Form 5500,   Annual Return/Report of Employee Benefit Plan. File this form for a plan that is not a one-participant plan (see below).

Form 5500-EZ,   Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan. File this form for a plan that only covers the owner (or the owner and his or her spouse) but only if the owner (or the owner and his or her spouse) owns the entire business.

Line 25. Employee benefit programs.   Enter the contributions to employee benefit programs not claimed elsewhere on the return (e.g., insurance, health and welfare programs, etc.) that are not an incidental part of a pension, profit-sharing, etc., plan included on line 24.

Line 26. Other deductions.   Attach a schedule, listing by type and amount, all allowable deductions that are not deductible elsewhere on Form 990-C.

Examples of amounts to include on line 26:

• Amortization of pollution control facilities, organization expenses, etc. See Form 4562.
• Insurance premiums.
• Legal and professional fees.
• Supplies used and consumed in the business.
• Utilities.
• Ordinary losses from trade or business activities of a partnership (from Schedule K-1 (Form 1065 or 1065-B)). Do not offset ordinary losses against ordinary income. Instead, include the income on line 10. Show the partnership's name, address, and EIN on a separate statement attached to this return. If the amount entered is from more than one partnership, identify the amount from each partnership.
• Extraterritorial income exclusion (from Form 8873, line 55).

Do not deduct:

• Fines or penalties paid to a government for violating any law.
• Any amount that is allocable to a class of exempt income. See section 265(b) for exceptions.

Special rules apply to the following expenses.

Travel, meals, and entertainment.   Subject to limitations and restrictions discussed below, a cooperative can deduct ordinary and necessary travel, meals, and entertainment expenses paid or incurred in its trade or business.

Also, special rules apply to deductions for gifts, skybox rentals, luxury water travel, convention expenses, and entertainment tickets. For details, see section 274 and Pub. 463, Travel, Entertainment, Gift, and Car Expenses.

Travel.   The cooperative cannot deduct travel expenses of any individual accompanying a cooperative officer or employee, including a spouse or dependent of the officer or employee, unless:

• That individual is an employee of the cooperative and
• His or her travel is for a bona fide business purpose and would otherwise be deductible by that individual.

Meals and entertainment.   Generally, the cooperative can deduct only 50% of the amount otherwise allowable for meals and entertainment expenses paid or incurred in its trade or business. In addition (subject to exceptions under section 274(k)(2)):

• Meals must not be lavish or extravagant;
• A bona fide business discussion must occur during, immediately before, or immediately after the meal; and
• An employee must be present at the meal.

See section 274(n)(3) for a special rule that applies to meal expenses for individuals subject to the hours of service limits of the Department of Transportation.

Membership dues.   The cooperative may deduct amounts paid or incurred for membership dues in civic or public service organizations, professional organizations, business leagues, trade associations, chambers of commerce, boards of trade, and real estate boards, unless a principal purpose of the organization is to entertain or provide entertainment facilities for members or their guest. In addition, cooperatives may not deduct membership dues in any club organized for business, pleasure, recreation, or other social purpose. This includes country clubs, golf and athletic clubs, airline and hotel clubs, and clubs operated to provide meals under conditions favorable to business discussion.

Entertainment facilities.   The cooperative cannot deduct an expense paid or incurred for a facility (such as a yacht or hunting lodge) used for an activity that is usually considered entertainment, amusement, or recreation.

Note.   The cooperative may be able to deduct the otherwise nondeductible expense if the amount is treated as compensation and reported on Form W-2 for an employee or on Form 1099-MISC for an independent contractor.

Deduction for clean-fuel vehicles and certain refueling property.   Section 179A allows a deduction for part of the cost of qualified clean-fuel vehicle property and qualified clean-fuel vehicle refueling property placed in service during the tax year. For more information, see Pub. 535, Business Expenses.

Lobbying expenses.   Generally, lobbying expenses are not deductible. These expenses include:

• Amounts paid or incurred in connection with influencing Federal or state legislation (but not local legislation) or
• Amounts paid or incurred in connection with any communication with certain Federal executive branch officials in an attempt to influence the official actions or positions of the officials. See Regulations section 1.162-29 for the definition of influencing legislation.

