U.S. Income Tax Return for an S Corporation

2012

Instructions for Form 1120S

Department of the Treasury
Internal Revenue Service

U.S. Income Tax Return for an S Corporation
Section references are to the Internal Revenue
Code unless otherwise noted.

Contents

General Instructions . . . . . . . . .
Purpose of Form . . . . . . . .
Who Must File . . . . . . . . .
Termination of Election . . . .
Electronic Filing . . . . . . . .
When To File . . . . . . . . . .
Who Must Sign . . . . . . . . .
Paid Preparer Authorization .
Assembling the Return . . . .
Tax Payments . . . . . . . . .
Electronic Deposit
Requirement . . . . . . . .
Estimated Tax Payments . .
Interest and Penalties . . . . .
Accounting Methods . . . . .
Accounting Period . . . . . . .
Rounding Off to Whole
Dollars . . . . . . . . . . . .
Recordkeeping . . . . . . . . .
Amended Return . . . . . . . .
Other Forms and
Statements That May Be
Required . . . . . . . . . . .
Passive Activity Limitations .
Extraterritorial Income
Exclusion . . . . . . . . . .
Specific Instructions . . . . . . . . .
Period Covered . . . . . . . .
Name and Address . . . . . .
Item B. Business Code . . . .
Item C. Schedule M-3
Information . . . . . . . . .
Item D. Employer
Identification Number
(EIN) . . . . . . . . . . . . .
Item F. Total Assets . . . . . .
Item H. Final Return, Name
Change, Address
Change, Amended
Return, or S Election
Termination or
Revocation . . . . . . . . .
Income . . . . . . . . . . . . . .
Deductions . . . . . . . . . . .
Tax and Payments . . . . . . .
Reconciliation . . . . . . . . . .
Schedule B . . . . . . . . . . . . . .
Schedules K and K-1 (General
Instructions) . . . . . . . . . . .
Specific Instructions
(Schedule K-1 Only) . . . . .
Specific Instructions (Schedules K
and K-1, Part III) . . . . . . . .
Schedule L . . . . . . . . . . . . . .
Schedule M-1 . . . . . . . . . . . . .
Schedule M-2 . . . . . . . . . . . . .

Jan 25, 2013

Page

.
.
.
.
.
.
.
.
.
.

.
.
.
.
.
.
.
.
.
.

.
.
.
.
.
.
.
.
.
.

.
.
.
.
.
.
.
.
.
.

2
2
2
2
2
3
3
3
4
4

.
.
.
.
.

.
.
.
.
.

.
.
.
.
.

.
.
.
.
.

4
4
4
5
5

.... 6
.... 6
.... 6
.... 6
.... 6
.
.
.
.
.

.
.
.
.
.

.
.
.
.
.

11
11
11
11
12

. . . 12
. . . 12
. . . 12

.
.
.
.
.
.

.
.
.
.
.
.

.
.
.
.
.
.

12
12
14
19
37
20

. . . 20
. . . 21
.
.
.
.

.
.
.
.

.
.
.
.

22
37
38
38

Contents

Page

Principal Business Activity
Codes . . . . . . . . . . . . . . . . . 41
Index . . . . . . . . . . . . . . . . . . . . . 44

Future Developments

For the latest information about
developments related to Form 1120S
and its instructions, such as legislation
enacted after they were published, go to
www.irs.gov/form1120s.

What's New
No separate payment card reporting
requirements. Gross receipts received
via payment card (credit and debit
cards) and third party network payments
are not separately reported on Form
1120S.
Schedule B. We added additional
questions to Schedule B, Other
Information.
Food inventory contributions. The
increased deduction for certain
charitable contributions of food
inventory was extended to cover
contributions made after 2011 and
before 2014. See section 170(e)(3)(C).
Principal business activity codes.
We revised the list of principal business
activity codes. See Principal Business
Activity Codes.

Photographs of
Missing Children

The Internal Revenue Service is a proud
partner with the National Center for
Missing and Exploited Children.
Photographs of missing children
selected by the Center may appear in
these instructions on pages that would
otherwise be blank. You can help bring
these children home by looking at the
photographs and calling
1-800-THE-LOST (1-800-843-5678) if
you recognize a child.

Unresolved Tax Issues

The Taxpayer Advocate Service (TAS)
is your voice at the IRS. Its job is to
ensure that every taxpayer is treated
fairly, and that you know and
understand your rights. TAS offers free
help to guide you through the
often-confusing process of resolving tax
Cat. No. 11515K

problems that you haven't been able to
solve on your own. Remember, the
worst thing you can do is nothing at all.
As a taxpayer, the corporation has
rights that the IRS must abide by in its
dealings with the corporation. The TAS
tax toolkit at www.irs.gov/advocate can
help the corporation understand these
rights.
The corporation can contact the TAS
as follows.
Call the corporation's local advocate,
whose number is listed in the local
phone book and on our website at
www.irs.gov/advocate.
Call the toll-free intake line at
1-877-777-4778 to see if the corporation
is eligible for assistance. Individuals
who are deaf, hard of hearing, or have a
speech disability and who have access
to TTY/TDD equipment can call
1-800-829-4059. These individuals can
also access the IRS through relay
services such as the Federal Relay
Service at www.gsa.gov/fedrelay.
TAS also handles large-scale or
systemic problems that affect many
taxpayers. If the corporation knows of
one of these broad issues, please report
it to us through the Systemic Advocacy
Management System at
www.irs.gov/advocate.
For more information, go to
www.irs.gov/advocate.

Direct Deposit of Refund

To request a direct deposit of the
corporation's income tax refund into an
account at a U.S. bank or other financial
institution, attach Form 8050, Direct
Deposit of Corporate Tax Refund. See
the instructions for line 27.

How To Get Forms
and Publications
Internet. You can access the IRS
website 24 hours a day, 7 days a week,
at IRS.gov to:
Download forms, including talking tax
forms, instructions, and publications;
Order IRS products;
Research your tax questions;
Search publications by topic or
keyword;
Use the Internal Revenue Code,
regulations, or other official guidance;

View Internal Revenue Bulletins
(IRBs) published in the last few years;
and
Sign up to receive local and national
tax news by email.
DVD for tax products. You can order
Pub. 1796, IRS Tax Products DVD, and
obtain:
Current-year forms, instructions, and
publications.
Prior-year forms, instructions, and
publications.
Tax Map: an electronic research tool
and finding aid.
Tax law frequently asked questions.
Tax Topics from the IRS telephone
response system.
Internal Revenue Code—Title 26 of
the U.S. Code.
Links to other Internet based tax
research materials.
Fill-in, print, and save features for
most tax forms.
Internal Revenue Bulletins.
Toll-free and email technical support.
Two releases during the year.
– The first release will ship the
beginning of January 2013.
– The final release will ship the
beginning of March 2013.
Purchase the DVD from National
Technical Information Service (NTIS) at
www.irs.gov/cdorders for $30 (no
handling fee) or call 1-877-233-6767 toll
free to buy the DVD for $30 (plus a $6
handling fee).
By phone and in person. You can
order forms and publications by calling
1-800-TAX-FORM (1-800-829-3676).
You can also get most forms and
publications at your local IRS office.

General Instructions
Purpose of Form

Use Form 1120S to report the income,
gains, losses, deductions, credits, etc.,
of a domestic corporation or other entity
for any tax year covered by an election
to be an S corporation. For details about
the election, see Form 2553, Election by
a Small Business Corporation, and the
Instructions for Form 2553.

Who Must File

A corporation or other entity must file
Form 1120S if (a) it elected to be an S
corporation by filing Form 2553, (b) the
IRS accepted the election, and (c) the
election remains in effect. After filing
Form 2553, you should have received
confirmation that Form 2553 was
accepted. If you did not receive

notification of acceptance or
nonacceptance of the election within 2
months of filing Form 2553 (5 months if
you checked box Q1 to request a letter
ruling), take follow-up action by calling
1-800-829-4933. Do not file Form
1120S for any tax year before the year
the election takes effect.
If you have not filed Form 2553, or
did not file Form 2553 on time, you may
be entitled to relief for a late filed
election to be an S corporation. See the
Instructions for Form 2553 for details.

Termination of Election

Once the election is made, it stays in
effect until it is terminated. If the election
is terminated, the corporation (or a
successor corporation) can make
another election on Form 2553 only with
IRS consent for any tax year before the
5th tax year after the first tax year in
which the termination took effect. See
Regulations section 1.1362-5 for details.

An election terminates automatically
in any of the following cases.
1. The corporation is no longer a
small business corporation as defined in
section 1361(b). This kind of termination
of an election is effective as of the day
the corporation no longer meets the
definition of a small business
corporation. Attach to Form 1120S for
the final year of the S corporation a
statement notifying the IRS of the
termination and the date it occurred.
2. The corporation, for each of three
consecutive tax years, (a) has
accumulated earnings and profits and
(b) derives more than 25% of its gross
receipts from passive investment
income as defined in section 1362(d)(3)
(C). The election terminates on the first
day of the first tax year beginning after
the third consecutive tax year. The
corporation must pay a tax for each year
it has excess net passive income. See
the line 22a instructions for details on
how to figure the tax.
3. The election is revoked. An
election can be revoked only with the
consent of shareholders who, at the
time the revocation is made, hold more
than 50% of the number of issued and
outstanding shares of stock (including
non-voting stock). The revocation can
specify an effective revocation date that
is on or after the day the revocation is
filed. If no date is specified, the
revocation is effective at the start of the
tax year if the revocation is made on or
before the 15th day of the 3rd month of
that tax year. If no date is specified and
the revocation is made after the 15th
day of the 3rd month of the tax year, the
-2-

revocation is effective at the start of the
next tax year.
To revoke the election, the
corporation must file a statement with
the appropriate service center listed
under Where To File in the Instructions
for Form 2553. In the statement, the
corporation must notify the IRS that it is
revoking its election to be an S
corporation. The statement must be
signed by each shareholder who
consents to the revocation and contain
the information required by Regulations
section 1.1362-6(a)(3).
A revocation can be rescinded before
it takes effect. See Regulations section
1.1362-6(a)(4) for details.
For rules on allocating income and
deductions between an S short year and
a C short year and other special rules
that apply when an election is
terminated, see section 1362(e) and
Regulations section 1.1362-3.
If an election was terminated under
(1) or (2) above, and the corporation
believes the termination was
inadvertent, the corporation can request
permission from the IRS to continue to
be treated as an S corporation. See
Regulations section 1.1362-4 for the
specific requirements that must be met
to qualify for inadvertent termination
relief.

Electronic Filing

Corporations can generally
electronically file (e-file) Form 1120S,
related forms, schedules, statements,
and attachments, Form 7004 (automatic
extension of time to file), and Forms
940, 941, and 944 (employment tax
returns). Form 1099 and other
information returns can also be
electronically filed.
Exceptions. The option to e-file
generally does not apply to certain
returns, including:
Returns with precomputed penalty
and interest, and
Returns with request for overpayment
to be applied to another account.
Required e-filers. Certain
corporations with total assets of $10
million or more that file at least 250
returns a year are required to e-file Form
1120S, even if any of the above
exceptions apply. See Regulations
section 301.6037-2. However, these
corporations can request a waiver of the
electronic filing requirements. See
Notice 2010-13, 2010-4 I.R.B. 327.
Visit www.irs.gov/efile for more
information.
Instructions for Form 1120S

When To File

Generally, an S corporation must file
Form 1120S by the 15th day of the 3rd
month after the end of its tax year. For
calendar year corporations, the due
date is March 15, 2013. A corporation
that has dissolved must generally file by
the 15th day of the 3rd month after the
date it dissolved.
If the due date falls on a Saturday,
Sunday, or legal holiday, the
corporation can file on the next day that
is not a Saturday, Sunday, or legal
holiday.
If the S corporation election was
terminated during the tax year and the
corporation reverts to a C corporation,
file Form 1120S for the S corporation's
short year by the due date (including
extensions) of the C corporation's short
year return.

Private Delivery Services

Corporations can use certain private
delivery services designated by the IRS
to meet the “timely mailing as timely
filing” rule for tax returns. These private
delivery services include only the
following.
DHL Express (DHL): DHL Same Day
Service.
Federal Express (FedEx): FedEx
Priority Overnight, FedEx Standard

Overnight, FedEx 2Day, FedEx
International Priority, and FedEx
International First.
United Parcel Service (UPS): UPS
Next Day Air, UPS Next Day Air Saver,
UPS 2nd Day Air, UPS 2nd Day Air
A.M., UPS Worldwide Express Plus,
and UPS Worldwide Express.
For the IRS mailing address to use if
you are using a private delivery service,
go to IRS.gov and enter “private delivery
service” in the search box.
The private delivery service can tell
you how to get written proof of the
mailing date.
Private delivery services
cannot deliver items to P.O.
CAUTION
boxes. You must use the U.S.
Postal Service to mail any item to an
IRS P.O. box address.

!

Extension of Time To File

File Form 7004, Application for
Automatic Extension of Time To File
Certain Business Income Tax,
Information, and Other Returns, to
request a 6-month extension of time to
file. Generally, the corporation must file
Form 7004 by the regular due date of
the return. See the Instructions for Form
7004.

Where To File
File the corporation's return at the applicable IRS address listed below.
If the corporation's
principal business, office,
or agency is located in:

And the total assets at the
end of the tax year (Form
1120S, page 1, item F) are:

Connecticut, Delaware,
District of Columbia, Florida,
Georgia, Illinois, Indiana,
Kentucky, Maine, Maryland,
Massachusetts, Michigan,
New Hampshire, New Jersey,
New York, North Carolina,
Ohio, Pennsylvania, Rhode
Island, South Carolina,
Tennessee, Vermont, Virginia,
West Virginia, Wisconsin
Alabama, Alaska, Arizona,
Arkansas, California,
Colorado, Hawaii, Idaho,
Iowa, Kansas, Louisiana,
Minnesota, Mississippi,
Missouri, Montana, Nebraska,
Nevada, New Mexico, North
Dakota, Oklahoma, Oregon,
South Dakota, Texas, Utah,
Washington, Wyoming
A foreign country or U.S.
possession

Instructions for Form 1120S

Use the following address:

Less than $10 million and
Schedule M-3 is not filed

Department of the Treasury
Internal Revenue Service
Center
Cincinnati, OH 45999-0013

$10 million or more or
less than $10 million and
Schedule M-3 is filed

Department of the Treasury
Internal Revenue Service
Center
Ogden, UT 84201-0013

Any amount

Department of the Treasury
Internal Revenue Service
Center
Ogden, UT 84201-0013

Any amount

Internal Revenue Service
Center
P.O. Box 409101
Ogden, UT 84409

-3-

Who Must Sign

The return must be signed and dated
by:
The president, vice president,
treasurer, assistant treasurer, chief
accounting officer; or
Any other corporate officer (such as
tax officer) authorized to sign.
If a return is filed on behalf of a
corporation by a receiver, trustee, or
assignee, the fiduciary must sign the
return, instead of the corporate officer.
Returns and forms signed by a receiver
or trustee in bankruptcy on behalf of a
corporation must be accompanied by a
copy of the order or instructions of the
court authorizing signing of the return or
form.
If an employee of the corporation
completes Form 1120S, the paid
preparer space should remain blank.
Anyone who prepares Form 1120S but
does not charge the corporation should
not complete that section. Generally,
anyone who is paid to prepare the return
must sign it and fill in the “Paid Preparer
Use Only” area.
The paid preparer must complete the
required preparer information and:
Sign the return in the space provided
for the preparer's signature.
Give a copy of the return to the
taxpayer.
Note. A paid preparer may sign original
or amended returns by rubber stamp,
mechanical device, or computer
software program.

Paid Preparer
Authorization

If the corporation wants to allow the IRS
to discuss its 2012 tax return with the
paid preparer who signed it, check the
“Yes” box in the signature area of the
return. This authorization applies only to
the individual whose signature appears
in the “Paid Preparer Use Only” section
of the return. It does not apply to the
firm, if any, shown in that section.

If the “Yes” box is checked, the
corporation is authorizing the IRS to call
the paid preparer to answer any
questions that may arise during the
processing of its return. The corporation
is also authorizing the paid preparer to:
Give the IRS any information that is
missing from the return,
Call the IRS for information about the
processing of the return or the status of
any related refund or payment(s), and
Respond to certain IRS notices about
math errors, offsets, and return
preparation.

The corporation is not authorizing the
paid preparer to receive any refund
check, bind the corporation to anything
(including any additional tax liability), or
otherwise represent the corporation
before the IRS.
The authorization will automatically
end no later than the due date
(excluding extensions) for filing the
corporation's 2013 tax return. If the
corporation wants to expand the paid
preparer's authorization or revoke the
authorization before it ends, see Pub.
947, Practice Before the IRS and Power
of Attorney.

Assembling the Return

To ensure that the corporation's tax
return is correctly processed, attach all
schedules and other forms after page 5
of Form 1120S in the following order.
1. Schedule N (Form 1120), Foreign
Operations of U.S. Corporations.
2. Form 8825, Rental Real Estate
Income and Expenses of a Partnership
or an S Corporation.
3. Form 8050.
4. Form 1125-A, Cost of Goods
Sold.
5. Form 4136, Credit for Federal
Tax Paid on Fuels.
6. Form 8941, Credit for Small
Employer Health Insurance Premiums.
7. Form 5884-B, New Hire
Retention Credit.
8. Additional schedules in
alphabetical order.
9. Additional forms in numerical
order.
Complete every applicable entry
space on Form 1120S and
Schedule K-1. Do not enter “See
Attached” or “Available Upon Request”
instead of completing the entry spaces.
If more space is needed on the forms or
schedules, attach separate sheets using
the same size and format as the printed
forms.
If there are supporting statements
and attachments, arrange them in the
same order as the schedules or forms
they support and attach them last. Show
the totals on the printed forms. Enter the
corporation's name and EIN on each
supporting statement or attachment.

Tax Payments

The corporation must pay any tax due in
full no later than the 15th day of the 3rd
month after the end of the tax year.

Electronic Deposit
Requirement

Corporations must use electronic funds
transfers to make all federal tax
deposits (such as deposits of
employment, excise, and corporate
income tax). Generally, electronic funds
transfers are made using the Electronic
Federal Tax Payment System (EFTPS).
However, if the corporation does not
want to use EFTPS, it can arrange for its
tax professional, financial institution,
payroll service, or other trusted third
party to make deposits on its behalf.
Also, it may arrange for its financial
institution to initiate a same-day tax wire
payment (discussed below) on its
behalf. EFTPS is a free service provided
by the Department of the Treasury.
Services provided by a tax professional,
financial institution, payroll service, or
other third party may have a fee.
To get more information about
EFTPS or to enroll in EFTPS, visit
www.eftps.gov or call 1-800-555-4477.
Additional information about EFTPS is
also available in Pub. 966, Electronic
Federal Tax Payment System: A Guide
To Getting Started.

Depositing on time. For deposits
made by EFTPS to be on time, the
corporation must initiate the deposit by
8 p.m. Eastern time the day before the
date the deposit is due. If the
corporation uses a third party to make
deposits on its behalf, they may have
different cutoff times.
Same-day wire payment option. If
the corporation fails to initiate a deposit
transaction on EFTPS by 8 p.m. Eastern
time the day before the date a deposit is
due, it can still make the deposit on time
by using the Federal Tax Application
(FTA). Before using the same-day wire
payment option, the corporation will
need to make arrangements with its
financial institution ahead of time.
Please check with the financial
institution regarding availability,
deadlines, and costs. To learn more
about making a same-day wire payment
and download the Same-Day Payment
Worksheet, visit www.eftps.gov.

