| Instructions for Form 1120-FSC |
2006 Tax Year |
This is archived information that pertains only to the 2006 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
Use Form 1120-FSC to report the income, gains, losses, deductions, credits, and to figure the income tax liability of a FSC.
FSC Repeal and Extraterritorial Income Exclusion
In general, the FSC Repeal and Extraterritorial Income Exclusion
Act of 2000:
-
Repealed the FSC rules,
-
Provided taxpayers with an exclusion, which is figured on Form 8873, Extraterritorial Income Exclusion, and
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Provided transition rules for existing FSCs. These rules are included in Rules for Existing FSCs below.
Note.
The American Jobs Creation Act of 2004 repealed the extraterritorial income exclusion provisions generally for transactions
after 2004,
subject to a transition rule. See the instructions for Form 8873 for more information.
The Tax Increase Prevention and Reconciliation Act of 2005 repealed the FSC binding contract exception. See Binding contract exception
below for details.
In general, a FSC that was in existence on September 30, 2000, and at all times thereafter, may continue to use the FSC rules
for any transaction
in the ordinary course of business, that is (a) before January 1, 2002, or (b) after December 31, 2001, if such transaction
is pursuant to a binding
contract that meets the requirements described in Binding contract exception below.
Binding contract exception.
The binding contract exception has been repealed for tax years beginning after May 17, 2006. For tax years beginning
before May 18, 2006, the
following rules apply: The transaction must be pursuant to a binding contract between the FSC (or a person related to the
FSC) and a person other than
a related person if that binding contract was in effect on September 30, 2000, and has remained in effect. A binding contract
includes a purchase,
renewal, or replacement option that is enforceable against a lessor or seller (provided the option is part of a contract that
is binding and in effect
on September 30, 2000, and has remained in effect).
The mere entering into of a single transaction, such as a lease, would not, in and of itself, prevent the transaction from
being in the ordinary
course of business.
Election To Apply Exclusion Rules
Taxpayers may elect to apply the extraterritorial income exclusion rules instead of the FSC rules for transactions occurring
during the transition
period. The election is:
-
Made by checking the box on line 2 of Form 8873,
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Made on a transaction-by-transaction basis,
-
Effective for the tax year for which it is made and for all subsequent tax years, and
-
Revocable only with the consent of the IRS.
Taxpayers use Form 8873 to determine their extraterritorial income exclusion.
Election To Be Treated as a Domestic Corporation
A FSC that was in existence on September 30, 2000, and at all times thereafter, may elect to be treated as a domestic corporation
if substantially
all of its gross receipts are foreign trading gross receipts.
The election is made by checking the box on line 3 of Form 8873. An electing corporation files Form 1120, U.S. Corporation
Income Tax Return, or
Form 1120-A, U.S. Corporation Short-Form Income Tax Return. Once made, the election applies to the tax year for which it is
made and remains in effect
for all subsequent years unless the election is revoked or terminated. If the election is revoked or terminated, the corporation
would be a foreign
corporation that files Form 1120-F, U.S. Income Tax Return of a Foreign Corporation. Furthermore, the foreign corporation
would not be eligible to
reelect to be treated as a domestic corporation for 5 tax years beginning with the first tax year for which the original election
is not in effect as
a result of the revocation or termination.
Effect of election.
A FSC that elects to be treated as a domestic corporation ceases to be a FSC for any tax year for which the election
applies (and for any
subsequent tax year).
No corporation may elect to be a FSC or a small FSC (defined below) after
September 30, 2000.
Termination of Inactive FSCs
If a FSC has no foreign trade income (see definition under Tax Treatment of a FSC on page 3) for any 5 consecutive tax years beginning
after December 31, 2001, the FSC will no longer be treated as a FSC for any tax year beginning after that 5-year period.
For additional information regarding the rules discussed above, see Rev. Proc. 2001-37, 2001-1 C.B. 1327.
Definition of a Foreign Sales Corporation (FSC)
Under section 922(a), a FSC is defined as a corporation that has met all of the following rules:
-
It must be a corporation created or organized under the laws of a qualifying foreign country or any U.S. possession other
than Puerto
Rico.
