us internal revenue service: i1120 a--1997

8/14/2019 US Internal Revenue Service: i1120 a--1997

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97Department 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 address. Instead, see Where To File on page 3.

beginning after August 5, 1997, are carriedback two years and then forward to each of the20 taxable years following the year of the loss.Certain corporations that qualify as smallbusinesses or that are engaged in the tradeor business of farming may use a 3yearcarryback period for losses attributable toPresidentially declared disasters. For moreinformation, see Act section 1082.

Special rules apply to specified liabilitylosses, excess interest losses, and capitallosses. See section 172(b)(1) and section1212(a).q For tax years ending after August 5, 1997,commodities dealers and traders incommodities and securities may make an

election to use the mark-to-market accountingmethod. For more information, see Act section1001.q The Act imposed additional limitations on thededuction of premiums and interest on debtwith respect to life insurance, annuity, orendowment contracts. The Act also reducesinterest deductions that are allocable, underproration rules described in new section 264(f),to the unborrowed policy cash values of certainlife insurance, endowment, or annuity contractsissued or deemed issued after June 8, 1997.These proration rules generally apply to lifeinsurance, endowment, or annuity contractswith a direct or indirect business beneficiary,regardless of whether the business is listed asa policy holder or beneficiary on the policy. Formore information, see section 264 and theinstructions for Interest on page 7.q The penalty for failure to make electronicdeposits of depository taxes using theElectronic Federal Tax Payment System(EFTPS), has been temporarily waived for filerswho were first required to use EFTPS on orafter July 1, 1997. For more information, seeElectronic Deposit Requirement on page 4.q Employers that pay wages to qualifiedlong-term family assistance (AFDC or itssuccessor program) recipients who began workafter December 31, 1997, may qualify to claimthe welfare-to-work credit under new section51A. The credit is figured on Form 8861,Welfare-to-Work Credit.q The research credit has been extended foramounts paid or incurred through June 30,1998. For details, get Form 6765, Credit forIncreasing Researching Activities.q The orphan drug credit has beenpermanently extended. For details, get Form8820, Orphan Drug Credit.q The work opportunity credit has beenextended for wages paid to qualified individualswho begin work for the employer before July1, 1998. For details, get Form 5884, WorkOpportunity Credit.

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 through

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., 2 min. 7 hr., 47 min.1120-A 44 hr., 14min. 23 hr., 33 min. 41 hr., 7 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., 12 min. 8 hr., 35 min. 32 min.

Changes To NoteThe Taxpayer Relief Act of 1997 (The Act)made changes to the tax law for corporations.

Some of the changes are discussed below.q The holding period for the dividends-receiveddeduction has been changed. Generally, fordividends received or accrued after September4, 1997, a corporation is not entitled to adividends-received deduction if the dividendpaying stock is held less than 46 days duringthe 90day period beginning 45 days beforethe stock becomes ex-dividend with respect tothe dividend. For more information, includingtransitional rules and special rules for dividendson preferred stock, see the instructions forSchedule C, line 17, and Act section 1015.q The carryback and carryforward period fornet operating losses (NOLs) has changed.Generally, NOLs that occur in tax years

Contents PageContents PageInitial Return, Final Return, or Change of

Address . . . . . . . . . . . . . . 5Changes To Note . . . . . . . . . . . 1

Unresolved Tax Problems . . . . . . . 1Income . . . . . . . . . . . . . . . . 5

How To Make a Contribution To Reduce thePublic Debt . . . . . . . . . . . . . 2 Deductions . . . . . . . . . . . . . . 6

Schedule A and Cost of Goods SoldWorksheet . . . . . . . . . . . . . 10How To Get Forms and Publications . . 2General Instructions . . . . . . . . . 2

Schedule C . . . . . . . . . . . . . . 11Purpose of Form . . . . . . . . . . . 2

Schedule J . . . . . . . . . . . . . . 12Who Must File . . . . . . . . . . . . 2

Schedule K . . . . . . . . . . . . . . 14Who May File Form 1120A . . . . . . 2

Schedule L . . . . . . . . . . . . . . 15When To File . . . . . . . . . . . . . 2

Schedule M-1 . . . . . . . . . . . . . 15Who Must Sign . . . . . . . . . . . . 3

Codes for Principal Business Activity . . 16Where To File . . . . . . . . . . . . 3

Other Forms, Returns, and StatementsThat May Be Required . . . . 17 19Consolidated Return . . . . . . . . . . 3

Farm Return . . . . . . . . . . . . . 3 Index . . . . . . . . . . . . . . . . . 20Amended Return . . . . . . . . . . . 3

Statements . . . . . . . . . . . . . . 3

Attachments . . . . . . . . . . . . . 3

Accounting Methods . . . . . . . . . . 3

Accounting Periods . . . . . . . . . . 4

Rounding Off to Whole Dollars . . . . . 4

Recordkeeping . . . . . . . . . . . . 4

Depository Method of Tax Payment . . . 4

Estimated Tax Payments . . . . . . . 4

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

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

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

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

Personal Service Corporation . . . . . 5

Total Assets . . . . . . . . . . . . . 5

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normal 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 ToReduce the Public Debt

To help reduce the public debt, send a checkmade payable to Bureau of the Public Debtto Bureau of the Public Debt, Department G,Washington, DC 202390601. Or, enclose acheck with the income tax return. Contributionsto reduce the public debt are deductible subjectto the rules and limitations for charitablecontributions.