Dues and other similar amounts paid to certain tax-exempt organizations may not be deductible. See section 162(e)(3). If certain in-house expenditures do not exceed $2,000, they are deductible. See section 162(e)(5)(B). For information on contributions to charitable organizations that conduct lobbying activities, see the instructions for line 19. For more information on lobbying expenses, see section 162(e).

Line 28 Taxable income before NOL deduction and special deductions

At-risk rules.   Special at-risk rules under section 465 generally apply to closely held cooperatives (see Passive activity limitations on page 8) engaged in any activity as a trade or business or for the production of income. These cooperatives may have to adjust the amount on line 28, Form 990-C.

A taxpayer is generally considered at-risk for an amount equal to his or her investment in the entity. That investment consists of money and other property contributed to the entity and amounts borrowed on behalf of the entity.

The at-risk rules do not apply to the following:

• Holding real property placed in service by the cooperative before 1987;
• Equipment leasing under sections 465(c)(4), (5), and (6); and
• Any qualifying business of a qualified cooperative under section 465(c)(7).

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

If the at-risk rules apply, complete Form 6198, At-Risk Limitations, then adjust the amount on this line for any section 465(d) losses. These losses are limited to the amount for which the cooperative is at risk for each separate activity at the close of the tax year. If the cooperative is involved in one or more activities, any of which incurs a loss for the year, report the losses for each activity separately. Attach Form 6198 showing the amount at risk and gross income and deductions for the activities with the losses.

If the cooperative sells or otherwise disposes of 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 activity by combining the gain or loss on the sale or disposition with the profit or loss from the activity. If the cooperative has a net loss, the loss may be limited because of the at-risk rules.

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

Line 29a. Net operating loss deduction.   A cooperative may use the net operating loss incurred in one tax year to reduce its taxable income in another year. Enter the total NOL carryovers from other tax years on line 29a, but do not enter more than the cooperative's taxable income (after special deductions). Attach a schedule showing the computation of the NOL deduction. Also complete item 20 on Schedule N.

The following special rules apply.

• If an ownership change occurs, the amount of taxable income of a loss cooperative that may be offset by the pre-change NOL carryovers may be limited (see section 382 and the related regulations). A loss cooperative must file an information statement with its income tax return for each tax year that certain ownership shifts occur (see Temporary Regulations section 1.382-2T(a)(2)(ii) for details). See Regulations section 1.382-6(b) for details on how to make the closing-of-the-books election.
• If a cooperative acquires control of another cooperative (or acquires its assets in a reorganization), the amount of pre-acquisition losses that may offset recognized built-in gain may be limited (see sections 384 and 1388(j)(2)).

For details on the NOL deduction, see Pub. 542, Corporations, section 172, and Form 1139, Corporation Application for Tentative Refund.

Line 30. Taxable income.   Certain cooperatives may need to file Form 8817. If so, taxable income reported on line 30 may not exceed the combined taxable income shown on line 30, Form 8817. Attach Form 8817 to the cooperative's tax return.

Net operating loss.   If line 30 is zero or less, the cooperative may have an NOL that can be carried back or forward as a deduction to other tax years. Generally, a cooperative first carries back an NOL 2 tax years (5 tax years for NOLs incurred in tax years ending in 2001 or 2002). However, the cooperative may elect to waive the carryback period and instead carry the NOL forward to future tax years. To make the election, see the instructions for Schedule N, item 19, on page 18. See Form 1139 for details, including other elections that may be available, which must be made no later than 6 months after the due date (excluding extensions) of the cooperative's return.

Patronage source losses cannot be used to offset nonpatronage income.

Line 32b. Estimated tax payments.   Enter any estimated tax payments the cooperative made for the tax year.

Beneficiaries of trusts.   If the cooperative is the beneficiary of a trust, and the trust makes a section 643(g) election to credit its estimated tax payments to its beneficiaries, include the cooperative's share of the estimated tax payment in the total amount entered on line 32b. Write T and the amount of the payment in the blank space to the right of the entry space.