Qualifying U.S. possessions include Guam, American Samoa, the Commonwealth of the Northern Mariana Islands, and the U.S. Virgin
Islands.
A qualifying foreign country is a foreign country that meets the exchange of information rules of section 927(e)(3)(A) or
(B). All U.S. possessions
other than Puerto Rico are also certified to have met these rules.
The following countries are qualifying foreign countries that have met the exchange of information rules of section 927(e)(3)(A)
or 927(e)(3)(B):
Australia, Austria, Barbados, Belgium, Bermuda, Canada, Costa Rica, Cyprus, Denmark, Dominica, the Dominican Republic, Egypt,
Finland, France,
Germany, Grenada, Guyana, Honduras, Iceland, Ireland, Jamaica, Korea, Malta, the Marshall Islands, Mexico, Morocco, the Netherlands,
New Zealand,
Norway, Pakistan, Peru, the Philippines, St. Lucia, Sweden, and Trinidad and Tobago.
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It had no more than 25 shareholders at any time during the tax year.
-
It had no preferred stock outstanding at any time during the tax year.
-
During the tax year, the FSC must maintain:
-
An office in one of the qualifying foreign countries or U.S. possessions listed above,
-
A set of permanent books of account (including invoices) at that office, and
-
The books and records required under section 6001 at a U.S. location to sufficiently establish the amount of gross income,
deductions,
credits, or other matters required to be shown on its tax return.
-
It must have at least one director, at all times during the tax year, who is not a resident of the United States.
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It must not be a member, at any time during the tax year, of a controlled group of which a DISC is a member.
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It must have elected to be a FSC or small FSC, and the election must have been in effect for the tax year.
Small FSC.
Section 922(b) defines a small FSC as a corporation that:
-
Elected small FSC status and has kept the election in effect for the tax year and
-
Is not a member, at any time during the tax year, of a controlled group that includes a FSC (unless that other FSC is also
a
small FSC).
A small FSC is exempt from the foreign management and foreign economic process requirements outlined on page 3.
$5 million limit.
Generally, any foreign trading gross receipts of a small FSC for the tax year that exceed $5 million are not to be
considered in determining its
exempt foreign trade income. The $5 million limit is reduced if the small FSC has a short tax year. It may also be reduced
if the small FSC is a
member of a controlled group that contains other small FSCs. See Regulations section 1.921-2(b) for more information.
A FSC is not taxed on its exempt foreign trade income. Section 923 defines foreign trade income as the gross income of a FSC
attributable to
foreign trading gross receipts (defined below).
The percentage of foreign trade income exempt from tax is figured differently for income determined under the administrative
pricing rules (for
details, see the instructions for Schedule P (Form 1120-FSC)) and income determined without regard to the administrative pricing
rules. These
percentages are computed on Schedule E, page 4, Form 1120-FSC, and carried over to lines 9a and 9b of Schedule B, page 3,
Form 1120-FSC, to figure
taxable income or (loss).
See section 923(a)(4) for a special rule for foreign trade income allocable to a cooperative. See section 923(a)(5) for a
special rule for military
property.
Tax treaty benefits.
A FSC may not claim any benefits under any income tax treaty between the United States and any foreign country.
Foreign Trading Gross Receipts
A FSC is treated as having foreign trading gross receipts (defined in section 924) only if it has met certain foreign management
and foreign
economic process requirements.
Foreign trading gross receipts do not include:
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Certain excluded receipts (defined in section 924(f)).
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Receipts attributable to property excluded from export property under section 927(a)(2).
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Investment income (defined in section 927(c)).
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Carrying charges (defined in section 927(d)(1)).
Note.
Computer software licensed for reproduction abroad is not excluded from export property under section 927(a)(2). Therefore,
receipts
attributable to the sale, lease, or rental of computer software and services related and subsidiary to such transactions qualify
as foreign trading
gross receipts.
