Line 6c. General Business Credit

Enter on line 6c the corporation's total general business credit.

If the corporation is filing Form 8844, Empowerment Zone and Renewal Community Employment Credit, or Form 8884, New York Liberty Zone Business Employee Credit, check the Form(s) box, write the form number in the space provided, and include the allowable credit on line 6c.

If the corporation is required to file Form 3800, General Business Credit, check the Form 3800 box and include the allowable credit on line 6c.

If the corporation is not required to file Form 3800, check the Form(s) box, write the form number in the space provided, and include on line 6c the allowable credit from the applicable form listed below.

• Investment Credit (Form 3468).
• Work Opportunity Credit (Form 5884).
• Credit for Alcohol Used as Fuel (Form 6478).
• Credit for Increasing Research Activities (Form 6765).
• Low-Income Housing Credit (Form 8586).
• Orphan Drug Credit (Form 8820).
• Disabled Access Credit (Form 8826).
• Enhanced Oil Recovery Credit (Form 8830).
• Renewable Electricity Production Credit (Form 8835).
• Indian Employment Credit (Form 8845).
• Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips (Form 8846).
• Credit for Contributions to Selected Community Development Corporations (Form 8847).
• Welfare-to-Work Credit (Form 8861).
• New Markets Credit (Form 8874).
• Credit for Small Employer Pension Plan Startup Costs (Form 8881).
• Credit for Employer-Provided Child Care Facilities and Services (Form 8882).

Line 6d. Credit for Prior Year Minimum Tax

To figure the minimum tax credit and any carryforward of the credit, use Form 8827, Credit for Prior Year Minimum Tax - Corporations. Also see Form 8827 if any of the corporation's 2001 nonconventional source fuel credit or qualified electric vehicle credit was disallowed solely because of the tentative minimum tax limitation. See section 53(d).

Line 6e. Qualified Zone Academy Bond Credit

Enter the amount of any credit from Form 8860, Qualified Zone Academy Bond Credit.

Line 9. Other Taxes

Include any of the following taxes and interest in the total on line 9. Check the appropriate box(es) for the form, if any, used to compute the total.

Recapture of investment credit.   If the corporation disposed of investment credit property or changed its use before the end of its useful life or recovery period, it may owe a tax. See Form 4255, Recapture of Investment Credit, for details.

Recapture of low-income housing credit.   If the corporation disposed of property (or there was a reduction in the qualified basis of the property) for which it took the low-income housing credit, it may owe a tax. See Form 8611, Recapture of Low-Income Housing Credit.

Interest due under the look-back methods.   If the corporation used the look-back method for certain long-term contracts, see Form 8697 for information on figuring the interest the corporation may have to include. The corporation may also have to include interest due under the look-back method for property depreciated under the income forecast method. See Form 8866.

Other.   Additional taxes and interest amounts may be included in the total entered on line 9. Check the box for Other if the corporation includes any of the taxes and interest discussed below. See How to report, below, for details on reporting these amounts on an attached schedule.

• Recapture of qualified electric vehicle (QEV) credit. The corporation must recapture part of the QEV credit it claimed in a prior year if, within 3 years of the date the vehicle was placed in service, it ceases to qualify for the credit. See Regulations section 1.30-1 for details on how to figure the recapture.
• Recapture of Indian employment credit. Generally, if an employer terminates the employment of a qualified employee less than 1 year after the date of initial employment, any Indian employment credit allowed for a prior tax year because of wages paid or incurred to that employee must be recaptured. For details, see Form 8845 and section 45A.
• Recapture of new markets credit (see Form 8874).
• Interest on deferred tax attributable to
  • installment sales of certain timeshares and residential lots (section 453(l)(3)) and
  • certain nondealer installment obligations (section 453A(c)).
• Interest due on deferred gain (section 1260(b)).

How to report.    If the corporation checked the Other box, attach a schedule showing the computation of each item included in the total for line 9 and identify the applicable Code section and type of tax or interest.

Section III - Branch Profits Tax and Tax on Excess Interest

Part I - Branch Profits Tax

Section 884(a) imposes a 30% branch profits tax on the after-tax earnings of a foreign corporation's U.S. trade or business (i.e., effectively connected earnings and profits (ECEP)) that are not reinvested in a U.S. trade or business by the close of the tax year, or are disinvested in a later tax year. Changes in the value of the equity of the foreign corporation's U.S. trade or business (i.e., U.S. net equity) are used as a measure of whether earnings have been reinvested in, or disinvested from, a U.S. trade or business. An increase in U.S. net equity during the tax year is generally treated as a reinvestment of earnings for the current tax year. A decrease in U.S. net equity is generally treated as a disinvestment of prior year's earnings that have not previously been subject to the branch profits tax.

