us internal revenue service: i1120 a--1996

8/14/2019 US Internal Revenue Service: i1120 a--1996

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96Department of the TreasuryInternal Revenue Service

Instructions forForms 1120 and 1120-ASection references are to the Internal Revenue Code unless otherwise noted.

Paperwork Reduction Act Notice. We ask for the information on these forms to carry out theInternal Revenue laws of the United States. You are required to give us the information. We needit to ensure that you are complying with these laws and to allow us to figure and collect the rightamount of tax.

You are not required to provide the information requested on a form that is subject to thePaperwork Reduction Act unless the form displays a valid OMB control number. Books or recordsrelating to a form or its instructions must be retained as long as their contents may becomematerial in the administration of any Internal Revenue law. Generally, tax returns and returninformation are confidential, as required by section 6103.

The time needed to complete and file the following forms will vary depending on individualcircumstances. The estimated average times are:

If you have comments concerning the accuracy of these time estimates or suggestions formaking this form and related schedules simpler, we would be happy to hear from you. You canwrite to the Tax Forms Committee, Western Area Distribution Center, Rancho Cordova, CA95743-0001. DO NOT send the tax form to this office. Instead, see Where To File on page 3.

incurred after June 30, 1996, and before June1, 1997. The credit is part of the generalbusiness credit. Get Form 8820, Orphan DrugCredit, for more information.q The targeted jobs credit has been replacedby the work opportunity credit. The creditapplies for wages paid to qualified employeeswho begin work for the employer afterSeptember 30, 1996, and before October 1,1997. Get Form 5884, Work OpportunityCredit, for details.q The credit for employer social security andMedicare taxes paid on certain employee tipshas been expanded to include establishmentsthat provide food and beverages forconsumption off the premises (if tipping iscustomary). The new rules apply to tips forservices performed after December 31, 1996.

For details, get Form 8846, Credit for EmployerSocial Security and Medicare Taxes Paid onCertain Employee Tips.q Generally, for tax years beginning afterDecember 31, 1995, the possessions tax creditunder section 936 has been repealed. Existingcredit claimants may qualify for a credit underthe transitional rules. New section 30A requiresa separate computation of the credit forbusiness income from Puerto Rico. For details,get Form 5735, Possessions Corporation TaxCredit (Under Sections 936 and 30A).q Generally, for tax years beginning afterDecember 31, 1995, the reserve method ofaccounting for bad debts of thrift institutionsunder section 593 has been repealed.Generally, thrift institutions that qualify as smallbanks may use the reserve method for

accounting for bad debts under section 585;those that are treated as large banks must usethe specific charge-off method. For details,including how to figure the required section481(a) adjustment, see Act section 1616.q The Act modified the definition of section 179property, classified gas station conveniencestores as 15-year property, provided a new25-year recovery period for water utilityproperty, and added new rules for propertydepreciated under the income forecast method.For details, get Form 4562, Depreciation andAmortization.q The Act changed the rules for replacingbusiness property that was involuntarilyconverted as a result of a Presidentiallydeclared disaster. For more information, getForm 4684, Casualties and Thefts.q

A corporation that received a distributionfrom a foreign trust after August 20, 1996, mustprovide additional information. For details, getPub. 553, Highlights of 1996 Tax Changes.q The Act created the financial assetsecuritization investment trust (FASIT), anentity that facilitates the securitization ofrevolving, nonmortgage debt. If a corporationholds an ownership interest in a FASIT, itshould report all items of income, gain,deductions, losses, and credits on thecorporation's income tax return, except asprovided in section 860H. The FASITprovisions are generally effective beginningSeptember 1, 1997. See sections 860Hthrough 860L for more information.

Form Recordkeeping

Learning aboutthe law or the

formPreparing the

form

Copying,assembling, andsending the form

to the IRS

1120 71 hr., 31 min. 41 hr., 46 min. 71 hr., 46 min. 7 hr., 47 min.1120-A 43 hr., 3 min. 24 hr., 8 min. 41 hr., 43 min. 4 hr., 34 min.

Sch. D (1120) 6 hr., 56 min. 3 hr., 31 min. 5 hr., 39 min. 32 min.Sch. H (1120) 5 hr., 59 min. 35 min. 43 min. 0 min.Sch. PH (1120) 15 hr., 19 min. 6 hr., 6 min. 8 hr., 29 min. 32 min.

Contents Page

Changes To NoteThe Small Business Job Protection Act of 1996(The Act) made changes to the tax law forcorporations. The Act restored several expiredcredits and also changed the rules for claimingcertain credits. These and other changes arehighlighted below.q If the corporation's total deposits of social

security, Medicare, and withheld income taxeswere more than $50,000 in 1995, it must makeelectronic deposits for all depository taxliabilities that occur after June 30, 1997. Fordetails, see Depository Method of TaxPayment on page 3.q Corporations may qualify to claim theresearch credit figured on Form 6765, Creditfor Increasing Research Activities. The creditgenerally applies for qualified researchexpenses paid or incurred after June 30, 1996,and before June 1, 1997. Get Form 6765 fordetails.q Corporations may qualify to claim theorphan drug credit. The credit generally appliesfor qualified clinical testing expenses paid or

Contents PageChanges To Note . . . . . . . . . . . 1

Income . . . . . . . . . . . . . . . . 6Unresolved Tax Problems . . . . . . . 2

Deductions . . . . . . . . . . . . . . 7How To Make a Contribution To Reduce the

Public Debt . . . . . . . . . . . . . 2 Schedule A and Cost of Goods SoldWorksheet . . . . . . . . . . . . . 11

General Instructions . . . . . . . . . 2 Schedule C . . . . . . . . . . . . . . 12

Purpose of Form . . . . . . . . . . . 2 Schedule J . . . . . . . . . . . . . . 13Who Must File . . . . . . . . . . . . 2 Schedule K . . . . . . . . . . . . . . 15When To File . . . . . . . . . . . . . 2 Schedule L . . . . . . . . . . . . . . 16Where To File . . . . . . . . . . . . 3 Schedule M-1 . . . . . . . . . . . . . 16Who Must Sign . . . . . . . . . . . . 3 Codes for Principal Business Activity . . 17Accounting Methods . . . . . . . . . . 3 Index . . . . . . . . . . . . . . . . . 18Accounting Periods . . . . . . . . . . 3

Rounding Off to Whole Dollars . . . . . 3

Recordkeeping . . . . . . . . . . . . 3

Depository Method of Tax Payment . . . 3

Estimated Tax Payments . . . . . . . 4

Interest and Penalties . . . . . . . . . 4

Other Forms, Returns, and Statements ThatMay Be Required . . . . . . . . . . 4

Consolidated Return . . . . . . . . . . 5Farm Return . . . . . . . . . . . . . 5

Amended Return . . . . . . . . . . . 5

Statements . . . . . . . . . . . . . . 5

Attachments . . . . . . . . . . . . . 5

Specific Instructions . . . . . . . . . 5

Period Covered . . . . . . . . . . . . 5

Name, Address, and EIN . . . . . . . 5

Personal Service Corporation . . . . . 6

Total Assets . . . . . . . . . . . . . 6

Initial Return, Final Return, or Change ofAddress . . . . . . . . . . . . . . 6

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The Health Insurance and Portability Act of1996 changed the rules for deducting intereston loans for company-owned life insurance.Generally, no deduction is allowed for interestpaid or accrued after October 13, 1995, on anyamount of debt incurred with respect tocompany-owned life insurance policies,annuities, or endowment contracts that covercorporate officers or employees (or any personwho has a financial interest in the corporation).Exceptions and phase-in rules apply. See Actsection 501.

Unresolved Tax ProblemsThe Problem Resolution Program is forcorporations that have been unable to resolvetheir problems with the IRS. If the corporationhas a tax problem it cannot clear up throughnormal channels, write to the corporation'slocal IRS District Director or call thecorporation's local IRS office and ask forProblem Resolution assistance. Persons whohave access to TTY/TDD equipment may call18008294059 to ask for help from ProblemResolution. This office cannot change the lawor technical decisions. But it can help thecorporation clear up problems that resultedfrom previous contacts.

How To Make a Contribution

To Reduce the Public DebtTo make a contribution to reduce the publicdebt, send a check made payable to Bureauof the Public Debt to Bureau of the PublicDebt, Department G, Washington, DC202390601. Or, enclose a check with theincome tax return. Contributions to reduce thepublic debt are deductible subject to the rulesand limitations for charitable contributions.

How To Get Forms andPublicationsBy personal computer. If you subscribe toan on-line service, ask if IRS information isavailable and, if so, how to access it. Taxforms, instructions, publications, and other IRSinformation are available through the InternalRevenue Information Service (IRIS), onFedWorld, a government bulletin board. TheIRIS menus offer information on available fileformats and software needed to read and printfiles. You must print the forms to use them; theforms are not designed to be filled outon-screen.

IRIS is directly accessible by modem at7033218020. On the Internet, telnet toiris.irs.ustreas.gov or, for file transfer protocolservices, connect to ftp.irs.ustreas.gov. If youare using the World Wide Web, connect tohttp://www.irs.ustreas.gov. FedWorld's helpdesk offers technical assistance on accessingIRIS (not tax help) during regular businesshours at 7034874608.

Tax forms, instructions, and publications arealso available on CD-ROM, including prior-year

forms starting with the 1991 tax year. Forordering information and softwarerequirements, contact the Government PrintingOffice's Superintendent of Documents(2025121800) or Federal Bulletin Board(2025121387).By phone and in person. To order formsand publications, call 1800TAXFORM(18008293676). You can also get mostforms and publications at your local IRS office.