A FSC (other than a small FSC) is treated as having foreign trading gross receipts for the tax year only if the management
of the FSC during the
year takes place outside the United States. These management activities include:
-
Meetings of the board of directors and meetings of the shareholders.
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Disbursing cash, dividends, legal and accounting fees, salaries of officers, and salaries or fees of directors from the principal
bank
account (see below).
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Maintaining the principal bank account at all times during the tax year.
Meetings of directors and meetings of the shareholders.
All meetings of the board of directors of the FSC and all meetings of the shareholders of the FSC that take place
during the tax year must take
place outside the United States.
In addition, all such meetings must comply with the local laws of the foreign country or U.S. possession in which
the FSC was created or organized.
The local laws determine whether a meeting must be held, when and where it must be held (if it is held at all), who must be
present, quorum
requirements, use of proxies, etc.
Principal bank accounts.
See Regulations section 1.924(c)-1(c) for information regarding principal bank accounts.
Foreign Economic Process Rules
A FSC (other than a small FSC) has foreign trading gross receipts from any transaction only if certain economic processes
for the transaction take
place outside the United States. Section 924(d) and Regulations section 1.924(d)-1 set forth the rules for determining whether
a sufficient amount of
the economic processes of a transaction takes place outside the United States.
Generally, a transaction will qualify if the FSC satisfies two requirements:
The activities comprising these economic processes may be performed by the FSC or by any other person acting under contract
with the FSC.
Participation outside the United States in the sales portion of the transaction.
Generally, the requirement of section 924(d)(1)(A) is met for the gross receipts of a FSC derived from any transaction
if the FSC has participated
outside the United States in the following sales activities relating to the transaction: (1) solicitation (other than advertising),
(2) negotiation,
and (3) making a contract.
-
Solicitation (other than advertising) is any communication (including, but not limited to, telephone, telegraph, mail, or
in person) by the
FSC, to a specific, targeted customer or potential customer.
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Negotiation is any communication by the FSC to a customer or potential customer aimed at an agreement on one or more of the
terms of a
transaction, including, but not limited to, price, credit terms, quantity, or time or manner of delivery.
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Making a contract refers to performance by the FSC of any of the elements necessary to complete a sale, such as making or
accepting an
offer.
Grouping transactions.
Generally, the sales activities described above are to be applied on a transaction-by-transaction basis. However,
a FSC may make an annual election
to apply any of the sales activities on the basis of a group. To make the election, check the applicable box on line 10a,
Additional
Information, on page 2 of Form 1120-FSC. See Regulations section 1.924(d)-1(c)(5) for details.
Satisfaction of either the 50% or 85% foreign direct cost test.
To qualify as foreign trading gross receipts, the foreign direct costs incurred by the FSC attributable to the transaction
must equal or exceed 50%
of the total direct costs incurred by the FSC attributable to the transaction.
Instead of satisfying the 50% foreign direct cost test, the FSC may incur foreign direct costs attributable to activities
described in each of two
of the section 924(e) categories. The costs must equal or exceed 85% of the total direct costs incurred by the FSC attributable
to the activity
described in each of the two categories. If no direct costs are incurred by the FSC in a particular category, that category
is not taken into account
for purposes of determining whether the FSC has met either the 50% or 85% foreign direct cost test.
Direct costs are costs that:
-
Are incident to and necessary for the performance of any activity described in section 924(e);
-
Include the cost of materials consumed in the performance of the activity and the cost of labor that can be identified or
associated
directly with the performance of the activity (but only to the extent of wages, salaries, fees for professional services,
and other amounts paid for
personal services actually rendered, such as bonuses or compensation paid for services on the basis of a percentage of profits);
and
-
Include the allowable depreciation deduction for equipment or facilities (or the rental cost for its use) that can be specifically
identified or associated with the activity, as well as the contract price of an activity performed on behalf of the FSC by
a contractor.
Total direct costs means all of the direct costs of any transaction attributable to activities described in any paragraph of section
924(e). For purposes of the 50% test of section 924(d)(1)(B), total direct costs are based on the direct costs of all activities
described in all
paragraphs of section 924(e). For purposes of the 85% test of section 924(d)(2), however, the total direct costs are determined
separately for each
paragraph of section 924(e).