The amount subject to the branch profits tax for the tax year is the dividend equivalent amount. See Regulations section 1.884-1(b).

Exempt corporations.   A foreign corporation is exempt from the branch profits tax on its dividend equivalent amount if:

• It is a qualified resident of a country with which the United States has an income tax treaty in effect for the year in which the dividend equivalent arises and
• The income tax treaty with that country has not been modified on or after January 1, 1987.

See Regulations section 1.884-1(g)(3) for a list of the qualifying countries. See Item X on page 20 for the definition of qualified resident.

If the foreign corporation is exempt from the branch profits tax, do not complete Part I. However, be sure to complete Items W and X at the bottom of page 5.

Other entities subject to the branch profits tax.  

• A foreign corporate partner of a partnership engaged in a U.S. trade or business is subject to the branch profits tax on its ECEP attributable to its distributive share of effectively connected income.
• A foreign government is subject to both the branch profits tax and the branch-level interest taxes. However, no branch profits tax or branch-level interest tax will be imposed on ECEP and interest accrued prior to September 11, 1992. See Regulations section 1.884-0.

Line 2

Attach a schedule showing the following adjustments (based on the principles of section 312) to the corporation's line 1 effectively connected taxable income (ECTI) (before the NOL deduction and special deductions) to get ECEP:

• Positive adjustments for certain effectively connected income items that are excluded from ECTI but that must be included in computing ECEP (such as tax-exempt interest income).
• Positive adjustments for certain items deducted in computing ECTI but that cannot be deducted in computing ECEP. Include adjustments for certain deductions claimed in computing ECTI, such as:
  
  1. Excess of percentage depletion over cost depletion,
  2. Excess of accelerated depreciation over straight line depreciation (but only if 20% or more of the foreign corporation's gross income from all sources is U.S. source), and
  3. Capital loss carrybacks and carryovers.
• Negative adjustments for certain deductible items (that are allocable to effectively connected income) that cannot be deducted in computing ECTI but that must be deducted in computing ECEP (e.g., Federal income taxes, capital losses in excess of capital gains, and interest and expenses that are not deductible under section 265).

Note:   Do not reduce ECEP by any dividends or other distributions made by the foreign corporation to its shareholders during the year.

See Temporary Regulations section 1.884-2T for any adjustments to ECEP due to a reorganization, liquidation, or incorporation.

Exceptions.   Do not include the following types of income when computing ECEP:

• Income from the operation of ships or aircraft exempt from taxation under section 883(a)(1) or (2).
• FSC income and distributions treated as effectively connected income under section 921(d) or section 926(b) that are not otherwise effectively connected income.
• Gain on the disposition of an interest in a domestic corporation that is a U.S. real property interest under section 897(c)(1)(A)(ii) if the gain is not otherwise effectively connected income.
• Related person insurance company income that a taxpayer elects to treat as effectively connected income under section 953(c)(3)(C) if the income is not otherwise effectively connected income.
• Income that is exempt from tax under section 892.
• Interest income derived by a possession bank from U.S. obligations if the interest is treated as effectively connected income under section 882(e) and is not otherwise effectively connected income.

Note:   Deductions and other adjustments attributable (under the principles of Regulations section 1.861-8) to the types of income not includible in ECEP listed above do not reduce ECEP.

Lines 4a and 4b. U.S. Net Equity

U.S. net equity is U.S. assets reduced by U.S. liabilities. U.S. net equity may be less than zero. See Temporary Regulations section 1.884-2T for specific rules regarding the computation of the foreign corporation's U.S. net equity due to a reorganization, liquidation, or incorporation.

U.S. assets.   In general, property is a U.S. asset if all income from its use and all gain from its disposition (if used or sold on the last day of the tax year) are or would be effectively connected income. The amount of property taken into account as a U.S. asset is the adjusted basis (for purposes of computing earnings and profits) of the property. Special rules exist for specific types of property, such as depreciable property, inventory, and installment obligations. Special rules also exist to determine the amount of a partnership interest that is treated as a U.S. asset. See Regulations section 1.884-1(d).