General Instructions

Purpose of FormUse Form 1120, U.S. Corporation Income TaxReturn, and Form 1120-A, U.S. CorporationShort-Form Income Tax Return, to report theincome, gains, losses, deductions, credits, andto figure the income tax liability of acorporation. Also see Pub. 542, Corporations,for more information.

Who Must FileUnless exempt under section 501, all domesticcorporations (including corporations inbankruptcy) must file whether or not they havetaxable income. Domestic corporations mustfile Form 1120, or, if they qualify, Form 1120-A,unless they are required to file a special return(see Special Returns for CertainOrganizations below).Note: If an organization resembles acorporation more than it resembles apartnership or trust, it will be considered anassociation taxed as a corporation.Limited liability companies. If an entity wasformed as a limited liability company understate law and is treated as a partnership forFederal income tax purposes, it should not fileForm 1120 or 1120-A. Instead, it should file

Form 1065, U.S. Partnership Return ofIncome. For the definition of a limited liabilitycompany, see the Instructions for Form 1065.

Who May File Form 1120-AA corporation may file Form 1120-A if it meetsall of the following requirements:q Its gross receipts (line 1a, page 1) are under$500,000.q Its total income (line 11, page 1) is under$500,000.q Its total assets (line 12, column (b), Part III,on page 2) are under $500,000.q It does not have any ownership in a foreigncorporation.q It does not have foreign shareholders whoown, directly or indirectly, 50% or more of its

stock.q It is not a member of a controlled group ofcorporations (sections 1561 and 1563).q It is not a personal holding company(sections 541 through 547).q It is not a consolidated corporate return filer.q It is not a corporation undergoing adissolution or liquidation.q It is not filing its final tax return.q Its only dividend income (none of whichrepresents debt-financed securities) is fromdomestic corporations, and those dividendsqualify for the 70% deduction.q It has no nonrefundable tax credits otherthan the general business credit and the creditfor prior year minimum tax.q It has no liability for interest under section

453(l)(3) or 453A(c) (relating to certaininstallment sales) or installment payments oftax under section 1363(d).q It has no liability for interest due under thelook-back method of section 460(b)(2).q It is not required to file Form 8621, Returnby a Shareholder of a Passive ForeignInvestment Company or Qualified ElectingFund.q It has no liability for tax under section 7518on a nonqualified withdrawal from a capitalconstruction fund.

q It is not making an election under section172(b)(3) to forego the carryback period of anNOL.q It is not electing to pay tax on the gain fromthe sale of an intangible as described in section197(f)(9)(B)(ii).q It is not required to file one of the special taxreturns listed below.

Special Returns for CertainOrganizationsCertain organizations, as shown below, haveto file special returns.

When To FileGenerally, a corporation must file its income taxreturn by the 15th day of the 3rd month afterthe end of the tax year. A new corporation filing

a short-period return must generally file by the15th day of the 3rd month after the short periodends. A corporation that has dissolved mustgenerally file by the 15th day of the 3rd monthafter the date it dissolved.

If the due date falls on a Saturday, Sunday,or legal holiday, the corporation may file on thenext business day.Extension. File Form 7004, Application forAutomatic Extension of Time To FileCorporation Income Tax Return, to request a6-month extension of time to file.

If the organization is a File Form

Farmers' cooperative (sec. 1381) 990-C

Exempt organization with unrelatedtrade or business income

990-T

Entity formed as a limited liabilitycompany under state law and treatedas a partnership for Federal incometax purposes

1065

Religious or apostolic organizationexempt under section 501(d)

1065

Entity that elects to be treated as areal estate mortgage investmentconduit (REMIC) under sec. 860D

1066

Settlement fund (sec. 468B) 1120-SF

Interest charge domestic internationalsales corporation (sec. 992)

1120-IC-DISC

Foreign corporation (other than lifeand property and casualty insurancecompany filing Form 1120-L or Form1120-PC)

1120F

Foreign sales corporation (sec. 922) 1120-FSC

Condominium managementassociation or residential real estatemanagement association that electsto be treated as a homeownersassociation under sec. 528

1120-H

Life insurance company (sec. 801) 1120-L

Fund set up to pay for nuclear

decommissioning costs (sec. 468A)

1120-ND

Property and casualty insurancecompany (sec. 831)

1120-PC

Political organization (sec. 527) 1120-POL

Real estate investment trust (sec.856)

1120-REIT

Regulated investment company (sec.851)

1120-RIC

S corporation (sec. 1361) 1120S

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Where To FileFile your return at the applicable IRS address

listed below.

Corporations with their principal place ofbusiness outside the United States or claiminga possessions tax credit (sections 936 and30A) must file with the Internal RevenueService Center, Philadelphia, PA 192550012.

A group of corporations located in severalservice center regions will often keep all thebooks and records at the principal office of themanaging corporation. In this case, the incometax returns of the corporations may be filed withthe service center for the region in which theprincipal office is located.

Who Must SignThe return must be signed and dated by thepresident, vice president, treasurer, assistanttreasurer, chief accounting officer, or any othercorporate officer (such as tax officer)authorized to sign. Receivers, trustees, orassignees must also sign and date any returnfiled on behalf of a corporation.

If a corporate officer completes Form 1120or Form 1120-A, the Paid Preparer's spaceshould remain blank. Anyone who preparesForm 1120 or Form 1120-A but does not

charge the corporation should not sign thereturn. Generally, anyone who is paid toprepare the return must sign it and fill in thePaid Preparer's Use Only area.

The paid preparer must complete therequired preparer information andq Sign the return, by hand, in the spaceprovided for the preparer's signature (signaturestamps and labels are not acceptable).q Give a copy of the return to the taxpayer.

Accounting MethodsAn accounting method is a set of rules used todetermine when and how income andexpenses are reported.

Figure taxable income using the method ofaccounting regularly used in keeping thecorporation's books and records. Generally,permissible methods include the cash, accrual,or any other method authorized by the InternalRevenue Code. In all cases, the method usedmust clearly show taxable income.

Generally, a corporation (other than aqualified personal service corporation) mustuse the accrual method of accounting if itsaverage annual gross receipts exceed $5million. See section 448(c). A corporationengaged in farming operations must also usethe accrual method. For exceptions, seesection 447.

Under the accrual method, an amount isincludible in income when all the events haveoccurred that fix the right to receive the incomeand the amount can be determined withreasonable accuracy. See Regulations section1.451-1(a) for details.

Generally, an accrual basis taxpayer candeduct accrued expenses in the tax year inwhich (1) all events that determine the liabilityhave occurred, (2) the amount of the liabilitycan be figured with reasonable accuracy, and(3) economic performance takes place withrespect to the expense. There are exceptionsto the economic performance rule for certainitems, including recurring expenses. Seesection 461(h) and the related regulations forthe rules for determining when economicperformance takes place.

Long-term contracts (except for certain realproperty construction contracts) must generallybe accounted for using the percentage ofcompletion method described in section 460.See section 460 for general rules on long-termcontracts.Mark-to-market accounting method fordealers in securities. Dealers in securitiesmust use the mark-to-market accountingmethod described in section 475. Under thismethod, any security that is inventory to thedealer must be included in inventory at its fairmarket value. Any security held by a dealerthat is not inventory and that is held at theclose of the tax year is treated as sold at its fairmarket value on the last business day of thetax year. Any gain or loss must be taken intoaccount in determining gross income. The gainor loss taken into account is generally treated

as ordinary gain or loss. For details, includingexceptions, see section 475, the relatedtemporary regulations, and Rev. Rul. 94-7,1994-1 C.B. 151.Change in accounting method. Generally,the corporation may change the method ofaccounting used to report taxable income (forincome as a whole or for any material item)only by getting consent on Form 3115,Application for Change in Accounting Method.For more information, get Pub. 538,Accounting Periods and Methods.

Accounting PeriodsA corporation must figure its taxable incomeon the basis of a tax year. The tax year is theannual accounting period the corporation usesto keep its records and report its income andexpenses. Generally, corporations can use acalendar year or a fiscal year. Personal servicecorporations, however, must generally use acalendar year (see the instructions for Item Aon page 6 for exceptions).

If the calendar year is adopted as the annualaccounting period, the corporation mustmaintain its books and records and report its

income and expenses for the period fromJanuary 1 through December 31 of each year.A fiscal year is 12 consecutive months endingon the last day of any month except December.A 5253 week year is a fiscal year that variesfrom 52 to 53 weeks.

A corporation adopts a tax year when it filesits first income tax return. It must adopt a taxyear by the due date (not including extensions)of its first income tax return.

For more information, see TemporaryRegulations section 1.441-2T and Pub. 538,Accounting Periods and Methods.Change in accounting period. Generally,a corporation must get the consent of the IRSbefore changing its tax year by filing Form1128, Application To Adopt, Change, or Retaina Tax Year. However, under certain conditions,a corporation (other than a personal servicecorporation) may change its tax year withoutgetting the consent. See Regulations section1.442-1 and Pub. 538.

Rounding Off to WholeDollarsThe corporation may show amounts on thereturn and accompanying schedules as wholedollars. To do so, drop amounts less than 50cents and increase amounts from 50 centsthrough 99 cents to the next higher dollar.

