2003 HTML Instructions for Form 1120-PC,

This is archived information that pertains only to the 2003 Tax Year. If you
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Table of Contents

Period Covered

Generally, file the 2003 return for calendar year 2003. However, if an insurance company joins in the filing of a consolidated return, it may adopt the tax year of the common parent corporation even if that year is not a calendar year. For a fiscal year return, fill in the tax year space at the top of the form.

Address

Include the suite, room, or other unit number after the street address. If the post office does not deliver mail to the street address and the corporation has a P.O. box, show the box number instead.

Employer Identification Number (EIN)

Enter the corporation's EIN. If the corporation does not have an EIN, it must apply for one. An EIN may be applied for:

Online—Click on the EIN link at www.irs.gov/businesses/small. The EIN is issued immediately once the application information is validated.
By telephone at 1-800-829-4933 from 7:30 a.m. to 5:30 p.m. in the corporation's local time zone.
By mailing or faxing Form SS-4, Application for Employer Identification Number.

If the corporation has not received its EIN by the time the return is due, write “Applied for” in the space for the EIN. For more details, see Pub. 583.

Note:

The online application process is not yet available for corporations with addresses in foreign countries or Puerto Rico.

Item A. Section 953 Elections

Check the applicable box if the corporation is a foreign corporation and elects under:

Section 953(c)(3)(C) to treat its related person insurance income as effectively connected with the conduct of a trade or business in the United States or
Section 953(d) to be treated as a domestic corporation.

Generally, a foreign corporation making either election must file its return with the Internal Revenue Service Center, Philadelphia, PA 19255. See Notice 87-50, 1987-2 C.B. 357, and Rev. Proc. 2003-47, 2003-28 I.R.B. 55, for the procedural rules, election statement formats, and filing addresses for making the respective elections under section 953(c)(3)(C) or section 953(d).

Note.

Once either election is made, it will apply to the tax year for which made and all subsequent tax years unless revoked with the consent of the IRS. Also, any loss of a foreign corporation electing to be treated as a domestic insurance company under section 953(d) will be treated as a dual-consolidated loss and may not be used to reduce the taxable income of any other member of the affiliated group for this tax year or any other tax year.

Note.

If a section 953(d) election is made, include the additional tax required to be paid, on line 13, page 1. On the dotted line to the left of line 13, page 1, write “Section 953(d)” and the amount. Attach a schedule showing the computation. See section 953(d) for more details.

Item E. Final Return, Name Change, Address Change, or Amended Return

Indicate a final return, name change, address change, or amended return by checking the appropriate box.

Note.

If a change of address occurs after the return is filed, use Form 8822, Change of Address, to notify the IRS of the new address.

Taxable Income

Line 1, Taxable income, and line 2, Taxable investment income. If the corporation is a small company as defined in section 831(b)(2) and elects under section 831(b)(2)(A)(ii) to be taxed on taxable investment income, complete Schedule B (ignore Schedule A) and enter the amount from Schedule B, line 21, on line 2, page 1. All other corporations should complete Schedule A (ignore Schedule B) and enter on line 1, page 1, the amount from Schedule A, line 37.

Tax Computation and Payments

Line 3

Members of a controlled group. A member of a controlled group, as defined in section 1563, must check the box on line 3 and complete lines 3a and 3b.

Line 3a. Members of a controlled group are entitled to one $50,000, one $25,000, and one $9,925,000 taxable income bracket amount (in that order) on line 3a.

When a controlled group adopts or later amends an apportionment plan, each member must attach to its tax return a copy of its consent to this plan. The copy (or an attached statement) must show the part of the amount in each taxable income bracket apportioned to that member. See Regulations section 1.1561-3(b) for other requirements and for the time and manner of making the consent.

Unequal apportionment plan. Members of a controlled group may elect an unequal apportionment plan and divide the taxable income brackets as they want. There is no need for consistency among taxable income brackets. Any member may be entitled to all, some, or none of the taxable income bracket. However, the total amount for all members cannot be more than the total amount in each taxable income bracket.

Equal apportionment plan. If no apportionment plan is adopted, members of a controlled group must divide the amount in each taxable income bracket equally among themselves. For example, Controlled Group AB consists of Corporation A and Corporation B. They do not elect an apportionment plan. Therefore, each corporation is entitled to:

$25,000 (one-half of $50,000) on line 3a(1),
$12,500 (one-half of $25,000) on line 3a(2), and
$4,962,500 (one-half of $9,925,000) on line 3a(3).

Line 3b. Members of a controlled group are treated as one group to figure the applicability of the additional 5% tax and the additional 3% tax. If an additional tax applies, each member will pay that tax based on the part of the amount used in each taxable income bracket to reduce that member's tax. See section 1561(a). If an additional tax applies, attach a schedule showing the taxable income of the entire group and how the corporation figured its share of the additional tax.

Line 3b(1). Enter the corporation's share of the additional 5% tax on line 3b(1).

Line 3b(2). Enter the corporation's share of the additional 3% tax on line 3b(2).

Line 4

Most corporations figure their tax by using the Tax Rate Schedule below. Exceptions apply to members of a controlled group. See the Tax Computation Worksheet for Members of a Controlled Group on this page. Members of a controlled group must attach a statement showing the computation of the tax entered on line 4.

Tax Rate Schedule

If the amount on line 1 or line 2, Form 1120-PC, page 1 is:
Over—	But not over—	Tax is:	Of the amount over—
$0	$50,000	15%	$0
50,000	75,000	$ 7,500 + 25%	50,000
75,000	100,000	13,750 + 34%	75,000
100,000	335,000	22,250 + 39%	100,000
335,000	10,000,000	113,900 + 34%	335,000
10,000,000	15,000,000	3,400,000 + 35%	10,000,000
15,000,000	18,333,333	5,150,000 + 38%	15,000,000
18,333,333	- - - - -	35%	0

Deferred tax under section 1291. If the corporation was a shareholder in a passive foreign investment company (PFIC) and received an excess distribution or disposed of its investment in the PFIC during the year, it must include the total increase in taxes due under section 1291(c)(2) in the amount entered on line 4. On the dotted line next to line 4, write “Section 1291” and the amount.

Do not include on line 4 any interest due under section 1291(c)(3). Instead, show the amount of interest owed in the bottom margin of page 1 and write “Section 1291 interest.” For details, see Form 8621, Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund.

Additional tax under section 197(f). A corporation that elects to pay tax on the gain from the sale of an intangible under the related person exception to the anti-churning rules should include any additional tax due under section 197(f)(9)(B) in the total for line 4. On the dotted line next to line 4, write “Section 197” and the amount. For more information, see Pub. 535, Business Expenses.

Line 5. Enter amount of tax that a reciprocal must include. A mutual insurance company that is an interinsurer or reciprocal underwriter may elect, under section 835, to limit the deduction for amounts paid or incurred to a qualifying attorney-in-fact to the amount of the deductions of the attorney-in-fact allocable to the income received by the attorney-in-fact from the reciprocal. If this election is made, any increase in taxable income of a reciprocal as a result of this limitation is taxed at the highest rate of tax specified in section 11(b).

Make no entry on line 5 if the mutual insurance company's taxable income before including the section 835(b) amount is $100,000 or more. Otherwise, this tax is 35% of the section 835(b) amount. If an entry is made on line 5, attach a statement showing how the tax was computed.

Reciprocal underwriters making the section 835(a) election are allowed a credit on line 14h for the amount of tax paid by the attorney-in-fact that is related to the income received by the attorney-in-fact from the reciprocal in the tax year.

See section 835 and the related regulations for special rules and information regarding the statements required to be attached to the return.

Line 6. Alternative minimum tax (AMT).

Note:

A corporation that is not a small corporation exempt from the AMT (see below) may be required to file Form 4626 if it claims certain credits, even though it does not owe any AMT. See Form 4626 for details.

Unless the corporation is treated as a small corporation exempt from the AMT, it may owe the AMT if it has any of the adjustments and tax preference items listed on Form 4626. The corporation must file Form 4626 if its taxable income (or loss) before the NOL deduction, combined with these adjustments and tax preference items, is more than the smaller of $40,000 or the corporation's allowable exemption amount (from Form 4626).

For this purpose, taxable income does not include the NOL deduction. See Form 4626 for details.

Exemption for small corporation. A corporation is treated as a small corporation exempt from the AMT for its tax year beginning in 2003 if that year is the corporation's first tax year in existence (regardless of its gross receipts) or:

It was treated as a small corporation exempt from the AMT for all prior tax years beginning after 1997 and
Its average annual gross receipts for the 3-tax-year-period (or portion thereof during which the corporation was in existence) ending before its tax year beginning in 2003 did not exceed $7.5 million ($5 million if the corporation had only 1 prior tax year).