U.S. liabilities.   In general, U.S. liabilities are U.S.-connected liabilities of a foreign corporation (determined under Regulations section 1.882-5), computed as of the end of the tax year, rather than as an average, as required under Regulations section 1.882-5. Special rules may apply to foreign insurance companies. For more details, see Regulations section 1.884-1(e).

If the corporation is electing to reduce liabilities under Regulations section 1.884-1(e)(3), attach a statement that it is making the election and indicate the amount of the reduction of U.S. liabilities and the corresponding reduction in interest expense.

Reporting requirements.   In the schedules required for lines 4a and 4b, report U.S. assets according to the categories of U.S. assets in Regulations section 1.884-1(d). For U.S. liabilities, show the formula used to calculate the U.S. liabilities figure.

Line 6. Branch Profits Tax

Qualification for treaty benefits.   In general, a foreign corporation must be a qualified resident (see Item X below for definition) in the tax year in which it has a dividend equivalent amount to obtain treaty benefits for the branch profits tax. It must also meet the requirements of any limitation on benefits article in the treaty. However, a foreign corporation is not required to be a qualified resident if it meets the requirements of a limitation on benefits article that entered into force after December 31, 1986. Treaties other than income tax treaties do not exempt a foreign corporation from the branch profits tax.

Note:   If a foreign corporation claims to be a qualified resident based on the two-part stock ownership and base erosion test, a special rule governs the period during which it must be a qualified resident. (See the instructions for Item X below.)

Rate of tax.   If treaty benefits apply, the rate of tax is the rate on branch profits specified in the treaty. If the treaty does not specify a rate for branch profits, the rate of tax is the rate specified in the treaty for dividends paid by a wholly owned domestic corporation to the foreign corporation. See Regulations section 1.884-1(g) for applicable rates of tax. Benefits other than a rate reduction may be available under certain treaties, such as the Canadian income tax treaty.

Effect of complete termination.   If the foreign corporation has completely terminated its U.S. trade or business (within the meaning of Temporary Regulations section 1.884-2T(a)) during the tax year, enter zero on line 6, and complete Item V at the bottom of page 5.

In general, a foreign corporation has terminated its U.S. trade or business if it no longer has any U.S. assets, except those retained to pay off liabilities. The foreign corporation (or a related corporation) may not use assets from the terminated U.S. trade or business or the proceeds from their sale in a U.S. trade or business within 3 years after the complete termination.

Coordination with withholding tax.   If a foreign corporation is subject to the branch profits tax in a tax year, it will not be subject to withholding at source (sections 871(a), 881(a), 1441, or 1442) on dividends paid out of earnings and profits for the tax year.

Part II - Tax on Excess Interest

If a foreign corporation is engaged in a U.S. trade or business, has effectively connected gross income, or has U.S. assets for purposes of Regulations section 1.882-5, it is subject to the tax on excess interest.

Excess interest is the interest apportioned to effectively connected income of the foreign corporation (including capitalized and nondeductible interest) under Regulations section 1.882-5, less branch interest. Branch interest is the interest paid by the U.S. trade or business of the foreign corporation (including capitalized and other nondeductible interest).

Important:   See the instructions for line 10 below to determine if the foreign corporation is exempt from the tax on excess interest. If it is exempt from the tax, and not simply subject to a reduced rate of tax, do not complete Part II of Section III. However, be sure to complete Items W and X on page 5.

Line 8. Branch Interest

Foreign banks.   In general, branch interest of a foreign bank is limited to:

• Interest paid for branch liabilities that are reported to bank regulatory authorities;
• Interest paid for offshore shell branches, if the U.S. branch performs substantially all the activities required to incur the liability; and
• Interest on liabilities that are secured predominantly by U.S. assets or that cause certain nondeductible interest (such as capitalized interest) related to U.S. assets.

All other foreign corporations.   In general, branch interest of foreign corporations (other than banks) includes:

1. Interest on liabilities shown on the books and records of the U.S. trade or business for purposes of Regulations section 1.882-5;
2. Interest on liabilities that are secured predominantly by U.S. assets or that cause certain nondeductible interest (such as capitalized interest) related to U.S. assets; and
3. Interest on liabilities identified as liabilities of the U.S. trade or business on or before the earlier of the date on which the first interest payment is made or the due date (including extensions) of the foreign corporation's income tax return for the tax year.