RecordkeepingKeep the corporation's records for as long asthey may be needed for the administration ofany provision of the Internal Revenue Code.Usually, records that support an item ofincome, deduction, or credit on the return mustbe kept for 3 years from the date the return isdue or filed, whichever is later. Keep recordsthat verify the corporation's basis in property foras long as they are needed to figure the basisof the original or replacement property.

The corporation should keep copies of allfiled returns. They help in preparing futurereturns and amended returns.

Depository Method of TaxPaymentThe corporation must pay the tax due in full nolater than the 15th day of the 3rd month after

the end of the tax year. Some corporations(described below), are required to electronicallydeposit all depository taxes, includingcorporation income tax payments.Electronic deposit requirement. If thecorporation's total deposits of social security,Medicare, and withheld income taxes weremore than $50,000 in 1995, it must makeelectronic deposits for all depository taxliabilities that occur after June 30, 1997. If thecorporation was required to deposit byelectronic funds transfer in prior years, continueto do so in 1997. The Electronic Federal TaxPayment System (EFTPS) must be used tomake electronic deposits. If the corporation is

If the corporation'sprincipal business,office, or agency is

located in

Use the followingInternal Revenue

Service Center address

Alaska, Arizona, California(counties of Alpine, Amador,Butte, Calaveras, Colusa,Contra Costa, Del Norte, El

Dorado, Glenn, Humboldt,Lake, Lassen, Marin,Mendocino, Modoc, Napa,Nevada, Placer, Plumas,Sacramento, San Joaquin,Shasta, Sierra, Siskiyou,Solano, Sonoma, Sutter,Tehama, Trinity, Yolo, andYuba), Colorado, Idaho,Montana, Nebraska, Nevada,North Dakota, Oregon, SouthDakota, Utah, Washington,Wyoming

Ogden, UT842010012

California (all other counties),Hawaii

Fresno, CA938880012

New Jersey, New York (NewYork City and counties ofNassau, Rockland, Suffolk,and Westchester)

Holtsville, NY005010012

New York (all othercounties), Connecticut,Maine, Massachusetts, NewHampshire, Rhode Island,Vermont

Andover, MA055010012

Florida, Georgia, SouthCarolina

Atlanta, GA399010012

Indiana, Kentucky, Michigan,Ohio, West Virginia

Cincinnati, OH459990012

Kansas, New Mexico,Oklahoma, Texas

Austin, TX733010012

Illinois, Iowa, Minnesota,Missouri, Wisconsin

Kansas City, MO649990012

Alabama, Arkansas,Louisiana, Mississippi, NorthCarolina, Tennessee

Memphis, TN375010012

Delaware, District ofColumbia, Maryland,Pennsylvania, Virginia

Philadelphia, PA192550012

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required to make deposits by electronic fundstransfer and fails to do so, it may be subject toa 10% penalty. Corporations that are notrequired to make electronic deposits mayvoluntarily participate in EFTPS. Forinformation on EFTPS, call 18009458400or 18005554477. (These numbers are forEFTPS information only.)Form 8109, Federal Tax Deposit Coupon.If the corporation does not use EFTPS, depositcorporation income tax payments (andestimated tax payments) with Form 8109. Donot send deposits directly to an IRS office. Mailor deliver the completed Form 8109 with the

payment to a qualified depositary for Federaltaxes or to the Federal Reserve bank (FRB)servicing the corporation's geographic area.Make checks or money orders payable to thatdepositary or FRB. To help ensure propercrediting, write the corporation's EIN, the taxperiod to which the deposit applies, and Form1120 on the check or money order. Be sure todarken the 1120 box on the coupon. Recordsof these deposits will be sent to the IRS.

A penalty may be imposed if the depositsare mailed or delivered to an IRS office ratherthan to an authorized depositary or FRB. Formore information on deposits, see theinstructions in the coupon booklet (Form 8109)and Pub. 583, Starting a Business andKeeping Records.

Caution: If the corporation owes tax when it

files Form 1120 or Form 1120-A, do not includethe payment with the tax return. Instead, mailor deliver the payment with Form 8109 to aqualified depositary or FRB, or use EFTPS, ifapplicable.

Estimated Tax PaymentsGenerally, a corporation must make installmentpayments of estimated tax if it expects itsestimated tax (income tax minus credits) to be$500 or more. The installments are due by the15th day of the 4th, 6th, 9th, and 12th monthsof the tax year. If any date falls on a Saturday,Sunday, or legal holiday, the installment is dueon the next regular business day. Use Form1120-W, Estimated Tax for Corporations, as aworksheet to compute estimated tax. Use the

deposit coupons (Forms 8109) to makedeposits of estimated tax. For more informationon estimated tax payments, including penaltiesthat apply if the corporation fails to makerequired payments, see the instructions for line33 on page 11.Overpaid estimated tax. If the corporationoverpaid estimated tax, it may be able to get aquick refund by filing Form 4466, CorporationApplication for Quick Refund of Overpaymentof Estimated Tax. The overpayment must beat least 10% of the corporation's expectedincome tax liability and at least $500. To applyfor a quick refund, file Form 4466 before the16th day of the 3rd month after the end of thetax year, but before the corporation files itsincome tax return. Do not file Form 4466 beforethe end of the corporation's tax year.

Interest and PenaltiesInterest. Interest is charged on taxes paidlate even if an extension of time to file isgranted. Interest is also charged on penaltiesimposed for failure to file, negligence, fraud,gross valuation overstatements, andsubstantial understatements of tax from thedue date (including extensions) to the date ofpayment. The interest charge is figured at arate determined under section 6621.Penalty for late filing of return. Acorporation that does not file its tax return bythe due date, including extensions, may be

penalized 5% of the unpaid tax for each monthor part of a month the return is late, up to amaximum of 25% of the unpaid tax. Theminimum penalty for a return that is over 60days late is the smaller of the tax due or $100.The penalty will not be imposed if thecorporation can show that the failure to file ontime was due to reasonable cause.Corporations that file late must attach astatement explaining the reasonable cause.Penalty for late payment of tax. Acorporation that does not pay the tax when duemay be penalized 1/2 of 1% of the unpaid tax foreach month or part of a month the tax is not

paid, up to a maximum of 25% of the unpaidtax. The penalty will not be imposed if thecorporation can show that the failure to pay ontime was due to reasonable cause.Trust fund recovery penalty. This penaltymay apply if certain excise, income, socialsecurity, and Medicare taxes that must becollected or withheld are not collected orwithheld, or these taxes are not paid to the IRS.These taxes are generally reported on Forms720, 941, 943, or 945 (see Other Forms,Returns, and Statements That May BeRequired, below). The trust fund recoverypenalty may be imposed on all persons whoare determined by the IRS to have beenresponsible for collecting, accounting for, andpaying over these taxes, and who acted willfullyin not doing so. The penalty is equal to the

unpaid trust fund tax. See the instructions forForm 720, Pub. 15 (Circular E), Employer'sTax Guide, or Pub. 51 (Circular A), AgriculturalEmployer's Tax Guide, for details, including thedefinition of responsible persons.Other penalties. Other penalties can beimposed for negligence, substantialunderstatement of tax, and fraud. See sections6662 and 6663.

Other Forms, Returns, andStatements That May BeRequired

FormsThe corporation may have to file some of the

following forms. See the form for moreinformation.Form W-2, Wage and Tax Statement, andForm W-3, Transmittal of Wage and TaxStatements.Form 720, Quarterly Federal Excise TaxReturn. Use Form 720 to report the luxury taxon passenger vehicles, environmental excisetaxes, communications and air transportationtaxes, fuel taxes, manufacturers taxes, shippassenger tax, and certain other excise taxes.Also see Trust fund recovery penalty above.Form 926, Return by a U.S. Transferor ofProperty to a Foreign Corporation, ForeignEstate or Trust, or Foreign Partnership. Usethis form to report transfers of property to aforeign corporation, foreign estate or trust, orforeign partnership, to pay any excise tax due

under section 1491, and to report informationrequired under section 6038B. For details, seeForm 926.Form 940 or Form 940-EZ, Employer's AnnualFederal Unemployment (FUTA) Tax Return.The corporation may be liable for FUTA tax andmay have to file Form 940 or 940-EZ if it paidwages of $1,500 or more in any calendarquarter during the calendar year (or thepreceding calendar year) or one or moreemployees worked for the corporation for somepart of a day in any 20 different weeks duringthe calendar year (or the preceding calendaryear).