How To Get Forms andPublicationsPersonal computer. Visit the IRS's InternetWeb Site at www.irs.ustreas.gov to get:q Forms and instructionsq Publicationsq IRS press releases and fact sheets

You can also reach us using:q Telnet at iris.irs.ustreas.govq File Transfer Protocol at ftp.irs.ustreas.govq Direct Dial (by modem) Dial direct to theInternal Revenue Information Services (IRIS)by calling 7033218020 using your modem.IRIS is an on-line information service onFedWorld.CD-ROM. A CD-ROM containing over 2,000tax products (including many prior year forms)can be purchased from the GovernmentPrinting Office (GPO). To order the CD-ROM,call the Superintendent of Documents at2025121800, or go through GPO's InternetWeb Site (www.access.gpo.gov/su_docs).By phone and in person. To order formsand publications, call 1800TAXFORM(18008293676) between 7:30 a.m. and

5:30 p.m. on weekdays. 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 domestic

corporations (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 file

Who May File Form 1120-A

A corporation may file Form 1120-A if it meets all of the following requirements:

All of the following amounts are under $500,000:

Gross receipts (line 1a)

Total income (line 11)

Its only dividend income is from domestic corporations, and the dividends:

Qualify for the 70% deduction

Are not from debt-financed securities.

It does not have any of the write-in additions to tax listed on pages 13 and 14 in theinstructions for:

Form 1120, Schedule J, line 3

Form 1120, Schedule J, line 10.

It has no nonrefundable tax credits (other than the general business credit or the creditfor prior year minimum tax).

Total assets (Form 1120, Schedule L, line 15)

It is not:

A member of a controlled group

A personal holding company

Filing a consolidated return

Filing its final return

Dissolving or liquidating

Electing to forego the carryback period of an NOL

Required to file one of the returns listed under Special Returns for CertainOrganizations, below.

It does not have:

Any ownership in a foreign corporation

Foreign shareholders that directly or indirectly own 25% or more of its stock.

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 filinga 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.

Form 1120 or 1120-A. Instead, it should fileForm 1065, U.S. Partnership Return ofIncome. For the definition of a limited liabilitycompany, see the Instructions for Form 1065.

Ownership Interest in a FASIT

If a corporation holds an ownership interest ina financial asset securitization investment trust(FASIT), it must report all items of income,gain, deductions, losses, and credits on thecorporation's income tax return (except asprovided in section 860H). Show a breakdownof the items on an attached schedule. For moreinformation, see sections 860H and 860L.

Special Returns for CertainOrganizations

Certain organizations, as shown below, haveto file special returns.

Interest charge domestic internationalsales corporation (sec. 992)

1120-IC-DISC

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

1120-PC)

1120-F

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 nucleardecommissioning costs (sec. 468A)

1120-ND

Property and casualty insurancecompany (sec. 831)

1120-PC

Political organization (sec. 527) 1120-POL

If the organization is a File FormReal estate investment trust (sec.856)

1120-REIT

Farmers' cooperative (sec. 1381) 990-C Regulated investment company (sec.851)

1120-RICExempt organization with unrelatedtrade or business income

990-TS corporation (sec. 1361) 1120S

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

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If the due date falls on a Saturday, Sunday,or legal holiday, the corporation may file on thenext business day.Private delivery services. You can usecertain private delivery services designated bythe IRS to meet the timely mailing as timelyfiling/paying rule for tax returns and payments.The IRS publishes a list of the designatedprivate delivery services in September of eachyear. The list published in September 1997includes only the following:q Airborne Express (Airborne): Overnight AirExpress Service, Next Afternoon Service,Second Day Service.q DHL Worldwide Express (DHL): DHL SameDay Service, DHL USA Overnight.q Federal Express (FedEx): FedEx PriorityOvernight, FedEx Standard Overnight, FedEx2 Day.q United Parcel Service (UPS): UPS Next DayAir, UPS Next Day Air Saver, UPS 2nd DayAir, UPS 2nd Day Air A.M.

The private delivery service can tell you howto get written proof of the mailing date.Extension. File Form 7004, Application forAutomatic Extension of Time To FileCorporation Income Tax Return, to request a6-month extension of time to file.