Tax Computation Worksheet for Members of a Controlled Group (keep for your records)
Note. Each member of a controlled group must compute its tax using this worksheet.
1.	Enter taxable income (line 1 or line 2, page 1)
2.	Enter line 1 or the corporation's share of the $50,000 taxable income bracket, whichever is less
3.	Subtract line 2 from line 1
4.	Enter line 3 or the corporation's share of the $25,000 taxable income bracket, whichever is less
5.	Subtract line 4 from line 3
6.	Enter line 5 or the corporation's share of the $9,925,000 taxable income bracket, whichever is less
7.	Subtract line 6 from line 5
8.	Multiply line 2 by 15%
9.	Multiply line 4 by 25%
10.	Multiply line 6 by 34%
11.	Multiply line 7 by 35%
12.	If the taxable income of the controlled group exceeds $100,000, enter this member's share of the smaller of: 5% of the taxable income in excess of $100,000, or $11,750. See the instructions for line 3b.
13.	If the taxable income of the controlled group exceeds $15 million, enter this member's share of the smaller of: 3% of the taxable income in excess of $15 million, or $100,000. See the instructions for line 3b.
14.	Total. Add lines 8 through 13. Enter here and on line 4, page 1

Line 8a. Foreign tax credit. To find out when a corporation can take the credit for payment of income tax to a foreign country or U.S. possession, see Form 1118, Foreign Tax Credit—Corporations.

Line 8b. Other Credits

Include any other credits on line 8b. On the dotted line to the left of the entry space, write the amount of the credit and identify it.

Possessions tax credit. The Small Business Job Protection Act of 1996 repealed the possessions credit. However, existing credit claimants may qualify for a credit under the transitional rules. See Form 5735, Possessions Tax Credit (Under Sections 936 and 30A).

Nonconventional source fuel credit. A credit is allowed for the sale of qualified fuels produced from a nonconventional source. Section 29 contains a definition of qualified fuels, provisions for figuring the credit, and other special rules. Attach a separate schedule to the return showing the computation of the credit.

Qualified electric vehicle (QEV) credit. Include on line 8b any credit from Form 8834, Qualified Electric Vehicle Credit. Vehicles that qualify for this credit are not eligible for the deduction for clean-fuel vehicles under section 179A.

Line 8c. General Business Credit

Enter on line 8c 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 8c.

If the corporation is required to file Form 3800, General Business Credit, check the “Form 3800” box and include the allowable credit on line 8c.

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 8c 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).
Disabled Access Credit (Form 8826).
Enhanced Oil Recovery Credit (Form 8830).
Renewable Electricity Production Credit (Form 8835).
Indian Employment Credit (Form 8845).
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 Childcare Facilities and Services (Form 8882).

Line 8d. Credit for prior year minimum tax. To figure the minimum tax credit and any carryforward of that credit, use Form 8827, Credit for Prior Year Minimum Tax—Corporations. Also see Form 8827 if any of the corporation's 2002 nonconventional source fuel credit or qualified electric vehicle credit was disallowed solely because of the tentative minimum tax limitation. See section 53(d).

Line 8e. Qualified zone academy bond credit. Enter the amount of any credit from Form 8860, Qualified Zone Academy Bond Credit.

Line 10. Foreign corporations. A foreign corporation carrying on an insurance business in the United States is taxed as a domestic insurance company on its income effectively connected with the conduct of a trade or business in the United States (see sections 864(c) and 897 for definition).

Generally, any other U.S.-source income received by the foreign corporation is taxed at 30% (or at a lower treaty rate) under section 881. If the corporation has this income, attach a schedule showing the kind and amount of income, the tax rate, and the amount of tax. Enter the tax on line 9. However, see Reduction of section 881 tax below.

Note.

Interest received from certain portfolio debt investments that were issued after July 18, 1984, is not subject to the tax. See section 881(c) for details.

See section 842 for more information.

Minimum effectively connected net investment income. See section 842(b) and Notice 89-96, 1989-2 C.B. 417, for the general rules for computing this amount. Also, see Rev. Proc. 2003-70, 2003-34 I.R.B. 406, for the domestic asset/liability percentages and domestic investment yields needed to compute this amount.

Any additional income required by section 842(b) must be included in taxable income (e.g., Schedule A, line 13).

Reduction of section 881 tax. Additional taxes resulting from the net investment income adjustment may offset a corporation's section 881 tax on U.S.-source income. The tax reduction is determined by multiplying the section 881 tax by the ratio of the amount of income adjustment to income subject to the section 881 tax, computed without the exclusion for interest on state and local bonds or income exempted from taxation by treaty. See section 842(c)(2). Attach a statement showing how the reduction under section 881 was figured. Enter the net tax imposed by section 881 on line 10.

Line 11. Personal holding company tax. A corporation (other than a corporation described in section 542(c)) is taxed as a personal holding company (PHC) under section 542 if:

At least 60% of it's adjusted ordinary gross income for the tax year is PHC income and
At any time during the last half of the tax year more than 50% in value of its outstanding stock is owned, directly or indirectly, by five or fewer individuals.

See Schedule PH (Form 1120), U.S. Personal Holding Company Tax, for definitions and details on how to figure the tax.

A foreign PHC (defined in section 552) must file Form 5471.

Line 12. Other Taxes

Include any of the following taxes and interest in the total on line 12. 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.

Other. Additional taxes and interest amounts may be included in the total entered on line 12. 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 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).
Recapture of employer-provided childcare facilities and services credit (see Form 8882).
Interest on deferred tax attributable to 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 12 and identify the applicable Code section and the type of tax or interest.

Line 13. Total Tax

Include any deferred tax on the termination of a section 1294 election applicable to shareholders in a qualified electing fund in the amount entered on line 13. See Form 8621, Part V, and How to report below.

Subtract any deferred tax on the corporation's share of undistributed earnings of a qualified electing fund (see Form 8621, Part II).

How to report. Attach a schedule showing the computation of each item included in, or subtracted from, the total for line 13. On the dotted line next to line 13, specify (a) the applicable Code section, (b) the type of tax, and (c) the amount of tax.

Line 14b. Prior year(s) special estimated tax payments to be applied. The amount entered on line 14b must agree with the amount(s) from Form 8816, Part III, line 11. See Form 8816 and section 847 for additional information.

Line 14c. Estimated tax payments. Enter any estimated tax payments the corporation made for the tax year. Do not include any amount being applied on line 14d.

Line 14d. Special estimated tax payments. If the deduction under section 847 is claimed on Schedule A, line 27, special estimated tax payments must be made in an amount equal to the tax benefit of the deduction. These payments must be made on or before the due date (without regard to extensions) of this tax return. See Form 8816 and section 847(2) for additional information.

Tax benefit rule. Section 847(8) requires that if a corporation carries back net operating losses or capital losses that arise in years after a year in which a section 847 deduction was claimed, then the corporation must recompute the tax benefit attributable to the previously claimed section 847 deduction taking into account the loss carrybacks. Tax benefits also include those derived from filing a consolidated return with another insurance company (without regard to section 1503(c)).

Therefore, if the recomputation changes the amount of the section 847 tax benefit, then the taxpayer must provide a computation schedule and attach it to Form 8816.

Line 14h. Credit by reciprocal for tax paid by attorney-in-fact under section 835(d). Enter the amount of tax paid by an attorney-in-fact as a result of income received by the attorney-in-fact from the reciprocal during the tax year. For more information, see section 835, the related regulations, and the instructions for line 5 on page 7.

Line 14i. Other credits and payments. Enter the amount of any other credits the corporation may take and/or payments made. Write to the left of the entry space, an explanation of the entry.

Backup withholding. If the corporation had Federal 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 14i. Write the amount withheld and the words “Backup Withholding” on the dotted line to the left of the entry space for line 14i.

Line 14j. Total payments. Add the amounts on lines 14f through 14i and enter the total on line 14j.

Line 15. Estimated tax penalty. A corporation that does not make estimated tax payments when due may be subject to an underpayment penalty for the period of underpayment. Generally, a corporation 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 2003 or
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 the corporation owes a penalty and to figure the amount of the penalty. Generally, the corporation does not have to file this form because the IRS can figure the amount of any penalty and bill the corporation for it. However, even if the corporation does not owe the penalty, complete and attach Form 2220 if:

The annualized income or adjusted seasonal installment method is used or
The corporation is a large corporation 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 15 and enter the amount of any penalty on that line.

Line 18. Electronic deposit of tax refund of $1 million or more. If the corporation is due a refund of $1 million or more and wants it electronically deposited into its checking or savings account at any U.S. bank or other financial institution instead of having a check sent to the corporation, complete Form 8302 and attach it to the corporation's tax return.