Form 941, Employer's Quarterly Federal TaxReturn. Employers must file this form quarterlyto report payroll income tax withheld andemployer and employee social security andMedicare taxes. Agricultural employers mustfile Form 943, Employer's Annual Tax Returnfor Agricultural Employees, instead of Form941. Also see Trust fund recovery penaltyabove.Form 945, Annual Return of Withheld FederalIncome Tax. File Form 945 to report income taxwithholding from nonpayroll distributions orpayments, such as pensions, annuities, IRAs,military retirement, gambling winnings, Indian

gaming profits, and backup withholding. Alsosee Trust fund recovery penalty above.Form 952, Consent To Extend Period ofLimitation on Assessment of Income Taxes, isused to extend the period of assessment of allincome taxes of the receiving corporation onthe complete liquidation of a subsidiary undersection 332. File Form 952 if the liquidation willbe completed within the 3-year period followingthe end of the subsidiary's tax year in which thefirst distribution was made.Form 966, Corporate Dissolution orLiquidation.Form 1042, Annual Withholding Tax Return forU.S. Source Income of Foreign Persons, andForm 1042-S, Foreign Person's U.S. SourceIncome Subject to Withholding. Use theseforms to report and send withheld tax oncertain payments or distributions made tononresident alien individuals, foreignpartnerships, or foreign corporations. For moreinformation, see sections 1441 and 1442, andPub. 515, Withholding of Tax on NonresidentAliens and Foreign Corporations.Form 1096, Annual Summary and Transmittalof U.S. Information Returns.Form 1098, Mortgage Interest Statement. Thisform is used to report the receipt from anyindividual of $600 or more of mortgage interestand points in the course of the corporation'strade or business for any calendar year.Forms 1099-A, B, C, DIV, INT, MISC, OID,PATR, R, and S. Use these information returnsto report abandonments; acquisitions throughforeclosure; proceeds from broker and barterexchange transactions; discharges ofindebtedness; certain dividends anddistributions; interest payments; payments forcertain fishing boat crew members; medicaland dental health care payments; direct salesof consumer goods for resale; miscellaneousincome payments and nonemployeecompensation; original issue discount;patronage dividends; distributions fromprofit-sharing plans, retirement plans, individualretirement arrangements, insurance contracts,etc.; and proceeds from real estatetransactions. Also use these returns to reportamounts received as a nominee for anotherperson.

For more information, see the Instructionsfor Forms 1099, 1098, 5498, and W-2G.Note: Every corporation must file Form1099-MISC if, in the course of its trade orbusiness, it makes payments of rents,commissions, or other fixed or determinableincome (see section 6041) totaling $600 ormore to any one person during the calendaryear.Form 2553, Election by a Small BusinessCorporation. Corporations use this form to electto be an S corporation.Form 5452, Corporate Report of NondividendDistributions.Form 5471, Information Return of U.S.Persons With Respect to Certain ForeignCorporations. The corporation may have to fileForm 5471 if any of the following applies:q It controls a foreign corporation.

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q It acquires, disposes of, or owns 5% or morein value of the outstanding stock of a foreigncorporation.q It owns stock in a corporation that is acontrolled foreign corporation for anuninterrupted period of 30 days or more duringany tax year of the foreign corporation, and itowned that stock on the last day of that year.Form 5472, Information Return of a 25%Foreign-Owned U.S. Corporation or a ForeignCorporation Engaged in a U.S. Trade orBusiness. A domestic corporation that is 25%or more foreign-owned may have to file thisform. See the instructions for question 10 onpage 16.Form 5498, Individual Retirement ArrangementInformation. Use this form to reportcontributions (including rollover contributions)to an individual retirement arrangement (IRA)and the value of an IRA or simplified employeepension (SEP) account.Form 5713, International Boycott Report.Corporations that have operations in, or relatedto, a boycotting country, company, or nationalof a country, must file Form 5713 to reportthose operations and to figure the loss ofcertain tax benefits.Form 8264, Application for Registration of aTax Shelter. Tax shelter organizers arerequired to file Form 8264 to get a tax shelterregistration number from the IRS.

Form 8271, Investor Reporting of Tax ShelterRegistration Number. Taxpayers who haveacquired an interest in a tax shelter that isrequired to be registered use this form to reportthe tax shelter's registration number. Form8271 must be attached to any tax return(including an application for tentative refund(Form 1139) and an amended return (Form1120X)) on which a deduction, credit, loss, orother tax benefit attributable to a tax shelter istaken or any income attributable to a tax shelteris reported.Form 8275, Disclosure Statement. Taxpayersand income tax return preparers file Form 8275to disclose items or positions (except thosecontrary to a regulationsee Form 8275-Rbelow) that are not otherwise adequatelydisclosed on a tax return. The disclosure ismade to avoid parts of the accuracy-relatedpenalty imposed for disregard of rules orsubstantial understatement of tax. Form 8275is also used for disclosures relating to preparerpenalties for understatements due to unrealisticpositions or disregard of rules.Form 8275-R, Regulation DisclosureStatement, is used to disclose any item on atax return for which a position has been takenthat is contrary to Treasury regulations.Form 8281, Information Return for PubliclyOffered Original Issue Discount Instruments.Issuers of public offerings of debt instrumentsgenerally must file this form within 30 days ofthe issuance of the debt instrument.Form 8300, Report of Cash Payments Over$10,000 Received in a Trade or Business. Filethis form to report the receipt of more than

$10,000 in cash or foreign currency in onetransaction or in a series of relatedtransactions.Form 8594, Asset Acquisition Statement UnderSection 1060, must be filed by both thepurchaser and seller of a group of assetsconstituting a trade or business if section 197intangibles attach to such assets and if thepurchaser's basis in the assets is determinedonly by the amount paid for the assets.Form 8621, Return by a Shareholder of aPassive Foreign Investment Company orQualified Electing Fund. A corporation that wasa shareholder in a passive foreign investmentcompany (as defined in section 1296) at any

time during the tax year must complete andattach this form to its return.Form 8697, Interest Computation Under theLook-Back Method for Completed Long-TermContracts. Use this form to figure the interestdue or to be refunded under the look-backmethod of section 460(b)(2) on certainlong-term contracts accounted for under eitherthe percentage of completion-capitalized costmethod or the percentage of completionmethod.Form 8810, Corporate Passive Activity Lossand Credit Limitations. Closely heldcorporations and personal service corporationsthat are subject to the passive activitylimitations of section 469 use this form tocompute their allowable passive activity lossand credit.Form 8817, Allocation of Patronage andNonpatronage Income and Deductions.Taxable cooperatives with gross receipts of$10 million or more that have both patronageand nonpatronage source income anddeductions must complete and attach this formto the return.Form 8842, Election To Use DifferentAnnualization Periods for Corporate EstimatedTax. Corporations use Form 8842 for each yearthey want to elect one of the annualizationperiods in section 6655(e)(2)(C) for figuringestimated tax payments under the annualizedincome installment method.Form 8849, Claim for Refund of Excise Taxes.Use this form in the first three quarters of thetax year to claim a refund of excise taxes paidon Form 720, Form 730, or Form 2290. See theinstructions to Form 8849 and Pub. 378, FuelTax Credits and Refunds, for more information.

Consolidated ReturnThe parent corporation of an affiliated group ofcorporations must attach Form 851, AffiliationsSchedule, to the consolidated return. For thefirst year a consolidated return is filed, eachsubsidiary must attach Form 1122,Authorization and Consent of SubsidiaryCorporation to be Included in a ConsolidatedIncome Tax Return.

File supporting statements for each

corporation included in the consolidated return.Do not use Form 1120 as a supportingstatement. On the supporting statement, usecolumns to show the following, both before andafter adjustments:q Items of gross income and deductions.q A computation of taxable income.q Balance sheets as of the beginning and endof the tax year.q A reconciliation of income per books withincome per return.q A reconciliation of retained earnings.

Enter the totals for the consolidated groupon Form 1120. Attach consolidated balancesheets and a reconciliation of consolidatedretained earnings. For more information onconsolidated returns, see the regulations undersection 1502.

Farm ReturnDo not file Schedule F (Form 1040), Profit orLoss From Farming. Instead, enter income onlines 1a through 10, and read the relatedinstructions. Forms 1120 and 1120-A haveentry lines for many of the expenses deductedby farming corporations. Expenses not listedon the form should be entered on the line for"Other deductions." Attach a schedule, listingby type and amount, all deductions shown onthis line. Also, see the instructions for lines 12through 26, Form 1120 (lines 12 through 22,Form 1120-A).

Amended ReturnUse Form 1120X, Amended U.S. CorporationIncome Tax Return, to correct any error in apreviously filed Form 1120 or Form 1120-A.

StatementsStock ownership in foreign corporations.Attach the statement required by section 551(c)if (a) the corporation owned 5% or more invalue of the outstanding stock of a foreignpersonal holding company and (b) thecorporation was required to include in its grossincome any undistributed foreign personal

holding company income from a foreignpersonal holding company.Transfers to a corporation controlled by thetransferor. If a person receives stock of acorporation in exchange for property, and nogain or loss is recognized under section 351,the person (transferor) and the transferee musteach attach to their tax returns the informationrequired by Regulations section 1.351-3.Dual consolidated losses. If a domesticcorporation incurs a dual consolidated loss (asdefined in Regulations section 1.1503-2(c)(5)),the corporation (or consolidated group) mayneed to attach an elective relief agreementand/or an annual certification as provided inRegulations section 1.1503-2(g)(2).

AttachmentsAttach Form 4136, Credit for Federal Tax Paidon Fuels, after page 4, Form 1120, or page 2,Form 1120-A. Attach schedules in alphabeticalorder and other forms in numerical order afterForm 4136.

Complete every applicable entry space onForm 1120 or Form 1120-A. Do not write Seeattached instead of completing the entryspaces. If you need more space on the formsor schedules, attach separate sheets, using thesame size and format as the printed forms.Show the totals on the printed forms. Attachthese separate sheets after all the schedulesand forms. Be sure to put the corporation'sname and EIN on each sheet.

Specific InstructionsPeriod CoveredFile the 1996 return for calendar year 1996 andfiscal years that begin in 1996 and end in 1997.For a fiscal year, fill in the tax year space at thetop of the form.Note: The 1996 Form 1120 may also be usedif(1)the corporation has a tax year of less than12 months that begins and ends in 1997 and(2)the 1997 Form 1120 is not available at thetime the corporation is required to file its return.However, the corporation must show its 1997tax year on the 1996 Form 1120 andincorporate any tax law changes that areeffective for tax years beginning afterDecember 31, 1996.