However, a liability may not be identified under 3 if the liability is incurred in the ordinary course of the foreign corporation's trade or business, or if the liability is secured predominantly by assets that are not U.S. assets. The interest on liabilities identified in 3 that will be treated as interest paid by the U.S. trade or business is capped at 85% of the interest of the foreign corporation that would be excess interest before considering interest on liabilities identified in 3 above. See Regulations section 1.884-4.

Interbranch interest.   Any interest paid for interbranch liabilities is disregarded in computing branch interest of any corporation.

Eighty-percent rule.   If 80% or more of a foreign corporation's assets are U.S. assets, the foreign corporation's branch interest will generally equal the interest reported on line 7c. However, any interest included on line 7c that has accrued but has not been paid will not be treated as branch interest on line 8 unless an election is made under Regulations section 1.884-4(c)(1) to treat such interest as paid in that year for all purposes of the Code.

If this 80% rule applies, check the box on line 8.

Note:   Branch interest of a foreign corporation is treated as if paid by a domestic corporation. A foreign corporation is thus required to withhold on interest paid by its U.S. trade or business to foreign persons (unless the interest is exempt from withholding under a treaty or the Code) and is required to file Forms 1042 and 1042-S for the payments.

Special treaty shopping rules apply if the recipient of the interest paid by the U.S. trade or business is a foreign corporation.

Line 9b

A foreign bank may treat a percentage of its excess interest as if it were interest on deposits and thus exempt from tax. Multiply the amount on line 9a by the greater of 85% or the ratio of the foreign bank's worldwide interest-bearing deposits to its worldwide interest-bearing liabilities as of the close of the tax year.

Line 10. Tax on Excess Interest

The rate of tax on excess interest is the same rate that would apply to interest paid to the foreign corporation by a wholly owned domestic corporation. The tax on excess interest is not prohibited by any provision in any treaty to which the United States is a party. The corporation may qualify for treaty benefits if it meets certain requirements. See Line 6. Branch Profits Tax, above, and Item X below. The corporation is exempt from the tax on excess interest if the rate of tax that would apply to interest paid to the foreign corporation by a wholly owned domestic corporation is zero and the foreign corporation qualifies for treaty benefits.

Additional Information Required

Complete all applicable items on page 5.

Item X

Qualified resident.   A foreign corporation is a qualified resident of a country if it meets one of the three tests explained below. See the regulations under section 884 for details on these tests and certain circumstances in which a foreign corporation that does not meet these tests may obtain a ruling to be treated as a qualified resident.

Two-part ownership and base erosion test.   A foreign corporation meets this test if:

• More than 50% of its stock (by value) is owned (directly or indirectly) during at least half the number of days in its tax year by qualifying shareholders and
• Less than 50% of its income is used (directly or indirectly) to meet liabilities to persons who are not residents of the foreign country and are not U.S. citizens or residents.

For purposes of this test, individuals resident in the foreign country, U.S. citizens and residents, governments of foreign countries, and foreign corporations that meet the publicly traded test (described later) are treated as qualifying shareholders.

In general, stock owned by a corporation, partnership, trust, or estate is treated as proportionately owned by the individual owners of such entities.

In order to satisfy the 50% stock ownership test described above, a foreign corporation must, before filing Form 1120-F for the tax year, obtain certain written documentation from the requisite number of its direct and indirect shareholders to show that it meets the test, including a certificate of residency from each foreign individual resident signed by the Competent Authority of the individual's country of residence. See Regulations sections 1.884-5(a) through (c).

If a foreign corporation is a qualified resident under this test and a portion of its dividend equivalent amount for the tax year is from ECEP earned in prior tax years, the foreign corporation will be entitled to treaty benefits for the entire dividend equivalent amount only if:

1. The foreign corporation was a qualified resident for all tax years within the 36-month period that includes the tax year of the dividend equivalent amount or
2. The foreign corporation was a qualified resident for the tax year of the dividend equivalent amount, and for the years in which the ECEP included in the dividend equivalent amount were earned.

If the foreign corporation fails the 36-month test but is a qualified resident for the tax year, the portion of the dividend equivalent amount for ECEP from any prior tax year will not be entitled to treaty benefits if the foreign corporation was not a qualified resident for the tax year in which the ECEP was earned. Thus, in some instances, more than one rate of tax may apply to the dividend equivalent amount reported on line 5, Section III. See Regulations section 1.884-1(g)(2).