Who Must Sign

The return must be signed and dated by:q The president, vice president, treasurer,assistant treasurer, chief accounting officer, orq Any other corporate officer (such as taxofficer) authorized to sign.

Receivers, trustees, or assignees must alsosign and date any return filed on behalf of acorporation.

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 notcharge 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.

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.

Other Forms, Returns, andStatements That May BeRequired

Forms

To find out what other forms the corporationmay have to file, see Other Forms That MayBe Required on page 17

Consolidated Return

The 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 eachcorporation 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 Return

Do not file Schedule F (Form 1040), Profit orLoss From Farming. Instead, enter income on

lines 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 Return

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

Statements

Stock ownership in foreign corporations.Attach the statement required by section 551(c)if:q The corporation owned 5% or more in valueof the outstanding stock of a foreign personalholding company, andq The corporation was required to include inits gross income any undistributed foreignpersonal holding company income from aforeign personal 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).

Attachments

Attach 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 on

Form 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.

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:q Cash,q Accrual, orq Any other method authorized by the InternalRevenue Code.

In all cases, the method used must clearlyshow 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.

Illinois, Iowa, Minnesota,Missouri, Wisconsin

Kansas City, MO649990012

Alabama, Arkansas,Louisiana, Mississippi, NorthCarolina, Tennessee

Memphis, TN375010012

Delaware, District ofColumbia, Maryland,Pennsylvania, Virginia

Philadelphia, PA192550012

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

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

located in

Use the followingInternal Revenue

Service Center address

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

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Under the accrual method, an amount isincludible in income when:q All the events have occurred that fix the rightto receive the income, andq The amount can be determined withreasonable accuracy.

See Regulations section 1.451-1(a) fordetails.

Generally, an accrual basis taxpayer candeduct accrued expenses in the tax year when:q All events that determine the liability haveoccurred,q The amount of the liability can be figured with

reasonable accuracy, andq Economic performance takes place withrespect to the expense.

There are exceptions to the economicperformance rule for certain items, includingrecurring expenses. See section 461(h) and therelated regulations for the rules for determiningwhen economic performance 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 this

method, 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 treatedas ordinary gain or loss. For details, includingexceptions, see section 475, the relatedregulations, and Rev. Rul. 94-7, 1994-1 C.B.151.Note: For tax years ending after August 5,1997, dealers in commodities and traders insecurities and commodities may make theelection to use the mark-to-market accountingmethod. For detaiils, see sections 475(e) and

(f).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 service

corporations, however, must use a calendaryear unless they meet one of the exceptionsdiscussed in Accounting Period under ItemA on page 5.

For more information about accountingperiods, see Temporary Regulations sections1.4411T, 1.4412T, and Pub. 538.Calendar year. If the calendar year isadopted as the annual accounting period, thecorporation must maintain its books andrecords and report its income and expenses forthe period from January 1 through December31 of each year.

Fiscal year. A fiscal year is 12 consecutivemonths ending on the last day of any monthexcept December. A 5253 week year is afiscal year that varies from 52 to 53 weeks.Adoption of tax year. A corporation adoptsa tax year when it files its first income taxreturn. It must adopt a tax year by the due date(not including extensions) of its first income taxreturn.Change of tax year. Generally, acorporation 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 Whole DollarsThe 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 afterthe end of the tax year. Some corporations(described below), are required to electronically

deposit all depository taxes, includingcorporation income tax payments.

Electronic Deposit Requirement

The corporation must make electronic depositsof all depository tax liabilities that occur after1997 if:q It was required to electronically deposit taxesin prior years,q It deposited more than $50,000 in socialsecurity, Medicare, Railroad Retirement, andwithheld income taxes in 1996, orq It did not deposit social security, Medicare,or withheld income taxes in 1995 or 1996, butdeposited more than $50,000 in other taxesunder section 6302 (such as the corporateincome tax) in either year.

For details, see Regulations section

31.63021(h).The Electronic Federal Tax Payment

System (EFTPS) must be used to makeelectronic deposits. If the corporation isrequired to make electronic deposits and failsto do so, it may be subject to a 10% penalty.Note: A penalty will not be imposed prior toJuly 1, 1998, if the corporation was firstrequired to use EFTPS on or after July 1, 1997.

Corporations that are not required to makeelectronic deposits may voluntarily participatein EFTPS. To enroll in EFTPS, call18009458400 or 18005554477. Forgeneral information about EFTPS, call18008291040.

Deposits With Form 8109

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 thepayment 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 Form

1120 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 itfiles 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, the following rules apply to thecorporation's payments of estimated tax.q The corporation must make installmentpayments of estimated tax if it expects itsestimated tax (income tax minus credits) to be$500 or more.q The installments are due by the 15th day ofthe 4th, 6th, 9th, and 12th months of the taxyear. If any date falls on a Saturday, Sunday,or legal holiday, the installment is due on thenext regular business day.q Use Form 1120-W, Estimated Tax forCorporations, as a worksheet to computeestimated tax.q If the corporation does not use EFTPS, usethe deposit coupons (Forms 8109) to makedeposits of estimated tax.