Foreign direct costs means the portion of the total direct costs of any transaction attributable to activities performed outside the
United States. For purposes of the 50% test, foreign direct costs are based on the direct costs of all activities described
in all paragraphs of
section 924(e). For purposes of the 85% test, however, foreign direct costs are determined separately for each paragraph of
section 924(e).
For more details, see Regulations section 1.924(d)-1(d).
Check the applicable box(es) on line 10b, Additional Information, on page 2 of the form, to indicate how the FSC met the foreign direct
costs requirement.
Grouping transactions.
Generally, the foreign direct cost tests under Regulations section 1.924(d)-1(d) are applied on a transaction-by-transaction
basis. However, the
FSC may make an annual election (on line 10d, Additional Information, on page 2 of the form) to apply the foreign direct cost tests on a
customer, contract, or product or product line grouping basis. Any grouping used must be supported by adequate documentation
of performance of
activities and costs of activities relating to the grouping used. See Regulations section 1.924(d)-1(e) for details.
Exception for foreign military property.
The economic process rules do not apply to any activities performed in connection with foreign military sales except
those activities described in
section 924(e). See Regulations section 1.924(d)-1(f) for details.
To use the administrative pricing rules to determine the FSC's (or small FSC's) profit on a transaction or group of transactions,
the FSC must
perform (or contract with another person to perform) all of the economic process activities relating to the transaction or
group of transactions. All
of the direct and indirect expenses relating to the performance of those activities must be reflected on the books of the
FSC and on Form 1120-FSC.
Under Temporary Regulations section 1.925(a)-1T(b)(2)(ii), an election may be made to include on the FSC's books all expenses,
other than cost of
goods sold, that are necessary to figure combined taxable income for the transaction or group of transactions. The expenses
must be identified on
Schedule G on the applicable line.
File Form 1120-FSC if the corporation elected to be treated as a FSC or small FSC, and the election is still in effect.
Note.
A FSC that elects to be treated as a domestic corporation under section 943(e)(1) does not file Form 1120-FSC. Instead, it
files Form 1120 (or
Form 1120-A) .
Generally, a corporation must file Form 1120-FSC by the 15th day of the 3rd month after the end of its tax year. A FSC that
has dissolved must
generally file by the 15th day of the 3rd month after the date it dissolved.
If the due date falls on a Saturday, Sunday, or legal holiday, the FSC may file on the next business day.
Private delivery services.
FSCs may use certain private delivery services designated by the IRS to meet the “ timely mailing as timely filing/paying” rule for tax returns
and payments. These private delivery services include only the following:
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DHL Express (DHL): DHL Same Day Service, DHL Next Day 10:30 am, DHL Next Day 12:00 pm, DHL Next Day 3:00 pm, and DHL 2nd Day
Service.
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Federal Express (FedEx): FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2Day, FedEx International Priority, and
FedEx
International First.
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United Parcel Service (UPS): UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd Day Air A.M., UPS Worldwide
Express Plus,
and UPS Worldwide Express.
The private delivery service can tell you how to get written proof of the mailing date.
Private delivery services cannot deliver items to P.O. boxes. You must use the U.S. Postal Service to mail any item to an
IRS P.O. box address.
Extension of time to file.
File Form 7004, Application for Automatic 6-Month Extension of Time To File Certain Business Income Tax, Information,
and Other Returns, to request
a 6-month extension of time to file. Generally, file Form 7004 by the regular due date of the Form 1120-FSC.
