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2011 Tax Instructions

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2011 Tax Instructions

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Page Last Reviewed or Updated: 14-Mar-2014

The 2011 Tax Instructions

2011 tax instructions Publication 542 - Main Content Table of Contents Businesses Taxed as CorporationsPersonal services. 2011 tax instructions Employee-owners. 2011 tax instructions Other rules. 2011 tax instructions Other rules. 2011 tax instructions Property Exchanged for StockNonqualified preferred stock. 2011 tax instructions Liabilities. 2011 tax instructions Election to reduce basis. 2011 tax instructions Capital Contributions Filing and Paying Income TaxesIncome Tax Return Penalties Estimated Tax U. 2011 tax instructions S. 2011 tax instructions Real Property Interest Accounting MethodsSection 481(a) adjustment. 2011 tax instructions Accounting Periods Recordkeeping Income, Deductions, and Special ProvisionsCosts of Going Into Business Related Persons Income From Qualifying Shipping Activities Election to Expense Qualified Refinery Property Deduction to Comply With EPA Sulfur Regulations Energy-Efficient Commercial Building Property Deduction Corporate Preference Items Dividends-Received Deduction Extraordinary Dividends Below-Market Loans Charitable Contributions Capital Losses Net Operating Losses At-Risk Limits Passive Activity Limits Figuring TaxTax Rate Schedule Alternative Minimum Tax (AMT) Credits Recapture Taxes Accumulated Earnings Tax Distributions to ShareholdersMoney or Property Distributions Distributions of Stock or Stock Rights Constructive Distributions Reporting Dividends and Other Distributions How To Get Tax Help Businesses Taxed as Corporations The rules you must use to determine whether a business is taxed as a corporation changed for businesses formed after 1996. 2011 tax instructions Business formed before 1997. 2011 tax instructions   A business formed before 1997 and taxed as a corporation under the old rules will generally continue to be taxed as a corporation. 2011 tax instructions Business formed after 1996. 2011 tax instructions   The following businesses formed after 1996 are taxed as corporations. 2011 tax instructions A business formed under a federal or state law that refers to it as a corporation, body corporate, or body politic. 2011 tax instructions A business formed under a state law that refers to it as a joint-stock company or joint-stock association. 2011 tax instructions An insurance company. 2011 tax instructions Certain banks. 2011 tax instructions A business wholly owned by a state or local government. 2011 tax instructions A business specifically required to be taxed as a corporation by the Internal Revenue Code (for example, certain publicly traded partnerships). 2011 tax instructions Certain foreign businesses. 2011 tax instructions Any other business that elects to be taxed as a corporation. 2011 tax instructions For example, a limited liability company (LLC) can elect to be treated as an association taxable as a corporation by filing Form 8832, Entity Classification Election. 2011 tax instructions For more information about LLCs, see Publication 3402, Taxation of Limited Liability Companies. 2011 tax instructions S corporations. 2011 tax instructions   Some corporations may meet the qualifications for electing to be S corporations. 2011 tax instructions For information on S corporations, see the instructions for Form 1120S, U. 2011 tax instructions S. 2011 tax instructions Income Tax Return for an S Corporation. 2011 tax instructions Personal service corporations. 2011 tax instructions   A corporation is a personal service corporation if it meets all of the following requirements. 2011 tax instructions Its principal activity during the “testing period” is performing personal services (defined later). 2011 tax instructions Generally, the testing period for any tax year is the prior tax year. 2011 tax instructions If the corporation has just been formed, the testing period begins on the first day of its tax year and ends on the earlier of: The last day of its tax year, or The last day of the calendar year in which its tax year begins. 2011 tax instructions Its employee-owners substantially perform the services in (1), above. 2011 tax instructions This requirement is met if more than 20% of the corporation's compensation cost for its activities of performing personal services during the testing period is for personal services performed by employee-owners. 2011 tax instructions Its employee-owners own more than 10% of the fair market value of its outstanding stock on the last day of the testing period. 2011 tax instructions Personal services. 2011 tax instructions   Personal services include any activity performed in the fields of accounting, actuarial science, architecture, consulting, engineering, health (including veterinary services), law, and the performing arts. 2011 tax instructions Employee-owners. 2011 tax instructions   A person is an employee-owner of a personal service corporation if both of the following apply. 2011 tax instructions He or she is an employee of the corporation or performs personal services for, or on behalf of, the corporation (even if he or she is an independent contractor for other purposes) on any day of the testing period. 2011 tax instructions He or she owns any stock in the corporation at any time during the testing period. 2011 tax instructions Other rules. 2011 tax instructions   For other rules that apply to personal service corporations see Accounting Periods, later. 2011 tax instructions Closely held corporations. 2011 tax instructions   A corporation is closely held if all of the following apply. 2011 tax instructions It is not a personal service corporation. 2011 tax instructions At any time during the last half of the tax year, more than 50% of the value of its outstanding stock is, directly or indirectly, owned by or for five or fewer individuals. 2011 tax instructions “Individual” includes certain trusts and private foundations. 2011 tax instructions Other rules. 2011 tax instructions   For the at-risk rules that apply to closely held corporations, seeAt-Risk Limits, later. 2011 tax instructions Property Exchanged for Stock If you transfer property (or money and property) to a corporation in exchange for stock in that corporation (other than nonqualified preferred stock, described later), and immediately afterward you are in control of the corporation, the exchange is usually not taxable. 2011 tax instructions This rule applies both to individuals and to groups who transfer property to a corporation. 2011 tax instructions It also applies whether the corporation is being formed or is already operating. 2011 tax instructions It does not apply in the following situations. 2011 tax instructions The corporation is an investment company. 2011 tax instructions You transfer the property in a bankruptcy or similar proceeding in exchange for stock used to pay creditors. 2011 tax instructions The stock is received in exchange for the corporation's debt (other than a security) or for interest on the corporation's debt (including a security) that accrued while you held the debt. 2011 tax instructions Both the corporation and any person involved in a nontaxable exchange of property for stock must attach to their income tax returns a complete statement of all facts pertinent to the exchange. 2011 tax instructions For more information, see section 1. 2011 tax instructions 351-3 of the Regulations. 2011 tax instructions Control of a corporation. 2011 tax instructions   To be in control of a corporation, you or your group of transferors must own, immediately after the exchange, at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the outstanding shares of each class of nonvoting stock. 2011 tax instructions Example 1. 2011 tax instructions You and Bill Jones buy property for $100,000. 2011 tax instructions You both organize a corporation when the property has a fair market value of $300,000. 2011 tax instructions You transfer the property to the corporation for all its authorized capital stock, which has a par value of $300,000. 2011 tax instructions No gain is recognized by you, Bill, or the corporation. 2011 tax instructions Example 2. 2011 tax instructions You and Bill transfer the property with a basis of $100,000 to a corporation in exchange for stock with a fair market value of $300,000. 2011 tax instructions This represents only 75% of each class of stock of the corporation. 2011 tax instructions The other 25% was already issued to someone else. 2011 tax instructions You and Bill recognize a taxable gain of $200,000 on the transaction. 2011 tax instructions Services rendered. 2011 tax instructions   The term property does not include services rendered or to be rendered to the issuing corporation. 2011 tax instructions The value of stock received for services is income to the recipient. 2011 tax instructions Example. 2011 tax instructions You transfer property worth $35,000 and render services valued at $3,000 to a corporation in exchange for stock valued at $38,000. 2011 tax instructions Right after the exchange, you own 85% of the outstanding stock. 2011 tax instructions No gain is recognized on the exchange of property. 2011 tax instructions However, you recognize ordinary income of $3,000 as payment for services you rendered to the corporation. 2011 tax instructions Property of relatively small value. 