Name, Address, andEmployer IdentificationNumber (EIN)Use the label on the postcard or package thatwas mailed to the corporation. Cross out anyerrors and print the correct information on thelabel. If the corporation doesn't have a label,print or type the corporation's true name (as setforth in the charter or other legal documentcreating it), address, and EIN on theappropriate lines.

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Address. Include the suite, room, or otherunit number after the street address. If apreaddressed label is used, include thisinformation on the label.

If the Post Office does not deliver mail to thestreet address and the corporation has a P.O.box, show the box number instead of the streetaddress.Note: If a change in address occurs after thereturn is filed, useForm 8822, Change ofAddress, to notify the IRS of the new address.Employer identification number (EIN).Show the correct EIN in item B on page 1 of

Form 1120 or Form 1120-A. If the corporationdoes not have an EIN, it should apply for oneon Form SS-4, Application for EmployerIdentification Number. Form SS-4 can beobtained at Social Security Administration(SSA) offices, or by calling1800TAXFORM. If the corporation has notreceived its EIN by the time the return is due,write Applied for in the space for the EIN. SeePub. 583 for details.

Item APersonal ServiceCorporationA personal service corporation is a corporationwhose principal activity for the testing period(defined below) for the tax year is theperformance of personal services. The services

must be substantially performed byemployee-owners. Employee-owners must ownmore than 10% of the fair market value of thecorporation's outstanding stock on the last dayof the testing period.Testing period. Generally, the testing periodfor a tax year is the prior tax year. The testingperiod for a new corporation starts with the firstday of its first tax year and ends on the earlierof:q The last day of its first tax year, orq The last day of the calendar year in whichthe first tax year began.Principal activity. The principal activity of acorporation is considered to be theperformance of personal services if, during thetesting period, the corporation's compensationcosts for the performance of personal services

(defined below), are more than 50% of its totalcompensation costs.Performance of personal services.Personal services are those performed in thehealth, law, engineering, architecture,accounting, actuarial science, performing arts,or consulting fields (as defined in TemporaryRegulations section 1.448-1T(e)). The termperformance of personal services includesany activity involving the performance ofpersonal services in these fields.Substantial performance byemployee-owners. Personal services aresubstantially performed by employee-owners if,for the testing period, more than 20% of thecorporation's compensation costs for theperformance of personal services are forservices performed by employee-owners.

Employee-owner. A person is considered tobe an employee-owner if the person is anemployee of the corporation on any day of thetesting period, and owns any outstanding stockof the corporation on any day of the testingperiod. Stock ownership is determined underthe attribution rules of section 318, except thatany is substituted for 50% in section318(a)(2)(C).Accounting period. A personal servicecorporation must use a calendar tax yearunless:q It can establish a business purpose for adifferent tax year (see Rev. Proc. 87-32,

1987-2 C.B. 396, and Rev. Rul. 87-57, 1987-2C.B. 117), orq It elects under section 444 to have a tax yearother than a calendar year. To make theelection, get Form 8716, Election To Have aTax Year Other Than a Required Tax Year.

Personal service corporations that want tochange their tax year must also file Form 1128.

If a corporation makes the section 444election, its deduction for certain amounts paidto employee-owners may be limited. GetSchedule H (Form 1120), Section 280HLimitations for a Personal Service Corporation(PSC), to figure the maximum deduction.

If a section 444 election is terminated andthe termination results in a short tax year, typeor print at the top of the first page of Form 1120or 1120-A for the short tax year SECTION 444ELECTION TERMINATED. See TemporaryRegulations section 1.444-1T(a)(5) for moreinformation.

For more information about personal servicecorporations, see Temporary Regulationssection 1.441-4T.Other rules. For other rules that apply topersonal service corporations, see Passiveactivity limitations on page 7 andContributions of property other than cashon page 8.

Item DTotal AssetsEnter the corporation's total assets (asdetermined by the accounting method regularlyused in keeping the corporation's books andrecords) at the end of the tax year. If there areno assets at the end of the tax year, enter thetotal assets as of the beginning of the tax year.

Item EInitial Return, FinalReturn, or Change ofAddressIf this is the corporation's first return, check theInitial return box. If the corporation ceases toexist, file Form 1120 and check the Finalreturn box. Do not file Form 1120-A.

If the corporation has changed its addresssince it last filed a return, check the box forChange of address.

IncomeNote: Generally, income from all sources,whether U.S. or foreign, must be included.

Line 1

Gross Receipts

Enter gross receipts or sales from all businessoperations except those that must be reportedon lines 4 through 10. For reporting advancepayments, see Regulations section 1.451-5. Toreport income from long-term contracts, seesection 460.Installment sales. Generally, the installment

method cannot be used for dealer dispositionsof property. A dealer dispositon means anydisposition of personal property by a personwho regularly sells or otherwise disposes ofproperty of the same type on the installmentplan. The disposition of property used orproduced in the farming business is notincluded as a dealer disposition. See section453(l) for details and exceptions.

Enter on line 1 (and carry to line 3), thegross profit on collections from installmentsales for any of the following:q Dealer dispositions of property before March1, 1986.

q Dispositions of property used or produced inthe trade or business of farming.q Certain dispositions of timeshares andresidential lots reported under the installmentmethod.

Attach a schedule showing the followinginformation for the current and the 3 precedingyears: (a) gross sales, (b) cost of goods sold,(c) gross profits, (d) percentage of gross profitsto gross sales, (e) amount collected, and (f)gross profit on the amount collected.

For sales of timeshares and residential lotsreported under the installment method, thecorporation's income tax is increased by theinterest payable under section 453(l)(3). Toreport this addition to the tax, see theinstructions for line 10, Schedule J, Form 1120.

Accrual method taxpayers need not accruecertain amounts to be received from theperformance of services that, on the basis oftheir experience, will not be collected (section448(d)(5)). This provision does not apply to anyamount if interest is required to be paid on theamount or if there is any penalty for failure totimely pay the amount. Corporations that fallunder this provision should attach a scheduleshowing total gross receipts, the amount notaccrued as a result of the application of section448(d)(5), and the net amount accrued. Enterthe net amount on line 1a. For moreinformation and guidelines on this non-accrualexperience method, see Temporary

Regulations section 1.448-2T.

Line 2

Cost of Goods Sold

Enter the cost of goods sold on line 2, page 1.Before making this entry, a Form 1120 filermust complete Schedule A on page 2 of Form1120. Form 1120-A filers may use theworksheet on page 11 to figure the amount toenter on line 2. All filers should see theinstructions for Schedule A and the worksheet.

Line 4

Dividends

Form 1120 filers. See the instructions for

Schedule C. Then, complete Schedule C andenter on line 4 the amount from Schedule C,line 19.Form 1120-A filers. Enter the total dividendsreceived (that are not from debt-financed stock)from domestic corporations that qualify for the70% dividends-received deduction.

Line 5

Interest

Enter taxable interest on U.S. obligations andon loans, notes, mortgages, bonds, bankdeposits, corporate bonds, tax refunds, etc.

Do not offset interest expense againstinterest income.

Special rules apply to interest income fromcertain below-market-rate loans. See section7872 for more information.

Line 6

Gross Rents

Enter the gross amount received for the rentof property. Deduct expenses such as repairs,interest, taxes, and depreciation on the properlines for deductions. A rental activity held by aclosely held corporation or a personal servicecorporation may be subject to the passiveactivity loss rules. See Form 8810 and itsinstructions.

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Line 8

Capital Gain Net Income

Every sale or exchange of a capital asset mustbe reported in detail on Schedule D (Form1120), Capital Gains and Losses, even thoughno gain or loss is indicated.

Line 9

Net Gain or (Loss)

Enter the net gain or (loss) from line 20, Partll, Form 4797, Sales of Business Property.

Line 10

Other Income

Enter any other taxable income not reportedon lines 1 through 9. List the type and amountof income on an attached schedule. If thecorporation has only one item of other income,describe it in parentheses on line 10. Examplesof other income to report on line 10 are:q Any adjustment under section 481(a)required to be included in income during thecurrent tax year due to a change in a methodof accounting.q Recoveries of bad debts deducted in prioryears under the specific charge-off method.q The amount of credit for alcohol used as fuel

(determined without regard to the limitationbased on tax) entered on Form 6478, Credit forAlcohol Used as Fuel.q Refunds of taxes deducted in prior years tothe extent they reduced income subject to taxin the year deducted (see section 111). Do notoffset current year taxes against tax refunds.q The amount of any deduction previouslytaken under section 179A that is subject torecapture. The corporation must recapture thebenefit of any allowable deduction forclean-fuel vehicle property (or clean-fuelvehicle refueling property), if the property laterceases to qualify. See Regulations section1.179A-1 for details.q Ordinary income from trade or businessactivities of a partnership (from Schedule K-1(Form 1065), line 1).

Deductions

Limitations on DeductionsSection 263A uniform capitalization rules.These rules require corporations to capitalizeor include in inventory certain costs incurred inconnection with the production of real andtangible personal property held in inventory orheld for sale in the ordinary course of business.Tangible personal property produced by acorporation includes a film, sound recording,videotape, book, or similar property. The rulesalso apply to personal property (tangible andintangible) acquired for resale. Corporationssubject to the rules are required to capitalizenot only direct costs but an allocable portion

of most indirect costs (including taxes) thatrelate to the assets produced or acquired forresale. Interest expense paid or incurred duringthe production period of certain property mustbe capitalized and is governed by special rules.For more information, see Regulations sections1.263A-8 through 1.263A-15. The uniformcapitalization rules also apply to the productionof property constructed or improved by ataxpayer for use in its trade or business or inan activity engaged in for profit.

