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Line 10. Compensation of officers.

A bona fide business discussion must

an unequal apportionment plan and divide

Enter deductible officers’ compensation

occur during, immediately before, or

the taxable income brackets as they want.

on line 10. Do not include compensation

immediately after the meal; and

There is no need for consistency among

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deductible elsewhere on the return, such

An employee of the FSC must be

taxable income brackets. Any member

as amounts included in cost of goods

present at the meal.

may be entitled to all, some, or none of

sold, elective contributions to a section

the taxable income bracket. However, the

See section 274(n)(3) for a special rule

401(k) cash or deferred arrangement, or

total amount for all members cannot be

that applies to expenses for meals

amounts contributed under a salary

more than the total amount in each

consumed by individuals subject to the

reduction SEP agreement or a SIMPLE

taxable income bracket.

hours of service limits of the Department

IRA plan.

of Transportation.

Equal apportionment plan. If no

apportionment plan is adopted, members

Line 11. Bad debts. Enter the total debts

Membership dues. The FSC may

of a controlled group must divide the

that became worthless in whole or in part

deduct amounts paid or incurred for

amount in each taxable income bracket

during the tax year. A cash basis taxpayer

membership dues in civic or public

equally among themselves. For example,

may not claim a bad debt deduction

service organizations, professional

Controlled Group AB consists of

unless the amount was previously

organizations (such as bar and medical

Corporation A and Corporation B. They

included in income.

associations), business leagues, trade

do not elect an apportionment plan.

associations, chambers of commerce,

Line 14. Other deductions. Attach a

Therefore, each corporation is entitled to:

boards of trade, and real estate boards.

schedule, listing by type and amount, all

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However, no deduction is allowed if a

$25,000 (one-half of $50,000) on line

allowable deductions that are not

principal purpose of the organization is to

2a(1),

deductible elsewhere on Form 1120-FSC.

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entertain, or provide entertainment

$12,500 (one-half of $25,000) on line

Enter the total on line 14.

facilities for, members or their guests. In

2a(2), and

Examples of other deductions include:

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addition, FSCs may not deduct

$4,962,500 (one-half of $9,925,000) on

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Amortization of business start-up

membership dues in any club organized

line 2a(3).

expenditures, organizational expenses,

for business, pleasure, recreation, or

Line 2b. Members of a controlled group

etc. (see Form 4562).

other social purpose. This includes

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are treated as one group to figure the

Insurance premiums.

country clubs, golf and athletic clubs,

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applicability of the additional 5% tax and

Legal and professional fees.

airline and hotel clubs, and clubs

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the additional 3% tax. If an additional tax

Supplies used and consumed in the

operated to provide meals under

applies, each member will pay that tax

business.

conditions favorable to business

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based on the part of the amount used in

Utilities.

discussion.

each taxable income bracket to reduce

Also see Special rules below for limits

Entertainment facilities. The FSC

that member’s tax. See section 1561(a). If

on certain other deductions.

cannot deduct an expense paid or

an additional tax applies, attach a

incurred for a facility (such as a yacht or

schedule showing the taxable income of

Do not deduct:

hunting lodge) used for an activity usually

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the entire group and how the FSC figured

Fines or penalties paid to a government

considered entertainment, amusement, or

its share of the additional tax.

for violating any law.

recreation.

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Any amount that is allocable to a class

Line 2b(1). Enter the FSC’s share of

Note: The FSC may be able to deduct

of exempt income. See section 265(b) for

the additional 5% tax on line 2b(1).

otherwise nondeductible meals, travel,

exceptions.

Line 2b(2). Enter the FSC’s share of

and entertainment expenses if the

Special rules apply to the following

the additional 3% tax on line 2b(2).

amounts are treated as compensation

expenses:

and reported on Form W-2 for an

Line 3

employee or on Form 1099-MISC or Form

Travel, meals, and entertainment.

Most FSCs should figure their tax using

1042-S for an independent contractor.

Subject to limitations and restrictions

the Tax Rate Schedule below. Exceptions

discussed below, the FSC can deduct

apply to members of a controlled group

Schedule J

ordinary and necessary travel, meals, and

(see worksheet on page 14) and qualified

entertainment expenses paid or incurred

Tax Computation

personal service corporations (see

in its trade or business. Also, special rules

instructions below).

apply to deductions for gifts, skybox

Lines 1 and 2

Members of a controlled group must

rentals, luxury water travel, convention

attach to Form 1120-FSC a statement

expenses, and entertainment tickets. See

Members of a controlled group. A

showing the computation of the tax

section 274 and Pub. 463, Travel,

member of a controlled group, as defined

entered on line 3.

Entertainment, Gift, and Car Expenses.

in section 927(d)(4), must check the box

on line 1 and complete lines 2a and 2b of

Travel. The FSC cannot deduct travel

Tax Rate Schedule

Schedule J, Form 1120-FSC.

expenses of any individual accompanying

Line 2a. Members of a controlled group

a corporate officer or employee, including

If taxable income (Schedule B, line 20) is:

are entitled to one $50,000, one $25,000,

a spouse or dependent of the officer or

Of the

and one $9,925,000 taxable income

employee, unless:

But not

amount

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bracket amount (in that order) on line 2a.

That individual is an employee of the

Over —

over —

Tax is:

over —

corporation and

When a controlled group adopts or

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$50,000

15%

His or her travel is for a bona fide

later amends an apportionment plan,

50,000

75,000

$ 7,500 + 25%

50,000

business purpose and would otherwise be

each member must attach to its tax return

75,000

100,000

13,750 + 34%

75,000

deductible by that individual.

a copy of its consent to this plan. The

100,000

335,000

22,250 + 39%

100,000

copy (or an attached statement) must

Meals and entertainment. Generally,

335,000 10,000,000

113,900 + 34%

335,000

show the part of the amount in each

10,000,000 15,000,000 3,400,000 + 35% 10,000,000

the FSC can deduct only 50% of the

taxable income bracket apportioned to

15,000,000 18,333,333 5,150,000 + 38% 15,000,000

amount otherwise allowable for meals

that member. See Regulations section

18,333,333

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35%

and entertainment expenses paid or

1.1561-3(b) for other requirements and

incurred in its trade or business. In

for the time and manner of making the

addition (subject to exceptions under

Qualified personal service

consent.

section 274(k)(2)):

corporations. A qualified personal

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Meals must not be lavish or

Unequal apportionment plan.

service corporation is taxed at a flat rate

extravagant,

Members of a controlled group may elect

of 35% on its taxable income. A FSC is a

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Instructions For Form 1120-Fsc - U.s. Income Tax Return Of A Foreign Sales Corporation - 2003 Page 13

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