2011 tax instructions   The term property does not include property of a relatively small value when it is compared to the value of stock and securities already owned or to be received for services by the transferor if the main purpose of the transfer is to qualify for the nonrecognition of gain or loss by other transferors. 2011 tax instructions   Property transferred will not be considered to be of relatively small value if its fair market value is at least 10% of the fair market value of the stock and securities already owned or to be received for services by the transferor. 2011 tax instructions Stock received in disproportion to property transferred. 2011 tax instructions   If a group of transferors exchange property for corporate stock, each transferor does not have to receive stock in proportion to his or her interest in the property transferred. 2011 tax instructions If a disproportionate transfer takes place, it will be treated for tax purposes in accordance with its true nature. 2011 tax instructions It may be treated as if the stock were first received in proportion and then some of it used to make gifts, pay compensation for services, or satisfy the transferor's obligations. 2011 tax instructions Money or other property received. 2011 tax instructions   If, in an otherwise nontaxable exchange of property for corporate stock, you also receive money or property other than stock, you may have to recognize gain. 2011 tax instructions You must recognize gain only up to the amount of money plus the fair market value of the other property you receive. 2011 tax instructions The rules for figuring the recognized gain in this situation generally follow those for a partially nontaxable exchange discussed in Publication 544 under Like-Kind Exchanges. 2011 tax instructions If the property you give up includes depreciable property, the recognized gain may have to be reported as ordinary income from depreciation. 2011 tax instructions See chapter 3 of Publication 544. 2011 tax instructions No loss is recognized. 2011 tax instructions Nonqualified preferred stock. 2011 tax instructions   Nonqualified preferred stock is treated as property other than stock. 2011 tax instructions Generally, it is preferred stock with any of the following features. 2011 tax instructions The holder has the right to require the issuer or a related person to redeem or buy the stock. 2011 tax instructions The issuer or a related person is required to redeem or buy the stock. 2011 tax instructions The issuer or a related person has the right to redeem or buy the stock and, on the issue date, it is more likely than not that the right will be exercised. 2011 tax instructions The dividend rate on the stock varies with reference to interest rates, commodity prices, or similar indices. 2011 tax instructions For a detailed definition of nonqualified preferred stock, see section 351(g)(2) of the Internal Revenue Code. 2011 tax instructions Liabilities. 2011 tax instructions   If the corporation assumes your liabilities, the exchange generally is not treated as if you received money or other property. 2011 tax instructions There are two exceptions to this treatment. 2011 tax instructions If the liabilities the corporation assumes are more than your adjusted basis in the property you transfer, gain is recognized up to the difference. 2011 tax instructions However, if the liabilities assumed give rise to a deduction when paid, such as a trade account payable or interest, no gain is recognized. 2011 tax instructions If there is no good business reason for the corporation to assume your liabilities, or if your main purpose in the exchange is to avoid federal income tax, the assumption is treated as if you received money in the amount of the liabilities. 2011 tax instructions For more information on the assumption of liabilities, see section 357(d) of the Internal Revenue Code. 2011 tax instructions Example. 2011 tax instructions You transfer property to a corporation for stock. 2011 tax instructions Immediately after the transfer, you control the corporation. 2011 tax instructions You also receive $10,000 in the exchange. 2011 tax instructions Your adjusted basis in the transferred property is $20,000. 2011 tax instructions The stock you receive has a fair market value (FMV) of $16,000. 2011 tax instructions The corporation also assumes a $5,000 mortgage on the property for which you are personally liable. 2011 tax instructions Gain is realized as follows. 2011 tax instructions FMV of stock received $16,000 Cash received 10,000 Liability assumed by corporation 5,000 Total received $31,000 Minus: Adjusted basis of property transferred 20,000 Realized gain $11,000   The liability assumed is not treated as money or other property. 2011 tax instructions The recognized gain is limited to $10,000, the cash received. 2011 tax instructions Loss on exchange. 2011 tax instructions   If you have a loss from an exchange and own, directly or indirectly, more than 50% of the corporation's stock, you cannot deduct the loss. 2011 tax instructions For more information, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. 2011 tax instructions Basis of stock or other property received. 2011 tax instructions   The basis of the stock you receive is generally the adjusted basis of the property you transfer. 2011 tax instructions Increase this amount by any amount treated as a dividend, plus any gain recognized on the exchange. 2011 tax instructions Decrease this amount by any cash you received, the fair market value of any other property you received, and any loss recognized on the exchange. 2011 tax instructions Also decrease this amount by the amount of any liability the corporation or another party to the exchange assumed from you, unless payment of the liability gives rise to a deduction when paid. 2011 tax instructions    Further decreases may be required when the corporation or another party to the exchange assumes from you a liability that gives rise to a deduction when paid, if the basis of the stock would otherwise be higher than its fair market value on the date of the exchange. 2011 tax instructions This rule does not apply if the entity assuming the liability acquired either substantially all of the assets or the trade or business with which the liability is associated. 2011 tax instructions The basis of any other property you receive is its fair market value on the date of the trade. 2011 tax instructions Basis of property transferred. 2011 tax instructions   A corporation that receives property from you in exchange for its stock generally has the same basis you had in the property, increased by any gain you recognized on the exchange. 2011 tax instructions However, the increase for the gain recognized may be limited. 2011 tax instructions For more information, see section 362 of the Internal Revenue Code. 2011 tax instructions Election to reduce basis. 2011 tax instructions   In a section 351 transaction, if the adjusted basis of the property transferred exceeds the property's fair market value, the transferor and transferee may make an irrevocable election to treat the basis of the stock received by the transferor as having a basis equal to the fair market value of the property transferred. 2011 tax instructions The transferor and transferee make this election by attaching a statement to their tax returns filed by the due date (including extensions) for the tax year in which the transaction occurred. 2011 tax instructions However, if the transferor makes the election by including the certification provided in Notice 2005-70, 2005-41, I. 2011 tax instructions R. 2011 tax instructions B. 2011 tax instructions 694, on or with its tax return filed by the due date (including extensions), then no election need be made by the transferee. 2011 tax instructions    For more information on making this election, see section 362(e)(2)(C) of the Internal Revenue Code, and Notice 2005-70. 2011 tax instructions Capital Contributions This section explains the tax treatment of contributions from shareholders and nonshareholders. 2011 tax instructions Paid-in capital. 2011 tax instructions   Contributions to the capital of a corporation, whether or not by shareholders, are paid-in capital. 2011 tax instructions These contributions are not taxable to the corporation. 2011 tax instructions Basis. 2011 tax instructions   The corporation's basis of property contributed to capital by a shareholder is the same as the basis the shareholder had in the property, increased by any gain the shareholder recognized on the exchange. 2011 tax instructions However, the increase for the gain recognized may be limited. 2011 tax instructions For more information, see Basis of property transferred, above, and section 362 of the Internal Revenue Code. 2011 tax instructions   The basis of property contributed to capital by a person other than a shareholder is zero. 2011 tax instructions   If a corporation receives a cash contribution from a person other than a shareholder, the corporation must reduce the basis of any property acquired with the contribution during the 12-month period beginning on the day it received the contribution by the amount of the contribution. 2011 tax instructions If the amount contributed is more than the cost of the property acquired, then reduce, but not below zero, the basis of the other properties held by the corporation on the last day of the 12-month period in the following order. 2011 tax instructions Depreciable property. 2011 tax instructions Amortizable property. 2011 tax instructions Property subject to cost depletion but not to percentage depletion. 2011 tax instructions All other remaining properties. 