of the cost of

organizations described in section 170(c) and

Include only the deductible part of officers’

the acquired property or, in the case of a

any unused contributions carried over from

compensation on Schedule E. (See

disposition, as a reduction in the amount

prior years.

Disallowance of deduction for employee

realized on the disposition).

•

Funds reporting taxable income on the

compensation in excess of $1 million

Taxes assessed against local benefits that

accrual method may elect to treat as paid

below.) Complete Schedule E, columns (a)

increase the value of the property assessed

during the tax year any contributions paid by

through (e), for all officers. The fund

(such as for paving, etc.).

•

the 15th day of the 3rd month after the end of

determines who is an officer under the laws of

Taxes deducted elsewhere on the return.

the tax year if the contributions were

the state where incorporated.

See section 164(d) for apportionment of

authorized by the board of directors during the

taxes on real property between seller and

Disallowance of deduction for employee

tax year. Attach a declaration to the return

purchaser.

compensation in excess of $1 million.

stating that the resolution authorizing the

Publicly held funds may not deduct

contributions was adopted by the board of

Line 13 –Interest

compensation to a “covered employee” to the

directors during the tax year. The declaration

extent that the compensation exceeds $1

Note: The deduction for interest is limited

must include the date the resolution was

million. Generally, a covered employee is:

when the fund is a policyholder or beneficiary

adopted.

•

The chief executive officer of the fund (or an

with respect to a life insurance, endowment, or

Charitable contributions over the 10%

individual acting in that capacity) as of the end

annuity contract issued after June 8, 1997. For

limitation may not be deducted for the tax year

of the tax year or

details, see section 264(f). Attach a statement

•

but may be carried over to the next 5 tax years.

An employee whose total compensation

showing the computation of the deduction.

must be reported to shareholders under the

Substantiation requirements. Generally,

The fund must make an interest allocation if

Securities Exchange Act of 1934 because the

no deduction is allowed for any contribution of

the proceeds of a loan were used for more

employee is among the four highest

$250 or more unless the fund gets a written

than one purpose (e.g., to purchase a portfolio

compensated officers for that tax year (other

acknowledgment from the donee organization

investment and to acquire an interest in a

than the chief executive officer).

that shows the amount of cash contributed,

passive activity). See Temporary Regulations

For this purpose, compensation does not

describes any property contributed, and, either

section 1.163-8T for the interest allocation

include the following:

gives a description and a good faith estimate of

rules.

•

Income from certain employee trusts,

the value of any goods or services provided in

annuity plans, or pensions.

Do not deduct the following interest:

return for the contribution or states that no

•

Any benefit paid to an employee that is

Interest on indebtedness incurred or

goods or services were provided in return for

excluded from the employee’s income.

continued to purchase or carry obligations if

the contribution. The acknowledgment must be

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Instructions For Form 1120-Ric - U.s. Income Tax Return For Regulated Investment Companies - 2003 Page 7

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