Estimated Tax Payments

Generally, the corporation must make
installment payments of estimated tax
for the following taxes if the total of
these taxes is $500 or more: (a) the tax
on built-in gains, (b) the excess net
passive income tax, and (c) the
investment credit recapture tax.
The amount of estimated tax required
to be paid annually is the smaller of: (a)
-4-

the total of the above taxes shown on
the return for the tax year (or if no return
is filed, the total of these taxes for the
year) or (b) the sum of (i) the investment
credit recapture tax and the built-in
gains tax shown on the return for the tax
year (or if no return is filed, the total of
these taxes for the tax year) and (ii) any
excess net passive income tax shown
on the corporation's return for the
preceding tax year. If the preceding tax
year was less than 12 months, the
estimated tax must be determined
under (a).
The estimated tax is generally
payable in four equal installments.
However, the corporation may be able
to lower the amount of one or more
installments by using the annualized
income installment method or adjusted
seasonal installment method under
section 6655(e).
For a calendar year corporation, the
payments are due for 2013 by April 15,
June 17, September 16, and December
16. For a fiscal year corporation, they
are due by the 15th day of the 4th, 6th,
9th, and 12th months of the year. If any
date falls on a Saturday, Sunday, or
legal holiday, the installment is due on
the next day that is not a Saturday,
Sunday, or legal holiday.
The corporation must make the
payments using electronic funds
transfers as described earlier.
For information on penalties that
apply if the corporation fails to make
required payments, see the Instructions
for Form 2220.

Interest and Penalties
If the corporation receives a
notice about penalties after it
CAUTION
files its return, send the IRS an
explanation and we will determine if the
corporation meets reasonable-cause
criteria. Do not attach an explanation
when the corporation's return is filed.

!

Interest. Interest is charged on taxes
paid late even if an extension of time to
file is granted. Interest is also charged
on penalties imposed for failure to file,
negligence, fraud, substantial valuation
misstatements, substantial
understatements of tax, and reportable
transaction understatements from the
due date (including extensions) to the
date of payment. The interest charge is
figured at a rate determined under
section 6621.
Late filing of return. A penalty may be
charged if the return is filed after the due
date (including extensions) or the return
Instructions for Form 1120S

does not show all the information
required, unless each failure is due to
reasonable cause. See Caution, earlier.
For returns on which no tax is due, the
penalty is $195 for each month or part of
a month (up to 12 months) the return is
late or does not include the required
information, multiplied by the total
number of persons who were
shareholders in the corporation during
any part of the corporation's tax year for
which the return is due. If tax is due, the
penalty is the amount stated above plus
5% of the unpaid tax for each month or
part of a month the return is late, up to a
maximum of 25% of the unpaid tax. The
minimum penalty for a return that is
more than 60 days late is the smaller of
the tax due or $135.
Late payment of tax. A corporation
that does not pay the tax when due
generally may be penalized 1 2 of 1% of
the unpaid tax for each month or part of
a month the tax is not paid, up to a
maximum of 25% of the unpaid tax. The
penalty will not be imposed if the
corporation can show that the failure to
pay on time was due to reasonable
cause. See Caution, earlier.
Failure to furnish information timely.
For each failure to furnish Schedule K-1
to a shareholder when due and each
failure to include on Schedule K-1 all the
information required to be shown (or the
inclusion of incorrect information), a
$100 penalty may be imposed with
respect to each Schedule K-1 for which
a failure occurs. If the requirement to
report correct information is intentionally
disregarded, each $100 penalty is
increased to $250 or, if greater, 10% of
the aggregate amount of items required
to be reported. See sections 6722 and
6724 for more information.
The penalty will not be imposed if the
corporation can show that not furnishing
information timely was due to
reasonable cause. See Caution, earlier.
Trust fund recovery penalty. This
penalty may apply if certain excise,
income, social security, and Medicare
taxes that must be collected or withheld
are not collected or withheld, or these
taxes are not paid. These taxes are
generally reported on:
Form 720, Quarterly Federal Excise
Tax Return;
Form 941, Employer's QUARTERLY
Federal Tax Return;
Form 943, Employer's Annual
Federal Tax Return for Agricultural
Employees;
Form 944, Employer's ANNUAL
Federal Tax Return; or
Instructions for Form 1120S

Form 945, Annual Return of Withheld
Federal Income Tax.
The trust fund recovery penalty may
be imposed on all persons who are
determined by the IRS to have been
responsible for collecting, accounting
for, and paying over these taxes, and
who acted willfully in not doing so. The
penalty is equal to the full amount of the
unpaid trust fund tax. See the
Instructions for Form 720, Pub. 15
(Circular E), Employer's Tax Guide, or
Pub. 51 (Circular A), Agricultural
Employer's Tax Guide, for details,
including the definition of responsible
persons.
Other penalties. Other penalties can
be imposed for negligence, substantial
understatement of tax, reportable
transaction understatements, and fraud.
See sections 6662, 6662A, and 6663.

Accounting Methods

Figure income using the method of
accounting regularly used in keeping
the corporation's books and records.
The method used must clearly reflect
income. Permissible methods include
cash, accrual, or any other method
authorized by the Internal Revenue
Code.

The following rules apply.
Generally, an S corporation cannot
use the cash method of accounting if it
is a tax shelter (as defined in section
448(d)(3)). See section 448 for details.
Unless it is a qualifying taxpayer or a
qualifying small business taxpayer, a
corporation must use the accrual
method for sales and purchases of
inventory items. See the Form 1125-A
instructions.
Special rules apply to long-term
contracts. See section 460.
Generally, dealers in securities must
use the mark-to-market accounting
method. Dealers in commodities and
traders in securities and commodities
can elect to use the mark-to-market
accounting method. See section 475.
Change in accounting method.
Generally, the corporation must get IRS
consent to change the method of
accounting used to report income (for
income as a whole or for the treatment
of any material item). To do so, the
corporation generally must file Form
3115, Application for Change in
Accounting Method.
See the Instructions for Form 3115
and Pub. 538, Accounting Periods and
Methods, for more information on
accounting methods.
-5-

Accounting Period

A corporation must figure its income on
the basis of a tax year. A tax year is the
annual accounting period a corporation
uses to keep its records and report its
income and expenses.
An S corporation must use one of the
following tax years.
A tax year ending December 31.
A natural business year.
An ownership tax year.
A tax year elected under section 444.
A 52-53 week tax year that ends with
reference to a year listed above.
Any other tax year (including a
52-53-week tax year) for which the
corporation establishes a business
purpose.
A new S corporation must use Form
2553 to elect a tax year. To later change
the corporation's tax year, see Form
1128, Application To Adopt, Change, or
Retain a Tax Year, and its instructions
(unless the corporation is making an
election under section 444, discussed
next).
Electing a tax year under section
444. Under the provisions of section
444, an S corporation can elect to have
a tax year other than a required year,
but only if the deferral period of the tax
year is not longer than the shorter of 3
months or the deferral period of the tax
year being changed. This election is
made by filing Form 8716, Election To
Have a Tax Year Other Than a Required
Tax Year.
An S corporation may not make or
continue an election under section 444 if
it is a member of a tiered structure, other
than a tiered structure that consists
entirely of partnerships and S
corporations that have the same tax
year. For the S corporation to have a
section 444 election in effect, it must
make the payments required by section
7519. See Form 8752, Required
Payment or Refund Under Section
7519.
A section 444 election ends if an S
corporation:
Changes its accounting period to a
calendar year or some other permitted
year,
Is penalized for willfully failing to
comply with the requirements of section
7519, or
Terminates its S election (unless it
immediately becomes a personal
service corporation).
If the termination results in a short tax
year, enter at the top of the first page of
Form 1120S for the short tax year,

“SECTION 444 ELECTION
TERMINATED.”

Rounding Off to
Whole Dollars

The corporation can round off cents to
whole dollars on its return and
schedules. If the corporation does round
to whole dollars, it must round all
amounts. To round, drop amounts
under 50 cents and increase amounts
from 50 to 99 cents to the next dollar.
For example, $1.39 becomes $1 and
$2.50 becomes $3.
If two or more amounts must be
added to figure the amount to enter on a
line, include cents when adding the
amounts and round off only the total.

Recordkeeping

Keep the corporation's records for as
long as they may be needed for the
administration of any provision of the
Internal Revenue Code. Usually,
records that support an item of income,
deduction, or credit on the return must
be kept for 3 years from the date each
shareholder's return is due or filed,
whichever is later. 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.
The corporation should keep copies
of all filed returns. They help in
preparing future and amended returns.

Amended Return

To correct a previously filed Form
1120S, file an amended Form 1120S
and check box H(4) on page 1. Attach a
statement that identifies the line number
of each amended item, the corrected
amount or treatment of the item, and an
explanation of the reasons for each
change.
If the income, deductions, credits, or
other information provided to any
shareholder on Schedule K-1 is
incorrect, file an amended Schedule K-1
(Form 1120S) for that shareholder with
the amended Form 1120S. Also give a
copy of the amended Schedule K-1 to
that shareholder. Check the “Amended
K-1” box at the top of the Schedule K-1
to indicate that it is an amended
Schedule K-1.
A change to the corporation's federal
return may affect its state return. This
includes changes made as the result of
an IRS examination. For more
information, contact the state tax
agency for the state(s) in which the
corporation's return was filed.

Other Forms and
Statements That May Be
Required

transaction by filing Form 8918, Material
Advisor Disclosure Statement, with the
IRS. For details, see the Instructions for
Form 8918.

Reportable transaction disclosure
statement. Disclose information for
each reportable transaction in which the
corporation participated. Form 8886,
Reportable Transaction Disclosure
Statement, must be filed for each tax
year the corporation participated in the
transaction. The corporation may have
to pay a penalty if it is required to file
Form 8886 and does not do so. The
following are reportable transactions.
1. Any listed transaction, which is a
transaction that is the same as or
substantially similar to one of the types
of transactions that the IRS has
determined to be a tax avoidance
transaction and identified by notice,
regulation, or other published guidance
as a listed transaction.
2. Any transaction offered under
conditions of confidentiality for which
the corporation (or a related party) paid
an advisor a fee of at least $50,000.
3. Certain transactions for which the
corporation (or a related party) has
contractual protection against
disallowance of the tax benefits.
4. Certain transactions resulting in a
loss of at least $2 million in any single
year or $4 million in any combination of
years.
5. Any transaction identified by the
IRS by notice, regulation, or other
published guidance as a “transaction of
interest.”

Transfers to a corporation controlled
by the transferor. Every significant
transferor (as defined in Regulations
section 1.351-3(d)) that receives stock
of a corporation in exchange for
property in a nonrecognition event must
include the statement required by
Regulations section 1.351-3(a) on or
with the transferor's tax return for the tax
year of the exchange. The transferee
corporation must include the statement
required by Regulations section
1.351-3(b) on or with its return for the
tax year of the exchange, unless all the
required information is included in any
statement(s) provided by a significant
transferor that is attached to the same
return for the same section 351
exchange.

For more information, see
Regulations section 1.6011-4. Also see
the Instructions for Form 8886.
Penalties. The corporation may
have to pay a penalty if it is required to
disclose a reportable transaction under
section 6011 and fails to properly
complete and file Form 8886. Penalties
may also apply under section 6707A if
the corporation fails to file Form 8886
with its corporate return, fails to provide
a copy of Form 8886 to the Office of Tax
Shelter Analysis (OTSA), or files a form
that fails to include all the information
required (or includes incorrect
information). Other penalties, such as
an accuracy-related penalty under
section 6662A, may also apply. See the
Instructions for Form 8886 for details on
these and other penalties.
Reportable transactions by material
advisors. Material advisors to any
reportable transaction must disclose
certain information about the reportable
-6-

Election to reduce basis under section 362(e)(2)(C). The transferor may
make an election under section 362(e)
(2)(C) to limit the transferor's basis in
the stock received instead of the
transferor's basis in the transferred
property. The transferor can make the
election by including the certification
provided in Notice 2005-70, 2005-41
I.R.B. 694, on or with its tax return filed
by the due date (including extensions)
for the tax year in which the transaction
occurred.
If the election is made as described
above, no election need be made by the
transferee. Once made, the election is
irrevocable. See section 362(e)(2)(C)
and Notice 2005-70.
Other forms and statements. See
Pub. 542, Corporations, for a list of
other forms and statements a
corporation may need to file in addition
to the forms and statements discussed
throughout these instructions.

Passive Activity
Limitations

In general, section 469 limits the amount
of losses, deductions, and credits that
shareholders can claim from “passive
activities.” The passive activity
limitations do not apply to the
corporation. Instead, they apply to each
shareholder's share of any income or
loss and credit attributable to a passive
activity. Because the treatment of each
shareholder's share of corporate
income or loss and credit depends on
the nature of the activity that generated
it, the corporation must report income or

Instructions for Form 1120S

loss and credits separately for each
activity.
The following instructions and the
instructions for Schedules K and K-1,
later, explain the applicable passive
activity limitation rules and specify the
type of information the corporation must
provide to its shareholders for each
activity. If the corporation had more than
one activity, it must report information
for each activity on an attachment to
Schedules K and K-1.
Generally, passive activities include
(a) activities that involve the conduct of
a trade or business if the shareholder
does not materially participate in the
activity and (b) all rental activities
(defined later) regardless of the
shareholder's participation. For
exceptions, see Activities That Are Not
Passive Activities, later. The level of
each shareholder's participation in an
activity must be determined by the
shareholder.
The passive activity rules provide
that losses and credits from passive
activities can generally be applied only
against income and tax (respectively)
from passive activities. Thus, passive
losses cannot be applied against
income from salaries, wages,
professional fees, or a business in
which the shareholder materially
participates or against “portfolio income”
(defined later). Passive credits cannot
be applied against the tax related to any
of these types of income.
Special rules require that net income
from certain activities that would
otherwise be treated as passive income
must be recharacterized as nonpassive
income for purposes of the passive
activity limitations. See
Recharacterization of Passive Income,
later.
To allow each shareholder to
correctly apply the passive activity
limitations, the corporation must report
income or loss and credits separately
for each of the following:
Trade or business activities,
Rental real estate activities,
Rental activities other than rental real
estate, and
Portfolio income.

Activities That Are Not Passive
Activities

The following are not passive activities.
1. Trade or business activities in
which the shareholder materially
participated for the tax year.
2. Any rental real estate activity in
which the shareholder materially
Instructions for Form 1120S

participated if the shareholder met both
of the following conditions for the tax
year.
a. More than half of the personal
services the shareholder performed in
trades or businesses were performed in
real property trades or businesses in
which he or she materially participated.
b. The shareholder performed more
than 750 hours of services in real
property trades or businesses in which
he or she materially participated.
For purposes of this rule, each
interest in rental real estate is a
separate activity unless the shareholder
elects to treat all interests in rental real
estate as one activity.
If the shareholder is married filing
jointly, either the shareholder or his or
her spouse must separately meet both
of the above conditions, without taking
into account services performed by the
other spouse.
A real property trade or business is
any real property development,
redevelopment, construction,
reconstruction, acquisition, conversion,
rental, operation, management, leasing,
or brokerage trade or business.
Services the shareholder performed as
an employee are not treated as
performed in a real property trade or
business unless he or she owned more
than 5% of the stock in the employer.
3. The rental of a dwelling unit used
by a shareholder for personal purposes
during the year for more than the greater
of 14 days or 10% of the number of
days that the residence was rented at
fair rental value.
4. An activity of trading personal
property for the account of owners of
interests in the activity. For purposes of
this rule, personal property means
property that is actively traded, such as
stocks, bonds, and other securities. See
Temporary Regulations section
1.469-1T(e)(6).
Note. The section 469(c)(3) exception
for a working interest in oil and gas
properties does not apply to an S
corporation because state law generally
limits the liability of shareholders.

Trade or Business Activities

A trade or business activity is an activity
(other than a rental activity or an activity
treated as incidental to an activity of
holding property for investment) that:
1. Involves the conduct of a trade or
business (within the meaning of section
162),

-7-

2. Is conducted in anticipation of
starting a trade or business, or
3. Involves research or experimental
expenditures deductible under section
174 (or that would be if you chose to
deduct rather than capitalize them).
If the shareholder does not materially
participate in the activity, a trade or
business activity of the corporation is a
passive activity for the shareholder.
Each shareholder must determine if
he or she materially participated in an
activity. As a result, while the
corporation's ordinary business income
(loss) is reported on page 1 of Form
1120S, the specific income and
deductions from each separate trade or
business activity must be reported on
attachments to Form 1120S. Similarly,
while each shareholder's allocable
share of the corporation's ordinary
business income (loss) is reported in
box 1 of Schedule K-1, each
shareholder's allocable share of the
income and deductions from each trade
or business activity must be reported on
attachments to each Schedule K-1. See
Passive Activity Reporting
Requirements, later, for more
information.

Rental Activities

Generally, except as noted below, if the
gross income from an activity consists
of amounts paid principally for the use
of real or personal tangible property
held by the corporation, the activity is a
rental activity.
There are several exceptions to this
general rule. Under these exceptions,
an activity involving the use of real or
personal tangible property is not a rental
activity if any of the following apply.
The average period of customer use
(defined later) for such property is 7
days or less.
The average period of customer use
for such property is 30 days or less and
significant personal services (defined
later) are provided by or on behalf of the
corporation.
Extraordinary personal services
(defined later) are provided by or on
behalf of the corporation.
Rental of the property is treated as
incidental to a nonrental activity of the
corporation under Temporary
Regulations section 1.469-1T(e)(3)(vi)
and Regulations section 1.469-1(e)(3)
(vi)(D).
The corporation customarily makes
the property available during defined
business hours for nonexclusive use by
various customers.

The corporation provides property for
use in a nonrental activity of a
partnership in its capacity as an owner
of an interest in such partnership.
Whether the corporation provides
property used in an activity of a
partnership in the corporation's capacity
as an owner of an interest in the
partnership is determined on the basis
of all the facts and circumstances.
In addition, a guaranteed payment
described in section 707(c) is never
income from a rental activity.
Average period of customer use.
Figure the average period of customer
use for a class of property by dividing
the total number of days in all rental
periods by the number of rentals during
the tax year. If the activity involves
renting more than one class of property,
multiply the average period of customer
use of each class by the ratio of the
gross rental income from that class to
the activity's total gross rental income.
The activity's average period of
customer use equals the sum of these
class-by-class average periods
weighted by gross income. See
Regulations section 1.469-1(e)(3)(iii).
Significant personal services.
Personal services include only services
performed by individuals. To determine
if personal services are significant
personal services, consider all the
relevant facts and circumstances.
Relevant facts and circumstances
include:
How often the services are provided,
The type and amount of labor
required to perform the services, and
The value of the services in relation to
the amount charged for use of the
property.
The following services are not
considered in determining whether
personal services are significant.
Services necessary to permit the
lawful use of the rental property.
Services performed in connection
with improvements or repairs to the
rental property that extend the useful life
of the property substantially beyond the
average rental period.
Services provided in connection with
the use of any improved real property
that are similar to those commonly
provided in connection with long-term
rentals of high-grade commercial or
residential property. Examples include
cleaning and maintenance of common
areas, routine repairs, trash collection,
elevator service, and security at
entrances.

Extraordinary personal services.
Services provided in connection with
making rental property available for
customer use are extraordinary
personal services only if the services
are performed by individuals and the
customers' use of the rental property is
incidental to their receipt of the services.
For example, a patient's use of a
hospital room generally is incidental to
the care received from the hospital's
medical staff. Similarly, a student's use
of a dormitory room in a boarding school
is incidental to the personal services
provided by the school's teaching staff.
Rental activity incidental to a nonrental activity. An activity is not a
rental activity if the rental of the property
is incidental to a nonrental activity, such
as the activity of holding property for
investment, a trade or business activity,
or the activity of dealing in property.
Rental of property is incidental to an
activity of holding property for
investment if both of the following apply.
The main purpose for holding the
property is to realize a gain from the
appreciation of the property.
The gross rental income from such
property for the tax year is less than 2%
of the smaller of the property's
unadjusted basis or its fair market value.
Rental of property is incidental to a
trade or business activity if all of the
following apply.
The corporation owns an interest in
the trade or business at all times during
the year.
The rental property was mainly used
in the trade or business activity during
the tax year or during at least 2 of the 5
preceding tax years.
The gross rental income from the
property for the tax year is less than 2%
of the smaller of the property's
unadjusted basis or its fair market value.
The sale or exchange of property that
is also rented during the tax year (in
which the gain or loss is recognized) is
treated as incidental to the activity of
dealing in property if, at the time of the
sale or exchange, the property was held
primarily for sale to customers in the
ordinary course of the corporation's
trade or business.
See Temporary Regulations section
1.469-1T(e)(3) and Regulations section
1.469-1(e)(3) for more information on
the definition of rental activities for
purposes of the passive activity
limitations.
Reporting of rental activities. In
reporting the corporation's income or
-8-

losses and credits from rental activities,
the corporation must separately report
rental real estate activities and rental
activities other than rental real estate
activities.
Shareholders who actively
participate in a rental real estate activity
may be able to deduct part or all of their
rental real estate losses (and the
deduction equivalent of rental real
estate credits) against income (or tax)
from nonpassive activities. Generally,
the combined amount of rental real
estate losses and the deduction
equivalent of rental real estate credits
from all sources (including rental real
estate activities not held through the
corporation) that may be claimed is
limited to $25,000.
Report rental real estate activity
income (loss) on Form 8825 and line 2
of Schedule K and box 2 of
Schedule K-1, rather than on page 1 of
Form 1120S. Report credits related to
rental real estate activities on lines 13c
and 13d of Schedule K (box 13, codes E
and F, of Schedule K-1) and low-income
housing credits on lines 13a and 13b of
Schedule K (box 13, codes A, B, C, and
D of Schedule K-1).
Report income (loss) from rental
activities other than rental real estate on
line 3 of Schedule K and credits related
to rental activities other than rental real
estate on line 13e of Schedule K and in
box 13, code G, of Schedule K-1.