Line 32f. Credit from refiguring tax for years in which nonqualified per-unit retain certificates or nonqualified written notices of allocation (redeemed this year) were issued.   If the cooperative would pay less total tax by claiming the deduction for the redemption of nonqualified written notices of allocation or nonqualified per-unit retain certificates in the issue year versus the current tax year, refigure the tax for the years the nonqualified written notices or certificates were originally issued, then enter the amount of the reduction in the issue years' taxes on this line. Attach a schedule showing how the credit was figured. This credit is treated as a payment, and any amount that is more than the tax on line 31 will be refunded.

Line 32g. Credit for federal tax on fuels.   Enter the credit from Form 4136, Credit for Federal Tax Paid on Fuels, if the cooperative qualifies to take this credit. Attach Form 4136 to Form 990-C.

Line 32h. Total payments.   Add the amounts on lines 32d through 32g and enter the total on line 32h.

Backup withholding.   If the cooperative had income tax withheld from any payments it received, because, for example, it failed to give the payer its correct EIN, include the amount withheld in the total for line 32h. This type of withholding is called backup withholding. Show the amount withheld in the blank space in the right-hand column between lines 31 and 32h, and write Backup Withholding.

Line 33. Estimated tax penalty.   A cooperative that does not make estimated tax payments when due may be subject to an underpayment penalty for the period of underpayment. Generally, a cooperative is subject to the penalty if its tax liability is $500 or more and it did not timely pay the smaller of:

• Its tax liability for 2002 or
• Its prior year's tax.

See section 6655 for details and exceptions including special rules for large cooperatives.

Use Form 2220, Underpayment of Estimated Tax by Corporations, to see if the cooperative owes a penalty and to figure the amount of the penalty. Generally, the cooperative does not have to file this form because the IRS can figure the amount of any penalty and bill the cooperative for it. However, even if the cooperative does not owe the penalty, complete and attach Form 2220 if:

• The annualized income or adjusted seasonal installment method is used or
• The cooperative is a large cooperative computing its first required installment based on the prior year's tax. (See the Instructions for Form 2220 for the definition of a large corporation.)

If Form 2220 is attached, check the box on line 33, and enter the amount of any penalty on this line.

Line 36. Direct deposit of refund.   If the cooperative has a refund of $1 million or more and wants it directly deposited into its checking or savings account at any U.S. bank or other financial institution instead of having a check sent to the cooperative, complete Form 8302 and attach it to the cooperative's tax return.

Schedule A

Cost of Goods Sold

Generally, inventories are required at the beginning and end of each tax year if the production, purchase, or sale of merchandise is an income-producing factor. See Regulations section 1.471-1.

However, if the cooperative is a qualifying taxpayer, or a qualifying small business taxpayer, it may adopt or change its accounting method to account for inventoriable items in the same manner as materials and supplies that are not incidental.

A qualifying taxpayer is a taxpayer (a) whose average annual gross receipts for the 3 prior tax years are $1 million or less and (b) whose business is not a tax shelter (as defined in section 448(d)(3)). A qualifying small business taxpayer includes a cooperative whose average annual gross receipts for the 3 prior tax years are more than $1 million but not more than $10 million and that is not prohibited from using the cash method under section 448.

Under this accounting method, inventory costs for raw materials purchased for use in producing finished goods, and merchandise purchased for resale, are deductible in the year the finished goods or merchandise are sold (but not before the year the cooperative pays for the raw materials or merchandise if it is also using the cash method). Enter amounts paid for all raw materials and merchandise during the tax year on line 2. The amount the cooperative can deduct for the tax year is figured on line 9. For additional guidance on this method of accounting for inventoriable items, see Rev. Proc. 2001-10 if the cooperative is a qualifying taxpayer, or Rev. Proc. 2002-28 if it is a qualifying small business taxpayer.

All filers not using the cash method of accounting should see Section 263A uniform capitalization rules on page 7 before completing Schedule A.

Line 1. Inventory at beginning of year.   Beginning inventory will generally equal ending inventory for last year's return. If this is your initial year, do not make an entry on line 1.

If the cooperative is changing its method of accounting for the current tax year, it must refigure last year's closing inventory using the new method of accounting and enter the result on line 1. If there is a difference between last year's closing inventory and the refigured amount, attach an explanation and take it into account when figuring the cooperative's section 481(a) adjustment explained on page 4.

