For Australian-owned US corporations, the confusion often grows because the rules differ from local practice. This guide covers the process: confirm the form and tax year, classify expenses, apply limits, prepare the statement, reconcile the total and keep support. All figures are in US dollars and reflect the 2025 return unless noted.
Key Takeaways
- Line 26 holds allowable deductions not reported on any other line, and it needs an attached statement.
- List each category by type and amount, and never repeat a deduction from Lines 12-25.
- Form 1120-L, 1120-S, 1120-H and Schedule C use different line logic.
- Reconcile book expenses to tax deductions through Schedule M-1 or M-3 before filing.
What Is Form 1120 Line 26 and What Does the Other Deductions Worksheet Do?
On the 2025 return, Line 26 reads "Other deductions (attach statement)". Line 27 adds Lines 12 through 26 to give total deductions. Line 28 then subtracts that total from Line 11 to give income before NOL and special deductions.
The IRS instructions say to attach a statement listing, by type and amount, all allowable deductions not deductible elsewhere on the form. IRS form instructions do not include a separately named "Other Deductions worksheet" for Line 26. In practice, your worksheet is the internal working paper that feeds that attached statement. Check the current-year instructions for exact attachment requirements.
The ordinary-and-necessary test
Section 162(a) allows a deduction for all ordinary and necessary expenses paid or incurred in carrying on a trade or business. Per IRS Publication 583, ordinary means common and accepted in your trade, and necessary means helpful and appropriate, not necessarily indispensable.
Your worksheet should do four jobs:
- Gather candidate expenses
- Separate them by type
- Apply any limitation
- Pass the permitted total to Line 26
Lookalikes that are not Line 26
Several forms look similar but work differently:
- Form 1120-L: a life insurance company return. Other deductions sit on Line 18, and Line 26a is total tax.
- Form 1120-S: the return for a corporation with an S election, with pass-through reporting.
- Form 1120-H: the homeowners association return, where other deductions are on Line 15.
- Schedule C: special deductions such as dividends received. Schedule C Line 24 flows to Line 29b, not Line 26.
How to Complete the Form 1120 Line 26 Worksheet
Finalise the books first. Pull the general ledger, profit-and-loss statement, prior-year return and any expense schedules. Working from unfinished books means reworking the schedule later.
Step-by-step process
Exclude amounts that already belong on dedicated Form 1120 lines:
- Officer compensation (12), wages (13), repairs (14), bad debts (15) and rents (16)
- Taxes and licenses (17), interest (18) and charitable contributions (19)
- Depreciation (20), depletion (21) and advertising (22)
- Pension plans (23), employee benefits (24) and energy efficient buildings (25)
- List candidates. Identify other expenses that look deductible and are not reported on those lines.
- Remove items that belong elsewhere. Cost of goods sold goes on Form 1125-A and Line 2. Depreciation is supported by Form 4562. Business interest subject to section 163(j) runs through Form 8990.
- Classify what remains. Confirm the deductibility rules for each expense type for the return year. Where only part of an expense is allowed, separate the book amount from the deductible tax amount.
- Prepare the statement. Give each category a clear description and amount, total the allowable figures and carry the result to Line 26.
A simple hypothetical
Suppose a corporation's candidate list shows the following:
| Item | Book amount | Treatment | Line 26 amount |
|---|---|---|---|
| Insurance premiums | $8,000 | Fully allowable | $8,000 |
| Legal and professional fees | $12,000 | Fully allowable | $12,000 |
| Business meals | $4,000 | Generally 50% | $2,000 |
| Client entertainment | $3,000 | Generally nondeductible | $0 |
| Federal income tax | $5,000 | Nondeductible | $0 |
The statement would show three lines and a Line 26 total of $22,000. These figures are illustrative only and are not tax advice.
Zero, negative and amended amounts
The 2025 instructions contain no general zero or negative rule for Line 26. Related rules still matter:
- Report the ratable portion of a negative section 481(a) adjustment on Line 26 as a deduction
- Enter a positive section 481(a) adjustment on Line 10
- To correct a filed return, use Form 1120-X
Which Expenses Belong on Line 26, and Which Do Not?
The IRS instructions give these Line 26 examples:
- Insurance premiums
- Legal and professional fees
- Supplies used and consumed
- Travel (subject to special rules)
- Utilities
- Certain start-up and organisational costs
Always confirm an item is not already reported on another line before placing it here.