Portfolio Income

Generally, portfolio income includes all
gross income, other than income
derived in the ordinary course of a trade
or business, that is attributable to
interest; dividends; royalties; income
from a real estate investment trust, a
regulated investment company, a real
estate mortgage investment conduit, a
common trust fund, a controlled foreign
corporation, a qualified electing fund, or
a cooperative; income from the
disposition of property that produces
income of a type defined as portfolio
income; and income from the
disposition of property held for
investment. See Self-Charged Interest,
later, for an exception.

Solely for purposes of the preceding
paragraph, gross income derived in the
ordinary course of a trade or business
includes (and portfolio income,
therefore, does not include) the
following types of income.
Interest income on loans and
investments made in the ordinary
course of a trade or business of lending
money.
Instructions for Form 1120S

Interest on accounts receivable
arising from the performance of services
or the sale of property in the ordinary
course of a trade or business of
performing such services or selling such
property, but only if credit is customarily
offered to customers of the business.
Income from investments made in the
ordinary course of a trade or business of
furnishing insurance or annuity
contracts or reinsuring risks
underwritten by insurance companies.
Income or gain derived in the ordinary
course of an activity of trading or
dealing in any property if such activity
constitutes a trade or business (unless
the dealer held the property for
investment at any time before such
income or gain is recognized).
Royalties derived by the taxpayer in
the ordinary course of a trade or
business of licensing intangible
property.
Amounts included in the gross
income of a patron of a cooperative by
reason of any payment or allocation to
the patron based on patronage
occurring with respect to a trade or
business of the patron.
Other income identified by the IRS as
income derived by the taxpayer in the
ordinary course of a trade or business.
See Temporary Regulations section
1.469-2T(c)(3) for more information on
portfolio income.
Report portfolio income and related
deductions on Schedule K rather than
on page 1 of Form 1120S.

Self-Charged Interest

Certain self-charged interest income
and deductions may be treated as
passive activity gross income and
passive activity deductions if the loan
proceeds are used in a passive activity.
Generally, self-charged interest income
and deductions result from loans
between the corporation and its
shareholders. Self-charged interest also
occurs in loans between the corporation
and another S corporation or
partnership if each owner in the
borrowing entity has the same
proportional ownership interest in the
lending entity.
The self-charged interest rules do not
apply to a shareholder's interest in an S
corporation if the S corporation makes
an election under Regulations section
1.469-7(g) to avoid the application of
these rules. To make the election, the S
corporation must attach to its original or
amended Form 1120S a statement that
includes the name, address, and EIN of
the S corporation and a declaration that

Instructions for Form 1120S

the election is being made under
Regulations section 1.469-7(g). The
election will apply to the tax year for
which it was made and all subsequent
tax years. Once made, the election can
only be revoked with the consent of the
IRS.
For more details on the self-charged
interest rules, see Regulations section
1.469-7.

Grouping Activities

Generally, one or more trade or
business or rental activities may be
treated as a single activity if the
activities make up an appropriate
economic unit for measurement of gain
or loss under the passive activity rules.
Whether activities make up an
appropriate economic unit depends on
all the relevant facts and circumstances.
The factors given the greatest weight in
determining whether activities make up
an appropriate economic unit are:
Similarities and differences in types
of trades or businesses,
The extent of common control,
The extent of common ownership,
Geographical location, and
Reliance between or among the
activities.
Example. The corporation has a
significant ownership interest in a
bakery and a movie theater in Baltimore
and a bakery and a movie theater in
Philadelphia. Depending on the relevant
facts and circumstances, there may be
more than one reasonable method for
grouping the corporation's activities. For
instance, the following groupings may or
may not be permissible.
A single activity.
A movie theater activity and a bakery
activity.
A Baltimore activity and a
Philadelphia activity.
Four separate activities.
Once the corporation chooses a
grouping under these rules, it must
continue using that grouping in later tax
years unless either:
The corporation determines that the
original grouping was clearly
inappropriate; or
A material change in the facts and
circumstances makes that grouping
clearly inappropriate.
The IRS may regroup the
corporation's activities if the
corporation's grouping is not an
appropriate economic unit and one of
the primary purposes for the grouping
(or failure to regroup as required under
Regulations section 1.469-4(e)) is to
avoid the passive activity limitations.
-9-

Limitation on grouping certain activities. The following activities may not be
grouped together.
1. A rental activity with a trade or
business activity unless the activities
being grouped together make up an
appropriate economic unit and:
a. The rental activity is insubstantial
relative to the trade or business activity
or vice versa or
b. Each owner of the trade or
business activity has the same
proportionate ownership interest in the
rental activity. If so, the portion of the
rental activity involving the rental of
property to be used in the trade or
business activity can be grouped with
the trade or business activity.
2. An activity involving the rental of
real property with an activity involving
the rental of personal property (except
personal property provided in
connection with the real property or vice
versa).
3. Any activity with another activity
in a different type of business and in
which the corporation holds an interest
as a limited partner or as a limited
entrepreneur (as defined in section
464(e)(2)) if that other activity is holding,
producing, or distributing motion picture
films or videotapes; farming; leasing
section 1245 property; or exploring for
or exploiting oil and gas resources or
geothermal deposits.
Activities conducted through partnerships. Once a partnership
determines its activities under these
rules, the corporation as a partner can
use these rules to group those activities
with:
Each other,
Activities conducted directly by the
corporation, or
Activities conducted through other
partnerships.
The corporation cannot treat as
separate activities those activities
grouped together by a partnership.

Recharacterization of Passive
Income

Under Temporary Regulations section
1.469-2T(f) and Regulations section
1.469-2(f), net passive income from
certain passive activities must be
treated as nonpassive income. Net
passive income is the excess of an
activity's passive activity gross income
over its passive activity deductions
(current year deductions and prior year
unallowed losses).

Income from the following six
sources is subject to recharacterization.
Note. Any net passive income
recharacterized as nonpassive income
is treated as investment income for
purposes of figuring investment interest
expense limitations if it is from (a) an
activity of renting substantially
nondepreciable property from an
equity-financed lending activity or (b) an
activity related to an interest in a
pass-through entity that licenses
intangible property.
1. Significant participation
passive activities. A significant
participation passive activity is any trade
or business activity in which the
shareholder participated for more than
100 hours during the tax year but did not
materially participate. Because each
shareholder must determine his or her
level of participation, the corporation will
not be able to identify significant
participation passive activities.
2. Certain nondepreciable rental
property activities. Net passive
income from a rental activity is
nonpassive income if less than 30% of
the unadjusted basis of the property
used or held for use by customers in the
activity is subject to depreciation under
section 167.
3. Passive equity-financed
lending activities. If the corporation
has net income from a passive
equity-financed lending activity, the
smaller of the net passive income or the
equity-financed interest income from the
activity is nonpassive income.
4. Rental of property incidental
to a development activity. Net rental
activity income is the excess of passive
activity gross income from renting or
disposing of property over passive
activity deductions (current year
deductions and prior year unallowed
losses) that are reasonably allocable to
the rented property. Net rental activity
income is nonpassive income for a
shareholder if all of the following apply.
a. The corporation recognizes gain
from the sale, exchange, or other
disposition of the rental property during
the tax year.
b. The use of the item of property in
the rental activity started less than 12
months before the date of disposition.
The use of an item of rental property
begins on the first day on which (a) the
corporation owns an interest in the
property, (b) substantially all of the
property is either rented or held out for
rent and ready to be rented, and (c) no

significant value-enhancing services
remain to be performed.
c. The shareholder materially or
significantly participated for any tax year
in an activity that involved performing
services to enhance the value of the
property (or any other item of property, if
the basis of the property disposed of is
determined in whole or in part by
reference to the basis of that item of
property).
Because the corporation cannot
determine a shareholder's level of
participation, the corporation must
identify net income from property
described above (without regard to the
shareholder's level of participation) as
income that may be subject to
recharacterization.
5. Rental of property to a
nonpassive activity. If a taxpayer rents
property to a trade or business activity in
which the taxpayer materially
participates, the taxpayer's net rental
activity income (defined in item (4)) from
the property is nonpassive income.
6. Acquisition of an interest in a
pass-through entity that licenses
intangible property. Generally, net
royalty income from intangible property
is nonpassive income if the taxpayer
acquired an interest in the pass-through
entity after the pass-through entity
created the intangible property or
performed substantial services or
incurred substantial costs in developing
or marketing the intangible property. Net
royalty income is the excess of passive
activity gross income from licensing or
transferring any right in intangible
property over passive activity
deductions (current year deductions
and prior year unallowed losses) that
are reasonably allocable to the
intangible property. See Temporary
Regulations section 1.469-2T(f)(7)(iii)
for exceptions to this rule.

Passive Activity Reporting
Requirements

To allow shareholders to correctly apply
the passive activity loss and credit
limitation rules, any corporation that
carries on more than one activity must:
1. Provide an attached statement for
each activity conducted through the
corporation that identifies the type of
activity conducted (trade or business,
rental real estate, rental activity other
than rental real estate, or investment).
See Grouping Activities, earlier.
2. On the attached statement for
each activity, provide a statement, using
the same box numbers as shown on
-10-

Schedule K-1, detailing the net income
(loss), credits, and all items required to
be separately stated under section
1366(a)(1) from each trade or business
activity, from each rental real estate
activity, from each rental activity other
than a rental real estate activity, and
from investments.
3. Identify the net income (loss) and
the shareholder's share of corporation
interest expense from each activity of
renting a dwelling unit that any
shareholder uses for personal purposes
during the year for more than the greater
of 14 days or 10% of the number of
days that the residence is rented at fair
rental value.
4. Identify the net income (loss) and
the shareholder's share of interest
expense from each activity of trading
personal property conducted through
the corporation.
5. For any gain (loss) from the
disposition of an interest in an activity or
of an interest in property used in an
activity (including dispositions before
1987 from which gain is being
recognized after 1986):
a. Identify the activity in which the
property was used at the time of
disposition,
b. If the property was used in more
than one activity during the 12 months
preceding the disposition, identify the
activities in which the property was used
and the adjusted basis allocated to each
activity, and
c. For gains only, if the property was
substantially appreciated at the time of
the disposition and the applicable
holding period specified in Regulations
section 1.469-2(c)(2)(iii)(A) was not
satisfied, identify the amount of the
nonpassive gain and indicate whether
or not the gain is investment income
under Regulations section 1.469-2(c)(2)
(iii)(F).
6. Specify the amount of gross
portfolio income, the interest expense
properly allocable to portfolio income,
and expenses other than interest
expense that are clearly and directly
allocable to portfolio income.
7. Identify the ratable portion of any
section 481 adjustment (whether a net
positive or a net negative adjustment)
allocable to each corporate activity.
8. Identify any gross income from
sources specifically excluded from
passive activity gross income, including:
a. Income from intangible property,
if the shareholder is an individual whose
personal efforts significantly contributed
to the creation of the property;
Instructions for Form 1120S

b. Income from state, local, or
foreign income tax refunds; and
c. Income from a covenant not to
compete, if the shareholder is an
individual who contributed the covenant
to the corporation.
9. Identify any deductions that are
not passive activity deductions.
10. If the corporation makes a full or
partial disposition of its interest in
another entity, identify the gain (loss)
allocable to each activity conducted
through the entity, and the gain
allocable to a passive activity that would
have been recharacterized as
nonpassive gain had the corporation
disposed of its interest in property used
in the activity (because the property was
substantially appreciated at the time of
the disposition, and the gain
represented more than 10% of the
shareholder's total gain from the
disposition).
11. Identify the following items from
activities that may be subject to the
recharacterization rules under
Temporary Regulations section
1.469-2T(f) and Regulations section
1.469-2(f).
a. Net income from an activity of
renting substantially nondepreciable
property.
b. The smaller of equity-financed
interest income or net passive income
from an equity-financed lending activity.
c. Net rental activity income from
property developed (by the shareholder
or the corporation), rented, and sold
within 12 months after the rental of the
property commenced.
d. Net rental activity income from
the rental of property by the corporation
to a trade or business activity in which
the shareholder had an interest (either
directly or indirectly).
e. Net royalty income from
intangible property if the shareholder
acquired the shareholder's interest in
the corporation after the corporation
created the intangible property or
performed substantial services, or
incurred substantial costs in developing
or marketing the intangible property.
12. Identify separately the credits
from each activity conducted by or
through the corporation.
13. Identify the shareholder's pro rata
share of the corporation's self-charged
interest income or expense (see
Self-Charged Interest, earlier).
a. Loans between a shareholder
and the corporation. Identify the
lending or borrowing shareholder's
Instructions for Form 1120S

share of the self-charged interest
income or expense. If the shareholder
made the loan to the corporation, also
identify the activity in which the loan
proceeds were used. If the proceeds
were used in more than one activity,
allocate the interest to each activity
based on the amount of the proceeds
used in each activity.
b. Loans between the
corporation and another S
corporation or partnership. If the
corporation's shareholders have the
same proportional ownership interest in
the corporation and the other S
corporation or partnership, identify each
shareholder's share of the interest
income or expense from the loan. If the
corporation was the borrower, also
identify the activity in which the loan
proceeds were used. If the proceeds
were used in more than one activity,
allocate the interest to each activity
based on the amount of the proceeds
used in each activity.

Extraterritorial Income
Exclusion
Generally, no exclusion is
allowed for transactions after
CAUTION
2006. However, transactions
that meet the transition rules may still be
eligible for the exclusion. See the
Instructions for Form 8873 for details.

!

For details and to figure the amount
of the exclusion, see Form 8873,
Extraterritorial Income Exclusion, and its
separate instructions. The corporation
must report the extraterritorial income
exclusion on its return as follows.
1. If the corporation met the foreign
economic process requirements
explained in the Instructions for Form
8873, it can report the exclusion as a
nonseparately stated item on whichever
of the following lines apply to that
activity.
Form 1120S, page 1, line 19.
Form 8825, line 15.
Form 1120S, Schedule K, line 3b.
In addition, the corporation must
report as an item of information on
Schedule K-1, box 14, using code O,
the shareholder's pro rata share of
foreign trading gross receipts from Form
8873, line 15.
2. If the foreign trading gross
receipts of the corporation for the tax
year are $5 million or less and the
corporation did not meet the foreign
economic process requirements, it
cannot report the extraterritorial income
exclusion as a nonseparately stated
-11-

item on its return. Instead, the
corporation must report the following
separately stated items to the
shareholders on Schedule K-1, box 14.
Foreign trading gross receipts (code
O). Report each shareholder's pro rata
share of foreign trading gross receipts
from line 15 of Form 8873 in box 14
using code O.
Extraterritorial income exclusion
(code P). Report each shareholder's pro
rata share of the extraterritorial income
exclusion from line 52 of Form 8873 in
box 14 using code P and identify on an
attached statement the activity to which
the exclusion relates. If the corporation
is required to complete more than one
Form 8873, combine the exclusions and
report a single exclusion amount in
box 14.
Note. Upon request of a shareholder,
the corporation should furnish a copy of
the corporation's Form 8873 if that
shareholder has a reduction for
international boycott operations, illegal
bribes, kickbacks, etc.

Specific Instructions
Period Covered

File the 2012 return for calendar year
2012 and fiscal years that begin in 2012
and end in 2013. For a fiscal or short tax
year return, fill in the tax year space at
the top of the form.
The 2012 Form 1120S can also be
used if:
The corporation has a tax year of less
than 12 months that begins and ends in
2013, and
The 2013 Form 1120S is not
available at the time the corporation is
required to file its return.
The corporation must show its 2013
tax year on the 2012 Form 1120S and
take into account any tax law changes
that are effective for tax years beginning
after December 31, 2012.

Name and Address

Enter the corporation's true name (as
set forth in the charter or other legal
document creating it) and address on
the appropriate lines. Enter the address
of the corporation's principal office or
place of business. Include the suite,
room, or other unit number after the
street address. If the post office does
not deliver mail to the street address
and the corporation has a P.O. box,
show the box number instead.

Note. Do not use the address of the
registered agent for the state in which
the corporation is incorporated. For
example, if a business is incorporated in
Delaware or Nevada and the
corporation's principal office is located
in Little Rock, AR, the corporation
should enter the Little Rock address.
If the corporation receives its mail in
care of a third party (such as an
accountant or an attorney), enter on the
street address line “C/O” followed by the
third party's name and street address or
P.O. box.

Item B. Business Code

See Principal Business Activity Codes,
later.

Item C. Schedule M-3
Information

A corporation with total assets of $10
million or more on the last day of the tax
year must complete Schedule M-3
(Form 1120S), Net Income (Loss)
Reconciliation for S Corporations With
Total Assets of $10 Million or More,
instead of Schedule M-1. A corporation
filing Form 1120S that is not required to
file Schedule M-3 may voluntarily file
Schedule M-3 instead of Schedule M-1.
If you are filing Schedule M-3, check
the “Check if Sch. M-3 attached” box.
See the Instructions for Schedule M-3
for more details.

Item D. Employer
Identification Number
(EIN)

Enter the corporation's EIN. If the
corporation does not have an EIN, it
must apply for one. An EIN can be
applied for:
Online—Click on the EIN link at
www.irs.gov/businesses/small. The EIN
is issued immediately once the
application information is validated.
By telephone at 1-800-829-4933, or
at 1-800-829-4059 for individuals who
are deaf, hard of hearing, or have a
speech disability and who have access
to TTY/TDD equipment.
By faxing or mailing Form SS-4,
Application for Employer Identification
Number.
If the corporation has not received its
EIN by the time the return is due, enter
“Applied for” and the date the
corporation applied in the space for the
EIN. However, if the corporation is filing
its returns electronically, an EIN is
required at the time the return is filed.
For more information, see the
Instructions for Form SS-4.

Item F. Total Assets

Enter the corporation's total assets (as
determined by the accounting method
regularly used in keeping the
corporation's books and records) at the
end of the tax year. If there were no
assets at the end of the tax year,
enter -0-.
If the corporation is required to
complete Schedule L, enter total assets
from Schedule L, line 15, column (d) on
page 1, item F. If the S election
terminated during the tax year, see the
instructions for Schedule L, later, for
special rules that may apply when
figuring the corporation's year-end
assets.

Item H. Final Return, Name
Change, Address Change,
Amended Return, or S
Election Termination or
Revocation

If this is the corporation's final return
and it will no longer exist, check the
“Final return” box. Also check the “Final
K-1” box on each Schedule K-1.
If the corporation changed its name
since it last filed a return, check the
“Name change” box. Generally, a
corporation also must have amended its
articles of incorporation and filed the
amendment with the state in which it
was incorporated.
If the corporation has changed its
address since it last filed a return
(including a change to an “in care of”
address), check the “Address change”
box.
If this amends a previously filed
return, check the “Amended return” box.
If Schedules K-1 are also being
amended, check the “Amended K-1”
box on each Schedule K-1.
If the corporation has terminated or
revoked its S election, check the “S
election termination or revocation” box.
See Termination of Election, earlier.
Note. If a change in address occurs
after the return is filed, use Form
8822-B, Change of Address —
Business, to notify the IRS of the new
address.

Income
Report only trade or business
activity income on lines 1a
CAUTION
through 5. Do not report rental
activity income or portfolio income on
these lines. See Passive Activity
Limitations, earlier, for definitions of
rental income and portfolio income.