Dividends and Dividends-Received Deduction Worksheet
(See instructions that begin on page 9)
|
|
(a) Dividends
received
|
(b) % |
(c) Dividends-received deduction: (a) x (b) |
|
1
|
Dividends from less-than-20%-owned domestic corporations that are subject to the 70% deduction (other than debt-financed
stock)
|
|
|
70
|
|
|
2
|
Dividends from 20%-or-more-owned domestic corporations that are subject to the 80% deduction (other than debt-financed
stock)
|
|
|
80
|
|
|
3
|
Dividends on debt-financed stock of domestic and foreign corporations (section 246A)
|
|
|
See Inst.
|
|
|
4
|
Dividends on certain preferred stock of less-than-20%-owned public utilities
|
|
|
42
|
|
|
5
|
Dividends on certain preferred stock of 20%-or-more-owned public utilities
|
|
|
48
|
|
|
6
|
Dividends from less-than-20%-owned foreign corporations that are subject to the 70% deduction
|
|
|
70
|
|
|
7
|
Dividends from 20%-or-more-owned foreign corporations that are subject to the 80% deduction
|
|
|
80
|
|
|
8
|
Total dividends-received deduction. Add lines 1 through 7. See instructions for limitation. Enter here and on
line 19b, Schedule B.
|
▶
|
|
|
|
|
9
|
Other dividends from foreign corporations not included on lines 3, 6, or 7
|
|
|
|
|
|
10
|
Foreign dividend gross up (section 78)
|
|
|
|
|
|
11
|
Other dividends
|
|
|
|
|
|
12
|
Total dividends. Add lines 1 through 11. Enter here and on line 9, Schedule F
|
▶
|
|
|
|
File Form 1120-FSC with the:
Internal Revenue Service Center
P.O. Box 409101
Ogden, UT 84409
The return must be signed and dated by:
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The president, vice president, treasurer, assistant treasurer, chief accounting officer; or
-
Any other corporate officer (such as tax officer) authorized to sign.
If a return is filed on behalf of a FSC by a receiver, trustee, or assignee, the fiduciary must sign the return, instead of
the corporate officer.
Returns and forms signed by a receiver or trustee in bankruptcy on behalf of a FSC must be accompanied by a copy of the order
or instructions of the
court authorizing signing of the return or form.
If an employee of the FSC completes Form 1120-FSC, the paid preparer's space should remain blank. Anyone who prepares Form
1120-FSC but does not
charge the FSC should not complete that section. Generally, anyone who is paid to prepare the return must sign it and fill
in the “Paid Preparer's
Use Only” area.
The paid preparer must complete the required preparer information and:
Note.
A preparer may sign original or amended returns by rubber stamp, mechanical device, or computer software programs.
Paid Preparer Authorization
If the FSC wants to allow the IRS to discuss its 2006 tax return with the paid preparer who signed it, check the “Yes” box in the signature
area of the return. This authorization applies only to the individual whose signature appears in the “Paid Preparer's Use Only” section of the
return. It does not apply to the firm, if any, shown in that section.
If the “Yes” box is checked, the FSC is authorizing the IRS to call the paid preparer to answer any questions that may arise during the
processing of its return. The FSC is also authorizing the paid preparer to:
-
Give the IRS any information that is missing from the return,
-
Call the IRS for information about the processing of the return or the status of any related refund or payment(s), and
-
Respond to certain IRS notices about math errors, offsets, and return preparation.
The FSC is not authorizing the paid preparer to receive any refund check, bind the FSC to anything (including any additional
tax liability), or
otherwise represent the FSC before the IRS.
The authorization will automatically end no later than the due date (excluding extensions) for filing the FSC's 2007 tax return.
If the FSC wants
to expand the paid preparer's authorization or revoke it before it ends, see Pub. 947, Practice Before the IRS and Power of
Attorney.
Other Forms and Statements That May Be Required
The FSC may have to file some of the forms listed below. See the form for more information.
For a list of additional forms the FSC may need to file (most notably, forms pertaining to the reporting of various types
of income, and any
related withholding, to U.S. persons, foreign persons, and the IRS), see Pub. 542, Corporations.
-
Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. This form may have to be filed by
certain U.S. officers, directors, or shareholders of a FSC to report changes in ownership (see sections 6046 and the related
regulations).
If a Form 1120-FSC is filed, Form 5471 is not required to be filed to satisfy the requirements of section 6038 (see Temporary
Regulations section
1.921-1T(b)(3)). However, certain U.S. shareholders may be required to file
Form 5471 and the applicable schedules to report subpart F income.