Section 263A does not apply to personalproperty acquired for resale if the taxpayer'sannual average gross receipts for the 3 priortax years are $10 million or less. It does notapply to timber or to most property produced

under a long-term contract. Special rules applyfor farmers. The rules do not apply to propertythat is produced for use by the corporation ifsubstantial construction occurred before March1, 1986.

In the case of inventory, some of the indirectcosts that must be capitalized areadministration expenses; taxes; depreciation;insurance; compensation paid to officersattributable to services; rework labor; andcontributions to pension, stock bonus, andcertain profit-sharing, annuity, or deferredcompensation plans.

The costs that must be capitalized undersection 263A are not deductible until theproperty to which the costs relate is sold, used,or otherwise disposed of by the corporation.

Current deductions may still be claimed forreasonable research and experimental costsunder section 174, intangible drilling costs foroil and gas and geothermal property, andmining and exploration and development costs.Regulations section 1.263A-1(e)(3) specifiesother indirect costs that may be currentlydeducted and those that must be capitalizedwith respect to production or resale activities.For more information, see Regulations sections1.263A-1 through 1.263A-3.Transactions between related taxpayers.Generally, an accrual basis taxpayer may onlydeduct business expenses and interest owedto a related party in the year the payment is

included in the income of the related party. Seesections 163(e)(3), 163(j), and 267 forlimitations on deductions for unpaid interestand expenses.Section 291 limitations. Corporations maybe required to adjust deductions for depletionof iron ore and coal, intangible drilling andexploration and development costs, certaindeductions for financial institutions, and theamortizable basis of pollution control facilities.See section 291 to determine the amount ofadjustment. Also see section 43.Golden parachute payments. A portion ofthe payments made by a corporation to keypersonnel that exceeds their usualcompensation may not be deductible. Thisoccurs when the corporation has an agreement(golden parachute) with these key employees

to pay them these excessive amounts if controlof the corporation changes. See section 280G.Business startup expenses. Businessstartup expenses must be capitalized unlessan election is made to amortize them over aperiod of 60 months. See section 195.Passive activity limitations. Limitations onpassive activity losses and credits undersection 469 apply to personal servicecorporations as defined in TemporaryRegulations section 1.441-4T (see ItemAPersonal Service Corporation on page6) and closely held corporations.

For this purpose, a corporation is a closelyheld corporation if at any time during the lasthalf of the tax year more than 50% in value ofits outstanding stock is owned, directly orindirectly, by or for not more than fiveindividuals, and the corporation is not apersonal service corporation. Certainorganizations are treated as individuals forpurposes of this test. (See section 542(a)(2).)For rules of determining stock ownership, seesection 544 (as modified by section 465(a)(3)).

Generally, there are two kinds of passiveactivities: trade or business activities in whichthe corporation did not materially participate(see Temporary Regulations section1.469-1T(g)(3)) for the tax year, and rentalactivities regardless of its participation. Forexceptions, see Form 8810. An activity is atrade or business activity if the activity involvesthe conduct of a trade or business (i.e.,

deductions from the activity would be allowableunder section 162 if other limitations, such asthe passive loss rules, did not apply), or theactivity involves research and experimentalcosts that are deductible under section 174 (orwould be deductible if the corporation chose todeduct rather than capitalize them), and theactivity is not a rental activity.

Corporations subject to the passive activitylimitations must complete Form 8810 tocompute their allowable passive activity lossand credit. Before completing Form 8810, seeTemporary Regulations section 1.163-8T,which provides rules for allocating interest

expense among activities. If a passive activityis also subject to the earnings stripping rulesof section 163(j) or the at-risk rules of section465, those rules apply before the passive lossrules. For more information, see section 469,the related regulations, and Pub. 925, PassiveActivity and At-Risk Rules.Reducing certain expenses for whichcredits are allowable. For each credit listedbelow, the corporation must reduce theotherwise allowable deductions for expensesused to figure the credit by the amount of thecurrent year credit:1. The work opportunity credit.2. The research credit.3. The enhanced oil recovery credit.4. The disabled access credit.

5. The empowerment zone employmentcredit.6. The Indian employment credit.7. The employer credit for social security andMedicare taxes paid on certain employee tips.8. The orphan drug credit.

If the corporation has any of these credits,be sure to figure each current year creditbefore figuring the deduction for expenses onwhich the credit is based.

Line 12

Compensation of Officers

Enter deductible officers' compensation on line12. Form 1120 filers must complete ScheduleE if their total receipts (line 1a, plus lines 4through 10) are $500,000 or more. Do notinclude compensation deductible elsewhere onthe return, such as amounts included in costof goods sold, elective contributions to asection 401(k) cash or deferred arrangement,or amounts contributed under a salaryreduction SEP agreement or a SIMPLEretirement plan (savings incentive match plan).

Include only the deductible part of officers'compensation on Schedule E. (SeeDisallowance of deduction for employeecompensation in excess of $1 million,below.) Complete Schedule E, line 1, columns(a) through (f), for all officers. The corporationdetermines who is an officer under the laws ofthe state where incorporated.

If a consolidated return is filed, eachmember of an affiliated group must furnish thisinformation.Disallowance of deduction for employeecompensation in excess of $1 million.Publicly held corporations may not deductcompensation to a covered employee to theextent that the compensation exceeds $1million. Generally, a covered employee is:q The chief executive officer of the corporation(or an individual acting in that capacity) as ofthe end of the tax year, orq An employee whose total compensationmust be reported to shareholders under theSecurities Exchange Act of 1934 because theemployee is among the four highestcompensated officers for that tax year (otherthan the chief executive officer).

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For this purpose, compensation does notinclude the following:q Income from certain employee trusts, annuityplans, or pensions;q Any benefit paid to an employee that isexcluded from the employee's income.

The deduction limit does not apply to:q Commissions based on individualperformance;q Qualified performance-based compensation;and,q Income payable under a written, bindingcontract in effect on February 17, 1993.

The $1 million limit is reduced by amountsdisallowed as excess parachute paymentsunder section 280G.

For details, see section 162(m) andRegulations section 1.162-27.

Line 13

Salaries and Wages

Enter the amount of salaries and wages paidfor the tax year, less the amount of any workopportunity credit from Form 5884,empowerment zone employment credit fromForm 8844, and Indian employment credit fromForm 8845. See the instructions for theseforms for more information. Do not includesalaries and wages deductible elsewhere onthe return, such as amounts included in costof goods sold, elective contributions to asection 401(k) cash or deferred arrangement,or amounts contributed under a salaryreduction SEP agreement or a SIMPLEretirement plan (savings incentive match plan).Caution: If the corporation provided taxablefringe benefits to its employees, such aspersonal use of a car, do not deduct as wagesthe amount allocated for depreciation and otherexpenses claimed on lines 20 and 26, Form1120, or lines 20 and 22, Form 1120-A.

Line 14

Repairs and Maintenance

Enter the cost of incidental repairs andmaintenance not claimed elsewhere on the

return, such as labor and supplies, that do notadd to the value of the property or appreciablyprolong its life. New buildings, machinery, orpermanent improvements that increase thevalue of the property are not deductible. Theymust be depreciated or amortized.

Line 15

Bad Debts

Enter the total debts that became worthless inwhole or in part during the tax year. A smallbank or thrift institution using the reservemethod of section 585 should attach aschedule showing how it arrived at the currentyear's provision.Caution: A cash basis taxpayer may not claima bad debt deduction unless the amount was

previously included in income.

Line 16

Rents

If the corporation rented or leased a vehicle,enter the total annual rent or lease expensepaid or incurred during the year. Also completePart V of Form 4562, Depreciation andAmortization. If the corporation leased a vehiclefor a term of 30 days or more, the deduction forvehicle lease expense may have to be reducedby an amount called the inclusion amount.The corporation may have an inclusion amountif:

If the lease term began before January 1,1992, get Pub. 463, Travel, Entertainment, Gift,and Car Expenses, to find out if the corporationhas an inclusion amount. Also see Pub. 463 forinstructions on figuring the inclusion amount.

Line 17

Taxes and Licenses

Enter taxes paid or accrued during the tax year,but do not include the following:q Federal income taxes.q Foreign or U.S. possession income taxes ifa tax credit is claimed (however, see theInstructions for Form 5735 for special rules forpossession income taxes).q Taxes not imposed on the corporation.q Taxes, including state or local sales taxes,that are paid or incurred in connection with anacquisition or disposition of property (thesetaxes must be treated as a part of the cost ofthe acquired property or, in the case of adisposition, as a reduction in the amountrealized on the disposition).

q Taxes assessed against local benefits thatincrease the value of the property assessed(such as for paving, etc.).q Taxes deducted elsewhere on the return,such as those reflected in cost of goods sold.

See section 164(d) for apportionment oftaxes on real property between seller andpurchaser.

Line 18

Interest

If the proceeds of a loan were used for morethan one purpose (e.g., to purchase a portfolioinvestment and to acquire an interest in apassive activity), an interest allocation must bemade. See Temporary Regulations section1.163-8T for the interest allocation rules.

Do not include interest on indebtednessincurred or continued to purchase or carryobligations if the interest is wholly exempt fromincome tax. For exceptions, see section 265(b).