!

-12-

Rental activity income and portfolio
income are reported on Schedules K
and K-1. Rental real estate activities are
also reported on Form 8825.
Tax-exempt income. Do not include
any tax-exempt income on lines 1a
through 5. A corporation that receives
any tax-exempt income other than
interest, or holds any property or
engages in any activity that produces
tax-exempt income, reports this income
on line 16b of Schedule K and in box 16
of Schedule K-1 using code B.
Report tax-exempt interest income,
including exempt-interest dividends
received as a shareholder in a mutual
fund or other regulated investment
company, on line 16a of Schedule K
and in box 16 of Schedule K-1 using
code A.
See Deductions, later, for information
on how to report expenses related to
tax-exempt income.
Election to defer income from canceled debt. If the corporation elected
under section 108(i) to defer COD
income, the exclusions for COD income
under section 108(a)(1)(A), (B), (C), and
(D) do not apply to the deferred COD
income for the tax year of the election or
any later year.
For more information, see section
108(i); Rev. Proc. 2009-37, 2009-36
I.R.B. 309; and Temporary Regulations
section 1.108(i)-2T.
A corporation that receives a
Schedule K-1 from a partnership
containing information relating to a
section 108(i) election must report on
the Schedules K-1 to its shareholders
certain information relative to the
section 108(i) election. See Rev. Proc.
2009-37 for details. Also see Temporary
Regulations section 1.108(i)-2T.
Cancelled debt exclusion. If the
corporation has had debt discharged
resulting from a title 11 bankruptcy
proceeding or while insolvent, see Form
982, Reduction of Tax Attributes Due to
Discharge of Indebtedness, and Pub.
908, Bankruptcy Tax Guide.

Line 1a. Gross Receipts or
Sales

Enter on line 1a gross receipts or sales
from all business operations except for
amounts that must be reported on lines
4 and 5.
Special rules apply to certain income,
as discussed below.
Advance payments. In general,
advance payments are reported in the
year of receipt. There are exceptions to
Instructions for Form 1120S

this general rule for corporations that
use an accrual method of accounting.
To report income from long-term
contracts, see section 460. For special
rules for reporting certain advance
payments for goods and long-term
contracts, see Regulations section
1.451-5. For permissible methods for
reporting advance payments for
services and certain goods by an
accrual method corporation, see Rev.
Proc. 2004-34, 2004-22 I.R.B. 991, as
modified and clarified by Rev. Proc.
2011-18, 2011-5 I.R.B. 443, for advance
payments from the sale of certain gift
cards.
Installment sales. Generally, the
installment method cannot be used for
dealer dispositions of property. A
“dealer disposition” is any disposition of:
Personal property by a person who
regularly sells or otherwise disposes of
personal property of the same type on
the installment plan, or
Real property held for sale to
customers in the ordinary course of the
taxpayer's trade or business.
These restrictions on using the
installment method do not apply to
dispositions of property used or
produced in a farming business or sales
of timeshares and residential lots for
which the corporation elects to pay
interest under section 453(l)(3).
For sales of timeshares and
residential lots reported under the
installment method, each shareholder's
income tax is increased by the
shareholder's pro rata share of the
interest payable under section 453(l)(3).
Enter on line 1a the gross profit on
collections from installment sales for
any of the following.
Dealer dispositions of property before
March 1, 1986.
Dispositions of property used or
produced in the trade or business of
farming.
Certain dispositions of timeshares
and residential lots reported under the
installment method.
Attach a statement showing the
following information for the current and
the 3 preceding years.
Gross sales.
Cost of goods sold.
Gross profits.
Percentage of gross profits to gross
sales.
Amount collected.
Gross profit on the amount collected.

Instructions for Form 1120S

Line 1b. Returns and
Allowances

Enter cash and credit refunds the
corporation made to customers for
returned merchandise, rebates, and
other allowances made on gross
receipts or sales.

Line 2. Cost of Goods Sold

Complete Form 1125-A, Cost of Goods
Sold. Enter on line 2 the amount from
Form 1125-A, line 8. See Form 1125-A
and its instructions.

Line 4. Net Gain (Loss) From
Form 4797
Include only ordinary gains or
losses from the sale,
CAUTION
exchange, or involuntary
conversion of assets used in a trade or
business activity. Ordinary gains or
losses from the sale, exchange, or
involuntary conversion of rental activity
assets are reported separately on
line 19 of Form 8825 or line 3 of
Schedule K and box 3 of Schedule K-1,
generally as a part of the net income
(loss) from the rental activity.

!

A corporation that is a partner in a
partnership must include on Form 4797,
Sales of Business Property, its share of
ordinary gains (losses) from sales,
exchanges, or involuntary conversions
(other than casualties or thefts) of the
partnership's trade or business assets.
Corporations should not use Form
4797 to report the sale or other
disposition of property if a section 179
expense deduction was previously
passed through to any of its
shareholders for that property. Instead,
report it in box 17 of Schedule K-1 using
code K. See Dispositions of property
with section 179 deductions (code K),
later, for details.

Line 5. Other Income (Loss)

Enter any other trade or business
income (loss) not included on lines 1a
through 4. List the type and amount of
income on an attached statement.
Examples of other income include
the following.
Interest income derived in the
ordinary course of the corporation's
trade or business, such as interest
charged on receivable balances. See
Temporary Regulations section
1.469-2T(c)(3).
Recoveries of bad debts deducted in
prior years under the specific charge-off
method.
Taxable income from insurance
proceeds.
-13-

The amount included in income from
line 7 of Form 6478, Alcohol and
Cellulosic Biofuel Fuels Credit.
The amount included in income from
line 8 of Form 8864, Biodiesel and
Renewable Diesel Fuels Credit.
The recapture amount under section
280F if the business use of listed
property drops to 50% or less. To figure
the recapture amount, complete Part IV
of Form 4797.
All section 481 income adjustments
resulting from changes in accounting
methods. Show the computation of the
section 481 adjustments on an attached
statement.
Part or all of the proceeds received
from certain corporate-owned life
insurance contracts issued after August
17, 2006. Corporations that own one or
more employer-owned life insurance
contracts issued after this date must file
Form 8925, Report of Employer-Owned
Life Insurance Contracts. See section
101(j) for details.
Do not include items requiring
separate computations by shareholders
that must be reported on Schedules K
and K-1. See the instructions for
Schedules K and K-1 later in these
instructions.

Ordinary Income (Loss) From a
Partnership, Estate, or Trust
Enter the ordinary income (loss) shown
on Schedule K-1 (Form 1065) or
Schedule K-1 (Form 1041), or other
ordinary income (loss) from a foreign
partnership, estate, or trust. Show the
partnership's, estate's, or trust's name,
address, and EIN on a separate
statement attached to this return. If the
amount entered is from more than one
source, identify the amount from each
source.
Do not include portfolio income or
rental activity income (loss) from a
partnership, estate, or trust on this line.
Instead, report these amounts on
Schedules K and K-1, or on line 20a of
Form 8825 if the amount is from a rental
real estate activity.
Ordinary income or loss from a
partnership that is a publicly traded
partnership is not reported on this line.
Instead, report the amount separately
on line 10 of Schedule K and in box 10
of Schedule K-1 using code E.
Treat shares of other items
separately reported on Schedule K-1
issued by the other entity as if the items

were realized or incurred by this
corporation.
If there is a loss from a partnership,
the amount of the loss that may be
claimed is subject to the at-risk and
basis limitations as appropriate.
If the tax year of the S corporation
does not coincide with the tax year of
the partnership, estate, or trust, include
the ordinary income (loss) from the
other entity in the tax year in which the
other entity's tax year ends.

Deductions

!

CAUTION

Report only trade or business
activity deductions on lines 7
through 19.

Do not report the following expenses
on lines 7 through 19.
Rental activity expenses. Report
these expenses on Form 8825 or line 3b
of Schedule K.
Deductions allocable to portfolio
income. Report these deductions on
line 12d of Schedule K and in box 12 of
Schedule K-1 using code I, K, or L.
Nondeductible expenses (for
example, expenses connected with the
production of tax-exempt income).
Report nondeductible expenses on
line 16c of Schedule K and in box 16 of
Schedule K-1 using code C.
Qualified expenditures to which an
election under section 59(e) may apply.
The instructions for line 12c of
Schedule K and for Schedule K-1,
box 12, code J explain how to report
these amounts.
Items the corporation must state
separately that require separate
computations by the shareholders.
Examples include expenses incurred for
the production of income instead of in a
trade or business, charitable
contributions, foreign taxes paid or
accrued, intangible drilling and
development costs, soil and water
conservation expenditures, amortizable
basis of reforestation expenditures, and
exploration expenditures. The pro rata
shares of these expenses are reported
separately to each shareholder on
Schedule K-1.

Limitations on Deductions
Section 263A uniform capitalization
rules. The uniform capitalization rules
of section 263A generally require
corporations to capitalize, or include in
inventory, certain costs incurred in
connection with the following.
The production of real property and
tangible personal property held in

inventory or held for sale in the ordinary
course of business.
Real property or personal property
(tangible and intangible) acquired for
resale.
The production of real property and
tangible personal property by a
corporation for use in its trade or
business or in an activity engaged in for
profit.
Tangible personal property produced
by a corporation includes a film, sound
recording, videotape, book, or similar
property.
The costs required to be capitalized
under section 263A are not deductible
until the property to which the costs
relate is sold, used, or otherwise
disposed of by the corporation.
Exceptions. Section 263A does not
apply to the following.
Inventoriable items accounted for in
the same manner as materials and
supplies that are not incidental. See
Form 1125-A and its instructions for
more details.
Personal property acquired for resale
if the corporation's (or any
predecessor's) average annual gross
receipts for the 3 prior tax years were
$10 million or less.
Timber.
Most property produced under a
long-term contract.
Certain property produced in a
farming business. See Special rules for
certain corporations engaged in
farming, later.
Geological and geophysical costs
amortized under section 167(h).
Capital costs incurred to comply with
EPA sulfur regulations.
The corporation must report the
following costs separately to the
shareholders for purposes of
determinations under section 59(e).
Research and experimental costs
under section 174.
Intangible drilling costs for oil, gas,
and geothermal property.
Mining exploration and development
costs.
Indirect costs. Corporations
subject to the uniform capitalization
rules are required to capitalize not only
direct costs but an allocable part of most
indirect costs (including taxes) that
benefit the assets produced or acquired
for resale, or are incurred because of
the performance of production or resale
activities.
For inventory, indirect costs that must
be capitalized include the following.
-14-

Administration expenses.
Taxes.
Depreciation.
Insurance.
Compensation paid to officers
attributable to services.
Rework labor.
Contributions to pension, stock
bonus, and certain profit-sharing,
annuity, or deferred compensation
plans.
Regulations section 1.263A-1(e)(3)
specifies other indirect costs that relate
to production or resale activities that
must be capitalized and those that may
be currently deductible.
Interest expense paid or incurred
during the production period of
designated property must be capitalized
and is governed by special rules. For
more details, see Regulations sections
1.263A-8 through 1.263A-15.
For more details on the uniform
capitalization rules, see Regulations
sections 1.263A-1 through 1.263A-3.
Special rules for certain corporations engaged in farming. For S
corporations not required to use the
accrual method of accounting, the rules
of section 263A do not apply to
expenses of raising any:
Animal or
Plant that has a preproductive period
of 2 years or less.
Shareholders of S corporations not
required to use the accrual method of
accounting may elect to currently
deduct the preproductive period
expenses of certain plants that have a
preproductive period of more than 2
years. Because each shareholder
makes the election to deduct these
expenses, the corporation should not
capitalize them. Instead, the corporation
should report the expenses separately
on line 12d of Schedule K and report
each shareholder's pro rata share in
box 12 of Schedule K-1 using code M.
See Uniform Capitalization Rules in
chapter 6 of Pub. 225, Farmer's Tax
Guide, sections 263A(d) and (e), and
Regulations section 1.263A-4 for
definitions and other details.
Transactions between related taxpayers. Generally, an accrual basis S
corporation can deduct business
expenses and interest owed to a related
party (including any shareholder) only in
the tax year of the corporation that
includes the day on which the payment
is includible in the income of the related
party. See section 267 for details.

Instructions for Form 1120S

Section 291 limitations. If the S
corporation was a C corporation for any
of the 3 immediately preceding years,
the corporation may be required to
adjust items such as deductions for
depletion of iron ore and coal, and the
amortizable basis of pollution control
facilities. If this applies, see section 291
to figure the adjustment.
Business start-up and organizational
costs. A corporation can elect to
deduct up to $5,000 of business start-up
and up to $5,000 of organizational costs
paid or incurred after October 22, 2004.
Any remaining costs must be amortized
ratably over a 180-month period. The
$5,000 deduction is reduced (but not
below zero) by the amount the total
costs exceed $50,000. If the total costs
are $55,000 or more, the deduction is
reduced to zero. See sections 195(b)
and 248(a).
Time for making an election. The
corporation generally elects to deduct
start-up or organizational costs by
claiming the deduction on its income tax
return filed by the due date (including
extensions) for the tax year in which the
active trade or business begins.
However, for start-up or organizational
costs paid or incurred before
September 9, 2008, the corporation
may be required to attach a statement to
its return to elect to deduct such costs.
If the corporation timely filed its return
for the year without making an election,
it can still make an election by filing an
amended return within 6 months of the
due date of the return (excluding
extensions). Clearly indicate the
election on the amended return and
write “Filed pursuant to section
301.9100-2” at the top of the amended
return. File the amended return at the
same address the corporation filed its
original return. The election applies
when figuring taxable income for the
current tax year and all subsequent
years.
The corporation can choose to forgo
the elections above by clearly electing
to capitalize its start-up or organizational
costs on its income tax return filed by
the due date (including extensions) for
the tax year in which the active trade or
business begins.
Note. The election to either amortize or
capitalize start-up costs is irrevocable
and applies to all start-up costs that are
related to the trade or business.
Report the deductible amount of
start-up and organizational cost and any
amortization on line 19. For amortization
Instructions for Form 1120S

that begins during the 2012 tax year,
complete and attach Form 4562,
Depreciation and Amortization.
For more details on business start-up
and organizational costs, see the
Instructions for Form 4562. Also see
Pub. 535, Business Expenses.
Reducing certain expenses for
which credits are allowable. If the
corporation claims certain credits, it may
need to reduce the otherwise allowable
deductions for expenses used to figure
the credit. This applies to credits such
as the following.
Work opportunity credit (Form 5884).
Credit for increasing research
activities (Form 6765).
Orphan drug credit (Form 8820).
Disabled access credit (Form 8826).
Empowerment zone employment
credit (Form 8844).
Indian employment credit (Form
8845).
Credit for employer social security
and Medicare taxes paid on certain
employee tips (Form 8846).
Credit for small employer pension
plan startup costs (Form 8881).
Credit for employer-provided
childcare facilities and services (Form
8882).
Low sulfur diesel fuel production
credit (Form 8896).
Mine rescue team training credit
(Form 8923).
Agricultural chemicals security credit
(Form 8931).
Credit for employer differential wage
payments (Form 8932).
Credit for small employer health
insurance premiums (Form 8941).
If the corporation has any of these
credits, figure the current year credit
before figuring the deduction for
expenses on which the credit is based.
If the corporation capitalized any costs
on which it figured the credit, it may
need to reduce the amount capitalized
by the credit attributable to these costs.
See the instructions for the form used
to figure the applicable credit for more
details.

Line 7. Compensation of
Officers and
Line 8. Salaries and Wages
Distributions and other
payments by an S corporation
CAUTION
to a corporate officer must be
treated as wages to the extent the
amounts are reasonable compensation
for services rendered to the corporation.

!

-15-

Enter on line 7 the total compensation of
all officers paid or incurred in the trade
or business activities of the corporation.
The corporation determines who is an
officer under the laws of the state where
it is incorporated.
Enter on line 8 the total salaries and
wages paid or incurred to employees
(other than officers) during the tax year.
If the corporation claims a credit for
any wages paid or incurred, it may need
to reduce the amounts on lines 7 and 8.
See Reducing certain expenses for
which credits are allowable, earlier.
Do not include salaries and wages
reported elsewhere on the return, such
as amounts included in cost of goods
sold, elective contributions to a section
401(k) cash or deferred arrangement, or
amounts contributed under a salary
reduction SEP agreement or a SIMPLE
IRA plan.
Include fringe benefit expenditures
made on behalf of officers and
employees owning more than 2% of the
corporation's stock. Also report these
fringe benefits as wages in box 1 of
Form W-2. Do not include amounts paid
or incurred for fringe benefits of officers
and employees owning 2% or less of
the corporation's stock. These amounts
are reported on line 18. See the
instructions for that line for information
on the types of expenditures that are
treated as fringe benefits and for the
stock ownership rules.
Report amounts paid for health
insurance coverage for a more than 2%
shareholder (including that
shareholder's spouse, dependents, and
any children under age 27 who are not
dependents) as an information item in
box 14 of that shareholder's Form W-2.
A more-than-2% shareholder may be
allowed to deduct such amounts on
Form 1040, line 29. To find out if the
shareholder can claim this deduction,
see Self-Employed Health Insurance
Deduction in chapter 6 of Pub. 535,
Business Expenses.
If a shareholder or a member of the
family of one or more shareholders of
the corporation renders services or
furnishes capital to the corporation for
which reasonable compensation is not
paid, the IRS may make adjustments in
the items taken into account by such
individuals to reflect the value of such
services or capital. See section 1366(e).

Line 9. Repairs and
Maintenance

Enter the cost of incidental repairs and
maintenance not claimed elsewhere on
the return, such as labor and supplies,
that do not add to the value of the
property or appreciably prolong its life.
The corporation can deduct these
repairs only to the extent they relate to a
trade or business activity. New
buildings, machinery, or permanent
improvements that increase the value of
the property are not deductible. They
must be depreciated or amortized.

Line 10. Bad Debts

Enter the total debts that became
worthless in whole or in part during the
tax year, but only to the extent such
debts relate to a trade or business
activity. Report deductible nonbusiness
bad debts as a short-term capital loss
on Form 8949, Sales and Other
Dispositions of Capital Assets. A
corporation that uses the cash method
of accounting cannot claim a bad debt
deduction unless the amount was
previously included in income.

Line 11. Rents

Enter rent paid on business property
used in a trade or business activity. Do
not deduct rent for a dwelling unit
occupied by any shareholder for
personal use.
If the corporation rented or leased a
vehicle, enter the total annual rent or
lease expense paid or incurred in the
trade or business activities of the
corporation during the tax year. Also
complete Part V of Form 4562. If the
corporation leased a vehicle for a term
of 30 days or more, the deduction for
vehicle lease expense may have to be
reduced by including in gross income an
amount called the inclusion amount.
The corporation may have an inclusion
amount if:

The lease term began:

And the vehicle's
FMV on the first
day of the lease
exceeded:

Cars (excluding trucks
and vans)
After 12/31/07 but before
1/1/13 . . . . . . . . . .

$18,500

Trucks and Vans
After 12/31/09 but before
1/1/13 . . . . . . . . . .

$19,000

After 12/31/08 but before
1/1/10 . . . . . . . . . .

$18,500

After 12/31/07 but before
1/1/09 . . . . . . . . . .

$19,000

See Pub. 463, Travel, Entertainment,
Gift and Car Expenses, for instructions
on figuring the inclusion amount. The
inclusion amount for lease terms
beginning in 2013 will be published in
the Internal Revenue Bulletin in early
2013.