See the instructions for Form 5471 for more information.
-
Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or
Business. Generally, a FSC that is engaged in a trade or business in the United States that had a reportable transaction with
a foreign or domestic
related party during the tax year must file Form 5472.
-
Form 5713, International Boycott Report. FSCs that had operations in, or related to, certain “boycotting” countries file
Form 5713.
-
Form 8275, Disclosure Statement, and Form 8275-R, Regulation Disclosure Statement. Disclose items or positions taken
on a tax return that are not otherwise adequately disclosed on a tax return or that are contrary to Treasury regulations (to
avoid parts of the
accuracy-related penalty or certain preparer penalties).
-
Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business. Use this form to report the receipt of more than
$10,000 in cash or foreign currency in one transaction or a series of related transactions.
-
Form 8886, Reportable Transaction Disclosure Statement. Use this form to disclose information for each reportable transaction in
which the FSC participated. Form 8886 must be filed for each tax year that the Federal Income tax liability of the FSC is
affected by its
participation in the transaction. The FSC may have to pay a penalty if it is required to file Form 8886 and does not do so.
The following are
reportable transactions:
-
Any listed transaction which is a transaction that is the same as or substantially similar to tax avoidance transactions identified
by the
IRS.
-
Any transaction offered under conditions of confidentiality for which the FSC paid an advisor a fee of at least $250,000.
-
Certain transactions for which the FSC has contractual protection against disallowance of the tax benefits.
-
Certain transactions resulting in a loss of at least $10 million in any single year or $20 million in any combination of years.
-
Certain transactions resulting in a tax credit of more than $250,000, if the FSC held the asset generating the credit for
45 days or
less.
Penalties.
The FSC may have to pay a penalty if it is required to disclose a reportable transaction under section 6011 and fails
to properly complete and file
Form 8886. The penalty is $50,000 ($200,000 if the reportable transaction is a listed transaction) for each failure to file
Form 8886 with its
corporate return or for failure to provide a copy of Form 8886 to the Office of Tax Shelter Analysis (OTSA). Other penalties,
such as an
accuracy-related penalty under section 6662A, may also apply. See the Instructions for Form 8886 for details.
To ensure that the FSC's tax return is correctly processed, attach all schedules and other forms after page 6, Form 1120-FSC,
and in the following
order:
-
Schedule O (Form 1120).
-
Form 4626.
-
Form 4136.
-
Form 851.
-
Additional schedules in alphabetical order.
-
Additional forms in numerical order.
Complete every applicable entry space on Form 1120-FSC. Do not enter “See attached” instead of completing the entry spaces. If more space is
needed on the forms or schedules, attach separate sheets using the same size and format as the printed forms. If there are
supporting statements and
attachments, arrange them in the same order as the schedules or forms they support and attach them last. Show the totals on
the printed forms. Enter
the FSC's name and EIN on each supporting statement or attachment.
Figure taxable income using the method of accounting regularly used in keeping the FSC's books and records. In all cases,
the method used must
clearly show taxable income. Permissible methods include cash, accrual, or any other method authorized by the Internal Revenue
Code.
A member of a controlled group may not use an accounting method that would distort any group member's income, including its
own. For example, a FSC
acts as a commission agent for property sales by a related corporation that uses the accrual method and pays the FSC its commission
more than 2 months
after the sale. In this case, the FSC should not use the cash method because that method would materially distort its income.
Generally, the following rules apply:
-
A FSC (other than a qualified personal service corporation) must use the accrual method of accounting if its average annual
gross receipts
exceed $5 million.
-
Unless it is a qualifying taxpayer or a qualifying small business taxpayer, a FSC must use the accrual method for sales and
purchases of
inventory items. See Schedule A, Cost of Goods Sold Related to Foreign Trading Gross Receipts, on page 7.
Change in accounting method.
To change its method of accounting used to report taxable income (for income as a whole or for the treatment of any
material item), the FSC must
file Form 3115, Application for Change in Accounting Method. For more information, see Form 3115 and Pub. 538, Accounting
Periods and Methods.