2011 tax instructions   Reduce the basis of property in each category to zero before going on to the next category. 2011 tax instructions   There may be more than one piece of property in each category. 2011 tax instructions Base the reduction of the basis of each property on the following ratio:   Basis of each piece of property   Bases of all properties (within that category) If the corporation wishes to make this adjustment in some other way, it must get IRS approval. 2011 tax instructions The corporation files a request for approval with its income tax return for the tax year in which it receives the contribution. 2011 tax instructions Filing and Paying Income Taxes The federal income tax is a pay-as-you-go tax. 2011 tax instructions A corporation generally must make estimated tax payments as it earns or receives income during its tax year. 2011 tax instructions After the end of the year, the corporation must file an income tax return. 2011 tax instructions This section will help you determine when and how to pay and file corporate income taxes. 2011 tax instructions For certain corporations affected by Presidentially declared disasters such as hurricanes, the due dates for filing returns, paying taxes, and performing other time-sensitive acts may be extended. 2011 tax instructions The IRS may also forgive the interest and penalties on any underpaid tax for the length of any extension. 2011 tax instructions For more information, visit www. 2011 tax instructions irs. 2011 tax instructions gov/newsroom/article/0,,id=108362. 2011 tax instructions 00. 2011 tax instructions Income Tax Return This section will help you determine when and how to report a corporation's income tax. 2011 tax instructions Who must file. 2011 tax instructions   Unless exempt under section 501 of the Internal Revenue Code, all domestic corporations in existence for any part of a tax year (including corporations in bankruptcy) must file an income tax return whether or not they have taxable income. 2011 tax instructions Which form to file. 2011 tax instructions   A corporation generally must file Form 1120, U. 2011 tax instructions S. 2011 tax instructions Corporation Income Tax Return, to report its income, gains, losses, deductions, credits, and to figure its income tax liability. 2011 tax instructions Certain organizations and entities must file special returns. 2011 tax instructions For more information, see Special Returns for Certain Organizations, in the Instructions for Form 1120. 2011 tax instructions Electronic filing. 2011 tax instructions   Corporations can generally electronically file (e-file) Form 1120 and certain related forms, schedules, and attachments. 2011 tax instructions Certain corporations with total assets of $10 million or more, that file at least 250 returns a year must e-file Form 1120. 2011 tax instructions However, in certain instances, these corporations can request a waiver. 2011 tax instructions For more information regarding electronic filing, visit www. 2011 tax instructions irs. 2011 tax instructions gov/efile. 2011 tax instructions When to file. 2011 tax instructions   Generally, a corporation must file its income tax return by the 15th day of the 3rd month after the end of its tax year. 2011 tax instructions A new corporation filing a short-period return must generally file by the 15th day of the 3rd month after the short period ends. 2011 tax instructions A corporation that has dissolved must generally file by the 15th day of the 3rd month after the date it dissolved. 2011 tax instructions Example 1. 2011 tax instructions A corporation's tax year ends December 31. 2011 tax instructions It must file its income tax return by March 15th. 2011 tax instructions Example 2. 2011 tax instructions A corporation's tax year ends June 30. 2011 tax instructions It must file its income tax return by September 15th. 2011 tax instructions   If the due date falls on a Saturday, Sunday, or legal holiday, the due date is extended to the next business day. 2011 tax instructions Extension of time to file. 2011 tax instructions   File Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information and Other Returns, to request an extension of time to file a corporation income tax return. 2011 tax instructions The IRS will grant the extension if you complete the form properly, file it, and pay any tax due by the original due date for the return. 2011 tax instructions   Form 7004 does not extend the time for paying the tax due on the return. 2011 tax instructions Interest, and possibly penalties, will be charged on any part of the final tax due not shown as a balance due on Form 7004. 2011 tax instructions The interest is figured from the original due date of the return to the date of payment. 2011 tax instructions   For more information, see the instructions for Form 7004. 2011 tax instructions How to pay your taxes. 2011 tax instructions   A corporation must pay its tax due in full no later than the 15th day of the 3rd month after the end of its tax year. 2011 tax instructions Electronic Federal Tax Payment System (EFTPS). 2011 tax instructions   Corporations generally must use EFTPS to make deposits of all tax liabilities (including social security, Medicare, withheld income, excise, and corporate income taxes). 2011 tax instructions For more information on EFTPS and enrollment, visit www. 2011 tax instructions eftps. 2011 tax instructions gov or call 1-800-555-4477. 2011 tax instructions Also see Publication 966, The Secure Way to Pay Your Federal Taxes. 2011 tax instructions Note. 2011 tax instructions Forms 8109 and 8109-B, Federal Tax Deposit Coupon, can no longer be used to make federal tax deposits. 2011 tax instructions Penalties Generally, if the corporation receives a notice about interest and penalties after it files its return, send the IRS an explanation and we will determine if the corporation meets reasonable-cause criteria. 2011 tax instructions Do not attach an explanation when the corporation's return is filed. 2011 tax instructions See the instructions for your income tax return. 2011 tax instructions Late filing of return. 2011 tax instructions    A corporation 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. 2011 tax instructions If the corporation is charged a penalty for late payment of tax (discussed next) for the same period of time, the penalty for late filing is reduced by the amount of the penalty for late payment. 2011 tax instructions The minimum penalty for a return that is over 60 days late is the smaller of the tax due or $100. 2011 tax instructions The penalty will not be imposed if the corporation can show the failure to file on time was due to a reasonable cause. 2011 tax instructions Late payment of tax. 2011 tax instructions    A corporation that does not pay the tax when due 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. 2011 tax instructions The penalty will not be imposed if the corporation can show that the failure to pay on time was due to a reasonable cause. 2011 tax instructions Trust fund recovery penalty. 2011 tax instructions   If income, social security, and Medicare taxes that a corporation must withhold from employee wages are not withheld or are not deposited or paid to the United States Treasury, the trust fund recovery penalty may apply. 2011 tax instructions The penalty is the full amount of the unpaid trust fund tax. 2011 tax instructions This penalty may apply to you if these unpaid taxes cannot be immediately collected from the business. 2011 tax instructions   The trust fund recovery penalty may be imposed on all persons who are determined by the IRS to be responsible for collecting, accounting for, and paying these taxes, and who acted willfully in not doing so. 2011 tax instructions   A responsible person can be an officer or employee of a corporation, an accountant, or a volunteer director/trustee. 2011 tax instructions A responsible person also may include one who signs checks for the corporation or otherwise has authority to cause the spending of business funds. 2011 tax instructions   Willfully means voluntarily, consciously, and intentionally. 2011 tax instructions A responsible person acts willfully if the person knows the required actions are not taking place. 2011 tax instructions   For more information on withholding and paying these taxes, see Publication 15 (Circular E), Employer's Tax Guide, and Publication 51, (Circular A), Agricultural Employer's Tax Guide. 2011 tax instructions Other penalties. 2011 tax instructions   Other penalties can be imposed for negligence, substantial understatement of tax, reportable transaction understatements, and fraud. 2011 tax instructions See sections 6662, 6662A, and 6663 of the Internal Revenue Code. 2011 tax instructions Estimated Tax Generally, a corporation must make installment payments if it expects its estimated tax for the year to be $500 or more. 2011 tax instructions If the corporation does not pay the installments when they are due, it could be subject to an underpayment penalty. 2011 tax instructions This section will explain how to avoid this penalty. 2011 tax instructions When to pay estimated tax. 2011 tax instructions   Installment payments are due by the 15th day of the 4th, 6th, 9th, and 12th months of the corporation's tax year. 2011 tax instructions Example 1. 2011 tax instructions Your corporation's tax year ends December 31. 2011 tax instructions Installment payments are due on April 15, June 15, September 15, and December 15. 2011 tax instructions Example 2. 2011 tax instructions Your corporation's tax year ends June 30. 2011 tax instructions Installment payments are due on October 15, December 15, March 15, and June 15. 