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6. Certain transactions resulting in a tax

A member of a controlled group cannot

report taxable income (for income as a

credit of more than $250,000, if the FSC

use an accounting method that would distort

whole or for the treatment of any material

held the asset generating the credit for 45

any group member’s income, including its

item), the FSC must file Form 3115,

days or less.

own. For example, a FSC acts as a

Application for Change in Accounting

commission agent for property sales by a

Method. For more information, see Form

Personal Holding Companies

related corporation that uses the accrual

3115 and Pub. 538, Accounting Periods and

method and pays the FSC its commission

Methods.

and Foreign Personal Holding

more than 2 months after the sale. In this

Section 481(a) adjustment. The FSC

Companies

case, the FSC should not use the cash

may have to make an adjustment under

method because that method would

Personal holding company. A FSC that is

section 481(a) to prevent amounts of

materially distort its income.

a personal holding company (as defined in

income or expense from being duplicated or

section 542) but not a foreign personal

Accrual method. Generally, a FSC (other

omitted. The section 481(a) adjustment

holding company, must file Schedule PH

than a qualified personal service

period is generally 1 year for a net negative

(Form 1120), U.S. Personal Holding

corporation) must use the accrual method of

adjustment and 4 years for a net positive

Company (PHC) Tax, with Form 1120-FSC.

accounting if its average annual gross

adjustment. However, a FSC may elect to

On line 8, Schedule J, Form 1120-FSC, the

receipts exceed $5 million. See section

use a 1-year adjustment period if the net

FSC reports the personal holding company

448(c).

section 481(a) adjustment for the change is

tax. See section 542 and Schedule PH

less than $25,000. The FSC must complete

If inventories are required, the accrual

(Form 1120) for details.

the appropriate lines of Form 3115 to make

method generally must be used for sales

the election.

and purchases of merchandise. However,

Foreign personal holding company.

qualifying taxpayers and eligible businesses

Regulations section 1.551-4 requires certain

Accounting Periods

of qualifying small business taxpayers are

shareholders of a FSC that is a foreign

excepted from using the accrual method for

A FSC must figure its taxable income on the

personal holding company (as defined in

eligible trades or businesses and may

basis of a tax year. A tax year is the annual

section 552) to attach a statement to their

account for inventoriable items as materials

personal returns containing the information

accounting period a FSC uses to keep its

and supplies that are not incidental. For

records and report its income and expenses.

required by section 551(c).

details, see Schedule A, Cost of Goods Sold

Generally, FSCs can use a calendar year or

Form 5471. Section 6035 and the

Related to Foreign Trading Gross Receipts,

a fiscal year. Personal service corporations,

related regulations require certain U.S.

on page 7.

however, must generally use a calendar

officers, directors, and shareholders of a

year.

Under the accrual method, an amount is

foreign personal holding company to file

includible in income when:

Note. The tax year of a FSC must be the

Schedule N (Form 5471), Return of Officers,

same as the tax year of the principal

1. All the events have occurred that fix

Directors, and 10% or More Shareholders of

shareholder which, at the beginning of the

the right to receive the income, which is the

a Foreign Personal Holding Company, and

FSC tax year, has the highest percentage of

earliest of the date:

the appropriate schedules of Form 5471.

voting power. If two or more shareholders

See the Instructions for Form 5471 for

a. The required performance takes

have the highest percentage of voting

additional information.

place,

power, the FSC must have a tax year that

b. Payment is due, or

conforms to the tax year of any such

Assembling the Return

c. Payment is received and

shareholder. See section 441(h).

2. The amount can be determined with

To ensure that the FSC’s tax return is

reasonable accuracy.

correctly processed, attach all schedules

Calendar year. If the FSC is required to

and other forms after page 6, Form

See Regulations section 1.451-1(a) for

use the calendar year as its annual

1120-FSC, and in the following order.

details.

accounting period, the FSC must maintain

1. Form 4136.

its books and records and report its income

Generally, an accrual basis taxpayer can

2. Form 4626.

deduct accrued expenses in the tax year

and expenses for the period from January 1

3. Form 851.

when:

through December 31 of each year.

•

4. Additional schedules in alphabetical

All events that determine the liability have

Fiscal year. A fiscal year is 12 consecutive

order.

occurred,

months ending on the last day of any month

•

5. Additional forms in numerical order.

The amount of the liability can be figured

except December. A 52-53 week year is a

with reasonable accuracy, and

fiscal year that varies from 52 to 53 weeks.

•

Complete every applicable entry space

Economic performance takes place with

on Form 1120-FSC. Do not enter “See

respect to the expense.

Rounding Off To

attached” instead of completing the entry

There are exceptions to the economic

Whole Dollars

spaces. If more space is needed on the

performance rule for certain items, including

forms or schedules, attach separate sheets

recurring expenses. See section 461(h) and

The FSC may round off cents to whole

using the same size and format as the

the related regulations for the rules for

dollars on its return and schedules. If the

printed forms. If there are supporting

determining when economic performance

FSC does round to whole dollars, it must

statements and attachments, arrange them

takes place.

round all amounts. To round, drop amounts

in the same order as the schedules or forms

under 50 cents and increase amounts from

Nonaccrual experience method.

they support and attach them last. Show the

50 to 99 cents to the next dollar (for

Accrual method corporations are not

totals on the printed forms. Also be sure to

example, $1.39 becomes $1 and $2.50

required to accrue certain amounts to be

enter the FSC’s name and EIN on each

becomes $3).

received from the performance of certain

supporting statement or attachment.

services that, on the basis of their

If two or more amounts must be added to

experience, will not be collected, if the

figure the amount to enter on a line, include

Accounting Methods

corporation’s average annual gross receipts

cents when adding the amounts and round

An accounting method is a set of rules used

for the 3 prior years does not exceed $5

off only the total.

to determine when and how income and

million.

Recordkeeping

expenses are reported. Figure taxable

This provision does not apply to any

income using the method of accounting

amount if interest is required to be paid on

Keep the FSC’s records for as long as they

regularly used in keeping the FSC’s books

the amount or if there is any penalty for

may be needed for the administration of any

and records. In all cases, the method used

failure to timely pay the amount. For more

provision of the Internal Revenue Code.

must clearly show taxable income.

information, see section 448(d)(5) and

Usually, records that support an item of

Temporary Regulations section 1.448-2T.

Generally, permissible methods include:

income, deduction, or credit on the return

•

For reporting requirements, see the

Cash,

must be kept for 3 years from the date the

•

instructions for Schedule B on page 8.

Accrual, or

return is due or filed, whichever is later.

•

Any other method authorized by the

Change in accounting method. To

Keep records that verify the FSC’s basis in

Internal Revenue Code.

change its method of accounting used to

property for as long as they are needed to

-5-

Instructions For Form 1120-Fsc - U.s. Income Tax Return Of A Foreign Sales Corporation - 2004 Page 5

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