Schedule A—Taxable Income

Gross income. Under section 832, gross amounts of underwriting and investment income should be computed on the basis of the underwriting and investment exhibit of the NAIC annual statement to the extent not inconsistent with the Internal Revenue Code and its Regulations. Gross income, however, does not include extraterritorial income that is qualifying foreign trade income. Use Form 8873, Extraterritorial Income Exclusion, to figure the exclusion. Include the exclusion in the total for “Other deductions” on line 31.

Note.

In computing the amounts for lines 2, 3, and 4, take all interest, dividends, or rents received during the year, add interest, dividends, or rents due and accrued at the end of the tax year, and deduct interest, dividends, or rents due and accrued at the end of the preceding tax year. For rules regarding the accrual of dividends, see Regulations section 1.301-1(b).

Line 3a, column (a). Gross interest. Enter the gross amount of interest income, including all tax-exempt interest.

Line 3b, column (a). Section 103(a) excludes interest on state or local bonds from gross income.

This exclusion does not apply to any:

Private activity bond which is not a qualified bond as defined by section 141;
Arbitrage bond as defined by section 148; or
Bonds not meeting the requirements of section 149 (regarding the registration of tax-exempt bonds).

Lines 3a and 3b, column (b). Amortization of premium. Enter on line 3a, column (b), the total amortization of bond premium, including amortization on tax-exempt bonds. Enter on line 3b, column (b), the amortization of bond premium on tax-exempt bonds only.

Note.

Insurance companies electing to amortize discount for tax purposes must reduce the amortization of premium by any amortization of discount.

Line 4. Gross rents. Enter gross rents, computed as indicated under the instructions for Gross income above. Deduct expenses, such as repairs, interest, taxes, and depreciation, on the proper lines for deductions.

Line 6. Capital gain net income. Every sale or exchange of a capital asset must be reported in detail on Schedule D (Form 1120), Capital Gains and Losses, even if there is no gain or loss.

Generally, losses from sales or exchanges of capital assets are only allowed to the extent of gains. However, corporations taxed under section 831 may claim losses from capital assets sold or exchanged to get funds to meet abnormal insurance losses and to pay dividends and similar distributions to policyholders. Do not include those types of losses here, but instead, report them on Schedule G.

The net capital loss for these corporations is the amount by which losses for the year from sales or exchanges of capital assets exceed the gains from these sales or exchanges plus the smaller of:

Taxable income (computed without gains or losses from sales or exchanges of capital assets); or
Losses from the sale or exchange of capital assets sold or exchanged to obtain funds to meet abnormal insurance losses and to provide for the payment of dividends and similar distributions to policyholders.

Subject to the limitations in section 1212(a), a net capital loss can be carried back 3 years and forward 5 years as a short-term capital loss.

Line 8. Certain mutual fire or flood insurance company premiums. A mutual fire or flood insurance company whose principal business is the issuance of policies (1) for which the premium deposits are the same (regardless of the length of the term the policies are written for) and (2) under which the unabsorbed portion of such premium deposits not required for losses, expenses, or establishment of reserves is returned or credited to the policyholder on cancellation or expiration of the policy, must include in income an amount equal to 2% of the premiums earned on insurance contracts during the tax year with respect to such policies after deduction of premium deposits returned or credited during the same tax year. See section 832(b)(1)(D).

Line 9. Income on account of special income and deduction accounts. Corporations which write the kinds of insurance below must maintain the following special accounts. A corporation which writes:

Mortgage guaranty insurance, must maintain a mortgage guaranty account;
Lease guaranty insurance, must maintain a lease guaranty account; and
Insurance on obligations the interest on which is excludable from gross income under section 103, must maintain an account with respect to insurance on state and local obligations.

Amounts required to be subtracted from these accounts under sections 832(e)(5) and 832(e)(6) must be reported as income on line 9. See section 832(e) for more information.

Line 10. Income from protection against loss account. Although section 1024 of P.L. 99-514 repealed section 824 relating to the protection against loss (PAL) account, PAL account balances are includible in income as though section 824 were still in effect. Attach a schedule showing the computation.

Line 11. Mutual interinsurers or reciprocal underwriters—decrease in subscriber accounts. Enter the decrease for the tax year in savings credited to subscriber accounts of a mutual insurance company that is an interinsurer or reciprocal underwriter.

Line 12. Income from a special loss discount account. Enter the amount from Form 8816, Part II, line 6.

Line 13. Other Income. Enter any other taxable income not reported on lines 1 through 12. List the type and amount of income on an attached schedule. If the corporation has only one item of other income, describe it in parentheses on line 13. Examples of other income to report on line 13 are:

The amount of credit for alcohol used as fuel (determined without regard to the limitation based on tax) entered on Form 6478, Credit for Alcohol Used as Fuel.
Refunds of taxes deducted in prior years to the extent they reduced income subject to tax in the year deducted (see section 111). Do not offset current year taxes against tax refunds.
The amount of any deduction previously taken under section 179A that is subject to recapture. The corporation must recapture the benefit of any allowable deduction for clean-fuel vehicle property (or clean-fuel vehicle refueling property) if the property later ceases to qualify. See Regulations section 1.179A-1 for details.
Ordinary income from trade or business activities of a partnership (from Schedule K-1 (Form 1065 or Form 1065-B)). Do not offset ordinary losses against ordinary income. Instead, include the losses on line 31. 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.

Deductions

Limitations on Deductions

Section 263A uniform capitalization rules. The uniform capitalization rules of section 263A require corporations to capitalize certain costs.

For details on the uniform capitalization rules, see Regulations sections 1.263A-1 through 1.263A-3.

Transactions between related taxpayers. Generally, an accrual basis taxpayer may only deduct business expenses and interest owed to a related party in the year the payment is included in the income of the related party. See sections 163(e)(3), 163(j), and 267 for limitations on deductions for unpaid interest and expenses.

Section 291 limitations. Corporations may be required to adjust certain deductions. See section 291 to determine the amount of the adjustment. Also, see section 43.

Golden parachute payments. A portion of the payments made by a corporation to key personnel that exceeds their usual compensation may not be deductible. This occurs when the corporation has an agreement (golden parachute) with these key employees to pay them these excess amounts if control of the corporation changes. See section 280G.

Business startup expenses. Business startup expenses must be capitalized unless an election is made to amortize them over a period of 60 months. See section 195 and Regulations section 1.195-1.

Reducing certain expenses for which credits are allowable. For each credit listed below, the corporation must reduce the otherwise allowable deductions for expenses used to figure the credit by the amount of the current year credit.

Work opportunity credit.
Research credit.
Enhanced oil recovery credit.
Disabled access credit.
Empowerment zone and renewal community employment credit.
Indian employment credit.
Welfare-to-work credit.
New York Liberty Zone business employee credit.

If the corporation has any of these credits, figure each current year credit before figuring the deduction for expenses on which the credit is based.

Line 15. Compensation of officers. Enter deductible officers' compensation on line 15. Do not include compensation deductible elsewhere on the return, such as elective contributions to a section 401(k) cash or deferred arrangement or amounts contributed under a salary reduction SEP agreement or a SIMPLE IRA plan.

Include only the deductible part of each officer's compensation on line 15. (See Disallowance of deduction for employee compensation in excess of $1 million below.) Attach a schedule for all officers using the following columns:

Name of officer.
Social security number.
Percentage of time devoted to business.
Amount of compensation.

If a consolidated return is filed, each member of an affiliated group must furnish this information.

Disallowance of deduction for employee compensation in excess of $1 million. Publicly-held corporations may not deduct compensation to a “covered employee” to the extent that the compensation exceeds $1 million. Generally, a covered employee is:

The chief executive officer of the corporation (or an individual acting in that capacity) as of the end of the tax year or
An employee whose total compensation must be reported to shareholders under the Securities Exchange Act of 1934 because the employee is among the four highest compensated officers for that tax year (other than the chief executive officer).

For this purpose, compensation does not include the following:

Income from certain employee trusts, annuity plans, or pensions and
Any benefit paid to an employee that is excluded from the employee's income.

The deduction limit does not apply to:

Commissions based on individual performance,
Qualified performance-based compensation, and
Income payable under a written, binding contract in effect on February 17, 1993.

The $1 million limit is reduced by amounts disallowed as excess parachute payments under section 280G.

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

Line 16. Salaries and wages. Enter the amount of salaries and wages paid for the tax year, reduced by the current year credits claimed for:

Any work opportunity credit from Form 5884,
Any empowerment zone and renewal community employment credit from Form 8844,
Any Indian employment credit from Form 8845,
Any welfare-to-work credit from Form 8861, and
Any New York Liberty Zone business employee credit from Form 8884.