2011 tax instructions   If any due date falls on a Saturday, Sunday, or legal holiday, the installment is due on the next business day. 2011 tax instructions How to figure each required installment. 2011 tax instructions   Use Form 1120-W, Estimated Tax for Corporations, as a worksheet to figure each required installment of estimated tax. 2011 tax instructions You will generally use one of the following two methods to figure each required installment. 2011 tax instructions You should use the method that yields the smallest installment payments. 2011 tax instructions Note. 2011 tax instructions In these discussions, “return” generally refers to the corporation's original return. 2011 tax instructions However, an amended return is considered the original return if it is filed by the due date (including extensions) of the original return. 2011 tax instructions Method 1. 2011 tax instructions   Each required installment is 25% of the income tax the corporation will show on its return for the current year. 2011 tax instructions Method 2. 2011 tax instructions   Each required installment is 25% of the income tax shown on the corporation's return for the previous year. 2011 tax instructions   To use Method 2: The corporation must have filed a return for the previous year, The return must have been for a full 12 months, and The return must have shown a positive tax liability (not zero). 2011 tax instructions Also, if the corporation is a large corporation, it can use Method 2 to figure the first installment only. 2011 tax instructions   See the Instructions for Form 1120-W, for the definition of a large corporation and other special rules for large corporations. 2011 tax instructions Other methods. 2011 tax instructions   If a corporation's income is expected to vary during the year because, for example, its business is seasonal, it may be able to lower the amount of one or more required installments by using one or both of the following methods. 2011 tax instructions The annualized income installment method. 2011 tax instructions The adjusted seasonal installment method. 2011 tax instructions Use Schedule A of Form 1120-W to determine if using one or both of these methods will lower the amount of any required installments. 2011 tax instructions Refiguring required installments. 2011 tax instructions   If after the corporation figures and deposits its estimated tax it finds that its tax liability for the year will be more or less than originally estimated, it may have to refigure its required installments to see if an underpayment penalty may apply. 2011 tax instructions An immediate catchup payment should be made to reduce any penalty resulting from the underpayment of any earlier installments. 2011 tax instructions Underpayment penalty. 2011 tax instructions   If the corporation does not pay a required installment of estimated tax by its due date, it may be subject to a penalty. 2011 tax instructions The penalty is figured separately for each installment due date. 2011 tax instructions The corporation may owe a penalty for an earlier due date, even if it paid enough tax later to make up the underpayment. 2011 tax instructions This is true even if the corporation is due a refund when its return is filed. 2011 tax instructions Form 2220. 2011 tax instructions   Use Form 2220, Underpayment of Estimated Tax by Corporations, to determine if a corporation is subject to the penalty for underpayment of estimated tax and to figure the amount of the penalty. 2011 tax instructions   If the corporation is charged a penalty, the amount of the penalty depends on the following three factors. 2011 tax instructions The amount of the underpayment. 2011 tax instructions The period during which the underpayment was due and unpaid. 2011 tax instructions The interest rate for underpayments published quarterly by the IRS in the Internal Revenue Bulletin. 2011 tax instructions   A corporation generally does not have to file Form 2220 with its income tax return because the IRS will figure any penalty and bill the corporation. 2011 tax instructions However, even if the corporation does not owe a penalty, complete and attach the form to the corporation's tax return if any of the following apply. 2011 tax instructions The annualized income installment method was used to figure any required installment. 2011 tax instructions The adjusted seasonal installment method was used to figure any required installment. 2011 tax instructions The corporation is a large corporation figuring its first required installment based on the prior year's tax. 2011 tax instructions How to pay estimated tax. 2011 tax instructions   A corporation is generally required to use EFTPS to pay its taxes. 2011 tax instructions See Electronic Federal Tax Payment System (EFTPS), earlier. 2011 tax instructions Also see the Instructions for Form 1120-W. 2011 tax instructions Quick refund of overpayments. 2011 tax instructions   A corporation that has overpaid its estimated tax for the tax year may be able to apply for a quick refund. 2011 tax instructions Use Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax, to apply for a quick refund of an overpayment of estimated tax. 2011 tax instructions A corporation can apply for a quick refund if the overpayment is: At least 10% of its expected tax liability, and At least $500. 2011 tax instructions Use Form 4466 to figure the corporation's expected tax liability and the overpayment of estimated tax. 2011 tax instructions File Form 4466 before the 16th day of the 3rd month after the end of the tax year, but before the corporation files its income tax return. 2011 tax instructions Do not file Form 4466 before the end of the corporation's tax year. 2011 tax instructions An extension of time to file the corporation's income tax return will not extend the time for filing Form 4466. 2011 tax instructions The IRS will act on the form within 45 days from the date you file it. 2011 tax instructions U. 2011 tax instructions S. 2011 tax instructions Real Property Interest If a domestic corporation acquires a U. 2011 tax instructions S. 2011 tax instructions real property interest from a foreign person or firm, the corporation may have to withhold tax on the amount it pays for the property. 2011 tax instructions The amount paid includes cash, the fair market value of other property, and any assumed liability. 2011 tax instructions If a domestic corporation distributes a U. 2011 tax instructions S. 2011 tax instructions real property interest to a foreign person or firm, it may have to withhold tax on the fair market value of the property. 2011 tax instructions A corporation that fails to withhold may be liable for the tax, and any penalties and interest that apply. 2011 tax instructions For more information, see section 1445 of the Internal Revenue Code; Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities; Form 8288, U. 2011 tax instructions S. 2011 tax instructions Withholding Tax Return for Dispositions by Foreign Persons of U. 2011 tax instructions S. 2011 tax instructions Real Property Interests; and Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U. 2011 tax instructions S. 2011 tax instructions Real Property Interests. 2011 tax instructions Accounting Methods An accounting method is a set of rules used to determine when and how income and expenses are reported. 2011 tax instructions Taxable income should be determined using the method of accounting regularly used in keeping the corporation's books and records. 2011 tax instructions In all cases, the method used must clearly show taxable income. 2011 tax instructions Generally, permissible methods include: Cash, Accrual, or Any other method authorized by the Internal Revenue Code. 2011 tax instructions Accrual method. 2011 tax instructions   Generally, a corporation (other than a qualified personal service corporation) must use the accrual method of accounting if its average annual gross receipts exceed $5 million. 2011 tax instructions A corporation engaged in farming operations also must use the accrual method. 2011 tax instructions   If inventories are required, the accrual method generally must be used for sales and purchases of merchandise. 2011 tax instructions However, qualifying taxpayers and eligible businesses of qualifying small business taxpayers are excepted from using the accrual method for eligible trades or businesses and may account for inventoriable items as materials and supplies that are not incidental. 2011 tax instructions   Under the accrual method, an amount is includable in income when: All the events have occurred that fix the right to receive the income, which is the earliest of the date: The required performance takes place, Payment is due, or Payment is received; and The amount can be determined with reasonable accuracy. 2011 tax instructions   Generally, an accrual basis taxpayer can deduct accrued expenses in the tax year when: All events that determine the liability have occurred, The amount of the liability can be figured with reasonable accuracy, and Economic performance takes place with respect to the expense. 2011 tax instructions   There are exceptions to the economic performance rule for certain items, including recurring expenses. 2011 tax instructions See section 461(h) of the Internal Revenue Code and the related regulations for the rules for determining when economic performance takes place. 2011 tax instructions Nonaccrual experience method. 