Section 481(a) adjustment.
The FSC may have to make an adjustment under section 481(a) to prevent amounts of income or expense from being duplicated
or omitted. The section
481(a) adjustment period is generally 1 year for a net negative adjustment and 4 years for a net positive adjustment. However,
a FSC may elect to use
a 1-year adjustment period if the net section 481(a) adjustment for the change is less than $25,000. The FSC must complete
the appropriate lines of
Form 3115 to make the election.
A FSC must figure its taxable income on the basis of a tax year. A tax year is the annual accounting period a FSC uses to
keep its records and
report its income and expenses. Generally, FSCs may use a calendar year or a fiscal year. Personal service corporations, however,
must generally use a
calendar year.
Note.
The tax year of a FSC must be the same as the tax year of the principal shareholder which, at the beginning of the FSC tax
year, has the
highest percentage of voting power. If two or more shareholders have the highest percentage of voting power, the FSC must
have a tax year that
conforms to the tax year of any such shareholder. See section 441(h).
Rounding Off To Whole Dollars
The FSC may round off cents to whole dollars on its return and schedules. If the FSC does round to whole dollars, it must
round all amounts. To
round, drop amounts under 50 cents and increase amounts from 50 to 99 cents to the next dollar (for example, $1.39 becomes
$1 and $2.50 becomes $3).
If two or more amounts must be added to figure the amount to enter on a line, include cents when adding the amounts and round
off only the total.
Keep the FSC's records for as long as they may be needed for the administration of any provision of the Internal Revenue Code.
Usually, records
that support an item of income, deduction, or credit on the return must be kept for 3 years from the date the return is due
or filed, whichever is
later. Keep records that verify the FSC's basis in property for as long as they are needed to figure the basis of the original
or replacement
property.
The FSC should keep copies of all filed returns. They help in preparing future and amended returns.
The FSC must pay the tax due in full no later than the 15th day of the 3rd month after the end of the tax year. The method
for payment of the tax
due depends upon whether the FSC has an office or place of business in the United States.
-
FSCs that do not maintain an office or place of business in the United States must pay the tax due directly to the IRS (that
is, do not use
either of the depository methods of tax payment described below). The tax may be paid by check or money order, payable to
the “United States
Treasury.” To help ensure proper crediting, write the FSC's employer identification number (EIN), “Form 1120-FSC”, and the tax period to which
the payment applies on the check or money order. Enclose the payment when Form 1120-FSC is filed.
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FSCs that maintain an office or place of business in the United States must pay the tax due using one of the depository methods
of tax
payment described below.
Depository Methods of Tax Payment
Electronic Deposit Requirement
The FSC must make electronic deposits of all depository taxes (such as employment tax, excise tax, and corporate income tax)
using the
Electronic Federal Tax Payment System (EFTPS) in 2007 if:
-
The total deposits of such taxes in 2005 were more than $200,000 or
-
The FSC was required to use EFTPS
in 2006.
If the FSC is required to use EFTPS and fails to do so, it may be subject to a 10% penalty. If the FSC is not required to
use EFTPS, it may
participate voluntarily. To enroll in or get more information about EFTPS, call 1-800-555-4477. To enroll online, visit
www.eftps.gov.
Depositing on time.
For EFTPS deposits to be made timely, the FSC must initiate the transaction at least 1 business day before the date
the deposit is due.
If the FSC does not use EFTPS, deposit FSC income tax payments (and estimated tax payments) with Form 8109, Federal Tax Deposit
Coupon. If you do
not have a pre-printed Form 8109, use Form 8109-B to make deposits. You can get this form by calling 1-800-829-4933 or visiting
an IRS taxpayer
assistance center. Have your EIN ready when you call or visit.
Do not send deposits directly to an IRS office; otherwise, the FSC may have to pay a penalty. Mail or deliver the completed
Form 8109 with the
payment to an authorized depositary (a commercial bank or other financial institution authorized to accept Federal tax deposits).
Make checks or money
orders payable to the depositary.