See the instructions for these forms for more information. Do not include salaries and wages deductible elsewhere on the return, such as elective contributions to a section 401(k) cash or deferred arrangement or amounts contributed under a salary reduction SEP agreement or a SIMPLE IRA plan.

If the corporation provided taxable fringe benefits to its employees, such as the personal use of a car, do not deduct as wages the amount allocated for depreciation and other expenses that are claimed elsewhere on the return (e.g., Schedule A, line 22 or line 31).

Line 18. Rents. If the corporation rented or leased a vehicle, enter the total annual rent or lease expense paid or incurred during the year. Also complete Part V of Form 4562, Depreciation and Amortization. If the corporation leased a vehicle for a term of 30 days or more, the deduction for the vehicle lease expense may have to be reduced by an amount called the inclusion amount. The corporation may have an inclusion amount if:

The lease term began:	And the vehicle's FMV on the first day of the lease exceeded:
After 12/31/02 and before 1/1/04		$18,000
After 12/31/98 but before 1/1/03		$15,500
After 12/31/96 but before 1/1/99		$15,800
After 12/31/94 but before 1/1/97		$15,500
After 12/31/93 but before 1/1/95		$14,600
If the lease term began before January 1, 1994, see Pub. 463, Travel, Entertainment, Gift, and Car Expenses, to find out if the corporation has an inclusion amount. The inclusion amount for lease terms beginning in 2004 will be published in the Internal Revenue Bulletin in early 2004.

See Pub. 463 for instructions on figuring the inclusion amount.

Line 19. Taxes and licenses. Enter taxes paid or accrued during the tax year, but do not include the following.

Federal income taxes.
Foreign or U.S. possession income taxes if a tax credit is claimed (however, see the Instructions for Form 5735 for special rules for possession income taxes).
Taxes not imposed on the corporation.
Taxes, including state or local sales taxes, that are paid or incurred in connection with an acquisition or disposition of property. (These taxes must be treated as a part of the cost of the acquired property or, in the case of a disposition, as a reduction in the amount realized on the disposition.)
Taxes assessed against local benefits that increase the value of the property assessed (such as for paving, etc.).
Taxes deducted elsewhere on the return.

See section 164(d) for the apportionment of taxes on real property between a seller and a purchaser.

Line 20a. Interest.

Note.

The deduction for interest is limited when the corporation is a policyholder or beneficiary with respect to a life insurance, endowment, or annuity contract issued after June 8, 1997. For details, see section 264(f). Attach a statement showing the computation of the deduction.

The corporation must make an interest allocation if the proceeds of a loan were used for more than one purpose (e.g., to purchase a portfolio investment and to acquire an interest in a passive activity). See Temporary Regulations section 1.163-8T for the interest allocation rules.

Do not deduct the following interest:

Interest on indebtedness incurred or continued to purchase or carry obligations if the interest is wholly exempt from income tax. For exceptions, see section 265(b).
Interest and carrying charges on straddles. Generally, these amounts must be capitalized. See section 263(g).
Interest on debt allocable to the production of designated property by a corporation for its own use or for sale. The corporation must capitalize this interest. Also capitalize any interest on debt allocable to an asset used to produce the property. See section 263A(f) and Regulations section 1.263A-8 through 1.263A-15 for definitions and more information.

Special rules apply to:

Interest on which no tax is imposed (see section 163(j)).
Foregone interest on certain below-market-rate loans (see section 7872).
Original issue discount on certain high-yield discount obligations. (See section 163(e) to figure the disqualified portion.)

Line 20b. Less tax-exempt interest expense. Enter interest paid or accrued during the tax year on indebtedness incurred or continued to purchase or carry obligations if the interest is wholly exempt from income tax. For exceptions, see section 265(b).

Line 21. Charitable contributions. Enter contributions or gifts actually paid within the tax year to or for the use of charitable and governmental organizations described in section 170(c) and any unused contributions carried over from prior years.

Corporations reporting taxable income on the accrual method may elect to treat as paid during the tax year any contributions paid by the 15th day of the 3rd month after the end of the tax year if the contributions were authorized by the board of directors during the tax year. Attach a declaration to the return stating that the resolution authorizing the contributions was adopted by the board of directors during the tax year. The declaration must include the date the resolution was adopted.

Limitation on deduction. The total amount claimed may not be more than 10% of taxable income (line 37, Schedule A) computed without regard to:

Any deduction for contributions,
The deduction for dividends received,
Any net operating loss (NOL) carryback to the tax year under section 172, and
Any capital loss carryback to the tax year under section 1212(a)(1).

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

Special rules apply if the corporation has an NOL carryover to the tax year. In figuring the charitable contributions deduction for the tax year, the 10% limit is applied using taxable income after taking into account any deduction for the NOL.

To figure the amount of any remaining NOL carryover to later years, taxable income must be modified (see section 172(b)). To the extent that contributions are used to reduce taxable income for this purpose and increase an NOL carryover, a contributions carryover is not allowed. See section 172(d)(2)(B).

Substantiation requirements. Generally, no deduction is allowed for any contribution of $250 or more unless the corporation obtains a written acknowledgment from the donee organization that shows the amount of cash contributed, describes any property contributed, and, either gives a description and a good faith estimate of the value of any goods or services provided in return for the contribution or states that no goods or services were provided in return for the contribution. The acknowledgment must be obtained by the due date (including extensions) of the corporation's return, or, if earlier, the date the return is filed. Do not attach the acknowledgment to the tax return, but keep it with the corporation's records. These rules apply in addition to the filing requirements for Form 8283, Noncash Charitable Contributions, described on page 12.

For more information on substantiation and recordkeeping requirements, see the regulations under section 170 and Pub. 526, Charitable Contributions.

Contributions to organizations conducting lobbying activities. Contributions made to an organization that conducts lobbying activities are not deductible if:

The lobbying activities relate to matters of direct financial interest to the donor's trade or business and
The principal purpose of the contribution was to avoid Federal income tax by obtaining a deduction for activities that would have been nondeductible under the lobbying expense rules if conducted directly by the donor.

Contributions of property other than cash. If a corporation contributes property other than cash and claims over a $500 deduction for the property, it must attach a schedule to the return describing the kind of property contributed and the method used to determine its fair market value (FMV). Generally, corporations must complete and attach Form 8283 to their returns for contributions of property (other than money) if the total claimed deduction for all property contributed was more than $5,000.

If the corporation made a “qualified conservation contribution” under section 170(h), also include the FMV of the underlying property before and after the donation, as well as the type of legal interest contributed, and describe the conservation purpose benefited by the donation. If a contribution carryover is included, show the amount and how it was determined.

Reduced deduction for contributions of certain property. For a charitable contribution of property, the corporation must reduce the contribution by the sum of:

The ordinary income and short-term capital gain that would have resulted if the property had been sold at its FMV and
For certain contributions, the long-term capital gain that would have resulted if the property had been sold at its FMV.

The reduction for long-term capital gain applies to:

Contributions of tangible personal property for use by an exempt organization for a purpose or function unrelated to the basis for its exemption and
Contributions of any property to or for the use of certain private foundations except for stock for which market quotations are readily available (section 170(e)(5)).

Larger deduction. A larger deduction is allowed for certain contributions of:

Inventory and other property to certain organizations for use in the care of the ill, needy, or infants (see section 170(e)(3) and Regulations section 1.170A-4A);
Scientific equipment used for research to institutions of higher learning or to certain scientific research organizations (see section 170(e)(4)); and
Computer technology and equipment for educational purposes.

Contributions of computer technology and equipment for educational purposes. A corporation may take an increased deduction under section 170(e)(6) for qualified contributions of computer technology or equipment for educational purposes. Computer technology or equipment means computer software, computer or peripheral equipment, and fiber optic cable related to computer use. A contribution is a qualified contribution if:

It is made to an eligible donee (see below);
Substantially all of the donee property's use is:
1. Related to the purpose or function of the donee,
2. For use within the United States, and
3. For educational purposes.
The contribution is made not later than 3 years after the date the taxpayer acquired or substantially completed the construction of the property;
The original use of the property is by the donor or the donee;
The property is not transferred by the donee for money, services, or other property, except for shipping, transfer, and installation costs;
The property fits productively into the donee's education plan; and
The property meets standards, if any, that may be prescribed by future regulations, to assure it meets minimum functionality and suitability for educational purposes.

Eligible donee. The term “eligible donee” means:

An educational organization that normally maintains a regular faculty and curriculum and has a regularly enrolled body of pupils in attendance at the place where its educational activities are regularly conducted,
A section 501(c)(3) entity organized primarily for purposes of supporting elementary and secondary education, or
A public library (as described in section 170(e)(6)(B)(i)(III).