2011 tax instructions   Accrual method corporations are not required to maintain accruals for certain amounts from the performance of services that, on the basis of their experience, will not be collected, if: The services are in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting; or The corporation's average annual gross receipts for the 3 prior tax years does not exceed $5 million. 2011 tax instructions   This provision does not apply if interest is required to be paid on the amount or if there is any penalty for failure to pay the amount timely. 2011 tax instructions Percentage of completion method. 2011 tax instructions   Long-term contracts (except for certain real property construction contracts) must generally be accounted for using the percentage of completion method described in section 460 of the Internal Revenue Code. 2011 tax instructions Mark-to-market accounting method. 2011 tax instructions   Generally, dealers in securities must use the mark-to-market accounting method described in section 475 of the Internal Revenue Code. 2011 tax instructions Under this method any security held by a dealer as inventory must be included in inventory at its FMV. 2011 tax instructions Any security not held as inventory at the close of the tax year is treated as sold at its FMV on the last business day of the tax year. 2011 tax instructions Any gain or loss must be taken into account in determining gross income. 2011 tax instructions The gain or loss taken into account is treated as ordinary gain or loss. 2011 tax instructions   Dealers in commodities and traders in securities and commodities can elect to use the mark-to-market accounting method. 2011 tax instructions Change in accounting method. 2011 tax instructions   A corporation can change its method of accounting used to report taxable income (for income as a whole or for the treatment of any material item). 2011 tax instructions The corporation must file Form 3115, Application for Change in Accounting Method. 2011 tax instructions For more information, see Form 3115 and Publication 538. 2011 tax instructions Section 481(a) adjustment. 2011 tax instructions   The corporation may have to make an adjustment under section 481(a) of the Internal Revenue Code to prevent amounts of income or expense from being duplicated or omitted. 2011 tax instructions The section 481(a) adjustment period is generally 1 year for a net negative adjustment and 4 years for a net positive adjustment. 2011 tax instructions However, a corporation can elect to use a 1-year adjustment period if the net section 481(a) adjustment for the change is less than $25,000. 2011 tax instructions The corporation must complete the appropriate lines of Form 3115 to make the election. 2011 tax instructions See the Instructions for Form 3115. 2011 tax instructions Accounting Periods A corporation must figure its taxable income on the basis of a tax year. 2011 tax instructions A tax year is the annual accounting period a corporation uses to keep its records and report its income and expenses. 2011 tax instructions Generally, corporations can use either a calendar year or a fiscal year as its tax year. 2011 tax instructions Unless special rules apply, a corporation generally adopts a tax year by filing its first federal income tax return using that tax year. 2011 tax instructions For more information, see Publication 538. 2011 tax instructions Personal service corporation. 2011 tax instructions   A personal service corporation must use a calendar year as its tax year unless: It elects to use a 52–53 week tax year that ends with reference to the calendar year; It can establish a business purpose for a different tax year and obtains approval of the IRS. 2011 tax instructions See Form 1128, Application To Adopt, Change, or Retain a Tax Year, and Publication 538; or It elects under section 444 of the Internal Revenue Code to have a tax year other than a calendar year. 2011 tax instructions Use Form 8716, Election to Have a Tax Year Other Than a Required Tax Year, to make the election. 2011 tax instructions   If a personal service corporation makes a section 444 election, its deduction for certain amounts paid to employee-owners may be limited. 2011 tax instructions See Schedule H (Form 1120), Section 280H Limitations for a Personal Service Corporation (PSC), to figure the maximum deduction. 2011 tax instructions Change of tax year. 2011 tax instructions   Generally, a corporation must get the consent of the IRS before changing its tax year by filing Form 1128. 2011 tax instructions However, under certain conditions, a corporation can change its tax year without getting the consent. 2011 tax instructions For more information, see Form 1128 and Publication 538. 2011 tax instructions Recordkeeping A corporation should keep its records for as long as they may be needed for the administration of any provision of the Internal Revenue Code. 2011 tax instructions Usually records that support items of income, deductions, or credits on the return must be kept for 3 years from the date the return is due or filed, whichever is later. 2011 tax instructions Keep records that verify the corporation's basis in property for as long as they are needed to figure the basis of the original or replacement property. 2011 tax instructions The corporation should keep copies of all filed returns. 2011 tax instructions They help in preparing future and amended returns and in the calculation of earnings and profits. 2011 tax instructions Income, Deductions, and Special Provisions Rules on income and deductions that apply to individuals also apply, for the most part, to corporations. 2011 tax instructions However, the following special provisions apply only to corporations. 2011 tax instructions Costs of Going Into Business When you go into business, treat all costs you incur to get your business started as capital expenses. 2011 tax instructions However, a corporation can elect to deduct a limited amount of start-up or organizational costs. 2011 tax instructions Any costs not deducted can be amortized. 2011 tax instructions Start-up costs are costs for creating an active trade or business or investigating the creation or acquisition of an active trade or business. 2011 tax instructions Organizational costs are the direct costs of creating the corporation. 2011 tax instructions For more information on deducting or amortizing start-up and organizational costs, see the instructions for your income tax return. 2011 tax instructions Also see, Publication 535, chapter 7, Costs You Can Deduct or Capitalize, and chapter 8, Amortization. 2011 tax instructions Related Persons A corporation that uses an accrual method of accounting cannot deduct business expenses and interest owed to a related person who uses the cash method of accounting until the corporation makes the payment and the corresponding amount is includible in the related person's gross income. 2011 tax instructions Determine the relationship, for this rule, as of the end of the tax year for which the expense or interest would otherwise be deductible. 2011 tax instructions If a deduction is denied, the rule will continue to apply even if the corporation's relationship with the person ends before the expense or interest is includible in the gross income of that person. 2011 tax instructions These rules also deny the deduction of losses on the sale or exchange of property between related persons. 2011 tax instructions Related persons. 2011 tax instructions   For purposes of this rule, the following persons are related to a corporation. 2011 tax instructions Another corporation, that is a member of the same controlled group (as defined in section 267(f) of the Internal Revenue Code). 2011 tax instructions An individual who owns, directly or indirectly, more than 50% of the value of the outstanding stock of the corporation. 2011 tax instructions A trust fiduciary, when the trust or the grantor of the trust owns, directly or indirectly, more than 50% in value of the outstanding stock of the corporation. 2011 tax instructions An S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. 2011 tax instructions A partnership, if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital or profits interest in the partnership. 2011 tax instructions Any employee-owner, if the corporation is a personal service corporation (see Personal service corporation, earlier), regardless of the amount of stock owned by the employee-owner. 2011 tax instructions Ownership of stock. 2011 tax instructions   To determine whether an individual directly or indirectly owns any of the outstanding stock of a corporation, the following apply. 2011 tax instructions Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust, is treated as being owned proportionately by or for its shareholders, partners, or beneficiaries. 2011 tax instructions An individual is treated as owning the stock owned, directly or indirectly, by or for the individual's family. 2011 tax instructions Family includes only brothers and sisters (including half brothers and half sisters), a spouse, ancestors, and lineal descendants. 2011 tax instructions Any individual owning (other than by applying (2), above) stock in a corporation, is treated as also owning the stock owned directly or indirectly by that individual's partner. 2011 tax instructions To apply (1), (2), or (3), above, stock constructively owned by a person under (1) is treated as actually owned by that person. 2011 tax instructions But stock constructively owned by an individual under (2) or (3) is not treated as actually owned by the individual for applying either (2) or (3) to make another person the constructive owner of that stock. 