Line 12. Taxes and Licenses

Enter taxes and licenses paid or
incurred in the trade or business
activities of the corporation, unless they
are reflected elsewhere on the return.
Federal import duties and federal excise
and stamp taxes are deductible only if
paid or incurred in carrying on the trade
or business of the corporation.
Do not deduct the following taxes on
line 12.
Federal income taxes (except for the
portion of built-in gains tax allocable to
ordinary income), or taxes reported
elsewhere on the return.
Section 901 foreign taxes. Report
these taxes on line 14l of Schedule K
and in box 14 of Schedule K-1 using
codes L and M.
Taxes allocable to a rental activity.
Report taxes allocable to a rental real
estate activity on Form 8825. Report
taxes allocable to a rental activity other
than a rental real estate activity on
line 3b of Schedule K.
Taxes allocable to portfolio income.
Report these taxes on line 12d of
Schedule K and in box 12 of
Schedule K-1 using code K.
Taxes paid or incurred for the
production or collection of income, or for
the management, conservation, or
maintenance of property held to
produce income. Report these taxes
separately on line 12d of Schedule K
and in box 12 of Schedule K-1 using
code S.
See section 263A(a) for rules on
capitalization of allocable costs
(including taxes) for any property.
-16-

Taxes not imposed on the
corporation.
Taxes, including state or local sales
taxes, that are paid or incurred in
connection with an acquisition or
disposition of property (these taxes
must be treated as a part of the cost of
the acquired property or, in the case of a
disposition, as a reduction in the amount
realized on the disposition).
Taxes assessed against local
benefits that increase the value of the
property assessed (such as for paving,
etc.).
See section 164(d) for information on
apportionment of taxes on real property
between seller and purchaser.

Line 13. Interest

Include only interest incurred in the
trade or business activities of the
corporation that is not claimed
elsewhere on the return.
Do not include interest expense:
On debt used to purchase rental
property or debt used in a rental activity.
Interest allocable to a rental real estate
activity is reported on Form 8825 and is
used in arriving at net income (loss)
from rental real estate activities on line 2
of Schedule K and in box 2 of
Schedule K-1. Interest allocable to a
rental activity other than a rental real
estate activity is included on line 3b of
Schedule K and is used in arriving at net
income (loss) from a rental activity
(other than a rental real estate activity).
This net amount is reported on line 3c of
Schedule K and in box 3 of
Schedule K-1.
On debt used to buy property held for
investment. Interest that is clearly and
directly allocable to interest, dividend,
royalty, or annuity income not derived in
the ordinary course of a trade or
business is reported on line 12b of
Schedule K and in box 12 of
Schedule K-1 using code H. See the
instructions for line 12b of Schedule K,
for box 12, code H of Schedule K-1, and
Form 4952, Investment Interest
Expense Deduction, for more
information on investment property.
On debt proceeds allocated to
distributions made to shareholders
during the tax year. Instead, report such
interest on line 12d of Schedule K and in
box 12 of Schedule K-1 using code S.
To determine the amount to allocate to
distributions to shareholders, see Notice
89-35, 1989-1 C.B. 675.
On debt required to be allocated to
the production of designated property.
Designated property includes real
property, personal property that has a
Instructions for Form 1120S

class life of 20 years or more, and other
tangible property requiring more than 2
years (1 year in the case of property
with a cost of more than $1 million) to
produce or construct. Interest allocable
to designated property produced by a
corporation for its own use or for sale
must be capitalized. In addition, a
corporation must also capitalize any
interest on debt allocable to an asset
used to produce designated property. A
shareholder may have to capitalize
interest that the shareholder incurs
during the tax year for the S
corporation's production expenditures.
Similarly, interest incurred by an S
corporation may have to be capitalized
by a shareholder for the shareholder's
own production expenditures. The
information required by the shareholder
to properly capitalize interest for this
purpose must be provided by the
corporation on an attachment for box 17
of Schedule K-1 using code P. See
section 263A(f) and Regulations
sections 1.263A-8 through 1.263A-15.
Special rules apply to:
Allocating interest expense among
activities so that the limitations on
passive activity losses, investment
interest, and personal interest can be
properly figured. Generally, interest
expense is allocated in the same
manner as debt is allocated. Debt is
allocated by tracing disbursements of
the debt proceeds to specific
expenditures. Temporary Regulations
section 1.163-8T gives rules for tracing
debt proceeds to expenditures.
Prepaid interest, which generally can
only be deducted over the term of the
debt. See Regulations sections 1.163-7,
1.446-2, and 1.1273-2(g) for details.
See also section 461(g).
Interest which is allocable to
unborrowed policy cash values of life
insurance, endowment, or annuity
contracts issued after June 8, 1997. See
section 264(f). Attach a statement
showing the computation of the
deduction.

Line 14. Depreciation

Enter the depreciation claimed on
assets used in a trade or business
activity less any depreciation reported
elsewhere (for example, on Form
1125-A). See the Instructions for Form
4562 or Pub. 946, How To Depreciate
Property, to figure the amount of
depreciation to enter on this line.
Complete and attach Form 4562 only
if the corporation placed property in
service during the tax year or claims
depreciation on any car or other listed
property.
Instructions for Form 1120S

Do not include any section 179
expense deduction on this line. This
amount is not deducted by the
corporation. Instead, it is passed
through to the shareholders in box 11 of
Schedule K-1. However, reduce the
basis of any asset of the S corporation
by the amount of section 179 expense
elected by the S corporation, even if a
portion of that amount cannot be
passed through to its shareholders this
year and must be carried forward
because of limitations at the S
corporation level. See Regulations
section 1.179-1(f)(2).

Line 15. Depletion

If the corporation claims a deduction for
timber depletion, complete and attach
Form T (Timber), Forest Activities
Schedule.
Do not deduct depletion for oil
and gas properties. Each
CAUTION
shareholder figures depletion
on oil and gas properties. See the
instructions for Schedule K-1, box 17,
code R, for the information on oil and
gas depletion that must be supplied to
the shareholders by the corporation.

!

Line 17. Pension,
Profit-Sharing, etc., Plans

Enter the deductible contributions not
claimed elsewhere on the return made
by the corporation for its employees
under a qualified pension, profit-sharing,
annuity, or simplified employee pension
(SEP) or SIMPLE IRA plan, or any other
deferred compensation plan.
If the corporation contributes to an
individual retirement arrangement (IRA)
for employees, include the contribution
in salaries and wages on page 1, line 8,
or Form 1125-A, line 3, and not on
line 17.
Employers who maintain a pension,
profit-sharing, or other funded deferred
compensation plan, whether or not the
plan is qualified under the Internal
Revenue Code and whether or not a
deduction is claimed for the current tax
year, generally must file the applicable
form listed below.
Form 5500, Annual Return/Report of
Employee Benefit Plan.
Form 5500-SF, Short Form Annual
Return/Report of Small Employee
Benefit Plan (generally filed instead of
Form 5500 if there are under 100
participants at the beginning of the plan
year).
Form 5500-EZ, Annual Return of
One-Participant (Owners and Their
Spouses) Retirement Plan. File this form
for a plan that only covers the owner (or
-17-

the owner and his or her spouse) but
only if the owner (or the owner and his
or her spouse) owns the entire
business.
Note. Form 5500 and Form 5500-SF
must be filed electronically under the
computerized ERISA Filing Acceptance
System (EFAST2). For more
information, see the EFAST2 website at
www.efast.dol.gov.
There are penalties for not filing
these forms on time and for overstating
the pension plan deduction. See
sections 6652(e) and 6662(f).

Line 18. Employee Benefit
Programs

Enter amounts for fringe benefits paid or
incurred on behalf of employees owning
2% or less of the corporation's stock.
These fringe benefits include (a)
employer contributions to certain
accident and health plans, (b) the cost
of up to $50,000 of group-term life
insurance on an employee's life, and (c)
meals and lodging furnished for the
employer's convenience.

Do not deduct amounts that are an
incidental part of a pension,
profit-sharing, etc., plan included on
line 17 or amounts reported elsewhere
on the return or on Form 1125-A.
Report amounts for fringe benefits
paid on behalf of employees owning
more than 2% of the corporate stock on
line 7 or 8, whichever applies. An
employee is considered to own more
than 2% of the corporation's stock if that
person owns on any day during the tax
year more than 2% of the outstanding
stock of the corporation or stock
possessing more than 2% of the
combined voting power of all stock of
the corporation. See section 318 for
attribution rules.

Line 19. Other Deductions

Enter the total allowable trade or
business deductions that are not
deductible elsewhere on page 1 of Form
1120S. Attach a statement listing by
type and amount each deduction
included on this line.

Examples of other deductions
include the following.
Amortization. See Part VI of Form
4562.
Certain business start-up and
organizational costs (discussed earlier).
Insurance premiums.
Legal and professional fees.
Supplies used and consumed in the
business.

Travel, meal, and entertainment
expenses. Special rules apply
(discussed later).
Utilities.
Deduction for certain energy efficient
commercial building property placed in
service during the tax year. See section
179D, Notice 2006-52, 2006-26 I.R.B.
1175, as clarified and amplified by
Notice 2008-40, 2008-14 I.R.B. 725, as
modified by Notice 2012-26, 2012-17
I.R.B. 847.
Any negative net section 481(a)
adjustment.
Do not deduct the following on
line 19.
Items that must be reported
separately on Schedules K and K-1.
Fines or penalties paid to a
government for violating any law. Report
these expenses on Schedule K,
line 16c.
Expenses allocable to tax-exempt
income. Report these expenses on
Schedule K, line 16c.

Special Rules
Commercial revitalization deduction.
If the corporation qualified for a
commercial revitalization deduction for a
building constructed, purchased, or
substantially rehabilitated in a renewal
community and placed in service before
2010, and it elected to amortize
qualified capital expenditures, include
any current year amortization deduction
for a nonrental building on line 19.
Include any current year amortization
deduction for a rental real estate activity
on Schedule K, line 12d. See section
1400I for details.
Note. The commercial revitalization
deduction is not available for buildings
placed in service after 2009.
Travel, meals, and entertainment.
Subject to limitations and restrictions
discussed below, a corporation can
deduct ordinary and necessary travel,
meals, and entertainment expenses
paid or incurred in its trade or business.
Also, special rules apply to deductions
for gifts, skybox rentals, luxury water
travel, convention expenses, and
entertainment tickets. See section 274
and Pub. 463 for details.
Travel. The corporation cannot
deduct travel expenses of any individual
accompanying a corporate officer or
employee, including a spouse or
dependent of the officer or employee,
unless:
That individual is an employee of the
corporation, and

His or her travel is for a bona fide
business purpose and would otherwise
be deductible by that individual.
Meals and entertainment.
Generally, the corporation can deduct
only 50% of the amount otherwise
allowable for meals and entertainment
expenses paid or incurred in its trade or
business. In addition (subject to
exceptions under section 274(k)(2)):
Meals must not be lavish or
extravagant;
A bona fide business discussion must
occur during, immediately before, or
immediately after the meal; and
An employee of the corporation must
be present at the meal.
See section 274(n)(3) for a special
rule that applies to expenses for meals
consumed by individuals subject to the
hours of service limits of the Department
of Transportation.
Membership dues. The corporation
can generally deduct amounts paid or
incurred for membership dues in civic or
public service organizations,
professional organizations (such as bar
and medical associations), business
leagues, trade associations, chambers
of commerce, boards of trade, and real
estate boards. However, no deduction
is allowed if a principal purpose of the
organization is to entertain, or provide
entertainment facilities for, members or
their guests. In addition, corporations
cannot deduct membership dues in any
club organized for business, pleasure,
recreation, or other social purpose. This
includes country clubs, golf and athletic
clubs, airline and hotel clubs, and clubs
operated to provide meals under
conditions favorable to business
discussion.
Entertainment facilities. The
corporation cannot deduct an expense
paid or incurred for a facility (such as a
yacht or hunting lodge) used for an
activity usually considered
entertainment, amusement, or
recreation.
Amounts treated as
compensation. The corporation may
be able to deduct otherwise
nondeductible entertainment,
amusement, or recreation expenses if
the amounts are treated as
compensation to the recipient and
reported on Form W-2 for an employee
or on Form 1099-MISC for an
independent contractor.
However, if the recipient is an officer,
director, or beneficial owner (directly or
indirectly) of more than 10% of the
-18-

corporation's stock, the deductible
expense is limited. See section 274(e)
(2) and Notice 2005-45, 2005-24 I.R.B.
1228. For tax years beginning after
August 1, 2012, see Regulations
sections 1.274-9 and 1.274-10.
Lobbying expenses. Generally,
lobbying expenses are not deductible.
Report nondeductible expenses on
Schedule K, line 16c. These expenses
include:
Amounts paid or incurred in
connection with influencing federal or
state legislation (but not local
legislation) or
Amounts paid or incurred in
connection with any communication
with certain federal executive branch
officials in an attempt to influence the
official actions or positions of the
officials. See Regulations section
1.162-29 for the definition of “influencing
legislation.”
Dues and other similar amounts paid
to certain tax-exempt organizations may
not be deductible. See section 162(e)
(3). If certain in-house lobbying
expenditures do not exceed $2,000,
they are deductible. For information on
contributions to charitable organizations
that conduct lobbying activities, see
section 170(f)(9).
Certain corporations engaged in
farming. Section 464(f) limits the
deduction for certain expenditures of S
corporations engaged in farming if they
use the cash method of accounting, and
their prepaid farm supplies are more
than 50% of other deductible farming
expenses.
Prepaid farm supplies include
expenses for feed, seed, fertilizer, and
similar farm supplies not used or
consumed during the year. They also
include the cost of poultry that would be
allowable as a deduction in a later tax
year if the corporation were to (a)
capitalize the cost of poultry bought for
use in its farm business and deduct it
ratably over the lesser of 12 months or
the useful life of the poultry and (b)
deduct the cost of poultry bought for
resale in the year it sells or otherwise
disposes of it.
If the limit applies, the corporation
can deduct prepaid farm supplies that
do not exceed 50% of its other
deductible farm expenses in the year of
payment. The excess is deductible only
in the year the corporation uses or
consumes the supplies (other than
poultry, which is deductible as
explained above). For exceptions and

Instructions for Form 1120S

more details on these rules, see Pub.
225.
Reforestation expenditures. If the
corporation made an election to deduct
a portion of its reforestation
expenditures on line 12d of Schedule K,
it must amortize over an 84-month
period the portion of these expenditures
in excess of the amount deducted on
Schedule K (see section 194). Deduct
on line 19 only the amortization of these
excess reforestation expenditures. See
Reforestation expense deduction (code
O), later.
Do not deduct amortization of
reforestation expenditures paid
CAUTION
or incurred before October 23,
2004. If the corporation elected to
amortize these expenditures, report the
amortizable basis on line 17d of
Schedule K. See Amortization of
reforestation costs (code S), later, for
details.

!

Line 21. Ordinary Business
Income (Loss)

Enter this income or loss on line 1 of
Schedule K. Line 21 income is not used
in figuring the excess net passive
income or built-in gains taxes. See the
instructions for line 22a for figuring
taxable income for purposes of these
taxes.

Tax and Payments
Line 22a. Excess Net Passive
Income and LIFO Recapture
Tax

These taxes can apply if the corporation
was previously a C corporation or if the
corporation engaged in a tax-free
reorganization with a C corporation.

Excess net passive income tax. If
the corporation has accumulated
earnings and profits (E&P) at the close

of its tax year, has passive investment
income for the tax year that is in excess
of 25% of gross receipts, and has
excess net passive income, the
corporation must pay a tax on the
excess net passive income. Complete
lines 1 through 3 and line 9 of the
worksheet below to make this
determination. If line 2 is greater than
line 3 and the corporation has taxable
income (see instructions for line 9 of the
worksheet), it must pay the tax.
Complete a separate statement using
the format of lines 1 through 11 of the
worksheet to figure the tax. Enter the tax
on line 22a, page 1, Form 1120S, and
attach the computation statement to
Form 1120S.
Reduce each item of passive
investment income passed through to
shareholders by its portion of any
excess net passive income tax reported
on line 22a. See section 1366(f)(3).
LIFO recapture tax. The corporation
may be liable for the additional tax due
to LIFO recapture under Regulations
section 1.1363-2 if:
The corporation used the LIFO
inventory pricing method for its last tax
year as a C corporation, or
A C corporation transferred LIFO
inventory to the corporation in a
nonrecognition transaction in which
those assets were transferred basis
property.
The additional tax due to LIFO
recapture is figured for the corporation's
last tax year as a C corporation or for
the tax year of the transfer, whichever
applies. See the Instructions for Form
1120 to figure the tax.
The tax is paid in four equal
installments. The C corporation must
pay the first installment by the due date
(not including extensions) of Form 1120
for the corporation's last tax year as a C
corporation or for the tax year of the

transfer, whichever applies. The S
corporation must pay each of the
remaining installments by the due date
(not including extensions) of Form
1120S for the 3 succeeding tax years.
Include this year's installment in the total
amount to be entered on line 22a. To
the left of the total on line 22a, enter the
installment amount and “LIFO tax.”

Line 22b. Tax From Schedule D
(Form 1120S)

Enter the built-in gains tax from line 23
of Part III of Schedule D. See the
instructions for Part III of Schedule D to
determine if the corporation is liable for
the tax.

Line 22c

Include the following in the total for
line 22c.

Investment credit recapture tax. The
corporation is liable for any required
investment credit recapture attributable
to credits allowed for tax years for which
the corporation was not an S
corporation. The corporation is also
liable for any required qualifying
therapeutic discovery project grant
recapture. Figure the corporation's
investment credit recapture tax and
qualifying therapeutic discovery project
grant recapture tax by completing Form
4255, Recapture of Investment Credit.
To the left of the line 22c total, enter
the amount of recapture tax and “Tax
From Form 4255.” Attach Form 4255 to
Form 1120S.
Interest due under the look-back
method for completed long-term
contracts. If the corporation owes this
interest, attach Form 8697, Interest
Computation Under the Look-Back
Method for Completed Long-Term
Contracts. To the left of the total on
line 22c, enter the amount owed and
“From Form 8697.”

Excess Net Passive Income Tax Worksheet for Line 22a
1. Enter gross receipts for the tax year
(see section 1362(d)(3)(B) for gross
receipts from the sale of capital
assets)*
2. Enter passive investment income as
defined in section 1362(d)(3)(C)*
3. Enter 25% of line 1 (If line 2 is less than
line 3, stop here. You are not liable for
this tax.)

4.
5.

6.
7.

Excess passive investment income—
Subtract line 3 from line 2
Enter deductions directly connected
with the production of income on line 2
(see section 1375(b)(2))*
Net passive income—Subtract line 5
from line 2
Divide amount on line 4 by amount on
line 2

%

8. Excess net passive income—Multiply
line 6 by line 7
9. Enter taxable income (see instructions
for taxable income below)
10. Enter smaller of line 8 or line 9
11. Excess net passive income tax—Enter
35% of line 10. Enter here and on
Form 1120S, line 22a

*Income and deductions on lines 1, 2, and 5 are from total operations for the tax year. This includes applicable income and expenses from page 1, Form 1120S, as
well as those reported separately on Schedule K. See section 1375(b)(4) for an exception regarding lines 2 and 5.

Line 9 of Worksheet—Taxable income
Line 9 taxable income is defined in Regulations section 1.1374-1A(d)(1). Figure this income by completing lines 1 through 28 of Form
1120, U.S. Corporation Income Tax Return. Include the Form 1120 computation with the worksheet computation you attach to Form
1120S. You do not have to attach the schedules, etc., called for on Form 1120. However, you may want to complete certain Form 1120
schedules, such as Schedule D (Form 1120), if you have capital gains or losses.

Instructions for Form 1120S

-19-

Interest due under the look-back
method for property depreciated under the income forecast method. If
the corporation owes this interest,
attach Form 8866, Interest Computation
Under the Look-Back Method for
Property Depreciated Under the Income
Forecast Method. To the left of the total
on line 22c, enter the amount owed and
“From Form 8866.”

Line 23d

If the corporation is the beneficiary of a
trust, and the trust makes a section
643(g) election to credit its estimated
tax payments to its beneficiaries,
include the corporation's share of the
payment in the total for line 23d. Enter
“T” and the amount on the dotted line to
the left of the entry space.

Line 24. Estimated Tax Penalty

If Form 2220 is attached, check the box
on line 24 and enter the amount of any
penalty on this line.

Line 27
Direct deposit of refund. If the
corporation wants its refund directly
deposited into its checking or savings
account at any U.S. bank or other
financial institution instead of having a
check sent to the corporation, complete
Form 8050 and attach it to the
corporation's return. However, the
corporation cannot have its refund from
an amended return directly deposited.

Schedule B. Other
Information

Complete all items that apply to the
corporation.

Item 2

See Principal Business Activity Codes
at the end of these instructions and
enter the business activity and product
or service.

