Line 1–Taxable income before net operating loss deduction and special deductions.   Enter the amount from Form 1120, line 28, page 1. If the income on line 28 was figured using section 443(b) (placing the income on an annual basis), refigure it without using that section.

  A foreign corporation figures line 1 by including only income derived from U.S. sources or effectively connected with a U.S. trade or business, reduced by deductions allowable in determining taxable income before the net operating loss deduction and special deductions.

  If all of a foreign corporation's stock is owned during the last half of the tax year by nonresident alien individuals (directly or indirectly), taxable income for section 545(a) is only income received under a contract for personal services as described in section 543(a)(7), reduced by deductions attributable to that income, and adjusted as provided in section 545(b) with respect to that income.

Line 3–Excess expenses and depreciation (section 545(b)(6)).   If the corporation earned rent or other compensation for the use of, or right to use, property and that rent or compensation was less than the total allowable expenses and depreciation, complete Part V in most cases and enter the excess on line 3. However, if the corporation can establish that it meets all three of the requirements listed below, it may attach a statement instead of completing Part V. The statement must include (a) a list of the deductions, with the complete facts, circumstances, and arguments supporting them and
(b) the information required by Regulations section 1.545-2(h)(2).

   To qualify, the corporation must establish that:

Line 5–Federal and foreign income, war profits, and excess profits taxes not deducted in figuring line 1.   The corporation can deduct:

  The corporation cannot deduct:

  *The foreign tax credit is not allowed against PHC tax. But, as described above, the corporation may take a deduction for taxes paid to foreign countries and U.S. possessions even if a credit was claimed when figuring the corporation's income tax.

  Attach a schedule showing the type of tax, the tax year, and the amount. For more information, see section 545(b)(1).

Line 6–Contributions (section 545(b)(2)).   Figure the deduction using the limitations under sections 170(b)(1)(A), (B), and (D), but without sections 170(b)(2) and (d)(1). When figuring the limitations under section 170(b)(1), use taxable income figured with the adjustments (other than the 10% limitation) provided in sections 170(b)(2) and (d)(1) and without any expenses and depreciation disallowed under section 545(b)(6).

Line 7–Net operating loss (section 545(b)(4)).   Instead of the net operating loss deduction provided in section 172, a deduction is allowed for the net operating loss (as defined in section 172(c)) for the preceding tax year figured without the deductions provided in Part VIII (except section 248) of subchapter B.

Line 8–Net capital gain.   Net capital gain for a foreign corporation is determined by taking into account only gains and losses that are effectively connected with the conduct of a trade or business within the United States that are not exempt from tax under treaty.

Line 10–Total.   Include in the total for line 10 any deduction for amounts used or irrevocably set aside to pay or retire qualified indebtedness under section 545(c) (as in effect before November 5, 1990). See Regulations section 1.545-3. Write the amount and “Section 545(c)” on the dotted line next to line 10.

Line 12–Dividends paid after the end of the tax year.   The corporation may elect to treat dividends (other than deficiency dividends) paid after the end of the year and before the 16th day of the 3rd month following the end of the tax year as paid during the tax year. Enter these dividends on line 12 but not in Part VI.

Line 13–Undistributed PHC income.   If 10% or less in value of the outstanding stock of a foreign corporation is owned (see section 958(a)) during the last half of the tax year by U.S. persons, undistributed PHC income is determined by multiplying the undistributed PHC income (determined without this instruction) by a percentage in value of the corporation's outstanding stock. This percentage is figured by using the greatest percentage in value of its outstanding stock owned by the U.S. persons on any day during the period.

Test 1.   The adjusted income from rents (line 18c) is at least 50% of adjusted ordinary gross income.

Test 2.   The sum of taxable distributions (Part VI, line 3) and the deduction for dividends paid after the end of the tax year (Part I, line 12) is at least equal to:

  For this purpose, PHC income includes copyright royalties and adjusted income from mineral, oil, and gas royalties, but does not include the amounts from lines 18c and 22.

Test 1.   The adjusted income from mineral, oil, and gas royalties (line 19c) is at least 50% of adjusted ordinary gross income.

Test 2.   PHC income is not more than 10% of ordinary gross income.

  For this purpose, PHC income includes copyright royalties and the adjusted income from rents, but does not include line 19c.

Test 3.   The deductions allowable under section 162 (other than compensation for personal services rendered by a shareholder and deductions specifically allowable under other sections) are at least 15% of adjusted ordinary gross income.

Test 1.    Income from copyright royalties is at least 50% of ordinary gross income. For this purpose, copyright royalties do not include royalties received for the use of, or right to use, copyrights or interests in copyrights on works created in whole or in part by any shareholder.

Test 2.   PHC income is not more than 10% of ordinary gross income.

  For this purpose, PHC income includes:

  PHC income does not include:

Test 3.   Total allocable deductions allowable under section 162 (other than compensation for personal services rendered by a shareholder, deductions for royalties paid or accrued, and deductions specifically allowable under other sections) are at least 25% of the excess of:

  See section 543(a)(4) for more information.

Royalties received in connection with the licensing of computer software.   Royalties received in connection with the licensing of computer software may be excluded from PHC income if all four of the tests below are met.

Test 1.   The corporation is engaged in the active business of developing, manufacturing, or producing computer software.

Test 2.   The royalties are at least 50% of ordinary gross income.

Test 3.   Total allowable deductions under sections 162, 174, and 195 that are allocable to the computer software business are at least 25% of ordinary gross income (or, the average of the deductions for the 5 tax years ending with the current tax year is at least 25% of the average ordinary gross income for that period).

Test 4.   The sum of taxable distributions (Part VI, line 3) and the deduction for dividends paid after the end of the tax year (Part I, line 12) is at least equal to the excess, if any, of:

  See section 543(d) for more information.

Line 4a–Deductions allocable to rents.   Enter deductions (listed below) allocable to rents (as defined in section 543(b)(3)).

  See section 543(b)(2)(A) for more information.

Line 4b–Deductions allocable to certain royalties and working interests in oil and gas wells.   Enter deductions (listed below) allocable to mineral, oil, and gas royalties (including production payments and overriding royalties) and to gross income from a working interest in an oil or gas well.

  See section 543(b)(2)(B) for more information.

Line 4c–Deductions allocable to compensation (section 543(b)(3)(D)).   Compensation for the use of, or right to use, tangible personal property manufactured or produced by the corporation does not count as rents if the corporation is engaged in substantial manufacturing or production of the same type of property during the tax year. Enter deductions (listed below) allocable to this type of compensation.

  See sections 543(b)(2)(D) and 543(b)(3)(D) for more information.

Line 4d–Certain excluded interest income (section 543(b)(2)(C)).   Include:

  See section 543(b)(2)(C) for more information.