2011 tax instructions Reallocation of income and deductions. 2011 tax instructions   Where it is necessary to clearly show income or prevent tax evasion, the IRS can reallocate gross income, deductions, credits, or allowances between two or more organizations, trades, or businesses owned or controlled directly, or indirectly, by the same interests. 2011 tax instructions Complete liquidations. 2011 tax instructions   The disallowance of losses from the sale or exchange of property between related persons does not apply to liquidating distributions. 2011 tax instructions More information. 2011 tax instructions   For more information about the related person rules, see Publication 544. 2011 tax instructions Income From Qualifying Shipping Activities A corporation may make an election to be taxed on its notional shipping income at the highest corporate tax rate. 2011 tax instructions If a corporation makes this election it may exclude income from qualifying shipping activities from gross income. 2011 tax instructions Also if the election is made, the corporation generally may not claim any loss, deduction, or credit with respect to qualifying shipping activities. 2011 tax instructions A corporation making this election may also elect to defer gain on the disposition of a qualifying vessel. 2011 tax instructions A corporation uses Form 8902, Alternative Tax on Qualifying Shipping Activities, to make the election and figure the alternative tax. 2011 tax instructions For more information regarding the election, see Form 8902. 2011 tax instructions Election to Expense Qualified Refinery Property A corporation can make an irrevocable election on its tax return filed by the due date (including extensions) to deduct 50% of the cost of qualified refinery property (defined in section 179C(c) of the Internal Revenue Code), placed in service before January 1, 2014. 2011 tax instructions The deduction is allowed for the year in which the property is placed in service. 2011 tax instructions A subchapter T cooperative can make an irrevocable election on its return by the due date (including extensions) to allocate this deduction to its owners based on their ownership interest. 2011 tax instructions For more information, see section 179C of the Internal Revenue Code and the related Regulations. 2011 tax instructions Deduction to Comply With EPA Sulfur Regulations A small business refiner can make an irrevocable election on its tax return filed by the due date (including extensions) to deduct up to 75% of qualified costs paid or incurred to comply with the Highway Diesel Fuel Sulfur Control Requirements of the Environmental Protection Agency (EPA). 2011 tax instructions A subchapter T cooperative can make an irrevocable election on its return filed by the due date (including extensions) to allocate the deduction to its owners based on their ownership interest. 2011 tax instructions For more information, see sections 45H and 179B of the Internal Revenue Code and the related Regulations. 2011 tax instructions Energy-Efficient Commercial Building Property Deduction A corporation can claim a deduction for costs associated with energy-efficient commercial building property, placed in service before January 1, 2014. 2011 tax instructions In order to qualify for the deduction: The costs must be associated with depreciable or amortizable property in a Standard 90. 2011 tax instructions 1-2001 domestic building; The property must be either a part of the interior lighting system, the heating, cooling, ventilation and hot water system, or the building envelope (defined in section 179D(c)(1)(C) of the Internal Revenue Code); and The property must be installed as part of a plan to reduce the total annual energy and power costs of the building by 50% or more. 2011 tax instructions The deduction is limited to $1. 2011 tax instructions 80 per square foot of the building less the total amount of deductions taken for this property in prior tax years. 2011 tax instructions Other rules and limitations apply. 2011 tax instructions The corporation must reduce the basis of any property by any deduction taken. 2011 tax instructions The deduction is subject to recapture if the corporation fails to fully implement an energy savings plan. 2011 tax instructions For more information, see section 179D of the Internal Revenue Code. 2011 tax instructions Also see Notice 2006-52, 2006-26 I. 2011 tax instructions R. 2011 tax instructions B. 2011 tax instructions 1175, clarified and amplified by Notice 2008-40, 2008-14 I. 2011 tax instructions R. 2011 tax instructions B. 2011 tax instructions 725, and any successor. 2011 tax instructions Corporate Preference Items A corporation must make special adjustments to certain items before it takes them into account in determining its taxable income. 2011 tax instructions These items are known as corporate preference items and they include the following. 2011 tax instructions Gain on the disposition of section 1250 property. 2011 tax instructions For more information, see section 1250 Property under Depreciation Recapture in chapter 3 of Publication 544. 2011 tax instructions Percentage depletion for iron ore and coal (including lignite). 2011 tax instructions For more information, see Mines and Geothermal Deposits under Mineral Property in chapter 9 of Publication 535. 2011 tax instructions Amortization of pollution control facilities. 2011 tax instructions For more information, see Pollution Control Facilities in chapter 8 of Publication 535 and section 291(a)(5) of the Internal Revenue Code. 2011 tax instructions Mineral exploration and development costs. 2011 tax instructions For more information, see Exploration Costs and Development Costs in chapter 7 of Publication 535. 2011 tax instructions For more information on corporate preference items, see section 291 of the Internal Revenue Code. 2011 tax instructions Dividends-Received Deduction A corporation can deduct a percentage of certain dividends received during its tax year. 2011 tax instructions This section discusses the general rules that apply. 2011 tax instructions The deduction is figured on Form 1120, Schedule C, or the applicable schedule of your income tax return. 2011 tax instructions For more information, see the Instructions for Form 1120, or the instructions for your applicable income tax return. 2011 tax instructions Dividends from domestic corporations. 2011 tax instructions   A corporation can deduct, within certain limits, 70% of the dividends received if the corporation receiving the dividend owns less than 20% of the corporation distributing the dividend. 2011 tax instructions If the corporation owns 20% or more of the distributing corporation's stock, it can, subject to certain limits, deduct 80% of the dividends received. 2011 tax instructions Ownership. 2011 tax instructions   Determine ownership, for these rules, by the amount of voting power and value of the paying corporation's stock (other than certain preferred stock) the receiving corporation owns. 2011 tax instructions Small business investment companies. 2011 tax instructions   Small business investment companies can deduct 100% of the dividends received from taxable domestic corporations. 2011 tax instructions Dividends from regulated investment companies. 2011 tax instructions   Regulated investment company dividends received are subject to certain limits. 2011 tax instructions Capital gain dividends received from a regulated investment company do not qualify for the deduction. 2011 tax instructions For more information, see section 854 of the Internal Revenue Code. 2011 tax instructions No deduction allowed for certain dividends. 2011 tax instructions   Corporations cannot take a deduction for dividends received from the following entities. 2011 tax instructions A real estate investment trust (REIT). 2011 tax instructions A corporation exempt from tax under section 501 or 521 of the Internal Revenue Code either for the tax year of the distribution or the preceding tax year. 2011 tax instructions A corporation whose stock was held less than 46 days during the 91-day period beginning 45 days before the stock became ex-dividend with respect to the dividend. 2011 tax instructions Ex-dividend means the holder has no rights to the dividend. 2011 tax instructions A corporation whose preferred stock was held less than 91 days during the 181-day period beginning 90 days before the stock became ex-dividend with respect to the dividend if the dividends received are for a period or periods totaling more than 366 days. 2011 tax instructions Any corporation, if your corporation is under an obligation (pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property. 2011 tax instructions Dividends on deposits. 2011 tax instructions   Dividends on deposits or withdrawable accounts in domestic building and loan associations, mutual savings banks, cooperative banks, and similar organizations are interest, not dividends. 2011 tax instructions They do not qualify for this deduction. 2011 tax instructions Limit on deduction for dividends. 2011 tax instructions   The total deduction for dividends received or accrued is generally limited (in the following order) to: 80% of the difference between taxable income and the 100% deduction allowed for dividends received from affiliated corporations, or by a small business investment company, for dividends received or accrued from 20%-owned corporations, then 70% of the difference between taxable income and the 100% deduction allowed for dividends received from affiliated corporations, or by a small business investment company, for dividends received or accrued from less-than-20%-owned corporations (reducing taxable income by the total dividends received from 20%-owned corporations). 