For more information on estimated taxpayments, including penalties that apply if thecorporation fails to make required payments,see the instructions for line 33 on page 10.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. FileForm 4466 before the 16th day of the 3rdmonth after the end of the tax year, but beforethe corporation files its income tax return. Donot file Form 4466 before the end of thecorporation'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 bepenalized 5% of the unpaid tax for each monthor part of a month the return is late, up to a

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maximum 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 notpaid, up to a maximum of 25% of the unpaidtax. The penalty will not be imposed if the

corporation 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 ThatMay Be Required, on page 17). The trust fundrecovery penalty may be imposed on allpersons who are determined by the IRS tohave been responsible for collecting,accounting for, and paying over these taxes,and who acted willfully in not doing so. Thepenalty is equal to the unpaid trust fund tax.See the instructions for Form 720, Pub. 15(Circular E), Employer's Tax Guide, or Pub. 51

(Circular A), Agricultural Employer's Tax Guide,for details, including the definition ofresponsible persons.Other penalties. Other penalties can beimposed for negligence, substantialunderstatement of tax, and fraud. See sections6662 and 6663.

Specific Instructions

Period CoveredFile the 1997 return for calendar year 1997 andfiscal years that begin in 1997 and end in 1998.For a fiscal year, fill in the tax year space at thetop of the form.

Note: The 1997 Form 1120 may also be usedif:q The corporation has a tax year of less than12 months that begins and ends in 1998, andq The 1998 Form 1120 is not available at thetime the corporation is required to file its return.The corporation must show its 1998 tax yearon the 1997 Form 1120 and incorporate anytax law changes that are effective for tax yearsbeginning after December 31, 1997.

Name, Address, and EmployerIdentification Number (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.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 ofForm 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 servicesmust 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 which thefirst 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:q Is an employee of the corporation on anyday of the testing period, andq Owns any outstanding stock of thecorporation on any day of the testing period.Stock ownership is determined under theattribution rules of section 318, except thatany is substituted for 50% in section318(a)(2)(C).Accounting period. A personal service

corporation 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. Get

Schedule 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 6 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 of AddressIf this is the corporation's first return, check the

Initial 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 advance

payments, see Regulations section 1.451-5. Toreport income from long-term contracts, seesection 460.Installment sales. Generally, the installmentmethod 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). To

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report this addition to the tax, see theinstructions for line 10, Schedule J, Form 1120.Nonaccrual experience method. Accrualmethod taxpayers need not accrue certainamounts to be received from the performanceof services that, on the basis of theirexperience, 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 section

448(d)(5), and the net amount accrued. Enterthe net amount on line 1a. For moreinformation and guidelines on this nonaccrualexperience method, see TemporaryRegulations 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 10 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 forSchedule 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.

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 18, 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).q Any LIFO recapture amount under section1363(d). The corporation may have to includea LIFO recapture amount in income if it:

1. Used the LIFO inventory method for itslast tax year before the first tax year for whichit elected to become an S corporation, or

2. Transferred LIFO inventory assets to anS corporation in a nonrecognition transactionin which those assets were transferred basisproperty.

The LIFO recapture amount is the amountby which the C corporation's inventory underthe FIFO method exceeds the inventoryamount under the LIFO method at the close ofthe corporation's last tax year as a C

corporation (or for the year of the transfer, if 2above applies). For more information, seeRegulations section 1.13632 and Rev. Proc.9461, 19942 C.B. 775. Also see theinstructions for Schedule J, line 10.

Deductions

Limitations on Deductions

Section 263A uniform capitalization rules.The uniform capitalization rules of section 263Arequire corporations to capitalize or include ininventory certain costs incurred in connectionwith:q The production of real property and tangiblepersonal property held in inventory or held forsale in the ordinary course of business.q Personal property (tangible and intangible)acquired for resale.q The production of property constructed orimproved by a corporation for use in its tradeor business or in an activity engaged in forprofit.

Tangible personal property produced by acorporation includes a film, sound recording,videotape, book, or similar property.

Corporations subject to the rules arerequired to capitalize not only direct costs butan allocable part of most indirect costs(including taxes) that benefit the assetsproduced or acquired for resale.

For inventory, some of the indirectexpenses that must be capitalized are:q Administration expenses.q Taxes.q Depreciation.q Insurance.q Compensation paid to officers attributable toservices.q Rework labor.q Contributions to pension, stock bonus, andcertain profit-sharing, annuity, or deferredcompensation plans.

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

other indirect costs that relate to production orresale activities that must be capitalized andthose that may be currently deductible.