Mutual savings banks, building and loanassociations, and cooperative banks candeduct the amounts paid or credited to theaccounts of depositors as dividends, interest,or earnings. See section 591.

Generally, a cash basis taxpayer cannotdeduct prepaid interest allocable to yearsfollowing the current tax year. For example, acash basis calendar year taxpayer who in 1996prepaid interest allocable to any period after1996 can deduct only the amount allocable to1996.

Generally, the interest and carrying chargeson straddles cannot be deducted and must becapitalized. See section 263(g).

See section 163(e)(5) for special rules forthe disqualified portion of original issuediscount on a high yield discount obligation.

The deduction for certain interest paid oraccrued by the corporation may be limited if notax is imposed on that interest. See section163(j) for more information.

Do not deduct interest on debt allocable tothe production of qualified property. Interestthat is allocable to property produced by acorporation for its own use or for sale must becapitalized. A corporation must also capitalizeany interest on debt allocable to an asset usedto produce the above property. See section

The lease term began:

And the vehicle's fairmarket value on the first

day of the lease exceeded:

263A and Regulations section 1.263A-8through 1.263A-15 for definitions and moreinformation.

See section 7872 for special rules on thedeductibility of forgone interest on certainbelow-market-rate loans.

Line 19

Charitable Contributions

Enter contributions or gifts actually paid withinthe tax year to or for the use of charitable andgovernmental organizations described in

section 170(c) and any unused contributionscarried over from prior years.The total amount claimed may not be more

than 10% of taxable income (line 30, Form1120, or line 26, Form 1120-A) computedwithout regard to the following:q Any deduction for contributions,q The special deductions on line 29b, Form1120 (line 25b, Form 1120-A),q The deduction allowed under section 249,q Any net operating loss (NOL) carryback tothe tax year under section 172, andq Any capital loss carryback to the tax yearunder section 1212(a)(1).

Charitable contributions over the 10%limitation may not be deducted for the tax yearbut may be carried over to the next 5 tax years.

Special rules apply if the corporation has anNOL carryover to the tax year. In figuring thecharitable contributions deduction for the taxyear, the 10% limit is applied using the taxableincome after taking into account any deductionfor the NOL.

To figure the amount of any remaining NOLcarryover to later years, taxable income mustbe modified (see section 172(b)). To the extentthat contributions are used to reduce taxableincome for this purpose and increase an NOLcarryover, a contributions carryover is notallowed. See section 170(d)(2)(B).

Corporations on the accrual basis may electto deduct contributions paid by the 15th day ofthe 3rd month after the end of the tax year if thecontributions are authorized by the board ofdirectors during the tax year. Attach adeclaration to the return, signed by an officer,stating that the resolution authorizing thecontributions was adopted by the board ofdirectors during the tax year. Also attach acopy of the resolution.Substantiation requirements. Generally,no deduction is allowed for any contribution of$250 or more unless the corporation gets awritten acknowledgment from the doneeorganization that shows the amount of cashcontributed, describes any propertycontributed, and gives an estimate of the valueof any goods or services provided in return forthe contribution. The acknowledgment must beobtained by the due date (including extensions)of the corporation's return, or, if earlier, the datethe return is filed. Do not attach theacknowledgment to the tax return, but keep itwith the corporation's records. These rules

apply in addition to the filing requirements forForm 8283 described below.

For more information on substantiation andrecordkeeping requirements, see theregulations under section 170 and Pub. 526,Charitable Contributions.Contributions of property other thancash. If a corporation (other than a closelyheld or personal service corporation)contributes property other than cash and claimsover a $500 deduction for the property, it mustattach a schedule to the return describing thekind of property contributed and the methodused to determine its fair market value. Closelyheld corporations and personal service

After 12/31/94 ................................................ $15,500After 12/31/93 but before 1/1/95.................... $14,600After 12/31/92 but before 1/1/94.................... $14,300After 12/31/91 but before 1/1/93.................... $13,700

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corporations must complete Form 8283,Noncash Charitable Contributions, and attachit to their returns. All other corporationsgenerally must complete and attach Form 8283to their returns for contributions of propertyother than money if the total claimed deductionfor all property contributed was more than$5,000.

If the corporation made a qualifiedconservation contribution under section170(h), also include the fair market value of theunderlying property before and after thedonation, as well as the type of legal interestcontributed, and describe the conservation

purpose benefited by the donation. If acontribution carryover is included, show theamount and how it was determined.Special rule for contributions of certainproperty. For a charitable contribution ofproperty, the corporation must reduce thecontribution by the sum of:q The ordinary income, short-term capital gainthat would have resulted if the property weresold at its fair market value, andq For certain contributions, all of the long-termcapital gain that would have resulted if theproperty were sold at its fair market value.

The reduction for the long-term capital gainapplies to:q Contributions of tangible personal propertyfor use by an exempt organization for a

purpose or function unrelated to the basis forits exemption, andq Contributions of any property to or for theuse of certain private foundations, except forstock contributed after June 30, 1996, andbefore June 1, 1997, for which marketquotations are readily available (section170(e)(5)).

For more information, including special rulesfor contributions of inventory and other propertyto certain organizations, see section 170(e)(3)and Regulations section 1.170A-4.Charitable contributions of scientificproperty used for research. A corporation(other than a personal holding company or aservice organization) can receive a largerdeduction for contributing scientific propertyused for research to an institution of higher

education. For more details, see section170(e).Contributions to organizations conductinglobbying activities. Contributions made toan organization that conducts lobbyingactivities are not deductible if:q The lobbying activities relate to matters ofdirect financial interest to the donor's trade orbusiness, andq The principal purpose of the contribution wasto avoid Federal income tax by obtaining adeduction for activities that would have beennondeductible under the lobbying expenserules if conducted directly by the donor.

Line 20

Depreciation

Besides depreciation, include on line 20 thepart of the cost that the corporation elected toexpense under section 179 for certain tangibleproperty placed in service during tax year 1996or carried over from 1995. See Form 4562,Depreciation and Amortization, and itsinstructions.

Line 22 (Form 1120 Only)

Depletion

See sections 613 and 613A for percentagedepletion rates applicable to natural deposits.Also, see section 291 for the limitation on the

depletion deduction for iron ore and coal(including lignite).

Foreign intangible drilling costs and foreignexploration and development costs must eitherbe added to the corporation's basis for costdepletion purposes or be deducted ratably overa 10-year period. See sections 263(i), 616, and617 for details.

Attach Form T (Timber), Forest ActivitiesSchedules, if a deduction for depletion oftimber is taken.


Pension, Profit-Sharing, etc., PlansEnter the deduction for contributions toqualified pension, profit-sharing, or otherfunded deferred compensation plans.Employers who maintain such a plan generallymust file one of the forms listed below, even ifthe plan is not a qualified plan under theInternal Revenue Code. The filing requirementapplies even if the corporation does not claima deduction for the current tax year. There arepenalties for failure to file these forms on timeand for overstating the pension plan deduction.See sections 6652(e) and 6662(f).Form 5500. File this form for each plan with100 or more participants.Form 5500-C/R. File this form for each planwith fewer than 100 participants.

Form 5500-EZ. File this form for aone-participant plan. The term one-participantplan also means a plan that covers the ownerand his or her spouse, or a plan that coverspartners in a business partnership (or thepartners and their spouses).


Employee Benefit Programs

Enter contributions to employee benefitprograms not claimed elsewhere on the return(e.g., insurance, health and welfare programs,etc.) that are not an incidental part of apension, profit-sharing, etc., plan included online 24.

Line 26, Form 1120 (Line 22, Form

1120-A)

Other Deductions

Note: Do not deduct fines or penalties paid toa government for violating any law.

Attach a schedule, listing by type andamount, all allowable deductions that are notdeductible elsewhere on Form 1120 or Form1120-A. Form 1120-A filers should includeamounts described in the instructions above forlines 22, 24, and 25 of Form 1120. Enter thetotal of other deductions on line 26, Form 1120(line 22, Form 1120-A).

Include on this line the deduction foramortization of pollution control facilities,organization expenses, etc. See Form 4562.

Also include ordinary losses from trade or

business activities of a partnership (fromSchedule K-1 (Form 1065), line 1).

A corporation may deduct dividends it paysin cash on stock held by an employee stockownership plan. However, a deduction mayonly be taken if, according to the plan, thedividends are:q Paid in cash directly to the plan participantsor beneficiaries;q Paid to the plan, which distributes them incash to the plan participants or theirbeneficiaries no later than 90 days after theend of the plan year in which the dividends arepaid; or

q Used to make payments on a loan describedin section 404(a)(9).

See section 404(k) for more details and thelimitation on certain dividends.

Generally, a deduction may not be taken forany amount that is allocable to a class ofexempt income. See section 265(b) forexceptions.Meals, travel, and entertainment.Generally, the corporation can deduct only 50%of the amount otherwise allowable for mealsand entertainment expenses paid or incurredin its trade or business. Also, meals must notbe lavish or extravagant; a bona fide businessdiscussion must occur during, immediatelybefore, or immediately after the meal; and anemployee of the corporation must be presentat the meal. See section 274(k)(2) forexceptions. If the corporation claims adeduction for unallowable meal expenses, itmay have to pay a penalty.

Additional limitations apply to deductions forgifts, skybox rentals, luxury water travel,convention expenses, and entertainmenttickets. For details, see section 274 and Pub.463.