Exceptions. The following exceptions apply to the above rules for computer technology and equipment:

Contributions to private foundations may qualify if the foundation contributes the property to an eligible donee within 30 days after the contribution and notifies the donor of the contribution. For more details, see section 170(e)(6)(C).
For contributions of property reacquired by the manufacturer of the property, the 3-year period begins on the date that the original construction of the property was substantially completed. Also, the original use of the property may be by someone other than the donor or donee.

Line 22. Depreciation. Besides depreciation, include on line 22 the part of the cost that the corporation elected to expense under section 179 for certain property placed in service during tax year 2003 or carried over from 2002. See Form 4562 and its instructions.

Line 23. Depletion. See sections 613 and 613A for percentage depletion rates applicable to natural deposits. Also, see section 291 for the limitation on the depletion deduction for iron ore and coal (including lignite).

Attach Form T (Timber), Forest Activities Schedule, if a deduction for depletion of timber is taken.

Foreign intangible drilling costs and foreign exploration and development costs must either be added to the corporation's basis for cost depletion purposes or be deducted ratably over a 10-year period. See sections 263(i), 616, and 617 for details.

Line 24. Pension, profit-sharing, etc., plans. Enter the deduction for contributions to qualified pension, profit-sharing, or other funded deferred compensation plans. Employers who maintain such a plan generally must file one of the forms listed below, even if the plan is not a qualified plan under the Internal Revenue Code. The filing requirement applies even if the corporation does not claim a deduction for the current tax year. There are penalties for failure to file these forms on time and for overstating the pension plan deduction. See sections 6652(e) and 6662(f).

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 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 27. Additional deduction. Enter on line 27, the total from Form 8816, Part II, line 5.

Any insurance company taking the additional deduction must:

Make special estimated tax payments equal to the tax benefit from the deduction and
Establish and maintain a Special Loss Discount Account. See section 847 and Form 8816 for more information.

Line 29. Dividends to policyholders. Enter the total dividends and similar distributions paid or declared to policyholders, as policyholders, except in the case of a mutual fire insurance company exclusively issuing perpetual policies. Whether dividends have been paid or declared should be determined according to the method of accounting employed by the insurance company.

Dividends and similar distributions include amounts returned or credited to policyholders on cancellation or expiration of policies issued by a mutual fire or flood insurance company:

Where the premium deposits for the policy are the same (regardless of the length of the policy) and
The unabsorbed portion of the premium deposits not required for losses, expenses, or establishment of reserves is returned or credited to the policyholder on cancellation or expiration of the policy.

In the case of a qualified group self-insurers fund, the fund's deduction for policyholder dividends is allowed no earlier than the date the state regulatory authority determines the amount of the policyholder dividend that may be paid. See section 6076 of the Technical and Miscellaneous Revenue Act of 1988 (“Act of 1988”).

Line 30. Mutual interinsurers or reciprocal underwriters—increase in subscriber accounts. A mutual insurance company that is an interinsurer or reciprocal underwriter may deduct the increase in savings credited to subscriber accounts for the tax year.

Savings credited to subscriber accounts means the surplus credited to the individual accounts of subscribers before the 16th day of the 3rd month following the close of the tax year. This is true only if the corporation would be required to pay this amount promptly to a subscriber if the subscriber ended the contract when the corporation's tax year ends. The corporation must notify the subscriber as required by Regulations section 1.823-6(c)(2)(v). The subscriber must treat any savings credited to the subscriber's account as a dividend paid or declared.

Line 31. Other deductions. Attach a schedule, listing by type and amount, all allowable deductions under sections 832(c)(1) and (10) (net of the annual statement change in undiscounted unpaid loss adjustment expenses) that are not deductible on lines 15 through 30. Examples of amounts to include are:

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 income against ordinary losses. Instead, include the income on line 13. 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 52).
Dividends paid in cash on stock held by an employee stock ownership plan. However, a deduction may only be taken if, according to the plan, the dividends are:
1. Paid in cash directly to the plan participants or beneficiaries;
2. Paid to the plan, which distributes them in cash to the plan participants or their beneficiaries no later than 90 days after the end of the plan year in which the dividends are paid;
3. At the election of the participants or their beneficiaries: (a) payable as provided under 1 or 2 above or (b) paid to the plan and reinvested in qualifying employer securities; or
4. Used to make payments on a loan described in section 404(a)(9).
  
  See section 404(k) for more details and the limitation on certain dividends.
  
  Do not deduct fines or penalties paid to a government for violating any law.

Travel, meals, and entertainment. Subject to limitations and restrictions discussed below, a corporation 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. See section 274 and Pub. 463 for more details.

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

That individual is an employee of the corporation 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 corporation 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 of the corporation must be present at the meal.

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

Membership dues. The corporation may deduct amounts paid or incurred for membership dues in civic or public service organizations, professional organizations (such as bar and medical associations), business leagues, trade associations, chambers of commerce, boards of trade, and real estate boards. However, no deduction is allowed if a principal purpose of the organization is to entertain, or provide entertainment facilities for, members or their guests. In addition, corporations 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 corporation cannot deduct an expense paid or incurred for a facility (such as a yacht or hunting lodge) used for an activity usually considered entertainment, amusement, or recreation.

Note.

The corporation may be able to deduct otherwise nondeductible meals, travel, and entertainment expenses if the amounts are 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.

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 lobbying expenditures do not exceed $2,000, they are deductible. For information on contributions to charitable organizations that conduct lobbying activities, see the instructions for Schedule A, line 21. For more information on lobbying expenses, see section 162(e).

Line 32. Total deductions. Insurance companies that issue specified insurance contracts (as defined in section 848(e)(1)) are generally required to amortize policy acquisition expenses on a straight-line basis over a period of 120 months beginning with the 1st month in the 2nd half of the tax year (section 848(a)). Reduce total deductions on line 32 by the amount required to be capitalized under section 848. Attach a schedule showing all computations. See section 848 and its regulations for special rules, definitions, and exceptions. Also see Schedule G, Form 1120-L, and its instructions for more information.

Line 34b. Deduction on account of the special income and deduction accounts. Enter the total of the amounts required to be added under sections 832(e)(4) and (6). However, no deduction is permitted unless tax and loss bonds are purchased in an amount equal to the tax benefit of the deduction. See section 832(e).

Note.

The deduction on account of the special income and deduction accounts is limited to taxable income for the tax year (computed without regard to this deduction or to any carryback of a net operating loss).

Line 36b. Net operating loss deduction. A corporation may use the net operating loss (NOL) incurred in one tax year to reduce its taxable income in another tax year.

Enter on line 36b the total NOL carryovers from other tax years, but do not enter more than the corporation's taxable income (after the dividends-received deduction). Attach a schedule showing the computation of the NOL deduction. Also complete item 12 on Schedule I.

The following special rules apply.

A corporate equity reduction interest loss may not be carried back to a tax year preceding the year of the equity reduction transaction (see section 172(b)(1)(E)).
If an ownership change occurs, the amount of the taxable income of a loss corporation that may be offset by the pre-change NOL carryovers may be limited (see section 382 and the related regulations). A loss corporation 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 corporation acquires control of another corporation (or acquires its assets in a reorganization), the amount of pre-acquisition losses that may offset recognized built-in gain may be limited (see section 384).
An NOL cannot be carried to or from any tax year for which the insurance company is not subject to tax under section 831(a), or to any tax year if, between the tax year from which the loss is being carried and such tax year, there is an intervening tax year for which the insurance company was not subject to tax imposed by section 831(a).

For details on the NOL deduction, see Pub. 542, section 172, section 844, and Form 1139, Corporation Application for Tentative Refund.

Line 37. Taxable income. If line 37 is zero or less, the corporation may have an NOL that may be carried back or forward as a deduction to other tax years. Generally, a corporation first carries back an NOL 2 tax years. However, the corporation 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 I, item 11, 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 corporation's tax return.

Schedule B, Part I—Taxable Investment Income of Electing Small Companies

Note.

(1) Once an election under section 831(b) is made to be taxed only on investment income, it can only be revoked with the consent of the Secretary, and (2) a corporation making this election must include on line 8, gross investment income, any amount subtracted from a protection against loss account.

Income

Line 1a, column (a). Gross interest. Enter the gross amount of interest income including all tax-exempt interest income.

Line 1b, column (a). Interest exempt under section 103. Enter the amount of interest on state and local bonds that is exempt from taxation under section 103. See the instructions for Schedule A, line 3b, column (a), for more information.

Lines 1a and 1b, column (b). Amortization of premium. Enter on line 1a, column (b), the total amortization of premium on tax-exempt bonds.

Enter on line 1b, column (b), the amortization of bond premium on tax-exempt bonds.

Note.

Insurance companies electing to amortize discount for tax purposes must reduce the amortization of premium by any amortization of discount.