Interest expense paid or incurred during theproduction period of certain property must becapitalized and is governed by special rules.For more details, see Regulations sections1.263A-8 through 1.263A-15.

The costs required to be capitalized undersection 263A are not deductible until theproperty to which the costs relate is sold, used,or otherwise disposed of by the corporation.Exceptions. Section 263A does not applyto:q Personal property acquired for resale if thecorporation's average annual gross receipts forthe 3 prior tax years were $10 million or less.q

Timber.q Most property produced under long-termcontract.q Certain property produced in a farmingbusiness.q Research and experimental costs undersection 174.q Intangible drilling costs for oil, gas, andgeothermal property.q Mining exploration and development costs.

For more details on the uniformcapitalization rules, 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 isincluded 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 employeesto pay them these excessive amounts if control

of 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 page5) and closely held corporations (see below).

Generally, the two kinds of passive activitiesare:

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q Trade or business activities in which thecorporation did not materially participate for thetax year (see Temporary Regulations section1.469-1T(g)(3)), andq Rental activities regardless of itsparticipation.

For exceptions, see Form 8810.An activity is a trade or business activity if it isnot a rental activity, andq The activity involves the conduct of a tradeor business (i.e., deductions from the activitywould be allowable under section 162 if otherlimitations, such as the passive loss rules, didnot apply), orq The activity involves research andexperimental costs that are deductible undersection 174 (or would be deductible if thecorporation chose to deduct rather thancapitalize them).

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 interestexpense 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.

Closely held corporations.For thispurpose, a corporation is a closely heldcorporation if:q At any time during the last half of the taxyear more than 50% in value of its outstandingstock is owned, directly or indirectly, by or fornot more than five individuals, andq The corporation is not a personal servicecorporation.

Certain organizations are treated asindividuals for purposes of this test. (Seesection 542(a)(2).) For rules of determiningstock ownership, see section 544 (as modifiedby section 465(a)(3)).Reducing certain expenses for whichcredits are allowable. For each credit listedbelow, the corporation must reduce the

otherwise allowable deductions for expensesused to figure the credit by the amount of thecurrent year credit:q Work opportunity credit.q Research credit.q Enhanced oil recovery credit.q Disabled access credit.q Empowerment zone employment credit.q Indian employment credit.q Employer credit for social security andMedicare taxes paid on certain employee tips.q Orphan drug credit.q Welfare-to-work 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 compensation mustbe 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).

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 is

excluded from the employee's income.The deduction limit does not apply to:q Commissions based on individualperformance;q Qualified performance-based compensation;andq 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, reduced by:q Any work opportunity credit from Form 5884,q Any empowerment zone employment creditfrom Form 8844,q Any Indian employment credit from Form8845, andq Any welfare-to-work credit from Form 8861.See the instructions for these forms for moreinformation. Do not include salaries and wagesdeductible elsewhere on the return, such asamounts included in cost of goods sold,elective contributions to a section 401(k) cashor deferred arrangement, or amountscontributed under a salary reduction SEPagreement or a SIMPLE retirement plan(savings incentive match plan).Caution: If the corporation provided taxable

fringe 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 thereturn, 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 the

value 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 waspreviously 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 1,1993, 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 if

a 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

The corporation must make an interestallocation if the proceeds of a loan were usedfor more than one purpose (e.g., to purchasea portfolio investment and to acquire an interestin a passive activity). See TemporaryRegulations section 1.163-8T for the interestallocation rules.

Mutual savings banks, building and loanassociations, and cooperative banks candeduct the amounts paid or credited to the

The lease term began:

And the vehicle's fairmarket value on the first

day of the lease exceeded:

After 12/31/96 ................................................ $15,800After 12/31/94 but before 1/1/97.................... $15,500After 12/31/93 but before 1/1/95.................... $14,600After 12/31/92 but before 1/1/94.................... $14,300

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accounts of depositors as dividends, interest,or earnings. See section 591.

Do not include the following interest:q Interest on indebtedness incurred orcontinued to purchase or carry obligations if theinterest is wholly exempt from income tax. Forexceptions, see section 265(b).q For cash basis taxpayers, prepaid interestallocable to years following the current taxyear. (For example, a cash basis calendar yeartaxpayer who in 1997 prepaid interest allocableto any period after 1997 can deduct only theamount allocable to 1997.)q

Interest and carrying charges on straddles.Generally, these amounts must be capitalized.See section 263(g).q Interest on debt allocable to the productionof qualified property or to property producedby a corporation for its own use or for sale. Thisinterest must be capitalized. A corporation mustalso capitalize any interest on debt allocable toan asset used to produce the above property.See section 263A and Regulations section1.263A-8 through 1.263A-15 for definitions andmore information.