No deduction is allowed for dues paid orincurred for membership in any club organizedfor business, pleasure, recreation, or othersocial purpose. This includes country clubs,golf and athletic clubs, airline and hotel clubs,and clubs operated to provide meals underconditions favorable to business discussion.But it does not include civic or public serviceorganizations, professional organizations (suchas bar and medical associations), businessleagues, trade associations, chambers ofcommerce, boards of trade, and real estateboards, unless a principal purpose of theorganization is to entertain or provideentertainment facilities for members or theirguests.

Also, no deduction is allowed for travelexpenses paid or incurred for a spouse,dependent, or other individual accompanyingan officer or employee of the corporation onbusiness travel, unless that spouse,dependent, or other individual is an employeeof the corporation and the travel is for a bonafide business purpose and would otherwise be

deductible by that person.Generally, a corporation can deduct all other

ordinary and necessary travel andentertainment expenses paid or incurred in itstrade or business. However, it cannot deductan expense paid or incurred for a facility (suchas a yacht or hunting lodge) used for an activitythat is usually considered entertainment,amusement, or recreation.Note: The corporation may be able to deductotherwise nondeductible meals, travel, andentertainment expenses if the amounts aretreated as compensation and reported on FormW-2 for an employee or on Form 1099-MISCfor an independent contractor.Deduction for clean-fuel vehicles andcertain refueling property. Section 179Aallows a deduction for part of the cost of

qualified clean-fuel vehicle property andqualified clean-fuel vehicle refueling propertyplaced in service after June 30, 1993. For moreinformation, see Pub. 535.Lobbying expenses. Generally, lobbyingexpenses are not deductible. These expensesinclude amounts paid or incurred in connectionwith influencing Federal or state legislation (butnot local legislation), or amounts paid orincurred in connection with any communicationwith certain Federal executive branch officialsin an attempt to influence the official actionsor positions of the officials. See Regulationssection 1.162-29 for the definition ofinfluencing legislation. If certain in-house

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lobbying expenditures do not exceed $2,000,they are deductible. Dues and other similaramounts paid to certain tax-exemptorganizations may not be deductible. Seesection 162(e)(3). For information oncontributions to charitable organizations thatconduct lobbying activities, see the instructionsfor line 19. For more information on lobbyingexpenses, see section 162(e).

Line 28, Form 1120(Line 24, Form 1120-A)

Taxable Income Before NOL Deductionand Special Deductions

At-risk rules. Generally, special at-risk rulesunder section 465 apply to closely heldcorporations (see Passive activity limitationson page 7) engaged in any activity as a tradeor business or for the production of income.These corporations may have to adjust theamount on line 28, Form 1120, or line 24, Form1120-A. (See below.)

But the at-risk rules do not apply to:q Holding real property placed in service by thetaxpayer before 1987;q Equipment leasing under sections 465(c)(4),(5), and (6); orq Any qualifying business of a qualifiedcorporation under section 465(c)(7).

However, the at-risk rules do apply to theholding of mineral property.

If the at-risk rules apply, adjust the amounton this line for any section 465(d) losses.These losses are limited to the amount forwhich the corporation is at risk for eachseparate activity at the close of the tax year. Ifthe corporation is involved in one or moreactivities, any of which incurs a loss for theyear, report the losses for each activityseparately. Attach Form 6198, At-RiskLimitations, showing the amount at risk andgross income and deductions for the activitieswith the losses.

If the corporation sells or otherwise disposesof an asset or its interest (either total or partial)in an activity to which the at-risk rules apply,determine the net profit or loss from the activityby combining the gain or loss on the sale or

disposition with the profit or loss from theactivity. If the corporation has a net loss, it maybe limited because of the at-risk rules.

Treat any loss from an activity not allowedfor the tax year as a deduction allocable to theactivity in the next tax year.

Line 29a, Form 1120(Line 25a, Form 1120-A)

Net Operating Loss Deduction

A corporation may use the net operating loss(NOL) incurred in one tax year to reduce itstaxable income in another year. Generally, acorporation may carry an NOL back to each ofthe 3 years preceding the year of the loss andthen carry any remaining amount over to each

of the 15 years following the year of the loss(but Form 1120 filers see Exceptions tocarryback rules below). Enter on line 29a (line25a, Form 1120-A), the total NOL carryoversfrom prior tax years, but do not enter more thanthe corporation's taxable income (after specialdeductions). An NOL deduction cannot betaken in a year in which the corporation has anegative taxable income. Attach a scheduleshowing the computation of the NOL deduction.

Form 1120 filers must also complete question15 on Schedule K.

For details on the NOL deduction, get Pub.536, Net Operating Losses.Carryback and carryover rules. Generally,an NOL must first be carried back to the thirdtax year preceding the year of the loss. Tocarry back the loss and obtain a quick refundof taxes, use Form 1139, CorporationApplication for Tentative Refund. Form 1139must be filed within 12 months after the closeof the tax year of the loss. See section 6411 fordetails. Do not attach Form 1139 to thecorporation's income tax return. Mail it in aseparate envelope to the service center wherethe corporation files its income tax return.

For carryback claims filed later than 12months after the close of the tax year of theloss, file Form 1120X, Amended U.S.Corporation Income Tax Return, instead ofForm 1139.

After the corporation applies the NOL to thefirst tax year to which it may be carried, thetaxable income of that year is modified (asdescribed in section 172(b)) to determine howmuch of the remaining loss may be carried toother years. See section 172(b) and the relatedregulations for details.

Special rules apply when an ownershipchange occurs (i.e., for any tax year endingafter a post-1986 ownership change, theamount of the taxable income of a losscorporation that can be offset by pre-changeNOL carryovers is limited). See section 382and the related regulations. Also seeTemporary Regulations section1.382-2T(a)(2)(ii), which requires that a losscorporation file an information statement withits income tax return for each tax year that it isa loss corporation and certain shifts inownership occurred. Also see Regulationssection 1.382-6(b) for details on how to makethe closing-of-the-books election.

See section 384 for the limitation on the useof preacquistion losses of one corporation tooffset recognized built-in gains of anothercorporation.Note: See section 383 and the relatedregulations for limits that apply to net capitallosses and credits when an ownership changeoccurs.Exceptions to carryback rules (Form 1120filers only). A corporation may make anirrevocable election to forego the carrybackperiod and instead carry the NOL over to eachof the 15 years following the year of the loss.To make this election, check the box inquestion 14 on Schedule K. The return mustbe timely filed (including extensions).

Different carryback periods apply for certainlosses. The part of an NOL that is attributableto a specified liability loss, including a productliability loss, may be carried back 10 years(section 172(b)(1)(C)). See Regulationssection 1.172-13(c) for the statement that mustbe attached to Form 1120 if the corporation isclaiming the 10-year carryback period for aproduct liability loss.

Special rules apply to the carryback oflosses that are attributable to interest paid inconnection with corporate equity reductiontransactions. The rules apply if a corporationhas a corporate equity reduction interest lossin a loss limitation year ending after August 2,1989. See section 172(b)(1)(E).

Personal service corporations may not carryback an NOL to or from any tax year to whicha section 444 election applies.

Line 29b, Form 1120(Line 25b, Form 1120-A)

Special Deductions

Form 1120 filers. See the Instructions forSchedule C.Form 1120-A filers. Generally, enter 70%of line 4, page 1, on line 25b. However, thisdeduction may not be more than 70% of line24, page 1. Compute line 24 without regard toany adjustment under section 1059 and withoutregard to any capital loss carryback to the taxyear under section 1212(a)(1).

In a year in which an NOL occurs, this 70%limitation does not apply even if the loss iscreated by the dividends-received deduction.See sections 172(d) and 246(b).

Line 30, Form 1120(Line 26, Form 1120-A)

Taxable Income

Capital construction fund. To take adeduction for amounts contributed to a capitalconstruction fund, reduce the amount thatwould otherwise be entered on line 30 (line 26,Form 1120-A) by the amount of the deduction.On the dotted line next to the entry space, writeCCF and the amount of the deduction. Formore information, get Pub. 595, Tax Highlights

for Commercial Fishermen.

Line 32b, Form 1120(Line 28b, Form 1120-A)

Estimated Tax Payments

Enter any estimated tax payments thecorporation made for the tax year.Beneficiaries of trusts. If the corporation isthe beneficiary of a trust, and the trust makesa section 643(g) election to credit its estimatedtax payments to its beneficiaries, include thecorporation's share of the payment in the totalfor line 32b, Form 1120 (line 28b, Form1120-A). Write T and the amount on thedotted line next to the entry space.Special estimated tax payments for certainlife insurance companies. If the corporationis required to make or apply special estimatedtax payments (SETP) under section 847 inaddition to its regular estimated tax payments,enter on line 32b (line 28b, Form 1120-A), thecorporation's total estimated tax payments. Onthe dotted line next to the entry space, writeSETP and the amount. Attach a scheduleshowing your computation of estimated taxpayments. See section 847(2) and Form 8816,Special Loss Discount Account and SpecialEstimated Tax Payments for InsuranceCompanies, for more information.

Line 32g, Form 1120(Line 28g, Form 1120-A)

Credit for Federal Tax on Fuels

Complete Form 4136, Credit for Federal TaxPaid on Fuels, if the corporation qualifies totake this credit.Credit for ozone-depleting chemicals.Include on line 32g (line 28g, Form 1120-A)any credit the corporation is claiming undersection 4682(g)(4) fo