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Form 5712-A (Rev. 12-2003) Page 2
Instructions Definitions
Section references are to the Internal Revenue Code unless Possession Product
otherwise noted.
“Possession product” means an item of property which is the result
Purpose of Form of a manufacturing process. The term “product” includes component
Possession corporations complete Form 5712-A: products, integrated products, and end-product forms. An affiliated
group may establish reasonable groupings of possession products
● To elect the cost sharing method or the profit split method of as a single product. New groupings may be established each year.
computing taxable income for all possession products in a product The Commissioner may disallow any grouping that materially distorts
area (see SIC Code, below) and income or the significant business presence test. See Regulations
● To show in subsequent tax years that the corporation continues to section 1.936-5(a) for more details.
have a “significant business presence” (see below) in the possession Direct labor
with regard to the product or product area for that tax year.
Once an election is made, it generally applies for that year and all This is labor associated with units of production. Basic
subsequent tax years, and may be revoked only with the consent of compensation, overtime, holiday and vacation pay, shift differential,
the Commissioner. payroll taxes, contributions to unemployment benefit plans, and
certain types of payments for sick leave are all part of direct labor if
Note: All members of an affiliated group must consent to the they can be associated with production. Direct labor costs are only
election. See Regulations section 1.936-7(a) for details. those costs that are inventoriable under section 471.
How To File Production costs
Attach Form 5712-A to Schedule P (Form 5735), Allocation of These include direct labor costs and fixed and variable indirect
Income and Expenses Under Section 936(h)(5), and file with production costs. Only those costs that are inventoriable under
Form 5735, Possessions Corporation Tax Credit (Under Sections section 471 are qualified production costs.
936 and 30A). Base period construction costs
SIC Code These costs are the average construction costs incurred by or on
behalf of the possessions corporation for services in the possession
An election to use the cost sharing or profit split method applies to during the current and preceding 4 tax years for section 1250
all products in a product area. In the space at the top of the form for property. This property must be used to manufacture the product or
“SIC code,” enter the three-digit code for the product or product to render the services in the possession, and must represent the
area for which this Form 5712-A is being filed. See the Standard original use of the section 1250 property. If the possessions
Industrial Classification Manual for the proper code for the product corporation did not exist during any year or years in the base period,
or product area. the total amount of base period construction costs for such year or
years is zero.
Significant Business Presence Tests
Manufacturing in a Possession
The possessions corporation must show that it had a significant
business presence in the possession for the tax year by meeting one The rules under Regulations section 1.954-3(a)(4) apply in
of the tests in Parts I and II. Corporations that use the profit split determining if the possession product has been manufactured in a
method must also certify that the possession product was possession. Manufacturing has taken place if:
manufactured in the possession. 1. The product has been substantially transformed by the
If the corporation is using the cost sharing method, it must meet possessions corporation in the possession;
one of the following tests: 2. Operations performed by the possessions corporation in the
● Direct labor test (Part I) possession for the property are substantial and are generally
considered to constitute the manufacture or production of
● Value added test (Part I) property; or
● Alternative test (Part II) 3. Conversion costs incurred by the possessions corporation in the
If the corporation is using the profit split method, it must: possession, including direct labor, factory burden, testing of
● Meet one of the tests specified above and: components before incorporation into an end product, and testing of
the manufactured product before sales, are at least 20% of the total
● Answer “Yes” to the question on line 18 in Part IV. cost of goods sold of the possessions corporation. Packaging,
repackaging, labeling, or minor assembly operations do not qualify
Start-up Operations as manufacturing.
Products that were not previously produced (or services that were
not previously rendered) in the possession are eligible for a 3-year Paperwork Reduction Act Notice. We ask for the information on
phase-in of the 65% direct labor test (line 3) and the 25% value this form to carry out the Internal Revenue laws of the United States.
added test (line 8), beginning with the year the corporation first starts You are required to give us the information. We need it to ensure
to sell the product (or provide the service). For more information, see that you are complying with these laws and to allow us to figure and
Regulations section 1.936-5(b)(7). The percentages that apply during collect the right amount of tax.
the phase-in are: You are not required to provide the information requested on a
form that is subject to the Paperwork Reduction Act unless the form
Year displays a valid OMB control number. Books or records relating to a
1 2 3 form or its instructions must be retained as long as their contents
may become material in the administration of any Internal Revenue
65% Direct labor test 35% 45% 55% law. Generally, tax returns and return information are confidential, as
required by section 6103.
25% Value added test 10% 15% 20%
The time needed to complete and file this form will vary depending
on individual circumstances. The estimated average time is:
Line 3. Use the applicable percentage from the chart above (instead
of 65%). Recordkeeping 5 hr., 15 min.
Line 8. Use the applicable percentage from the chart above (instead Learning about the law or the form 53 min.
of 25%). Preparing and sending the form to the IRS 1 hr., 1 min.
If you have any comments concerning the accuracy of these time
Signature estimates or suggestions for making this form simpler, we would be
By filing Form 5712-A, the taxpayer declares it has met all happy to hear from you. See the instructions for the tax return with
requirements for a valid election under section 936(h)(5). All signed which this form is filed.
consents of its affiliated members will be made available upon
request. See Regulations section 1.936-7(a) for more details.
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