Special rules apply to:q Interest on which no tax is imposed (seesection 163(j)).q Foregone interest on certainbelow-market-rate loans (see section 7872).q Original issue discount on certain high-yield

discount obligations (See section 163(e) tofigure the disqualified portion.)Note: The Taxpayer Relief Act of 1997imposed additional limitations on interestdeductions when the corporation is apolicyholder or beneficiary with respect to a lifeinsurance, endowment, or annuity contractissued after June 8, 1997. For details, see Actsection 1084 and section 264(f). Attach astatement showing the computation of thededuction disallowed under section 264(f).

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.Corporations on the accrual basis may elect

to 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.Limitation on deduction. The total amountclaimed may not be more than 10% of taxableincome (line 30, Form 1120, or line 26, Form1120-A) computed without regard to thefollowing: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 taxable

income 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).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 rulesapply 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 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.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 servicecorporations 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 conservationpurpose 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 apurpose or function unrelated to the basis forits exemption, and

q Contributions of any property to or for the useof certain private foundations, except for stockcontributed before July 1, 1998, for whichmarket quotations 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 scientificequipment used for research.Acorporation (other than a personal holdingcompany or a service organization) can receivea larger deduction for contributing scientificequipment used for research to an institutionof higher education. For more details, seesection 170(e).

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 1997or carried over from 1996. 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 thedepletion deduction for iron ore and coal(including lignite).

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

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.


Pension, Profit-Sharing, etc., Plans

Enter 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 a

one-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.

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Line 26, Form 1120 (Line 22, Form1120-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).Generally, a deduction may not be taken for

any amount that is allocable to a class ofexempt income. See section 265(b) forexceptions.

Examples of amounts to include are:q The deduction for amortization of pollutioncontrol facilities, organization expenses, etc.(see Form 4562).q Ordinary losses from trade or businessactivities of a partnership (from Schedule K-1(Form 1065), line 1).q Dividends paid in cash on stock held by anemployee stock ownership plan. However, adeduction may only be taken if, according tothe plan, the dividends are: 1. Paid in cash directly to the planparticipants or beneficiaries; 2. Paid to the plan, which distributes themin cash to the plan participants or theirbeneficiaries no later than 90 days after theend of the plan year in which the dividends arepaid; or 3. Used to make payments on a loandescribed in section 404(a)(9).See section 404(k) for more details and thelimitation on certain dividends.Travel, meals, and entertainment. Subjectto limitations and restrictions discussed below,a corporation can deduct ordinary andnecessary travel, meals, and entertainmentexpenses paid or incurred in its trade orbusiness. Also, special rules apply todeductions for gifts, skybox rentals, luxurywater travel, convention expenses, and

entertainment tickets. See section 274 andPub. 463 for more details.Travel.The corporation cannot deduct

travel expenses of any individualaccompanying a corporate officer or employee,including a spouse or dependent of the officeror employee, unless:q That individual is an employee of thecorporation, andq His or her travel is for a bona fide businesspurpose and would otherwise be deductible bythat individual.

Meals and entertainment.Generally, thecorporation can deduct only 50% of the amountotherwise allowable for meals andentertainment expenses paid or incurred in itstrade or business. In addition (subject toexceptions under section 274(k)(2)):

q Meals must not be lavish or extravagant;q A bona fide business discussion must occurduring, immediately before, or immediatelyafter the meal; andq An employee of the corporation must bepresent at the meal.

Membership dues.The corporation maydeduct amounts paid or incurred formembership dues in civic or public serviceorganizations, professional organizations (suchas bar and medical associations), businessleagues, trade associations, chambers ofcommerce, boards of trade, and real estateboards. However, no deduction is allowed if aprincipal purpose of the organization is to

entertain, or provide entertainment facilities for,members or their guests. In addition,corporations may not deduct membership duesin any club organized for business, pleasure,recreation, or other social purpose. Thisincludes country clubs, golf and athletic clubs,airline and hotel clubs, and clubs operated toprovide meals under conditions favorable tobusiness discussion.

Entertainment facilities.The corporationcannot deduct an expense paid or incurred fora facility (such as a yacht or hunting lodge)used for an activity usually consideredentertainment, 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 ofqualified clean-fuel vehicle property andqualified clean-fuel vehicle refueling propertyplaced in service during the tax year. For moreinformation, see Pub. 535.Lobbying expenses. Generally, lobbyingexpenses are not deductible. These expensesinclude:q Amounts paid or incurred in connection with

influencing Federal or state legislation (but notlocal legislation), orq Amounts paid or incurred in connection withany communication with certain Federalexecutive branch officials in an attempt toinfluence the official actions or positions of theofficials. See Regulations section 1.162-29 forthe definition of influencing legislation.