Question 4. Constructive
Ownership of Other Entities

For purposes of determining the
corporation's constructive ownership of
other entities, the constructive
ownership rules of section 267(c)
(excluding section 267(c)(3)) apply to
ownership of interests in partnerships
and trusts as well as corporate stock.
Generally, if an entity (a corporation,
partnership, or trust) is owned, directly
or indirectly, by or for another entity
(corporation, partnership, estate, or
trust), the owned entity is considered to
be owned proportionately by or for the

owners (shareholders, partners, or
beneficiaries) of the owning entity.

recognized built-in gain from prior years.
See sections 1374(c)(2) and (d)(1).

Maximum percentage owned in partnership profit, loss, or capital. For
the purposes of question 4b, the term
“maximum percentage owned” means
the highest percentage of interest in a
partnership's profit, loss, or capital as of
the end of the partnership's tax year, as
determined under the partnership
agreement, when taking into account
the constructive ownership rules earlier.
If the partnership agreement does not
express the partner's share of profit,
loss, and capital as fixed percentages,
use a reasonable method in arriving at
the percentage items for the purposes
of completing question 4b. Such
method must be consistent with the
partnership agreement. The method
used to compute a percentage share of
profit, loss, and capital must be applied
consistently from year to year. Maintain
records to support the determination of
the share of profits, losses, and share of
capital.

If the corporation has more than one
pool of assets (as defined in
Regulations section 1.1374-3(b)(4)),
attach a statement showing for each
pool of assets the amount of the
corporation's net unrealized built-in gain
reduced by the net recognized built-in
gain from prior years.

Question 6

Answer “Yes” if the corporation filed, or
is required to file, Form 8918, Material
Advisor Disclosure Statement. For
details, see the Instructions for Form
8918.

Item 8

Complete item 8 if the corporation: (a)
was a C corporation before it elected to
be an S corporation or the corporation
acquired an asset with a basis
determined by reference to its basis (or
the basis of any other property) in the
hands of a C corporation and (b) has net
unrealized built-in gain (defined below)
in excess of the net recognized built-in
gain from prior years.
The corporation is liable for section
1374 tax if (a) and (b) above apply and it
has a net recognized built-in gain
(defined in section 1374(d)(2)) for its tax
year.
The corporation's net unrealized
built-in gain is the amount, if any, by
which the fair market value of the assets
of the corporation at the beginning of its
first S corporation year (or as of the date
the assets were acquired, for any asset
with a basis determined by reference to
its basis (or the basis of any other
property) in the hands of a C
corporation) exceeds the aggregate
adjusted basis of such assets at that
time.
Enter the corporation's net unrealized
built-in gain reduced by the net
-20-

Item 9

If the corporation was a C corporation in
a prior year, or if it engaged in a tax-free
reorganization with a C corporation,
enter the amount of any accumulated
earnings and profits (E&P) at the close
of its 2012 tax year. For details on
figuring accumulated E&P, see section
312. Estimates based on retained
earnings at the end of the tax year are
acceptable. If the corporation has
accumulated E&P, it may be liable for
tax imposed on excess net passive
income. See Excess net passive
income tax, earlier, for details on this
tax.

Question 10

Total receipts is the sum of the following
amounts.
Gross receipts or sales (page 1,
line 1a).
All other income (page 1, lines 4 and
5).
Income reported on Schedule K, lines
3a, 4, 5a, and 6.
Income or net gain reported on
Schedule K, lines 7, 8a, 9, and 10.
Income or net gain reported on Form
8825, lines 2, 19, and 20a.

Question 12

Answer “Yes” if, during the tax year, the
corporation revoked a qualified
subchapter S (QSub) election or a
QSub election of the corporation was
terminated. If “Yes,” see Regulations
section 1.1361-5 for additional
information.

Schedules K and K-1
(General Instructions)
Purpose of Schedules

The corporation is liable for taxes on
lines 22a, 22b, and 22c, on page 1 of
Form 1120S. Shareholders are liable for
tax on their shares of the corporation's
income (reduced by any taxes paid by
the corporation on income).
Shareholders must include their share
of the income on their tax return whether
or not it is distributed to them. Unlike
most partnership income, S corporation
Instructions for Form 1120S

income is not self-employment income
and is not subject to self-employment
tax.
Schedule K. Schedule K is a summary
schedule of all shareholders' shares of
the corporation's income, deductions,
credits, etc. All corporations must
complete Schedule K.
Schedule K-1. Schedule K-1 shows
each shareholder's separate share.
Attach a copy of each Schedule K-1 to
the Form 1120S filed with the IRS. Keep
a copy for the corporation's records and
give each shareholder a copy.
Give each shareholder a copy of the
Shareholder's Instructions for
Schedule K-1 (Form 1120S) or specific
instructions for each item reported on
the shareholder's Schedule K-1.

Substitute Forms

The corporation does not need IRS
approval to use a substitute
Schedule K-1 if it is an exact copy of the
IRS schedule. The boxes must use the
same numbers and titles and must be in
the same order and format as on the
comparable IRS Schedule K-1. The
substitute schedule must include the
OMB number. The corporation must
provide each shareholder with the
Shareholder's Instructions for
Schedule K-1 (Form 1120S) or
instructions that apply to the specific
items reported on the shareholder's
Schedule K-1.
The corporation must request IRS
approval to use other substitute
Schedules K-1. To request approval,
write to Internal Revenue Service,
Attention: Substitute Forms Program,
SE:W:CAR:MP:T:M:S, 1111
Constitution Avenue NW, IR-6526,
Washington, DC 20224.
Each shareholder's information must
be on a separate sheet of paper.
Therefore, separate all continuously
printed substitutes before you file them
with the IRS.
The corporation may be subject to a
penalty if it files a substitute
Schedule K-1 that does not conform to
the specifications discussed in Pub.
1167, General Rules and Specifications
for Substitute Forms and Schedules.

Shareholder's Pro Rata Share
Items
General Rule
Items of income, gain, loss, deduction,
or credit are allocated to a shareholder
on a daily basis, according to the
number of shares of stock held by the
Instructions for Form 1120S

shareholder on each day of the
corporation's tax year. See the detailed
instructions for item F in Part II.
Information About the Shareholder,
later.
Shareholders who dispose of stock
are treated as shareholders for the day
of their disposition. Shareholders who
die are treated as shareholders for the
day of their death.

Special Rules
Termination of shareholder's interest. If a shareholder terminates his or
her interest in a corporation during the
tax year, the corporation, with the
consent of all affected shareholders
(including those whose interest is
terminated), may elect to allocate
income and expenses, etc., as if the
corporation's tax year consisted of 2
separate tax years, the first of which
ends on the date of the shareholder's
termination.
To make the election, the corporation
must attach a statement to a timely filed
original or amended Form 1120S for the
tax year for which the election is made.
In the statement, the corporation must
state that it is electing under section
1377(a)(2) and Regulations section
1.1377-1(b) to treat the tax year as if it
consisted of 2 separate tax years. The
statement must also explain how the
shareholder's entire interest was
terminated (for example, sale or gift),
and state that the corporation and each
affected shareholder consent to the
corporation making the election. A
single statement may be filed for all
terminating elections made for the tax
year. If the election is made, enter
“Section 1377(a)(2) Election Made” at
the top of each affected shareholder's
Schedule K-1.
For more details, see Regulations
section 1.1377-1(b).
Qualifying dispositions. If a qualifying
disposition takes place during the tax
year, the corporation may make an
irrevocable election to allocate income
and expenses, etc., as if the
corporation's tax year consisted of 2 tax
years, the first of which ends on the
close of the day the qualifying
disposition occurs.
A qualifying disposition is:
1. A disposition by a shareholder of
at least 20% of the corporation's
outstanding stock in one or more
transactions in any 30-day period during
the tax year,
-21-

2. A redemption treated as an
exchange under section 302(a) or
303(a) of at least 20% of the
corporation's outstanding stock in one
or more transactions in any 30-day
period during the tax year, or
3. An issuance of stock that equals
at least 25% of the previously
outstanding stock to one or more new
shareholders in any 30-day period
during the tax year.
To make the election, the corporation
must attach a statement to a timely filed
original or amended Form 1120S for the
tax year for which the election is made.
In the statement, the corporation must
state that it is electing under
Regulations section 1.1368-1(g)(2)(i) to
treat the tax year as if it consisted of two
separate tax years, give the facts
relating to the qualifying disposition (for
example, sale, gift, stock issuance, or
redemption), and state that each
shareholder who held stock in the
corporation during the tax year consents
to the election. A single election
statement may be filed for all qualifying
disposition elections for the tax year.
For more details, see Regulations
section 1.1368-1(g)(2).

Specific Instructions
(Schedule K-1 Only)
General Information

Generally, the corporation is required to
prepare and give a Schedule K-1 to
each person who was a shareholder in
the corporation at any time during the
tax year. Schedule K-1 must be
provided to each shareholder on or
before the day on which the
corporation's Form 1120S is required to
be filed.

How To Complete Schedule K-1
If the return is for a fiscal year or a short
tax year, fill in the tax year space at the
top of each Schedule K-1. On each
Schedule K-1, enter the information
about the corporation and the
shareholder in Parts I and II (items A
through F). In Part III, enter the
shareholder's pro rata share of each
item of income, deduction, and credit
and any other information the
shareholder needs to prepare his or her
tax return. Use 10-point Courier font (if
possible) for all entries if you are typing
or using a computer to complete
Schedule K-1.
Codes. In box 10 and boxes 12
through 17, identify each item by

entering a code in the left column of the
entry space. These codes are identified
in these instructions and on the back of
Schedule K-1.
Attached statements. Enter an
asterisk (*) after the code, if any, in the
left column of the entry space for each
item for which you have attached a
statement providing additional
information. For items that cannot be
reported as a single dollar amount,
enter the code and asterisk in the left
column and enter “STMT” in the right
column to indicate that the information is
provided on an attached statement.
More than one attached statement can
be placed on the same sheet of paper
and should be identified in
alphanumeric order by box number
followed by the letter code (if any). For
example: “Box 17, code R—Depletion
information—oil and gas” (followed by
the information the shareholder needs).
Too few entry spaces on Schedule K-1? If the corporation has more
coded items than the number of entry
spaces in box 10, or boxes 12 through
17, do not enter a code or dollar amount
in the last entry space of the box. In the
last entry space, enter an asterisk in the
left column and enter “STMT” in the
entry space to the right. Report the
additional items on an attached
statement and provide the box number,
the code, description, and dollar amount
or information for each additional item.
For example: “Box 13, code J—Work
opportunity credit—$1,000.”

Special Reporting Requirements
for Corporations With Multiple
Activities
If items of income, loss, deduction, or
credit from more than one activity
(determined for purposes of the passive
activity loss and credit limitations) are
reported on Schedule K-1, the
corporation must provide information
separately for each activity to its
shareholders. See Passive Activity
Reporting Requirements, earlier, for
details on the reporting requirements.

Special Reporting Requirements
for At-Risk Activities
If the corporation is involved in one or
more at-risk activities for which a loss is
reported on Schedule K-1, the
corporation must report information
separately for each activity. See section
465(c) for a definition of activities.

The following information must be
provided on an attachment to
Schedule K-1 for each activity.
A statement that the information is a
breakdown of at-risk activity loss
amounts.
The identity of the at-risk activity, the
loss amount for the activity, other
income and deductions, and any other
information that relates to the activity.

Part I. Information About the
Corporation
On each Schedule K-1, enter the
corporation's name, address, and
identifying number.

Item C
If the corporation is filing its return
electronically, enter “e-file.” Otherwise,
enter the name of the IRS service center
where the corporation will file its return.
See Where To File, earlier.

Part II. Information About the
Shareholder

On each Schedule K-1, enter the
shareholder's name, address,
identifying number, and percentage of
stock ownership.

If there was no change in
shareholders or in the relative interest in
stock the shareholders owned during
the tax year, enter the percentage of
total stock owned by each shareholder
during the tax year. For example, if
shareholders X and Y each owned 50%
for the entire tax year, enter 50% in item
F for each shareholder. Each
shareholder's pro rata share items
(boxes 1 through 17 of Schedule K-1)
are figured by multiplying the
corresponding Schedule K amount by
the percentage in item F.
If there was a change in shareholders
or in the relative interest in stock the
shareholders owned during the tax year,
figure the percentage as follows.
Each shareholder's percentage of
ownership is weighted for the number of
days in the tax year that stock was
owned. For example, A and B each held
50% for half the tax year and A, B, and
C held 40%, 40%, and 20%,
respectively, for the remaining half of
the tax year. The percentage of
ownership for the year for A, B, and C is
figured as presented in the illustration
and is then entered in item F.

Items D and E
For an individual shareholder, enter the
shareholder's social security number
(SSN) or individual taxpayer
identification number (ITIN) in item D.
For all other shareholders, enter the
shareholder's EIN.
If stock of the corporation is held by a
nominee, guardian, custodian, or an
agent, enter the name, address, and
identifying number of the person for
whom the stock is held.
If a single member limited liability
company (LLC) owns stock in the
corporation, and the LLC is treated as a
disregarded entity for federal income tax
purposes, enter the owner's identifying
number in item D and the owner's name
and address in item E. The owner must
be eligible to be an S corporation
shareholder. An LLC that elects to be
treated as a corporation for federal
income tax purposes is not eligible to be
an S corporation shareholder.

Item F
Each shareholder's pro rata share items
are figured separately for each period
on a daily basis, based on the
percentage of stock held by the
shareholder on each day.
-22-

A
B
C

a

b

c (a ⫻ b)

% of total
stock owned

% of tax
year held

% of ownership
for the year

50
40

50
50

25
+20

45

50
40

50
50

25
+20

45

20

50

10

10
100%

Total

Each shareholder's pro rata share
items generally are figured by
multiplying the Schedule K amount by
the percentage in item F. However, if a
shareholder terminated his or her entire
interest in the corporation during the
year or a qualifying disposition took
place, the corporation may elect to
allocate income and expenses, etc., as
if the tax year consisted of 2 tax years,
the first of which ends on the day of the
termination or qualifying disposition.
See Special Rules, earlier, for more
details.

Specific Instructions
(Schedules K and K-1, Part
III)
Income (Loss)
Reminder: Before entering income
items on Schedule K or K-1, reduce
each item of passive investment income
(within the meaning of section 1362(d)
Instructions for Form 1120S

(3)(C)) by its proportionate share of the
net passive income tax (Form 1120S,
page 1, line 22a).

Line 1. Ordinary Business Income
(Loss)
Enter the amount from Form 1120S,
page 1, line 21. Enter the income (loss)
without reference to the shareholder's:
Basis in the stock of the corporation
and in any indebtedness of the
corporation to the shareholders (section
1366(d)),
At-risk limitations, and
Passive activity limitations.
These limitations, if applicable, are
determined at the shareholder level.
Line 1 should not include rental
activity income (loss) or portfolio income
(loss).
Schedule K-1. Enter each
shareholder's pro rata share of ordinary
business income (loss) in box 1 of
Schedule K-1. If the corporation has
more than one trade or business
activity, identify on an attachment to
Schedule K-1 the amount from each
separate activity. See Passive Activity
Reporting Requirements, earlier.

Line 2. Net Rental Real Estate
Income (Loss)
Enter the net income (loss) from rental
real estate activities of the corporation
from Form 8825. Attach the form to
Form 1120S.

Enter on line 3c the net income
(loss).
See Rental Activities, earlier, and
Pub. 925, Passive Activity and At-Risk
Rules, for more information on rental
activities.
Schedule K-1. Enter in box 3 of
Schedule K-1 each shareholder's pro
rata share of other net rental income
(loss) reported on line 3c of Schedule K.
If the corporation has more than one
rental activity reported in box 3, identify
on an attachment to Schedule K-1 the
amount from each activity. See Passive
Activity Reporting Requirements,
earlier.

Portfolio Income
See Portfolio Income, earlier, for a
definition of portfolio income.
Do not reduce portfolio income by
deductions allocated to it. Report such
deductions (other than interest
expense) on line 12d of Schedule K.
Report each shareholder's pro rata
share of deductions in box 12 of
Schedule K-1 using codes I, K, and L.
Interest expense allocable to portfolio
income is generally investment interest
expense reported on line 12b of
Schedule K. Report each shareholder's
pro rata share of interest expense
allocable to portfolio income in box 12 of
Schedule K-1 using code H.

Line 4. Interest Income

Schedule K-1. Enter each
shareholder's pro rata share of net
rental real estate income (loss) in box 2
of Schedule K-1. If the corporation has
more than one rental real estate activity,
identify on an attachment to
Schedule K-1 the amount attributable to
each activity. See Passive Activity
Reporting Requirements, earlier.

Enter only taxable portfolio interest on
this line. Taxable interest is interest from
all sources except interest exempt from
tax and interest on tax-free covenant
bonds.

Line 3. Other Net Rental Income
(Loss)

Line 5a. Ordinary Dividends

Enter on line 3a gross income from
rental activities other than those
reported on Form 8825. Include on
line 3a gain (loss) from line 17 of Form
4797 that is attributable to the sale,
exchange, or involuntary conversion of
an asset used in a rental activity other
than a rental real estate activity.
Enter on line 3b the deductible
expenses of the activity. Attach a
statement of these expenses to Form
1120S.
Instructions for Form 1120S

Schedule K-1. Enter each
shareholder's pro rata share of interest
income in box 4 of Schedule K-1.

Enter only taxable ordinary dividends on
line 5a, including any qualified dividends
reported on line 5b.
Schedule K-1. Enter each
shareholder's pro rata share of ordinary
dividends in box 5a of Schedule K-1.

Line 5b. Qualified Dividends
Enter qualified dividends on line 5b.
Except as provided below, qualified
dividends are dividends received from
domestic corporations and qualified
foreign corporations.
-23-

Exceptions. The following dividends
are not qualified dividends.
Dividends the corporation received
on any share of stock held for less than
61 days during the 121-day period that
began 60 days before the ex-dividend
date. When determining the number of
days the corporation held the stock, do
not count certain days during which the
corporation's risk of loss was
diminished. The ex-dividend date is the
first date following the declaration of a
dividend on which the purchaser of a
stock is not entitled to receive the next
dividend payment. When counting the
number of days the corporation held the
stock, include the day the corporation
disposed of the stock but not the day
the corporation acquired it.
Dividends attributable to periods
totaling more than 366 days that the
corporation received on any share of
preferred stock held for less than 91
days during the 181-day period that
began 90 days before the ex-dividend
date. When determining the number of
days the corporation held the stock, do
not count certain days during which the
corporation's risk of loss was
diminished. Preferred dividends
attributable to periods totaling less than
367 days are subject to the 61-day
holding period rule above.
Dividends that relate to payments that
the corporation is obligated to make
with respect to short sales or positions
in substantially similar or related
property.
Dividends paid by a regulated
investment company that are not treated
as qualified dividend income under
section 854.
Dividends paid by a real estate
investment trust that are not treated as
qualified dividend income under section
857(c).
See Pub. 550, Investment Income
and Expenses, for more details.
Qualified foreign corporation. A
foreign corporation is a qualified foreign
corporation if it is:
1. Incorporated in a possession of
the United States or
2. Eligible for benefits of a
comprehensive income tax treaty with
the United States that the Secretary
determines is satisfactory for this
purpose and that includes an exchange
of information program. See Notice
2011-64, 2011-37 I.R.B. 231, for details.
If the foreign corporation does not
meet either 1 or 2, then it may be
treated as a qualified foreign
corporation for any dividend paid by the

corporation if the stock associated with
the dividend paid is readily tradable on
an established securities market in the
United States.
However, qualified dividends do not
include dividends paid by an entity
which was a passive foreign investment
company (defined in section 1297) in
either the tax year of the distribution or
the preceding tax year.
See Notice 2004-71, 2004-45 I.R.B.
793, and Notice 2006-3, 2006-3 I.R.B.
306, for more details.
Schedule K-1. Enter each
shareholder's pro rata share of qualified
dividends in box 5b of Schedule K-1.
If any amounts from line 5b are
from foreign sources, see the
CAUTION
instructions for lines 14d
through 14f for additional statements
required.

!

Line 6. Royalties
Enter the royalties received by the
corporation.
Schedule K-1. Enter each
shareholder's pro rata share of royalties
in box 6 of Schedule K-1.

Line 7. Net Short-Term Capital
Gain (Loss)
Enter the gain (loss) that is portfolio
income (loss) from Schedule D (Form
1120S), line 7.
Schedule K-1. Enter each
shareholder's pro rata share of net
short-term capital gain (loss) in box 7 of
Schedule K-1.