Line 3. Gross rents. Enter the gross rents received or accrued during the tax year. Deduct rental expenses such as repairs, interest, taxes, and depreciation on the proper lines in the Deductions section.

Line 5. Gross income from a trade or business, other than an insurance business, and from Form 4797. Enter the gross income from a trade or business, other than an insurance business, carried on by the insurance company or by a partnership of which the insurance company is a partner. Include section 1245 and section 1250 gains (as modified by section 291), and other gains from Form 4797, Sales of Business Property, on investment assets only.

Line 6. Income from leases described in sections 834(b)(1)(B) and 834(b)(1)(C). Enter gross income from entering into, changing, or ending any lease, mortgage, or other instrument or agreement from which the company earns interest, rents, or royalties.

Line 8. Gross investment income. If gross investment income includes an amount subtracted from the protection against loss account, write on the dotted line next to line 8, “PAL” and the amount.

Deductions

Note.

See section 834(d)(1) regarding the limitation of expenses on real estate owned and occupied in part or in whole by a mutual insurance company.

Line 9. Real estate taxes. Enter taxes paid or accrued on real estate owned by the corporation and deductible under section 164.

Line 10. Other real estate expenses. Enter all ordinary and necessary real estate expenses, such as fire insurance, heat, light, and labor. Also enter the cost of incidental repairs, such as labor and supplies, that do not add to the property's value or appreciably prolong its life. Do not include any amount paid for new buildings or for permanent improvements or betterments made to increase the value of any property or any amount spent on foreclosed property before the property is held for rent.

Line 11. Depreciation. Enter depreciation on assets only to the extent that the assets are used to produce gross investment income reported on lines 1 through 7 of Schedule B. For more information, see the instructions for line 22, Schedule A.

Line 12. Depletion. Enter any allowable depletion on royalty income reported on line 4, Schedule B. See the instructions for line 23, Schedule A, for more information.

Line 13. Trade or business deductions. Enter the total deductions related to any trade or business income included in gross investment income under section 834(b)(2). Do not include deductions for any insurance business. Do not include losses from sales or exchanges of capital assets or property used in the business, or from the compulsory or involuntary conversion of property used in the trade or business.

Line 14. Interest. See the instructions for lines 20a and 20b, Schedule A.

Line 17. Investment expenses. Enter expenses that are properly chargeable as investment expenses. If general expenses are allocated to investment expenses, the total deduction cannot be more than the amount on Schedule B, Part II, line 39. Attach a schedule showing the kind and amount of general expenses. Minor items may be grouped together.

See section 267 for the limitation on deductions for unpaid expenses and interest in transactions between related taxpayers.

Schedule B, Part II—Invested Assets Book Values

Use Schedule B, Part II, to compute the limitation on investment expenses under section 834(c)(2) when any general expenses are in part assigned to, or included in, the investment expenses deducted on Schedule B, Part I, line 17.

Schedule C—Dividends and Special Deductions

Definitions

The acquisition date for investments acquired by direct purchase is the trade date rather than the settlement date. For investments not acquired by direct purchase (such as those acquired through transfers among affiliates, tax-free reorganizations, or the liquidation of a subsidiary, etc.), the actual acquisition date should be used regardless of the holding period determined under section 1223.

A special rule applies in determining the acquisition date of dividends received from affiliates. This rule provides that the portion of any 100% dividend which is related to prorated amounts be treated as received with respect to stock acquired on the later of:

(a) the date the payor acquired the stock or obligation to which the prorated amounts are attributable or

(b) the first day on which the payor and payee were members of the same affiliated group as defined in section 243(b).

Also, if the taxpayer is a member of an affiliated group filing a consolidated return, its determination of dividends received is made as if the group were not filing a consolidated return.

Prorated amounts means tax-exempt interest and dividends for which a deduction is allowable under section 243, 244, or 245 (other than 100% dividends).

100% dividend means any dividend if the percentage used for purposes of determining the deduction allowable under section 243, 244, or 245(b) is 100%. A special rule applies to certain dividends received by a foreign corporation.

Lines 1 through 23

For purposes of the 20% ownership test on lines 1 through 7, the percentage of stock owned by the corporation is based on voting power and value of the stock. Preferred stock described in section 1504(a)(4) is not taken into account. Corporations filing a consolidated return should see Regulations sections 1.1502-13, 1.1502-26, and 1.1502-27 before completing Schedule C.

Lines 1 through 9, column (a). Enter in column (a) of the appropriate line those dividends that are subject to the provisions of section 832(b)(5)(B).This will include:

All dividends (other than 100% dividends) received on stock acquired after August 7, 1986, and
100% dividends received on stock acquired after August 7, 1986, to the extent that such dividends are attributable to prorated amounts (see definition above).

In the case of an insurance company that files a consolidated return, the determination with respect to any dividend paid by a member to another member of the affiliated group is made as if no consolidated return was filed. See section 832(g).

Line 1. Enter dividends (except those received on debt-financed stock acquired after July 18, 1984–see section 246A) that:

Are received from less-than-20%-owned domestic corporations subject to income tax and
Qualify for the 70% deduction under section 243(a)(1).

Also, include on line 1:
Taxable distributions from an IC-DISC or former DISC that are designated as eligible for the 70% deduction and certain dividends of Federal Home Loan Banks. See section 246(a)(2).
Dividends (except those received on debt-financed stock acquired after July 18, 1984) from a regulated investment company (RIC). The amount of dividends eligible for the dividends-received deduction under section 243 is limited by section 854(b). The corporation should receive a notice from the RIC specifying the amount of dividends that qualify for the deduction.

Report so-called dividends or earnings received from mutual savings banks, etc., as interest. Do not treat them as dividends.

Line 2. Enter on line 2:

Dividends (except those received on debt-financed stock acquired after July 18, 1984) that are received from 20%-or-more-owned domestic corporations subject to income tax and that are subject to the 80% deduction under section 243(c) and
Taxable distributions from an IC-DISC or former DISC that are considered eligible for the 80% deduction.

Line 3. Enter dividends that are:

Received on debt-financed stock acquired after July 18, 1984, from domestic and foreign corporations subject to income tax that would otherwise be subject to the dividends-received deduction under section 243(a)(1), 243(c), or 245(a). Generally, debt-financed stock is stock that the corporation acquired by incurring a debt (e.g., it borrowed money to buy the stock).
Received from a RIC on debt-financed stock. The amount of dividends eligible for the dividends-received deduction is limited by section 854(b). The corporation should receive a notice from the RIC specifying the amount of dividends that qualify for the deduction.

Line 4. Enter dividends received on the preferred stock of a less-than-20%-owned public utility that is subject to income tax and is allowed the deduction provided in section 247 for dividends paid.

Line 5. Enter dividends received on preferred stock of a 20%-or-more-owned public utility that is subject to income tax and is allowed the deduction provided in section 247 for dividends paid.

Line 6. Enter the U.S.-source portion of dividends that:

Are received from less-than-20%-owned foreign corporations and
Qualify for the 70% deduction under section 245(a). To qualify for the 70% deduction, the corporation must own at least 10% of the foreign corporation by vote and value.

Also include dividends received from a less-than-20%-owned foreign sales corporation (FSC) that:

Are attributable to income treated as effectively connected with the conduct of a trade or business within the United States (excluding foreign trade income) and
Qualify for the 70% deduction provided in section 245(c)(1)(B).

Line 7. Enter the U.S.-source portion of dividends that are received from 20%-or-more-owned foreign corporations and that qualify for the 80% deduction under section 245(a). Also include dividends received from a 20%-or-more-owned FSC that:

Are attributable to income treated as effectively connected with the conduct of a trade or business within the United States (excluding foreign trade income) and
Qualify for the 80% deduction provided in section 245(c)(1)(B).

Line 8. Enter dividends received from wholly owned foreign subsidiaries that are eligible for the 100% deduction provided in section 245(b).

In general, the deduction under section 245(b) applies to dividends paid out of the earnings and profits of a foreign corporation for a tax year during which:

All of its outstanding stock is owned (directly or indirectly) by the domestic corporation receiving the dividends and
All of its gross income from all sources is effectively connected with the conduct of a trade or business within the United States.

Also, include on line 8 dividends from FSCs that are attributable to foreign trade income and that are eligible for the 100% deduction provided in section 245(c)(1)(A).

Line 9. Enter only those dividends that qualify under section 243(b) for the 100% dividends-received deduction described in section 243(a)(3). Corporations taking this deduction are subject to the provisions of section 1561.

The 100% deduction does not apply to affiliated group members that are joining in the filing of a consolidated return.

Line 10, column (b). Enter foreign dividends not reportable on lines 3, 6, 7, and 8, column (b). Include on line 10 the corporation's share of the ordinary earnings of a qualified electing fund from Form 8621, line 1c. Exclude distributions of amounts constructively taxed in the current year or in prior years under subpart F (sections 951 through 964).