Dues and other similar amounts paid tocertain tax-exempt organizations may not bedeductible. See section 162(e)(3). If certainin-house lobbying expenditures do not exceed$2,000, they are deductible. 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 Deduction andSpecial Deductions

At-risk rules. Generally, special at-risk rulesunder section 465 apply to closely heldcorporations (see Passive activity limitationson page 6) 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 and

gross 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 ordisposition 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 (2 years for NOLs incurred in taxyears beginning after August 5, 1997),preceding the year of the loss and then carryany remaining amount over to each of the 15years (20 years for NOLs incurred in tax yearsbeginning after August 5, 1997), following theyear of the loss (but Form 1120 filers seeExceptions to carryback rules below). Enteron line 29a (line 25a, Form 1120-A), the totalNOL carryovers from prior tax years, but do not

enter more than the corporation's taxableincome (after special deductions). An NOLdeduction cannot be taken in a year in whichthe corporation has a negative taxable income.Attach a schedule showing the computation ofthe NOL deduction. Form 1120 filers must alsocomplete question 15 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 (second tax year for NOLs incurred intax years beginning after August 5, 1997),preceding the year of the loss. To carry backthe loss and obtain a quick refund of taxes, useForm 1139, Corporation Application forTentative Refund. Form 1139 must be filedwithin 12 months after the close of the tax year

of the loss. See section 6411 for details. Forcarryback claims filed later than 12 monthsafter the close of the tax year of the loss, fileForm 1120X, Amended U.S. CorporationIncome Tax Return, instead of Form 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., the amount of the taxableincome of a loss corporation that can be offsetby pre-change NOL carryovers is limited). Seesection 382 and the related regulations. Alsosee Temporary Regulations section

1.382-2T(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. See Regulations section1.382-6(b) for details on how to make theclosing-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.

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Exceptions to carryback rules (Form 1120filers only). A corporation may make anirrevocable election to forego the carrybackperiod and instead carry the NOL forward toyears following the year of the loss. To makethis election, check the box in question 14 onSchedule K. The return must be 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 must

be 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. 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).


Taxable Income

Capital construction fund. To take adeduction for amounts contributed to a capital

construction 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 Highlightsfor 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 the

corporation'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 Special

Cost of Goods Sold Worksheet

Form 1120-A(Keep for your records.)

Inventory at start of year. Enter here and in Part III, line 3, column(a), Form 1120-A 1.

Purchases. Enter here and in Part II, line 5a(1), Form 1120-A 2.Cost of labor. Enter here and include in total in Part II, line 5a(3),Form 1120-A 3.

Additional section 263A costs. Enter here and in Part II, line 5a(2),Form 1120-A (see instructions for line 4) 4.

Other costs. Enter here and include in Part II, line 5a(3), Form

1120-A 5.Total. Add lines 1 through 5 6.Inventory at end of year. Enter here and in Part III, line 3, column(b), Form 1120-A 7.

Cost of goods sold. Subtract line 7 from line 6. Enter the result hereand on page 1, line 2, Form 1120-A 8.

1.

2.

3.

4.

5.

6.

7.

8.

Estimated Tax Payments for InsuranceCompanies, for more information.

Line 32f, Form 1120(Line 28f, Form 1120A)

Enter the credit (from Form 2439, Notice toShareholder of Undistributed Long-TermCapital Gains), for the corporation's share ofthe tax paid by a regulated investmentcompany or a real estate investment trust onundistributed long-term capital gains included

in the corporation's income. Attach Form 2439to Form 1120 or 1120A.

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 tax on ozone-depletingchemicals. Include on line 32g (line 28g,Form 1120-A) any credit the corporation isclaiming under section 4682(g)(4) for tax onozone-depleting chemicals. Write ODC to theleft of the entry space.

Line 32h, Form 1120

(Line 28h, Form 1120-A)

Total Payments

On Form 1120, add the amounts on lines 32dthrough 32g and enter the total on line 32h.On Form 1120-A, add the amounts on lines28d through 28g and enter the total on line 28h.Backup withholding. If the corporation hadincome tax withheld from any payments itreceived, because, for example, it failed to givethe payer its correct EIN, include the amountwithheld in the total for line 32h, Form 1120(line 28h, Form 1120-A). This type ofwithholding is called backup withholding. OnForm 1120, show the amount withheld in theblank space in the right-hand column betweenlines 31 and 32h, and write backupwithholding. On Form 1120-A, show theamount withheld on the dotted line to the leftof line 28h, and write backup withholding.