Line 8a. Net Long-Term Capital
Gain (Loss)
Enter the gain or loss that is portfolio
income (loss) from Schedule D (Form
1120S), line 15.
Schedule K-1. Enter each
shareholder's pro rata share of net
long-term capital gain (loss) in box 8a of
Schedule K-1.
If any gain or loss from lines 7
or 15 of Schedule D is from the
CAUTION
disposition of nondepreciable
personal property used in a trade or
business, it may not be treated as
portfolio income. Instead, report it on
line 10 of Schedule K and report each
shareholder's pro rata share in box 10 of
Schedule K-1 using code E.

!

Line 8b. Collectibles (28%) Gain
(Loss)
Figure the amount attributable to
collectibles from the amount reported on
Schedule D (Form 1120S), line 15. A
collectibles gain (loss) is any long-term
gain or deductible long-term loss from
the sale or exchange of a collectible that
is a capital asset.
Collectibles include works of art,
rugs, antiques, metal (such as gold,
silver, or platinum bullion), gems,
stamps, coins, alcoholic beverages, and
certain other tangible property.
Also, include gain (but not loss) from
the sale or exchange of an interest in a
partnership or trust held for more than 1
year and attributable to unrealized
appreciation of collectibles. For details,
see Regulations section 1.1(h)-1. Also
attach the statement required under
Regulations section 1.1(h)-1(e).
Schedule K-1. Report each
shareholder's pro rata share of the
collectibles (28%) gain (loss) in box 8b
of Schedule K-1.

Line 8c. Unrecaptured Section
1250 Gain
The three types of unrecaptured section
1250 gain must be reported separately
on an attached statement to Form
1120S.
From the sale or exchange of the
corporation's business assets.
Figure this amount in Part III of Form
4797 for each section 1250 property
(except property for which gain is
reported using the installment method
on Form 6252, Installment Sale Income)
for which you had an entry in Part I of
Form 4797. Subtract line 26g of Form
4797 from the smaller of line 22 or
line 24. Figure the total of these
amounts for all section 1250 properties.
Generally, the result is the corporation's
unrecaptured section 1250 gain.
However, if the corporation is reporting
gain on the installment method for a
section 1250 property held more than 1
year, see the next paragraph.
The total unrecaptured section 1250
gain for an installment sale of section
1250 property held more than 1 year is
figured in a manner similar to that used
in the preceding paragraph. However,
the total unrecaptured section 1250 gain
must be allocated to the installment
payments received from the sale. To do
so, the corporation generally must treat
the gain allocable to each installment
payment as unrecaptured section 1250
-24-

gain until all such gain has been used in
full. Figure the unrecaptured section
1250 gain for installment payments
received during the tax year as the
smaller of (a) the amount from line 26 or
line 37 of Form 6252 (whichever
applies) or (b) the total unrecaptured
section 1250 gain for the sale reduced
by all gain reported in prior years
(excluding section 1250 ordinary
income recapture).
If the corporation chose not to
treat all of the gain from
CAUTION
payments received after May 6,
1997, and before August 24, 1999, as
unrecaptured section 1250 gain, use
only the amount the corporation chose
to treat as unrecaptured section 1250
gain for those payments to reduce the
total unrecaptured section 1250 gain
remaining to be reported for the sale.
See Regulations section 1.453-12.

!

From the sale or exchange of an interest in a partnership. Also report as
a separate amount any gain from the
sale or exchange of an interest in a
partnership attributable to unrecaptured
section 1250 gain. See Regulations
section 1.1(h)-1 and attach the
statement required under Regulations
section 1.1(h)-1(e).
From an estate, trust, REIT, or RIC. If
the corporation received a Schedule K-1
or Form 1099-DIV from an estate, a
trust, a real estate investment trust
(REIT), or a regulated investment
company (RIC) reporting “unrecaptured
section 1250 gain,” do not add it to the
corporation's own unrecaptured section
1250 gain. Instead, report it as a
separate amount. For example, if the
corporation received a Form 1099-DIV
from a REIT with unrecaptured section
1250 gain, report it as “Unrecaptured
section 1250 gain from a REIT.”
Schedule K-1. Report each
shareholder's pro rata share of
unrecaptured section 1250 gain from
the sale or exchange of the
corporation's business assets in box 8c
of Schedule K-1. If the corporation is
reporting unrecaptured section 1250
gain from an estate, trust, REIT, or RIC,
or from the corporation's sale or
exchange of an interest in a partnership
(as explained above), enter “STMT” in
box 8c and an asterisk (*) in the left
column of the box and attach a
statement that separately identifies the
amount of unrecaptured section 1250
gain from:
The sale or exchange of the
corporation's business assets.
Instructions for Form 1120S

The sale or exchange of an interest in
a partnership.
An estate, trust, REIT, or RIC.
If any amounts from line 8c are
from foreign sources, see the
CAUTION
instructions for lines 14d
through 14f for additional statements
required.

!

Line 9. Net Section 1231 Gain
(Loss)
Enter the net section 1231 gain (loss)
from Form 4797, line 7.
Do not include net gain or loss from
involuntary conversions due to casualty
or theft. Report net loss from involuntary
conversions due to casualty or theft on
line 10 of Schedule K (box 10, code B,
of Schedule K-1). See the instructions
for line 10 on how to report net gain from
involuntary conversions.
Schedule K-1. Report each
shareholder's pro rata share of net
section 1231 gain (loss) in box 9 of
Schedule K-1. If the corporation has
more than one rental, trade, or business
activity, identify on an attachment to
Schedule K-1 the amount of section
1231 gain (loss) from each separate
activity. See Passive Activity Reporting
Requirements, earlier.
If any amounts from line 9 are
from foreign sources, see the
CAUTION
instructions for lines 14d
through 14f for additional required
statements.

!

Line 10. Other Income (Loss)
Enter any other item of income or loss
not included on lines 1 through 9. On
the line to the left of the entry space for
line 10, identify the type of income. If
there is more than one type of income,
attach a statement to Form 1120S that
separately identifies each type and
amount of income for each of the
following categories. The codes needed
for Schedule K-1 reporting are provided
for each category.
Other portfolio income (loss) (code
A). Portfolio income not reported on
lines 4 through 8. Report and identify
other portfolio income or loss on an
attachment for line 10.
If the corporation holds a residual
interest in a REMIC, report on an
attachment the shareholder's share of
the following.
Taxable income (net loss) from the
REMIC (line 1b of Schedules Q (Form
1066)).
Instructions for Form 1120S

Excess inclusion (line 2c of
Schedules Q (Form 1066)).
Section 212 expenses (line 3b of
Schedules Q (Form 1066)).
Because Schedule Q (Form 1066) is
a quarterly statement, the corporation
must follow the Schedule Q instructions
to figure the amounts to report to
shareholders for the corporation's tax
year.
Involuntary conversions (code B).
Report net loss from involuntary
conversions due to casualty or theft.
The amount for this item is shown on
Form 4684, Casualties and Thefts,
line 38a or 38b.
Each shareholder's pro rata share
must be entered on Schedule K-1.
Enter the net gain from involuntary
conversions of property used in a trade
or business (line 39 of Form 4684) on
line 3 of Form 4797.
If there was a gain (loss) from a
casualty or theft to property not used in
a trade or business or for
income-producing purposes, notify the
shareholder. The corporation should not
complete Form 4684 for this type of
casualty or theft. Instead, each
shareholder will complete his or her own
Form 4684.
Section 1256 contracts and straddles (code C). Report any net gain or
loss from section 1256 contracts from
Form 6781, Gains and Losses From
Section 1256 Contracts and Straddles.
Mining exploration costs recapture
(code D). Provide the information
shareholders need to recapture certain
mining exploration expenditures. See
Regulations section 1.617-3.
Other income (loss) (code E).
Include any other type of income, such
as:
Recoveries of tax benefit items
(section 111).
Gambling gains and losses subject to
the limitations in section 165(d). Indicate
on an attached statement whether or
not the corporation is in the trade or
business of gambling.
Disposition of an interest in oil, gas,
geothermal, or other mineral properties.
Report the following information on a
statement attached to Schedule K-1: (a)
a description of the property; (b) the
shareholder's share of the amount
realized on the sale, exchange, or
involuntary conversion of each property
(fair market value of the property for any
other disposition, such as a distribution);
(c) the shareholder's share of the
corporation's adjusted basis in the
-25-

property (except for oil or gas
properties); and (d) total intangible
drilling costs, development costs, and
mining exploration costs (section 59(e)
expenditures) passed through to the
shareholder for the property. See
Regulations section 1.1254-4 for more
information.
COD income deferred under section
108(i). Report COD income deferred
under section 108(i) that must be
included in income in the current tax
year under section 108(i)(1) or section
108(i)(5)(D)(i) or (ii). For information on
events that will cause previously
deferred income to be reportable and
allocating deferred income to the
shareholders, see section 108(i); Rev.
Proc. 2009-37, 2009-36 I.R.B. 309; and
Temporary Regulations section
1.108(i)-2T.
Gain from the sale or exchange of
qualified small business (QSB) stock
(as defined in the Instructions for
Schedule D) that is eligible for the
section 1202 exclusion. The section
1202 exclusion applies only to QSB
stock held by the corporation for more
than 5 years. Additional limitations apply
at the shareholder level. Report each
shareholder's share of section 1202
gain on Schedule K-1. Each
shareholder will determine if he or she
qualifies for the exclusion. Report on an
attachment to Schedule K-1 for each
sale or exchange (a) the name of the
corporation that issued the QSB stock,
(b) the shareholder's pro rata share of
the corporation's adjusted basis and
sales price of the QSB stock, and (c) the
dates the QSB stock was bought and
sold.
Gain eligible for section 1045 rollover
(replacement stock purchased by the
corporation). Include only gain from the
sale or exchange of qualified small
business (QSB) stock (as defined in the
Instructions for Schedule D) that was
deferred by the corporation under
section 1045 and reported on
Schedule D. See the Instructions for
Schedule D for more details. Additional
limitations apply at the shareholder
level. Report each shareholder's share
of the gain eligible for section 1045
rollover on Schedule K-1. Each
shareholder will determine if he or she
qualifies for the rollover. Report on an
attachment to Schedule K-1 for each
sale or exchange (a) the name of the
corporation that issued the QSB stock,
(b) the shareholder's pro rata share of
the corporation's adjusted basis and
sales price of the QSB stock, and (c) the
dates the QSB stock was bought and
sold.

Gain eligible for section 1045 rollover
(replacement stock not purchased by
the corporation). Include only gain from
the sale or exchange of qualified small
business (QSB) stock (as defined in the
Instructions for Schedule D) the
corporation held for more than 6 months
but that was not deferred by the
corporation under section 1045. See the
Instructions for Schedule D for more
details. A shareholder may be eligible to
defer his or her pro rata share of this
gain under section 1045 if he or she
purchases other QSB stock during the
60-day period that began on the date
the QSB stock was sold by the
corporation. Additional limitations apply
at the shareholder level. Report on an
attachment to Schedule K-1 for each
sale or exchange (a) the name of the
corporation that issued the QSB stock,
(b) the shareholder's pro rata share of
the corporation's adjusted basis and
sales price of the QSB stock, and (c) the
dates the QSB stock was bought and
sold.
Any gain or loss from lines 7 or 15 of
Schedule D that is not portfolio income
(for example, gain or loss from the
disposition of nondepreciable personal
property used in a trade or business).

year for use in its trade or business or
certain rental activities. See Pub. 946 for
a definition of what kind of property
qualifies for the section 179 expense
deduction and the Instructions for Form
4562 for limitations on the amount of the
section 179 expense deduction.

Schedule K-1. Enter each
shareholder's pro rata share of the other
income categories listed above in
box 10 of Schedule K-1. Enter the
applicable code A, B, C, D, or E (as
shown above).
If you are reporting each
shareholder's pro rata share of only one
type of income under code E, enter the
code with an asterisk (E*) and the dollar
amount in the entry space in box 10 and
attach a statement that shows “Box 10,
code E,” and the type of income. If you
are reporting multiple types of income
under code E, enter the code with an
asterisk (E*) and enter “STMT” in the
entry space in box 10 and attach a
statement that shows “Box 10, code E,”
and the dollar amount of each type of
income.
If the corporation has more than one
trade or business or rental activity (for
codes B through E), identify on an
attachment to Schedule K-1 the amount
from each separate activity. See
Passive Activity Reporting
Requirements, earlier.

Identify on an attachment to
Schedules K and K-1 the cost of any
section 179 property placed in service
during the year that is qualified
enterprise zone property, qualified
section 179 disaster assistance
property, or qualified real property. See
the Instructions for Form 4562 for more
details.

Deductions
Line 11. Section 179 Deduction
A corporation can elect to expense part
of the cost of certain property the
corporation purchased during the tax

Complete Part I of Form 4562 to
figure the corporation's section 179
expense deduction. The corporation
does not take the deduction itself, but
instead passes it through to the
shareholders. Attach Form 4562 to
Form 1120S and show the total section
179 expense deduction on Schedule K,
line 11.
Although the corporation cannot take
the section 179 deduction, it generally
must still reduce the basis of the asset
by the amount of the section 179
deduction it elected, regardless of
whether any shareholder can use the
deduction. However, the corporation
does not reduce the basis for any
section 179 deduction allocable to a
trust or estate because they are not
eligible to take the section 179
deduction. See Regulations section
1.179-1(f).

See the instructions for line 17d of
Schedule K for sales or other
dispositions of property for which a
section 179 deduction has passed
through to shareholders and for the
recapture rules if the business use of
the property dropped to 50% or less.
Schedule K-1. Report each
shareholder's pro rata share of the
section 179 expense deduction in
box 11 of Schedule K-1. If the
corporation has more than one rental,
trade, or business activity, identify on an
attachment to Schedule K-1 the amount
of section 179 deduction from each
separate activity. See Passive Activity
Reporting Requirements, earlier.
Do not complete box 11 of
Schedule K-1 for any shareholder that is
an estate or trust; estates and trusts are
not eligible for the section 179 expense
deduction.

-26-

Line 12a. Charitable Contributions
Cash contributions must be supported
by a dated bank record or receipt.
Generally, no deduction is allowed
for any contribution of $250 or more
unless the corporation obtains a written
acknowledgment from the charitable
organization that shows the amount of
cash contributed, describes any
property contributed, and gives an
estimate of the value of any goods or
services provided in return for the
contribution. The acknowledgment must
be obtained by the due date (including
extensions) of the corporation's return,
or if earlier, the date the return is filed.
Do not attach the acknowledgment to
the tax return, but keep it with the
corporation's records. These rules apply
in addition to the filing requirements for
Form 8283, Noncash Charitable
Contributions, described under
Contributions of property, later.
Enter charitable contributions made
during the tax year. Attach a statement
to Form 1120S that separately identifies
the corporation's contributions for each
of the following categories. See Limits
on Deductions in Pub. 526, Charitable
Contributions, for information on
adjusted gross income (AGI) limitations
on deductions for charitable
contributions.
The codes needed for Schedule K-1
reporting are provided for each
category.
Cash contributions (50%) (code A).
Enter cash contributions subject to the
50% AGI limitation.
Cash contributions (30%) (code B).
Enter cash contributions subject to the
30% AGI limitation.
Noncash contributions (50%) (code
C). Enter noncash contributions subject
to the 50% AGI limitation. Do not include
food inventory contributions reported
separately on an attached statement. If
property other than cash is contributed
and the claimed deduction for one item
or group of similar items of property
exceeds $5,000, the corporation must
give each shareholder a copy of Form
8283 to attach to the shareholder's
return. Attach a statement to
Schedule K-1 that shows:
The shareholder's pro rata share of
the amount of the charitable
contributions under section 170(e)(3) for
qualified food inventory that was
donated to charitable organizations for
the care of the ill, needy, and infants.
The food must meet all the quality and
Instructions for Form 1120S

labeling standards imposed by federal,
state, and local laws and regulations.
The charitable contribution for donated
food inventory is the lesser of (a) the
basis of the donated food plus one-half
of the appreciation (gain if the donated
food were sold at fair market value on
the date of the gift) or (b) twice the basis
of the donated food. See section 170(e)
(3)(C) for more details.
The shareholder's pro rata share of
the net income for the tax year from the
corporation's trades or businesses that
made the contributions of food
inventory.
Qualified conservation contributions. The AGI limit for qualified
conservation contributions under
section 170(h) is generally 50%.
However, if the corporation is a qualified
farmer or rancher (farm income is more
than 50% of gross income), the AGI limit
for qualified conservation contributions
of property used in agriculture or
livestock production (or available for
such production) is 100%. The
carryover period is 15 years. See
section 170(b) and Notice 2007-50,
2007-25 I.R.B. 1430, for details. Report
qualified conservation contributions with
a 50% AGI limitation on Schedule K-1 in
box 12 using code C. Report qualified
conservation contributions with a 100%
AGI limitation on Schedule K-1 in box 12
using code G.
Noncash contributions (30%) (code
D). Enter noncash contributions subject
to the 30% AGI limitation.
Capital gain property to a 50% organization (30%) (code E). Enter
capital gain property contributions
subject to the 30% AGI limitation.
Capital gain property (20%) (code
F). Enter capital gain property
contributions subject to the 20% AGI
limitation.
Contributions of property. See
Contributions of Property in Pub. 526
and Pub. 561, Determining the Value of
Donated Property, for information on
noncash contributions and contributions
of capital gain property. If the deduction
claimed for noncash contributions
exceeds $500, complete Form 8283
and attach it to Form 1120S.
Shareholders can deduct their pro
rata share of the fair market value of
property contributions, but will only need
to adjust their stock basis by their pro
rata share of the property's adjusted
basis. Give each shareholder a
statement identifying their pro rata share
of both the fair market value and
adjusted basis of the property.
Instructions for Form 1120S

If the corporation made a qualified
conservation contribution under section
170(h), also include the fair market
value of the underlying property before
and after the donation, as well as the
type of legal interest contributed, and
describe the conservation purpose
furthered by the donation. Give a copy
of this information to each shareholder.
If the corporation made a contribution
of real property located in a registered
historic district, restrictions apply.
Generally, no deductions are allowed
for structures or land (deductions are
only allowed for buildings), and the
charitable contribution may be reduced
if rehabilitation credits were claimed for
the building. A $500 filing fee may apply
to certain deductions over $10,000. See
Pub. 526 for details.
Nondeductible contributions.
Certain contributions made to an
organization conducting lobbying
activities are not deductible. See section
170(f)(9) for more details. Also, see
Contributions You Cannot Deduct in
Pub. 526 for more examples of
nondeductible contributions.
An accrual basis S corporation
cannot elect to treat a
CAUTION
contribution as having been
paid in the tax year the board of
directors authorizes the payment if the
contribution is not actually paid until the
next tax year.

!

Contributions (100%) (code G). If
the corporation is a qualified farmer or
rancher (farm income is more than 50%
of gross income), enter qualified
conservation contributions of property
used in agriculture or livestock
production (or available for such
production). The contribution must be
subject to a restriction that the property
remain available for such production.
See section 170(b) for details.
Schedule K-1. Report each
shareholder's pro rata share of
charitable contributions in box 12 of
Schedule K-1 using codes A through G
for each of the contribution categories
shown earlier. See Contributions of
property, earlier, for information on
statements you may be required to
attach to Schedule K-1. The corporation
must attach a copy of its Form 8283 to
the Schedule K-1 of each shareholder if
the deduction for any item or group of
similar items of contributed property
exceeds $5,000, even if the amount
allocated to any shareholder is $5,000
or less.

-27-

Line 12b. Investment Interest
Expense
Include on this line the interest properly
allocable to debt on property held for
investment purposes. Property held for
investment includes property that
produces income (unless derived in the
ordinary course of a trade or business)
from interest, dividends, annuities, or
royalties; and gains from the disposition
of property that produces those types of
income or is held for investment.
Investment interest expense does
not include interest expense allocable to
a passive activity.
Investment income and investment
expenses other than interest are
reported on lines 17a and 17b
respectively. This information is needed
by shareholders to determine the
investment interest expense limitation
(see Form 4952 for details).
Schedule K-1. Report each
shareholder's pro rata share of
investment interest expense in box 12 of
Schedule K-1 using code H.