Line 4a.   Qualified per-unit retain certificates are issued to patrons who have agreed to include the stated dollar amount in current income.

Line 5.   Enter the amount paid in money or other property (except per-unit retain certificates) to patrons to redeem nonqualified per-unit retain certificates. No deduction is allowed at the time of issuance for a nonqualified per-unit retain certificate. However, the cooperative may take a deduction in the year the certificate is redeemed, subject to the stated dollar amount of the certificate.

The cooperative may also choose to deduct the amount paid to redeem the certificate in the prior year if redemption occurs within the payment period for that preceding year. See section 1382(b).

See section 1383 and the instructions for line 32f for a special rule for figuring the cooperative's tax in the year of redemption of a nonqualified per-unit retain certificate.

Line 6a.   An entry is required on this line only for cooperatives electing a simplified method of accounting.

For cooperatives that have elected the simplified production method, additional section 263A costs are generally those costs, other than interest, that were not capitalized under the cooperative's method of accounting immediately prior to the effective date of section 263A that are now required to be capitalized under section 263A. For details, see Regulations section 1.263A-2(b).

For cooperatives that have elected the simplified resale method, additional section 263A costs are generally those costs incurred with respect to the following categories:

• Off-site storage or warehousing.
• Purchasing; handling, such as processing, assembly, repackaging, and transporting.
• General and administrative costs (mixed service costs).

For details, see Regulations section 1.263A-3(d).

Enter on line 6a the balance of section 263A costs paid or incurred during the tax year not includable on lines 2, 3, and 6b.

Line 6b.   Enter on line 6b any costs paid or incurred during the tax year not entered on lines 2 through 6a.

Line 8.   See Regulations sections 1.263A-1 through 1.263A-3 for details on figuring the amount of additional section 263A costs to be included in ending inventory.

If the cooperative accounts for inventoriable items in the same manner as materials and supplies that are not incidental, enter on line 8 the portion of its raw materials and merchandise purchased for resale that are included on line 7 and were not sold during the year.

Lines 10a through 10f

Inventory valuation methods.   Inventories can be valued at:

• Cost,
• Cost or market value (whichever is lower), or
• Any other method approved by the IRS that conforms to the requirements of the applicable regulations cited below.

However, the cooperative is required to use cost if it is using the cash method of accounting.

Cooperatives that account for inventory in the same manner as materials and supplies that are not incidental may currently deduct expenditures for direct labor and all indirect costs that would otherwise be included in inventory costs.

The average cost (rolling average) method of valuing inventories generally does not conform to the requirements of the regulations. See Rev. Rul. 71-234, 1971-1 C.B. 148.

Cooperatives that use erroneous valuation methods must change to a method permitted for Federal income tax purposes. To make this change, use Form 3115.

On line 10a, check the method(s) used for valuing inventories. Under lower of cost or market, the term market (for normal goods) means the current bid price prevailing on the inventory valuation date for the particular merchandise in the volume usually purchased by the taxpayer. For a manufacturer, market applies to the basic elements of cost - raw materials, labor, and burden. If section 263A applies to the taxpayer, the basic elements of cost must reflect the current bid price of all direct costs and all indirect costs properly allocable to goods on hand at the inventory date.

Inventory may be valued below cost when the merchandise is unsalable at normal prices or unsalable in the normal way because the goods are subnormal due to damage, imperfections, shop wear, etc., within the meaning of Regulations section 1.471-2(c). The goods may be valued at a current bona fide selling price, minus direct cost of disposition (but not less than scrap value) if such a price can be established.

If this is the first year the Last-in, First-out (LIFO) inventory method was either adopted or extended to inventory goods not previously valued under the LIFO method provided for in section 472, attach Form 970, Application To Use LIFO Inventory Method, or a statement with the information required by Form 970. Also check the LIFO box on line 10c. On line 10d, enter the amount or the percent of total closing inventories covered under section 472. Estimates are acceptable.

If the cooperative changed or extended its inventory to LIFO and had to write up its opening inventory to cost in the year of election, report the effect of this write-up as income (line 10, page 1) proportionately over a 3-year period that begins with the year of the LIFO election (section 472(d)).

For more information on inventory valuation methods, see Pub. 538.

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