Items with their own limits
- Meals: generally 50% under section 274(n). The taxpayer or an employee must be present, and the cost cannot be lavish.
- Entertainment: generally nondeductible for amounts paid after 31 December 2017. Separately stated food can still get meal treatment.
- Start-up costs (section 195): an elective deduction of up to $5,000, reduced by expenditure above $50,000, with the rest amortised over 180 months.
- Organisational costs (section 248): a separate $5,000 deduction with the same phase-out and 180-month rule.
- Section 197 intangibles: amortised over 15 years from the acquisition month.
- Charity: Line 19, not Line 26. The 2025 ceiling is 10% of adjusted taxable income. A 1% corporate floor begins for tax years starting after 31 December 2025.
What should stay off Line 26
- Personal expenses
- Shareholder distributions and ordinary dividends paid
- Capital expenditures under section 263(a)
- Costs belonging in inventory or COGS
- Federal income tax (section 275(a)(1))
- Government-directed fines and penalties, generally disallowed under section 162(f)
Book-to-tax differences and duplication
Permanent differences, such as the nondeductible half of a meal, never reverse. Temporary differences, such as book versus tax depreciation, reverse over time.
The IRS's own M-3 example shows a $100 meal as a $50 permanent difference, and $40,000 book depreciation against $30,000 tax depreciation.
To prevent duplication, trace each Line 26 item to the general ledger. Then check it against:
- Lines 12-25
- Form 1125-A
- Form 4562
- Form 8990
- Schedule C
State returns may use different line numbers and rules, so do not copy a federal classification to a state filing automatically.
Documentation, Reconciliation, and Filing Checklist
Records to keep
Publication 463 asks for adequate records plus documentary evidence showing amount, date, place and business purpose, made at or near the time. For each category, keep:
- Invoices and receipts
- Contracts and proof of payment
- Business-purpose notes
- Travel and mileage records
- Calculations behind any limitation
- Board minutes where relevant
Retention is generally 3 years, extending to 6 years if omitted income exceeds 25% of gross income shown, and to 7 years for worthless securities or bad debt claims. IRS retention guidance lists the full set of periods.
Reconcile to Schedule M-1 or M-3
Corporations with both receipts and year-end assets below $250,000 may omit Schedules L, M-1 and M-2. Year-end assets of $10 million or more generally require Schedule M-3.
Partly or wholly nondeductible book expenses appear as adjustments in the reconciliation. The M-3 ties back to Form 1120 Line 28, not Line 30.
Final review checklist
- Correct tax year and entity form
- No deduction repeated from another line
- Supporting forms attached (1125-A, 4562, 8990)
- Line 26 statement matches ledger totals
- Return signed by an authorised corporate officer
- Filed on time: generally the 15th day of the fourth month after year-end, with Form 7004 giving a six-month filing extension (not a payment extension)
Foreign-owned corporations should also check Form 5472 instructions. A 25% foreign shareholder plus reportable related-party transactions generally triggers filing, with a $25,000 penalty for failure to file.
VJM Global supports Australian businesses and other foreign-owned groups with accounting records, expense classification and US corporate tax compliance review. Its team of 100+ accounting professionals has served 250+ Australian businesses.
Frequently Asked Questions
What is a deduction worksheet?
It is a calculation or supporting schedule used to work out deductible amounts before they reach a tax return. The current IRS instructions determine whether a specific worksheet or attachment is required.
What is Form 1120 Line 26?
Line 26 reports allowable "other deductions" not reported on another Form 1120 line or schedule. Tax rules and documentation requirements still apply.
What expenses can be reported on Form 1120 Line 26?
Eligibility varies by tax year and business facts. Consider only ordinary, necessary and substantiated amounts not reported elsewhere.
Do I need an attachment for Form 1120 Line 26?
Yes. The 2025 line is labelled "attach statement", listing deductions by type and amount. Check the instructions for your tax year.
Are meals and entertainment deductible on Line 26?
Business meals are generally 50% deductible, while entertainment is generally nondeductible. Apply current-year limits and substantiation rules.
Is Form 1120 Line 26 the same as Form 1120-L Line 26?
No. Form 1120-L is for life insurance companies, and its Line 26a is total tax. Regular Form 1120 Line 26 covers a C corporation's other deductions.