2011 tax instructions Figuring the limit. 2011 tax instructions   In figuring the limit, determine taxable income without the following items. 2011 tax instructions The net operating loss deduction. 2011 tax instructions The domestic production activities deduction. 2011 tax instructions The deduction for dividends received. 2011 tax instructions Any adjustment due to the nontaxable part of an extraordinary dividend (see Extraordinary Dividends, below). 2011 tax instructions Any capital loss carryback to the tax year. 2011 tax instructions Effect of net operating loss. 2011 tax instructions   If a corporation has a net operating loss (NOL) for a tax year, the limit of 80% (or 70%) of taxable income does not apply. 2011 tax instructions To determine whether a corporation has an NOL, figure the dividends-received deduction without the 80% (or 70%) of taxable income limit. 2011 tax instructions Example 1. 2011 tax instructions A corporation loses $25,000 from operations. 2011 tax instructions It receives $100,000 in dividends from a 20%-owned corporation. 2011 tax instructions Its taxable income is $75,000 ($100,000 – $25,000) before the deduction for dividends received. 2011 tax instructions If it claims the full dividends-received deduction of $80,000 ($100,000 × 80%) and combines it with an operations loss of $25,000, it will have an NOL of ($5,000). 2011 tax instructions Therefore, the 80% of taxable income limit does not apply. 2011 tax instructions The corporation can deduct the full $80,000. 2011 tax instructions Example 2. 2011 tax instructions Assume the same facts as in Example 1, except that the corporation only loses $15,000 from operations. 2011 tax instructions Its taxable income is $85,000 before the deduction for dividends received. 2011 tax instructions After claiming the dividends-received deduction of $80,000 ($100,000 × 80%), its taxable income is $5,000. 2011 tax instructions Because the corporation will not have an NOL after applying a full dividends-received deduction, its allowable dividends-received deduction is limited to 80% of its taxable income, or $68,000 ($85,000 × 80%). 2011 tax instructions Extraordinary Dividends If a corporation receives an extraordinary dividend on stock held 2 years or less before the dividend announcement date, it generally must reduce its basis in the stock by the nontaxed part of the dividend. 2011 tax instructions The nontaxed part is any dividends-received deduction allowable for the dividends. 2011 tax instructions Extraordinary dividend. 2011 tax instructions   An extraordinary dividend is any dividend on stock that equals or exceeds a certain percentage of the corporation's adjusted basis in the stock. 2011 tax instructions The percentages are: 5% for stock preferred as to dividends, or 10% for other stock. 2011 tax instructions Treat all dividends received that have ex-dividend dates within an 85-consecutive-day period as one dividend. 2011 tax instructions Treat all dividends received that have ex-dividend dates within a 365-consecutive-day period as extraordinary dividends if the total of the dividends exceeds 20% of the corporation's adjusted basis in the stock. 2011 tax instructions Disqualified preferred stock. 2011 tax instructions   Any dividend on disqualified preferred stock is treated as an extraordinary dividend regardless of the period of time the corporation held the stock. 2011 tax instructions   Disqualified preferred stock is any stock preferred as to dividends if any of the following apply. 2011 tax instructions The stock when issued has a dividend rate that declines (or can reasonably be expected to decline) in the future. 2011 tax instructions The issue price of the stock exceeds its liquidation rights or stated redemption price. 2011 tax instructions The stock is otherwise structured to avoid the rules for extraordinary dividends and to enable corporate shareholders to reduce tax through a combination of dividends-received deductions and loss on the disposition of the stock. 2011 tax instructions   These rules apply to stock issued after July 10, 1989, unless it was issued under a written binding contract in effect on that date, and thereafter, before the issuance of the stock. 2011 tax instructions More information. 2011 tax instructions   For more information on extraordinary dividends, see section 1059 of the Internal Revenue Code. 2011 tax instructions Below-Market Loans If a corporation receives a below-market loan and uses the proceeds for its trade or business, it may be able to deduct the forgone interest. 2011 tax instructions A below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. 2011 tax instructions A below-market loan generally is treated as an arm's-length transaction in which the borrower is considered as having received both the following: A loan in exchange for a note that requires payment of interest at the applicable federal rate, and An additional payment in an amount equal to the forgone interest. 2011 tax instructions Treat the additional payment as a gift, dividend, contribution to capital, payment of compensation, or other payment, depending on the substance of the transaction. 2011 tax instructions Foregone interest. 2011 tax instructions   For any period, forgone interest is equal to: The interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. 2011 tax instructions See Below-market loans, in chapter 4 of Publication 535 for more information. 2011 tax instructions Charitable Contributions A corporation can claim a limited deduction for charitable contributions made in cash or other property. 2011 tax instructions The contribution is deductible if made to, or for the use of, a qualified organization. 2011 tax instructions For more information on qualified organizations, see Publication 526, Charitable Contributions. 2011 tax instructions Also see, Exempt Organizations Select Check (EO Select Check) at www. 2011 tax instructions irs. 2011 tax instructions gov/charities, the on-line search tool for finding information on organizations eligible to receive tax-deductible contributions. 2011 tax instructions Note. 2011 tax instructions You cannot take a deduction if any of the net earnings of an organization receiving contributions benefit any private shareholder or individual. 2011 tax instructions Cash method corporation. 2011 tax instructions   A corporation using the cash method of accounting deducts contributions in the tax year paid. 2011 tax instructions Accrual method corporation. 2011 tax instructions   A corporation using an accrual method of accounting can choose to deduct unpaid contributions for the tax year the board of directors authorizes them if it pays them by the 15th day of the 3rd month after the close of that tax year. 2011 tax instructions Make the choice by reporting the contribution on the corporation's return for the tax year. 2011 tax instructions A declaration stating that the board of directors adopted the resolution during the tax year must accompany the return. 2011 tax instructions The declaration must include the date the resolution was adopted. 2011 tax instructions Limitations on deduction. 2011 tax instructions   A corporation cannot deduct charitable contributions that exceed 10% of its taxable income for the tax year. 2011 tax instructions Figure taxable income for this purpose without the following. 2011 tax instructions The deduction for charitable contributions. 2011 tax instructions The dividends-received deduction. 2011 tax instructions The deduction allowed under section 249 of the Internal Revenue Code. 2011 tax instructions The domestic production activities deduction. 2011 tax instructions Any net operating loss carryback to the tax year. 2011 tax instructions Any capital loss carryback to the tax year. 2011 tax instructions Farmers and ranchers. 2011 tax instructions    Corporations that are farmers and ranchers should see section 170(b)(2) of the Internal Revenue Code for special rules that may affect the deduction limit. 2011 tax instructions Carryover of excess contributions. 2011 tax instructions   You can carry over, within certain limits, to each of the subsequent 5 years any charitable contributions made during the current year that exceed the 10% limit. 2011 tax instructions You lose any excess not used within that period. 2011 tax instructions For example, if a corporation has a carryover of excess contributions paid in 2010 and it does not use all the excess on its return for 2011, it can carry any excess over to 2012, 2013, 2014, and 2015, if applicable. 2011 tax instructions Any excess not used in 2015 is lost. 2011 tax instructions Do not deduct a carryover of excess contributions in the carryover year until after you deduct contributions made in that year (subject to the 10% limit). 2011 tax instructions You cannot deduct a carryover of excess contributions to the extent it increases a net operating loss carryover. 2011 tax instructions Cash contributions. 2011 tax instructions   A corporation must maintain a record of any contribution of cash, check, or other monetary contribution, regardless of the amount. 2011 tax instructions The record can be a bank record, receipt, letter, or other written communication from the donee indicating the name of the organization, the date of the contribution, and the amount of the contribution. 2011 tax instructions Keep the record of the contribution with the other corporate records. 2011 tax instructions Do not attach the records to the corporation's return. 