Line 11, column (b). Include income constructively received from controlled foreign corporations under subpart F. This amount should equal the total subpart F income reported on Schedule I of Form 5471.

Line 12, column (b). Enter the taxes deemed paid under sections 902 and 960.

Line 13, column (b). Include the following:

1. Dividends (other than capital gain distributions reported on Schedule D (Form 1120) and exempt-interest dividends) that are received from RICs and that are not subject to the 70% deduction.

2. Dividends from tax-exempt organizations.

3. Dividends (other than capital gain dividends) received from a real estate investment trust (REIT) that, for the tax year of the trust in which the dividends are paid, qualifies under sections 856 through 860.

4. Dividends not eligible for a dividends-received deduction because of the holding period of the stock or an obligation to make corresponding payments with respect to similar stock.

Two situations in which the dividends-received deduction will not be allowed on any share of stock are:

If the corporation held it less than 46 days during the 90-day period beginning 45 days before the stock became ex-dividend with respect to the dividend (see section 246(c)(1)(A)) or
To the extent the corporation is under an obligation to make related payments for substantially similar or related property.

5. Any other taxable dividend income not properly reported above (including distributions under section 936(h)(4)).

Line 17. Dividends received on debt-financed stock acquired after July 18, 1984, are not entitled to the full 70% or 80% dividends-received deduction. The 70% or 80% deduction is reduced by a percentage that is related to the amount of debt incurred to acquire the stock. See section 246A. Also, see section 245(a) before making this computation for an additional limitation that applies to dividends received from foreign corporations. Attach a schedule showing how the amount on line 17 was figured.

Line 23

Limitations on Dividends-Received Deduction

Generally, line 23, column (b), may not exceed the amount from the worksheet below. However, in a year in which an NOL occurs, this limitation does not apply even if the loss is created by the dividends-received deduction. See sections 172(d) and 246(b).

Worksheet for Schedule C, line 23
(keep for your records)

1.	Refigure the amount from Schedule A, line 35 or Schedule B, line 19, whichever applies, without any adjustment under section 1059 and without any capital loss carryback to the tax year under section 1212(a)(1)
2.	Enter the sum of the amounts from line 22, column (b) (without regard to wholly owned foreign subsidiary dividends) and line 9, column (b)
3.	Subtract line 2 from line 1
4.	Multiply line 3 by 80%
5.	Add lines 16, 19, 21, and 22 (without regard to FSC dividends), column (b), and the portion of the deduction on line 17, column (b), that is attributable to dividends received from 20%-or-more-owned corporations
6.	Enter the smaller of line 4 or line 5. If line 5 is greater than line 4, stop here; enter the amount from line 6 on line 23, column (b). Do not complete the rest of this worksheet
7.	Enter the total amount of dividends received from 20%-or-more-owned corporations that are included on lines 2, 3, 5, 7, and 8 (without regard to FSC dividends), column (b)
8.	Subtract line 7 from line 3
9.	Multiply line 8 by 70%
10.	Subtract line 5 from line 23, column (b) (without regard to FSC dividends)
11.	Enter the smaller of line 9 or line 10
12.	Dividends-received deduction after limitation (section 246(b)). Add lines 6 and 11. Enter the result here and on line 23, column (b)

Schedule E—Premiums Earned

Definitions

Undiscounted unearned premiums means the unearned premiums shown in the annual statement filed for the year ending with or in the tax year.

Applicable interest rate means the annual rate determined under section 846(c)(2) for the calendar year the premiums are received.

Applicable statutory premium recognition pattern means the statutory premium recognition pattern in effect for the calendar year the premiums are received, and is based on the statutory premium recognition pattern which applies to premiums received by the corporation in that calendar year. For purposes of the preceding sentence, premiums received during any calendar year will be treated as received in the middle of such year.

Line 1. Enter gross premiums written on insurance contracts during the tax year, less return premiums and premiums paid for reinsurance. See Regulations section 1.832-4.

Lines 2a and 4a. Include on lines 2a and 4a:

All life insurance reserves, as defined in section 816(b) (but determined under section 807) and
All unearned premiums of a Blue Cross or Blue Shield organization to which section 833 applies.

Lines 2b and 4b. Include on lines 2b and 4b, 90% of unearned premiums for insurance against default in the payment of principal or interest on securities described in section 165(g)(2)(C) (relating to worthless securities) with maturities of more than 5 years.

Lines 2c and 4c. The amount of discounted unearned premiums at the end of any tax year must be the present value of those premiums (as of such time and separately with respect to premiums received in each calendar year) determined by using:

The amount of the undiscounted unearned premiums at such time;
The applicable interest rate; and
The applicable statutory premium recognition pattern.

Lines 2d and 4d. Include on lines 2d and 4d, 80% of the total of all unearned premiums not reported on lines 2a through 2c, or 4a through 4c, respectively.

A reciprocal or interinsurer required under state law to reflect unearned premiums on its annual statement net of premium acquisition expenses should increase its unearned premiums by the amount of such acquisition expenses prior to making the computation on lines 2d and 4d. See section 832(b)(7)(E).

Line 6. Transitional adjustments apply to companies which become taxable under section 831(a). See section 832(b)(7)(D) for more information.

Schedule F—Losses Incurred

Line 1. Losses paid. Enter the total losses paid on insurance contracts during the tax year less salvage and reinsurance recovered during the tax year.

Lines 2a and 4a. Unpaid losses on life insurance contracts. Unpaid losses must be adjusted for recoveries of reinsurance. The amounts of expected recoveries should be estimated based on the facts in each case and the corporation's experience with similar cases. See Regulations section 1.832-4(b).

Lines 2b and 4b. Discounted unpaid losses outstanding. Enter all discounted unpaid losses as defined in section 846.

Section 846 provides that the amount of discounted unpaid losses must be computed separately by each line of business (multiple peril lines must be treated as a single line of business) and by each accident year and must be equal to the present value of those losses determined by using the:

Amount of the undiscounted unpaid losses,
Applicable interest rate, and
Applicable loss payment pattern.

Special rules apply with respect to:

Unpaid losses related to disability insurance (other than credit disability insurance),
Noncancelable accident and health insurance,
Cancelable accident and health insurance, and
International and reinsurance lines of business.

With regard to the special rules for discounting unpaid losses on accident and health insurance (other than disability income insurance), unpaid losses are assumed to be paid in the middle of the year following the accident year.

Generally, the amount of undiscounted unpaid losses means the unpaid losses and unpaid loss adjustment expenses shown in the annual statement. However, see Regulations section 1.846-1(a)(1) referring to Regulations section 1.832-4(b) relating to the determination of unpaid losses.

Under section 832(b)(5)(A), unpaid losses must be adjusted to take into account estimated recoveries due to salvage and reinsurance for those losses. If the amounts shown in the annual statement were determined on a discounted basis and if the extent to which these losses were discounted can be determined on the basis of information disclosed on or with the annual statement, the amount of the undiscounted unpaid losses must be recomputed to eliminate any reduction caused by such discounting. In no event can the amount of discounted unpaid losses with respect to any line of business for an accident year exceed the total amount of unpaid losses with respect to any line of business for an accident year as reported on the annual statement. Also see Regulations section 1.832-4(d) regarding increasing unpaid losses shown on the annual statement by salvage recoverable. Also see Rev. Proc. 92-77, 1992-2 C.B. 454.

The applicable interest rate for each calendar year and the applicable loss payment pattern for each accident year for each line of business are determined by the IRS. The applicable interest rate and loss payment patterns for 2003 will be published in the Internal Revenue Bulletin when available. The applicable interest rates and loss payment pattern for 2001 and 2002 are published in Rev. Proc. 2001-60, 2001-53 I.R.B. 643, and Rev. Proc. 2003-17, 2003-6 I.R.B. 427, respectively.

Corporations having sufficient historical experience to determine a loss payment pattern may, under certain circumstances, elect under section 846(e) to use their own historical experience (instead of the loss payment patterns determined by the IRS). If this election is made, the loss payment patterns will be based on the most recent calendar year for which an annual statement was filed before the beginning of the accident year. The election will not apply to any international or reinsurance line of business. If the corporation makes this election, check the “Yes” column for question 7 in Schedule I, Other Information. For more information, see section 846(e), Regulations section 1.846-2, and Rev. Proc. 92-76, 1992-2 C.B. 453.

Note.

There is a special application of the “Fresh Start” provision for an insurance company that is not subject to tax under section 831(a) for its first tax year beginning after December 31, 1986, because (1) it is described in section 501(c) or (2) it is subject to tax under section 831(b) on its investment income.