Estimated Tax Penalty

A corporation that does not make estimated taxpayments when due may be subject to anunderpayment penalty for the period ofunderpayment. Generally, a corporation issubject to the penalty if its tax liability is $500or more, and it did not timely pay the smallerof:q 100% of its tax liability for 1997, or

q 100% of its prior year's tax.See section 6655 for details and exceptions,

including special rules for large corporations.Use Form 2220, Underpayment of

Estimated Tax by Corporations, to see if thecorporation owes a penalty and to figure theamount of the penalty. Generally, thecorporation does not have to file this formbecause the IRS can figure the amount of anypenalty and bill the corporation for it. However,even if the corporation does not owe the

penalty, you must complete and attach Form2220 if:q The annualized income or adjusted seasonalinstallment method is used, orq The corporation is a large corporationcomputing its first required installment basedon the prior year's tax. (See the Form 2220instructions for the definition of a largecorporation.)

If you attach Form 2220, check the box online 33, Form 1120 (line 29, Form 1120-A), andenter the amount of any penalty on this line.

Schedule A, Form 1120(Worksheet, Form 1120-A)

Cost of Goods SoldInventories are required at the beginning andend of each tax year if the production,purchase, or sale of merchandise is anincome-producing factor. See Regulationssection 1.471-1. If inventories are not used,enter zero on lines 1 and 7 of Schedule A,Form 1120, or the worksheet.

All filers should see Section 263A uniformcapitalization rules on page 6 beforecompleting Schedule A or the worksheetabove. The instructions for lines 4 through 7below apply to Schedule A and the worksheet.

Line 4

Additional Section 263A Costs

An entry is required on this line only forcorporations that have elected a simplifiedmethod of accounting.

For corporations that have elected thesimplified production method, additionalsection 263A costs are generally those costs,other than interest, that were not capitalizedunder the corporation's method of accountingimmediately prior to the effective date ofsection 263A that are now required to becapitalized under section 263A. For details, seeRegulations section 1.263A-2(b).

For corporations that have elected thesimplified resale method, additional section263A costs are generally those costs incurredwith respect to the following categories:

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Worksheet for Schedule C, line 9

(Keep for your records.)

Refigure line 28, page 1, Form 1120, without any adjustment undersection 1059 and without any capital loss carryback to the tax yearunder section 1212(a)(1) 1.

Complete lines 10, 11, and 12, column (c), and enter the total here 2.

Subtract line 2 from line 1 3.

Multiply line 3 by 80% 4.

Add lines 2, 5, 7, and 8, column (c), and the part of the deductionon line 3, column (c), that is attributable to dividends from20%-or-more-owned corporations 5.

Enter the smaller of line 4 or 5. If line 5 is greater than line 4, stophere; enter the amount from line 6 on line 9, column (c), and do notcomplete the rest of this worksheet 6.

Enter the total amount of dividends from 20%-or-more-ownedcorporations that are included on lines 2, 3, 5, 7, and 8, column (a) 7.

Subtract line 7 from line 3 8.

Multiply line 8 by 70% 9.

Subtract line 5 above from line 9, column (c) 10.

Enter the smaller of line 9 or line 10 11.

Dividends-received deduct ion after limitation (sec. 246(b)). Add lines6 and 11. Enter the result here and on line 9, column (c) 12.

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

Line 1, Column (a)

Enter dividends (except those received ondebt-financed stock acquired after July 18,1984see section 246A) that:q Are received from less-than-20%-owneddomestic corporations subject to income tax;andq Qualify for the 70% deduction under section243(a)(1).

Include taxable distributions from anIC-DISC or former DISC that are designatedas eligible for the 70% deduction and certaindividends of Federal Home Loan Banks. See

section 246(a)(2).Also include on line 1 dividends (except

those received on debt-financed stock acquiredafter July 18, 1984) from a regulatedinvestment company (RIC). The amount ofdividends eligible for the dividends-receiveddeduction under section 243 is limited bysection 854(b). The corporation should receivea notice from the RIC specifying the amountof dividends that qualify for the deduction.

Report so-called dividends or earningsreceived from mutual savings banks, etc., asinterest. Do not treat them as dividends.

Line 2, Column (a)

Enter dividends (except those received ondebt-financed stock acquired after July 18,1984) that are received from

20%-or-more-owned domestic corporationssubject to income tax and that are subject tothe 80% deduction under section 243(c).Include on this line taxable distributions froman IC-DISC or former DISC that are consideredeligible for the 80% deduction.

Line 3, Column (a)

Enter dividends received on debt-financedstock acquired after July 18, 1984, fromdomestic and foreign corporations subject toincome tax that would otherwise be subject tothe dividends-received deduction under section243(a)(1), 243(c), or 245(a). Generally,debt-financed stock is stock that thecorporation acquired by incurring a debt (e.g.,it borrowed money to buy the stock).

Include on line 3 dividends received from a

regulated investment company (RIC) ondebt-financed stock. The amount of dividendseligible for the dividends-received deduction islimited by section 854(b). The corporationshould receive a notice from the RIC specifyingthe amount of dividends that qualify for thededuction.

Line 3, Columns (b) and (c)

Dividends received on debt-financed stockacquired after July 18, 1984, are not entitled tothe full 70% or