Publicly traded test.   A foreign corporation meets this test if:

1. Its stock is primarily and regularly traded on one or more established securities markets in its country of residence or in the United States or
2. 90% or more of its stock is owned (directly or indirectly) by another corporation that meets the requirements of 1 and is a resident of the same country or is a domestic corporation.

See Regulations section 1.884-5(d).

Active trade or business test.   A foreign corporation meets this test if it has a substantial presence in its country of residence and its U.S. trade or business is an integral part of an active trade or business conducted by the foreign corporation in its country of residence. See Regulations section 1.884-5(e).

Item Z

If the corporation owned at least a 10% interest, directly or indirectly, in any foreign partnership, attach a statement listing the following information for each foreign partnership:

• Name and EIN (if any) of the foreign partnership;
• Identify which, if any, of the following forms the foreign partnership filed for its tax year ending with or within the corporation's tax year: Form 1042, 1065 or 1065-B, or 8804;
• Name of tax matters partner (if any); and
• Beginning and ending dates of the foreign partnership's tax year.

Schedules L, M-1, and M-2

A foreign corporation may limit Schedules L, M-1, and M-2 to:

1. The corporation's U.S. assets and its other assets effectively connected with its U.S. trade or business and liabilities reported on its U.S. books and records and
2. Its effectively connected income and its other U.S. source income.

Do not complete Schedules M-1 and M-2 if total assets at the end of the tax year (line 15, column (d) of Schedule L) are less than $25,000.

Schedule L - Balance Sheets per Books

The balance sheet should agree with the corporation's books and records. Include certificates of deposit as cash on line 1.

Line 5. Tax-exempt securities.   Include:

• State and local government obligations, the interest on which is excludable from gross income under section 103(a) and
• Stock in a mutual fund or other regulated investment company that distributed exempt-interest dividends during the tax year of the corporation.

Line 26. Adjustments to shareholders' equity.   Some examples of adjustments to report on this line include:

• Unrealized gains and losses on securities held available for sale.
• Foreign currency translation adjustments.
• The excess of additional pension liability over unrecognized prior service cost.
• Guarantees of employee stock (ESOP) debt.
• Compensation related to employee stock award plans.

If the total adjustment to be entered on line 26 is a negative amount, enter the amount in parentheses.

Schedule M-1 - Reconciliation of Income (Loss) per Books With Income per Return

Line 5c. Travel and entertainment expenses.   Include any of the following.

• Meals and entertainment expenses not deductible under section 274(n).
• Expenses for the use of an entertainment facility.
• The part of business gifts over $25.
• Expenses of an individual over $2,000 that are allocable to conventions on cruise ships.
• Employee achievement awards over $400.
• The cost of entertainment tickets over face value (also subject to the 50% limit under section 274(n)).
• The cost of skyboxes over the face value of nonluxury box seat tickets.
• The part of luxury water travel expenses not deductible under section 274(m).
• Expenses for travel as a form of education.
• Other nondeductible travel and entertainment expenses.

For more information, see Pub. 542.

Line 7a. Tax-exempt interest.   Include any exempt-interest dividends received as a shareholder in a mutual fund or other regulated investment company.

Codes for Principal Business Activity

Page 2 of Principal Business Activity Codes

Page 3 of Principal Business Activity Codes

Paperwork Reduction Act Notice.

We ask for the information on this form to carry out the Internal Revenue laws of the United States. You are required to give us the information. We need it to ensure that you are complying with these laws and to allow us to figure and collect the right amount of tax.

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

The time needed to complete and file this form will vary depending on individual circumstances. The estimated average time is:

Recordkeeping	106 hr., 25 min.
Learning about the law or the form	41 hr., 18 min.
Preparing the form	70 hr., 54 min.
Copying, assembling, and sending the form to the IRS	7 hr., 30 min.

If you have comments concerning the accuracy of these time estimates or suggestions for making this form simpler, we would be happy to hear from you. You can write to the Tax Forms Committee, Western Area Distribution Center, Rancho Cordova, CA 95743-0001. Do not send the tax form to this office. Instead, see Where To File on page 4.

Previous | First

Instructions Index | 2002 Tax Help Archives | Tax Help Archives | Home