If the insurance company later becomes subject to tax under section 831(a), the rules relating to the Fresh Start under the discounting provisions are applied by treating the last tax year before the year in which the insurance company becomes subject to tax under section 831(a) as the insurance company's last tax year beginning before 1987. See section 1010(e) of the Act of 1988 and Notice 88-100, 1988-2 C.B. 439.

Lines 6 and 7. Estimated salvage and reinsurance recoverable. Enter on lines 6 and 7 the amount of estimated salvage and reinsurance recoverable. The amount of estimated salvage recoverable must be determined on a discounted basis. The estimated salvage discount factors for 2002 are published in Rev. Proc. 2003-18, 2003-6 I.R.B. 439. The 2003 estimated salvage and reinsurance rates will be published in the Internal Revenue Bulletin when available. Also see Regulations section 1.832-4.

Line 9. Tax-exempt interest subject to section 832(b)(5)(B). Enter the amount of tax-exempt interest received or accrued during the tax year on investments made after August 7, 1986. For information regarding the determination of the acquisition date of an investment, see the instructions for Schedule C.

Schedule G—Other Capital Losses

Capital assets are considered sold or exchanged to provide funds to meet abnormal insurance losses and to pay dividends and make similar distributions to policyholders to the extent that the gross receipts from their sale or exchange are not more than the amount by which the sum of dividends and similar distributions paid to policyholders, losses paid, and expenses paid for the tax year is more than the total on line 9, Schedule G.

Total gross receipts from sales of capital assets (line 12, column (c)) must not be more than line 10. If necessary, the corporation may report part of the gross receipts from a particular sale of a capital asset on this schedule and the rest on Schedule D (Form 1120). Otherwise, do not include on Schedule D (Form 1120) any sales reported on this schedule.

Schedule H—Special Deduction and Ending Adjusted Surplus for Section 833 Organizations

Line 5. Beginning adjusted surplus. If the corporation was a section 833 organization in 2002, it should enter the amount from Schedule H, line 10, of its 2002 Form 1120-PC.

Generally, the adjusted surplus as of the beginning of any tax year is an amount equal to the adjusted surplus as of the beginning of the preceding tax year:

Increased by the amount of any adjusted taxable income for the preceding tax year or
Decreased by the amount of any adjusted net operating loss for the preceding tax year.

If 2003 is the first tax year the taxpayer qualifies as a section 833 organization, see section 833(c)(3)(C) to determine the adjusted surplus as of the beginning of the 2003 tax year.

For purposes of the computation of the adjusted surplus, the terms “adjusted taxable income” and “adjusted net operating loss” mean the taxable income or the net operating loss, respectively, determined with the following modifications:

Without regard to the deduction determined under section 833(b)(1);
Without regard to any carryover or carryback to that tax year; and
By increasing gross income by an amount equal to the net exempt income for the tax year.

Line 6. Special deduction. The deduction for any tax year is limited to taxable income for that tax year determined without regard to this deduction.

Note.

Under section 833(b)(4), any determination under section 833(b) must be made by only taking into account items from the health-related business of the corporation.

Line 8a. Adjusted tax-exempt income. Reduce the total tax-exempt interest received or accrued during the tax year by any amount (not otherwise deductible) which would have been allowable as a deduction for the tax year if such interest were not tax-exempt. Enter the result on line 8a.

Line 8b. Adjusted dividends-received deduction. Reduce the total amount allowed as a deduction under sections 243, 244, and 245 by the amount of any decrease in deductions allowable for the tax year because of section 832(b)(5)(B) when the decrease is caused by the deductions under sections 243, 244, and 245. Enter the result on line 8b.

Schedule I—Other Information

The following instructions apply to page 7, Form 1120-PC. Be sure to complete all of the items that apply to the corporation.

Question 4

Check the “Yes” box if:

The corporation is a subsidiary in an affiliated group (defined below), but is not filing a consolidated return for the tax year with that group or
The corporation is a subsidiary in a parent-subsidiary controlled group (defined below).

Any corporation that meets either of the requirements above should check the “Yes” box. This applies even if the corporation is a subsidiary member of one group and the parent corporation of another.

Note.

If the corporation is an “excluded member” of a controlled group (see section 1563(b)(2)), it is still considered a member of a controlled group for this purpose.

Affiliated group. The term “affiliated group” means one or more chains of includible corporations (section 1504(a)) connected through stock ownership with a common parent corporation. The common parent must be an includible corporation and the following requirements must be met.

The common parent must own directly stock that represents at least 80% of the total voting power and at least 80% of the total value of the stock of at least one of the other includible corporations and
Stock that represents at least 80% of the total voting power and at least 80% of the total value of the stock of each of the other corporations (except for the common parent) must be owned directly by one or more of the other includible corporations.

For this purpose, the term “stock” generally does not include any stock that (a) is nonvoting, (b) is nonconvertible, (c) is limited and preferred as to dividends and does not participate significantly in corporate growth, and (d) has redemption and liquidation rights that do not exceed the issue price of the stock (except for a reasonable redemption or liquidation premium). See section 1504(a)(4).

Parent-subsidiary controlled group. The term “parent-subsidiary controlled group” means one or more chains of corporations connected through stock ownership (section 1563(a)(1)). Both of the following requirements must be met.

At least 80% of the total combined voting power of all classes of voting stock or at least 80% of the total value of all classes of stock of each corporation in the group (except the parent) must be owned by one or more of the other corporations in the group and
The common parent must own at least 80% of the total combined voting power of all classes of stock entitled to vote or at least 80% of the total value of all classes of stock of one or more of the other corporations in the group. Stock owned directly by other members of the group is not counted when computing the voting power or value.

See section 1563(d)(1) for the definition of “stock” for purposes of determining stock ownership above.

Question 6

Check the “Yes” box if one foreign person owned at least 25% of (a) the total voting power of all classes of stock of the corporation entitled to vote or (b) the total value of all classes of stock of the corporation.

The constructive ownership rules of section 318 apply in determining if a corporation is foreign owned. See section 6038A(c)(5) and the related regulations.

Enter on line 6a the percentage owned by the foreign person specified in question 6. On line 6b, write the name of the owner's country.

Note.

If there is more than one 25%-or-more foreign owner, complete lines 6a and 6b for the foreign person with the highest percentage of ownership.

Foreign person. The term “foreign person” means:

A foreign citizen or nonresident alien.
An individual who is a citizen of a U.S. possession (but who is not a U.S. citizen or resident).
A foreign partnership.
A foreign corporation.
Any foreign estate or trust within the meaning of section 7701(a)(31).
A foreign government (or one of its agencies or instrumentalities) to the extent that it is engaged in the conduct of a commercial activity as described in section 892.

Owner's country. For individuals, the term “owner's country” means the country of residence. For all others, it is the country where incorporated, organized, created, or administered.

Requirement to file Form 5472. If the corporation checked “Yes”, it may have to file Form 5472. Generally, a 25% foreign-owned corporation that had a reportable transaction with a foreign or domestic related party during the tax year must file Form 5472.

See Form 5472 for filing instructions and penalties for failure to file.

Item 10

Show any tax-exempt interest income received or accrued. Include any exempt-interest dividends received as a shareholder in a mutual fund or other RIC.

Item 11

If the corporation has an NOL for its 2003 tax year, it may elect under section 172(b)(3) to waive the entire carryback period for the NOL and instead carry the NOL forward to future tax years. To do so, check the box on line 11 and file the tax return by its due date, including extensions (do not attach the statement described in Temporary Regulations section 301.9100-12T). Once made, the election is irrevocable. See Pub. 542, section 172, and Form 1139 for more details.

Corporations filing a consolidated return must also attach the statement required by Temporary Regulations section 1.1502-21T(b)(3)(i) or (ii).

Item 12

Enter the amount of the NOL carryover to the tax year from prior years, even if some of the loss is used to offset income on this return. The amount to enter is the total of all NOLs generated in prior years but not used to offset income (either as a carryback or carryover) to a tax year prior to 2003. Do not reduce the amount by any NOL deduction reported on Schedule A, line 36b.

Schedule L—Balance Sheets per Books

Note.

All insurance companies required to file Form 1120-PC must complete Schedule L.

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

Line 5. Tax-exempt securities. Include on this line:

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 RIC that distributed exempt-interest dividends during the tax year of the corporation.

Line 18. Insurance liabilities. Include on this line:

Undiscounted unpaid losses.
Loss adjustment expenses.
Unearned premiums.

See section 846 for more information.

Line 27. 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 27 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. Include on line 5c 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 which are allocable to conventions on cruise ships.
Employee achievement awards over $400.
The cost of entertainment tickets over face value (also subject to 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 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 as interest on line 7a any exempt-interest dividends received as a shareholder in a mutual fund or other RIC.

Specific Instructions