If the FSC prefers, it may mail the coupon and payment to: Financial Agent, Federal Tax Deposit Processing, P.O. Box 970030,
St. Louis, MO 63197.
Make the check or money order payable to
“Financial Agent.”
To help ensure proper crediting, write the FSC's EIN, the tax period to which the deposit applies, and “Form 1120-FSC” on the check or money
order. Darken the “1120” box under “Type of Tax” and the appropriate “Quarter” box under “Tax Period” on the coupon. Records of
these deposits will be sent to the IRS.
For more information on deposits, see the instructions in the coupon booklet (Form 8109) and Pub. 583, Starting a Business
and Keeping Records.
If the FSC maintains an office or place of business in the United States and it owes tax when it files Form 1120-FSC, do not
include the payment
with the tax return. Instead, mail or deliver the payment with Form 8109 to an authorized depositary, or use EFTPS, if applicable.
Generally, the following rules apply to the FSC's payments of estimated tax:
-
The FSC must make installment payments of estimated tax if it expects its total tax for the year (less applicable credits)
to be $500 or
more.
-
The installments are due by the 15th day of the 4th, 6th, 9th, and 12th months of the tax year. If any date falls on a Saturday,
Sunday, or
legal holiday, the installment is due on the next regular business day.
-
Use Form 1120-W, Estimated Tax for Corporations, as a worksheet to compute estimated tax.
-
If the FSC maintains an office or place of business in the United States and it does not use EFTPS, use the deposit coupons
(Forms 8109) to
make deposits of estimated tax.
-
If the FSC does not maintain an office or place of business in the United States, it must pay the estimated tax due directly
to the
IRS
-
If the FSC overpaid estimated tax, it may be able to get a quick refund by filing Form 4466, Corporation Application for Quick
Refund of
Overpayment of Estimated Tax.
For more information on estimated tax payments, including penalties that apply if the FSC fails to make required payments,
see Line 3,
Estimated tax penalty,
on page 7.
Interest.
Interest is charged on taxes paid late even if an extension of time to file is granted. Interest is also charged on
penalties imposed for failure
to file, negligence, fraud, substantial valuation misstatements, gross valuation misstatements, substantial understatements
of tax, and reportable
transaction understatements from the due date (including extensions) to the date of payment. The interest charge is figured
at a rate determined under
section 6621.
Late filing of return.
A FSC that does not file its tax return by the due date, including extensions, may be penalized 5% of the unpaid tax
for each month or part of a
month the return is late, up to a maximum of 25% of the unpaid tax. The minimum penalty for a return that is over 60 days
late is the smaller of the
tax due or $100. The penalty will not be imposed if the FSC can show that the failure to file on time was due to reasonable
cause. FSCs that file late
should attach a statement explaining the reasonable cause.
Late payment of tax.
A FSC that does not pay the tax when due generally may be penalized ½ of 1% of the unpaid tax for each month or part
of a month the
tax is not paid, up to a maximum of 25% of the unpaid tax. The penalty will not be imposed if the FSC can show that the failure
to pay on time was due
to reasonable cause.
Trust fund recovery penalty.
This penalty may apply if certain income, social security, and Medicare taxes that must be collected or withheld are
not collected or withheld, or
these taxes are not paid. These taxes are generally reported on Form 941, Employer's Quarterly Federal Tax Return, or Form
945, Annual Return of
Withheld Federal Income Tax.
The trust fund recovery penalty may be imposed on all persons who are determined by the IRS to have been responsible
for collecting, accounting
for, and paying over these taxes, and who acted willfully in not doing so. The penalty is equal to the unpaid trust fund tax.
See Pub. 15 (Circular
E), Employer's Tax Guide, for details, including the definition of responsible persons.
Other penalties.
Other penalties may be imposed for negligence, substantial understatement of tax, and fraud. See sections 6662, 6662A,
and 6663.
A FSC may also be subject to a penalty (under section 6686) of:
-
$100 for each failure to supply information, up to $25,000 during the calendar year.
-
$1,000 for not filing a return.
These penalties will not apply if the FSC can show that the failure to furnish the required information was due to
reasonable cause.
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