2011 tax instructions For more information on cash contributions, see Publication 526. 2011 tax instructions Gifts of $250 or more. 2011 tax instructions   Generally, no deduction is allowed for any contribution of $250 or more unless the corporation gets a written acknowledgement from the donee organization. 2011 tax instructions The acknowledgement should show the amount of cash contributed, a description of the 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. 2011 tax instructions The acknowledgement should be received by the due date (including extensions) of the return, or, if earlier, the date the return was filed. 2011 tax instructions Keep the acknowledgement with other corporate records. 2011 tax instructions Do not attach the acknowledgement to the return. 2011 tax instructions Contributions of property other than cash. 2011 tax instructions   If a corporation (other than a closely-held or a personal service corporation) claims a deduction of more than $500 for contributions of property other than cash, a schedule describing the property and the method used to determine its fair market value must be attached to the corporation's return. 2011 tax instructions In addition the corporation should keep a record of: The approximate date and manner of acquisition of the donated property and The cost or other basis of the donated property held by the donor for less than 12 months prior to contribution. 2011 tax instructions   Closely held and personal service corporations must complete and attach Form 8283, Noncash Charitable Contributions, to their returns if they claim a deduction of more than $500 for non-cash contributions. 2011 tax instructions For all other corporations, if the deduction claimed for donated property exceeds $5,000, complete Form 8283 and attach it to the corporation's return. 2011 tax instructions   A corporation must obtain a qualified appraisal for all deductions of property claimed in excess of $5,000. 2011 tax instructions A qualified appraisal is not required for the donation of cash, publicly traded securities, inventory, and any qualified vehicles sold by a donee organization without any significant intervening use or material improvement. 2011 tax instructions The appraisal should be maintained with other corporate records and only attached to the corporation's return when the deduction claimed exceeds $500,000; $20,000 for donated art work. 2011 tax instructions   See Form 8283 for more information. 2011 tax instructions Qualified conservation contributions. 2011 tax instructions   If a corporation makes a qualified conservation contribution, the corporation must provide information regarding the legal interest being donated, the fair market value of the underlying property before and after the donation, and a description of the conservation purpose for which the property will be used. 2011 tax instructions For more information, see section 170(h) of the Internal Revenue Code. 2011 tax instructions Contributions of used vehicles. 2011 tax instructions   A corporation is allowed a deduction for the contribution of used motor vehicles, boats, and airplanes. 2011 tax instructions The deduction is limited, and other special rules apply. 2011 tax instructions For more information, see Publication 526. 2011 tax instructions Reduction for contributions of certain property. 2011 tax instructions   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 were sold at its FMV and For certain contributions, the long-term capital gain that would have resulted if the property were sold at its FMV. 2011 tax instructions   The reduction for the 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; Contributions of any property to or for the use of certain private foundations except for stock for which market quotations are readily available; and Contributions of any patent, certain copyrights, trademark, trade name, trade secret, know-how, software (that is a section 197 intangible), or similar property, or applications or registrations of such property. 2011 tax instructions Larger deduction. 2011 tax instructions   A corporation (other than an S corporation) may be able to claim a deduction equal to the lesser of (a) the basis of the donated inventory or property plus one-half of the inventory or property's appreciation (gain if the donated inventory or property was sold at fair market value on the date of the donation), or (b) two times basis of the donated inventory or property. 2011 tax instructions This deduction may be allowed for certain contributions of: Certain inventory and other property made to a donee organization and used solely for the care of the ill, the needy, and infants. 2011 tax instructions Scientific property constructed by the corporation (other than an S corporation, personal holding company, or personal service corporation) and donated no later than 2 years after substantial completion of the construction. 2011 tax instructions The property must be donated to a qualified organization and its original use must be by the donee for research, experimentation, or research training within the United States in the area of physical or biological science. 2011 tax instructions Computer technology and equipment acquired or constructed and donated no later than 3 years after either acquisition or substantial completion of construction to an educational organization for educational purposes within the United States. 2011 tax instructions Contributions to organizations conducting lobbying activities. 2011 tax instructions   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. 2011 tax instructions More information. 2011 tax instructions   For more information on charitable contributions, including substantiation and recordkeeping requirements, see section 170 of the Internal Revenue Code, the related regulations, and Publication 526. 2011 tax instructions Capital Losses A corporation can deduct capital losses only up to the amount of its capital gains. 2011 tax instructions In other words, if a corporation has an excess capital loss, it cannot deduct the loss in the current tax year. 2011 tax instructions Instead, it carries the loss to other tax years and deducts it from any net capital gains that occur in those years. 2011 tax instructions A capital loss is carried to other years in the following order. 2011 tax instructions 3 years prior to the loss year. 2011 tax instructions 2 years prior to the loss year. 2011 tax instructions 1 year prior to the loss year. 2011 tax instructions Any loss remaining is carried forward for 5 years. 2011 tax instructions When you carry a net capital loss to another tax year, treat it as a short-term loss. 2011 tax instructions It does not retain its original identity as long term or short term. 2011 tax instructions Example. 2011 tax instructions A calendar year corporation has a net short-term capital gain of $3,000 and a net long-term capital loss of $9,000. 2011 tax instructions The short-term gain offsets some of the long-term loss, leaving a net capital loss of $6,000. 2011 tax instructions The corporation treats this $6,000 as a short-term loss when carried back or forward. 2011 tax instructions The corporation carries the $6,000 short-term loss back 3 years. 2011 tax instructions In year 1, the corporation had a net short-term capital gain of $8,000 and a net long-term capital gain of $5,000. 2011 tax instructions It subtracts the $6,000 short-term loss first from the net short-term gain. 2011 tax instructions This results in a net capital gain for year 1 of $7,000. 2011 tax instructions This consists of a net short-term capital gain of $2,000 ($8,000 − $6,000) and a net long-term capital gain of $5,000. 2011 tax instructions S corporation status. 2011 tax instructions   A corporation may not carry a capital loss from, or to, a year for which it is an S corporation. 2011 tax instructions Rules for carryover and carryback. 2011 tax instructions   When carrying a capital loss from one year to another, the following rules apply. 2011 tax instructions When figuring the current year's net capital loss, you cannot combine it with a capital loss carried from another year. 2011 tax instructions In other words, you can carry capital losses only to years that would otherwise have a total net capital gain. 2011 tax instructions If you carry capital losses from 2 or more years to the same year, deduct the loss from the earliest year first. 2011 tax instructions You cannot use a capital loss carried from another year to produce or increase a net operating loss in the year to which you carry it back. 2011 tax instructions Refunds. 2011 tax instructions   When you carry back a capital loss to an earlier tax year, refigure your tax for that year. 2011 tax instructions If your corrected tax is less than the tax you originally owed, use either Form 1139, Corporate Application for Tentative Refund, or Form 1120X, Amended U. 2011 tax instructions S. 2011 tax instructions Corporation Income Tax Return, to apply for a refund. 2011 tax instructions Form 1139. 2011 tax instructions    A corporation can get a refund faster by using Form 1139. 2011 tax instructions It cannot file Form 1139 before filing the return for the corporation's capital loss year, but it must file Form 1139 no later than 1 year after the year it sustains the capital loss. 2011 tax instructions Form 1120X. 2011 tax instructions   If the corporation does not file Form 1139, it must file Form 1120X to apply for a refund. 2011 tax instructions The corporation must file the Form 1120X within 3 years of the due date, includin