Lines 12c(1) and 12c(2). Section
59(e)(2) Expenditures
Generally, section 59(e) allows each
shareholder to make an election to
deduct their pro rata share of the
corporation's otherwise deductible
qualified expenditures ratably over 10
years (3 years for circulation
expenditures). The deduction is taken
beginning with the tax year in which the
expenditures were made (or for
intangible drilling and development
costs, over the 60-month period
beginning with the month in which such
costs were paid or incurred).
The term “qualified expenditures”
includes only the following types of
expenditures paid or incurred during the
tax year.
Circulation expenditures.
Research and experimental
expenditures.
Intangible drilling and development
costs.
Mining exploration and development
costs.
If a shareholder makes the election,
these items are not treated as AMT tax
preference items.
Because the shareholders make this
election, the corporation cannot deduct
these amounts or include them as AMT
items on Schedule K-1. Instead, the

corporation passes through the
information the shareholders need to
figure their separate deductions.
On line 12c(1), enter the type of
expenditures claimed on line 12c(2).
Enter on line 12c(2) the qualified
expenditures paid or incurred during the
tax year for which a shareholder may
make an election under section 59(e).
Enter this amount for all shareholders
whether or not any shareholder makes
an election under section 59(e).
On an attached statement, identify
the property for which the expenditures
were paid or incurred. If the
expenditures were for intangible drilling
or development costs for oil and gas
properties, identify the month(s) in
which the expenditures were paid or
incurred. If there is more than one type
of expenditure or more than one
property, provide the amounts (and the
months paid or incurred, if required) for
each type of expenditure separately for
each property.
Schedule K-1. Report each
shareholder's pro rata share of section
59(e) expenditures in box 12 of
Schedule K-1 using code J. On an
attached statement, identify (a) the type
of expenditure, (b) the property for
which the expenditures are paid or
incurred, and (c) for oil and gas
properties only, the month in which
intangible drilling costs and
development costs were paid or
incurred. If there is more than one type
of expenditure or the expenditures are
for more than one property, provide
each shareholder's pro rata share of the
amounts (and the months paid or
incurred for oil and gas properties) for
each type of expenditure separately for
each property.

Line 12d. Other Deductions
Enter deductions not included on lines
11, 12a, 12b, 12c(2), or 14l. On the line
to the left of the entry space for line 12d,
identify the type of deduction. If there is
more than one type of deduction, attach
a statement to Form 1120S that
separately identifies the type and
amount of each deduction for the
following categories. The codes needed
for Schedule K-1 reporting are provided
for each category.
Deductions—royalty income (code
I). Enter deductions related to royalty
income.
Deductions—portfolio (2% floor)
(code K). Enter deductions related to
portfolio income that are subject to the

2% of AGI floor (see the Instructions for
Schedule A (Form 1040)).
Deductions—portfolio (other) (code
L). Enter any other deductions related
to portfolio income.
No deduction is allowed under
section 212 for expenses allocable to a
convention, seminar, or similar meeting.
Because these expenses are not
deductible by shareholders, the
corporation does not report these
expenses on line 12d of Schedule K.
The expenses are nondeductible and
are reported as such on line 16c of
Schedule K and in box 16 of
Schedule K-1 using code C.
Preproductive period expenses
(code M). If the corporation is required
to use an accrual method of accounting
under section 448(a)(3), it must
capitalize these expenses. If the
corporation is permitted to use the cash
method, enter the amount of
preproductive period expenses that
qualify under Regulations section
1.263A-4(d). An election not to
capitalize these expenses must be
made at the shareholder level. See
Uniform Capitalization Rules in Pub.
225.
Commercial revitalization deduction
from rental real estate activities
(code N). Enter the commercial
revitalization deduction on line 12d only
if it is for a rental real estate activity. If
the deduction is for a nonrental building,
enter it on line 19 of Form 1120S. See
Special Rules under Line 19. Other
Deductions, earlier, for more
information.
Reforestation expense deduction
(code O). The corporation can elect to
deduct a limited amount of its
reforestation expenditures paid or
incurred during the tax year. The
amount the corporation can elect to
deduct is limited to $10,000 for each
qualified timber property. See section
194(c) for a definition of reforestation
expenditures and qualified timber
property. See Notice 2006-47, 2006-20
I.R.B. 892, for details on making the
election. The corporation must amortize
over 84 months any amount not
deducted. See Reforestation
expenditures, earlier.
Schedule K-1. Enter the
shareholder's pro rata share of
allowable reforestation expense in
box 12 of Schedule K-1 using code O
and attach a statement that provides a
description of the qualified timber
property. If the corporation is electing to
deduct amounts from more than one
-28-

qualified timber property, provide a
description and the amount for each
property.
Domestic production activities information (code P). If the corporation is
not eligible or chooses not to figure
qualified production activities income
(QPAI) at the corporate level, attach a
statement with the following information
to enable each shareholder to figure the
domestic production activities
deduction. Identify any amounts from
oil-related production activities and list
them separately.
Domestic production gross receipts
(DPGR).
Gross receipts from all sources.
Cost of goods sold allocable to
DPGR.
Cost of goods sold from all sources.
Total deductions, expenses, and
losses directly allocable to DPGR.
Total deductions, expenses, and
losses directly allocable to a non-DPGR
class of income.
Other deductions, expenses, and
losses not directly allocable to DPGR or
another class of income.
Form W-2 wages.
Any other information a shareholder
using the section 861 method will need
to allocate and apportion cost of goods
sold and deductions between domestic
production gross receipts and other
receipts.
See Form 8903, Domestic
Production Activities Deduction, and its
instructions for details. If the corporation
is eligible and chooses to figure QPAI at
the corporate level, see the instructions
below.
Qualified production activities income (code Q). If the corporation is
eligible and chooses to figure qualified
production activities income (QPAI) at
the corporate level, use code Q to report
the shareholder's pro rata share of the
corporation's QPAI. This amount may
be less than zero. If any portion of QPAI
is attributable to oil-related production
activities, attach a separate statement to
identify the oil-related portion. See the
Instructions for Form 8903 for details.
Employer's Form W-2 wages (code
R). If the corporation is eligible and
chooses to report QPAI with code Q,
use code R to report the shareholder's
pro rata share of employer's Form W-2
wages properly allocable to domestic
production gross receipts. See the
Instructions for Form 8903 for details.
Other deductions (code S). Include
any other deductions, such as:
Instructions for Form 1120S

Amounts paid by the corporation that
would be allowed as itemized
deductions on any of the shareholders'
income tax returns if they were paid
directly by a shareholder for the same
purpose. These amounts include, but
are not limited to, expenses under
section 212 for the production of income
other than from the corporation's trade
or business. However, do not enter
expenses related to portfolio income or
investment interest expense reported on
line 12b of Schedule K on this line.
Soil and water conservation
expenditures (section 175). See Pub.
225.
Endangered species recovery
expenditures (section 175).
Expenditures paid or incurred for the
removal of architectural and
transportation barriers to the elderly and
disabled that the corporation has
elected to treat as a current expense.
See section 190.
Interest expense allocated to
debt-financed distributions. See Notice
89-35, 1989-1 C.B. 675, or Pub. 535,
chapter 4, for more information.
Contributions to a capital construction
fund. See Pub. 595, Capital
Construction Fund for Commercial
Fisherman.
Any penalty on early withdrawal of
savings because the corporation
withdrew funds from its time savings
deposit before its maturity.
Film and television production
expenses. The corporation can elect to
deduct certain costs of a qualified film or
television production if the aggregate
cost of the production does not exceed
$15 million. There is a higher dollar
limitation for productions in certain
areas. Provide a description of the film
or television production on an attached
statement. If the corporation makes the
election for more than one film or
television production, attach a
statement to Schedule K-1 that shows
each shareholder's pro rata share of the
qualified expenditures separately for
each production. The deduction is
subject to recapture under section 1245
if the election is voluntarily revoked or
the production fails to meet the
requirements for the deduction. See
section 181 and the related regulations.
Current year section 108(i) original
issue discount (OID) deduction. In
general, if the corporation made a
section 108(i) election for income from
the cancellation of debt (COD)
attributable to the reacquisition of an
applicable debt instrument and the
corporation issued a debt instrument
with OID that is subject to section 108(i)
Instructions for Form 1120S

(2) because of the election, the
deduction for all or a portion of the OID
that accrues before the first tax year the
COD is includible in income is deferred
until the COD is includible in income.
The aggregate amount of OID that is
deferred during this period is generally
allowed as a deduction ratably over the
5-year period the COD is includible in
income under section 108(i). The
amount deferred is limited to the amount
of COD subject to the section 108(i)
election.
Schedule K-1. Enter each
shareholder's pro rata share of the
deduction categories listed above in
box 12 of Schedule K-1 or provide the
required information on an attached
statement. Enter the applicable code
shown above.
If you are reporting only one type of
deduction under code S, enter code S
with an asterisk (S*) and the dollar
amount in the entry space in box 12 and
attach a statement that shows the box
number, code, and type of deduction. If
you are reporting multiple types of
deductions under code S, enter the
code with an asterisk (S*), enter “STMT”
in the dollar amount entry space in
box 12, and attach a statement that
shows the box number, code, and dollar
amount of each type of deduction.
If the corporation has more than one
trade or business activity, identify on an
attachment to Schedule K-1 the amount
for each separate activity. See Passive
Activity Reporting Requirements,
earlier.

Credits

Note. Do not attach Form 3800,
General Business Credit, to Form
1120S.

Low-Income Housing Credit
Section 42 provides a credit that can be
claimed by owners of low-income
residential rental buildings. To qualify for
the credit, the corporation must file
Form 8609, Low-Income Housing Credit
Allocation and Certification, separately
with the IRS. Do not attach Form 8609
to Form 1120S. Complete and attach
Form 8586, Low-Income Housing
Credit, and Form 8609-A, Annual
Statement for Low-Income Housing
Credit, to Form 1120S.

Line 13a. Low-Income Housing
Credit (Section 42(j)(5))
If the corporation invested in a
partnership to which the provisions of
section 42(j)(5) apply, report on line 13a
-29-

the credit reported to the corporation in
box 15 of Schedule K-1 (Form 1065)
using code A or code C.
Schedule K-1. Report in box 13 of
Schedule K-1 each shareholder's pro
rata share of the low-income housing
credit reported on line 13a of
Schedule K. Use code A to report the
portion of the credit attributable to
buildings placed in service before 2008.
Use code C to report the portion of the
credit attributable to buildings placed in
service after 2007. If the corporation has
credits from more than one activity,
identify on an attachment to
Schedule K-1 the amount for each
separate activity. See Passive Activity
Reporting Requirements, earlier.

Line 13b. Low-Income Housing
Credit (Other)
Report on line 13b any low-income
housing credit not reported on line 13a.
This includes any credit reported to the
corporation in box 15 of Schedule K-1
(Form 1065) using code B or code D.
Schedule K-1. Report in box 13 of
Schedule K-1 each shareholder's pro
rata share of the low-income housing
credit reported on line 13b of
Schedule K. Use code B to report the
portion of the credit attributable to
buildings placed in service before 2008.
Use code D to report the portion of the
credit attributable to buildings placed in
service after 2007. If the corporation has
credits from more than one rental
activity, identify on an attachment to
Schedule K-1 the amount for each
separate activity. See Passive Activity
Reporting Requirements, earlier.

Line 13c. Qualified Rehabilitation
Expenditures (Rental Real Estate)
Enter on line 13c the total qualified
rehabilitation expenditures related to
rental real estate activities of the
corporation. See the Instructions for
Form 3468 for details on qualified
rehabilitation expenditures.
Qualified rehabilitation
expenditures for property not
CAUTION
related to rental real estate
activities must be reported in box 17
using code C.

!

Schedule K-1. Report each
shareholder's pro rata share of qualified
rehabilitation expenditures related to
rental real estate activities in box 13 of
Schedule K-1 using code E. Attach a
statement to Schedule K-1 that provides
the information and the shareholder's

pro rata share of the basis and
expenditure amounts the shareholder
will need to figure the amounts to report
on lines 10b through 10j and 10m of
Form 3468. See the Instructions for
Form 3468 for details. If the corporation
has expenditures from more than one
rental real estate activity, identify on an
attachment to Schedule K-1 the
information and amounts for each
separate activity. See Passive Activity
Reporting Requirements, earlier.

Line 13d. Other Rental Real Estate
Credits
Enter on line 13d any other credit (other
than credits reported on lines 13a
through 13c) related to rental real estate
activities. On the dotted line to the left of
the entry space for line 13d, identify the
type of credit. If there is more than one
type of credit, attach a statement to
Form 1120S that identifies the type and
amount for each credit. These credits
may include any type of credit listed in
the instructions for line 13g.
Schedule K-1. Report in box 13 of
Schedule K-1 each shareholder's pro
rata share of other rental real estate
credits using code F. If you are reporting
each shareholder's pro rata share of
only one type of rental real estate credit
under code F, enter the code with an
asterisk (F*) and the dollar amount in
the entry space in box 13 and attach a
statement that shows “Box 13, code F,”
and the type of credit. If you are
reporting multiple types of rental real
estate credit under code F, enter the
code with an asterisk (F*) and enter
“STMT” in the entry space in box 13 and
attach a statement that shows “Box 13,
code F” and the dollar amount of each
type of credit. If the corporation has
credits from more than one rental real
estate activity, identify on the attached
statement the amount of each type of
credit for each separate activity. See
Passive Activity Reporting
Requirements, earlier.

Line 13e. Other Rental Credits
Enter on line 13e any other credit (other
than credits reported on lines 13a
through 13d) related to rental activities.
On the dotted line to the left of the entry
space for line 13e, identify the type of
credit. If there is more than one type of
credit, attach a statement to Form
1120S that identifies the type and
amount for each credit. These credits
may include any type of credit listed in
the instructions for line 13g.

Schedule K-1. Report in box 13 of
Schedule K-1 each shareholder's pro
rata share of other rental credits using
code G. If you are reporting each
shareholder's pro rata share of only one
type of rental credit under code G, enter
the code with an asterisk (G*) and the
dollar amount in the entry space in
box 13 and attach a statement that
shows “Box 13, code G” and the type of
credit. If you are reporting multiple types
of rental credit under code G, enter the
code with an asterisk (G*) and enter
“STMT” in the entry space in box 13 and
attach a statement that shows “Box 13,
code G” and the dollar amount of each
type of credit. If the corporation has
credits from more than one rental
activity, identify on the attached
statement the amount of each type of
credit for each separate activity. See
Passive Activity Reporting
Requirements, earlier.

Line 13f. Alcohol and Cellulosic
Biofuel Fuels Credit
Enter on line 13f the alcohol and
cellulosic biofuel fuels credit attributable
to trade or business activities. If the
credit is attributable to rental activities,
enter the amount on line 13d or 13e.
Figure this credit on Form 6478.
Attach it to Form 1120S. Include the
amount shown on line 7 of Form 6478 in
the corporation's income on line 5 of
Form 1120S.
See section 40(f) for an election the
corporation can make to have the credit
not apply.
Schedule K-1. Report in box 13 of
Schedule K-1 each shareholder's pro
rata share of the alcohol and cellulosic
biofuel fuels credit reported on line 13f
using code I.
If this credit includes the small
ethanol producer credit, identify on a
statement attached to each
Schedule K-1 (a) the amount of the
small ethanol producer credit included
in the total credit allocated to the
shareholder, (b) the number of gallons
for which the corporation claimed the
small ethanol producer credit, and (c)
the corporation's productive capacity for
alcohol. If the corporation has credits
from more than one activity, identify on
an attachment to Schedule K-1 the
amount for each separate activity. See
Passive Activity Reporting
Requirements, earlier.

-30-

Line 13g. Other Credits
Enter on line 13g any other credit,
except credits or expenditures shown or
listed for lines 13a through 13f or the
credit for federal tax paid on fuels
(which is reported on line 23c of
page 1). On the line to the left of the
entry space for line 13g, identify the
type of credit. If there is more than one
type of credit, attach a statement to
Form 1120S that separately identifies
each type and amount of credit for the
following categories. The codes needed
for box 13 of Schedule K-1 are provided
in the heading of each category.
Undistributed capital gains credit
(code H). This credit represents taxes
paid on undistributed capital gains by a
regulated investment company (RIC) or
a real estate investment trust (REIT). As
a shareholder of a RIC or REIT, the
corporation will receive notice of the
amount of tax paid on undistributed
capital gains on Form 2439, Notice to
Shareholder of Undistributed
Long-Term Capital Gains.
Work opportunity credit (code J).
Complete Form 5884 to figure the
credit. Attach it to Form 1120S.
Disabled access credit (code K).
Complete Form 8826 to figure the
credit. Attach it to Form 1120S.
Empowerment zone and renewal
community employment credit (code
L). Complete Form 8844 to figure the
credit. Attach it to Form 1120S.
Credit for increasing research activities (code M). Complete Form 6765 to
figure the credit. Attach it to Form
1120S.
Credit for employer social security
and Medicare taxes paid on certain
employee tips (code N). Complete
Form 8846 to figure the credit. Attach it
to Form 1120S.
Backup withholding (code O). This
credit is for backup withholding on
dividends, interest, and other types of
income of the corporation.
Other credits (code P). Attach a
statement to Form 1120S that identifies
the type and amount of any other credits
not reported elsewhere. Complete the
credit form identified below and attach it
to Form 1120S.
Unused investment credit from the
qualifying advanced coal project credit,
qualifying gasification project credit,
qualifying advanced energy project
credit, or qualifying therapeutic
discovery project credit allocated from
cooperatives.
Instructions for Form 1120S

Unused investment credit from the
rehabilitation credit or energy credit
allocated from cooperatives.
New hire retention credit (Form
5884-B).
Orphan drug credit (Form 8820).
Qualified plug-in electric vehicle
credit (Form 8834).
Renewable electricity, refined coal,
and Indian coal production credit (Form
8835). Attach a statement to Form
1120S and Schedule K-1 showing
separately the amount of the credit from
Part I and from Part II of Form 8835.
Indian employment credit (Form
8845).
Biodiesel and renewable diesel fuels
credit (Form 8864). Include the amount
from line 8 of Form 8864 in the
corporation's income on line 5 of Form
1120S. If this credit includes the small
agri-biodiesel producer credit, identify
on a statement attached to
Schedule K-1 (a) the small
agri-biodiesel producer credit included
in the total credit allocated to the
shareholder, (b) the number of gallons
for which the corporation claimed the
small agri-biodiesel producer credit, and
(c) the corporation's productive capacity
for agri-biodiesel.
New markets credit (Form 8874).
Credit for small employer pension
plan startup costs (Form 8881).
Credit for employer-provided
childcare facilities and services (Form
8882).
Low sulfur diesel fuel production
credit (Form 8896).
Qualified railroad track maintenance
credit (Form 8900).
Distilled spirits credit (Form 8906).
Nonconventional source fuel credit
(Form 8907).
Energy efficient home credit (Form
8908).
Energy efficient appliance credit
(Form 8909).
Alternative motor vehicle credit (Form
8910).
Alternative fuel vehicle refueling
property credit (Form 8911).
Clean renewable energy bond credit
(Form 8912). The amount of this credit
(excluding any credits from
partnerships, estates, and trusts) must
also be reported as interest income on
line 4 of Schedule K. In addition, the
amount of this credit must also be
reported on line 17d of Schedule K.
Midwestern tax credit bond credit
(Form 8912). The amount of this credit
(excluding any credits from
partnerships, estates, and trusts) must
also be reported as interest income on
Instructions for Form 1120S

line 4 of Schedule K. In addition, the
amount of this credit must also be
reported on line 17d of Schedule K.
Qualified zone academy bond credit
(for bonds issued before October 4,
2008) (Form 8912). The amount of this
credit must also be reported as interest
income on line 4 of Schedule K. In
addition, the amount of this credit must
also be reported on line 17d of
Schedule K.
New clean renewable energy bond
credit (Form 8912). The amount of this
credit (excluding any credits from
partnerships, estates, and trusts) must
also be reported as interest income on
line 4 of Schedule K. In addition, the
amount of this credit must also be
reported as a property distribution on
line 16d of Schedule K.
Qualified energy conservation bond
credit (Form 8912). The amount of this
credit (excluding any credits from
partnerships, estates, and trusts) must
also be reported as interest income on
line 4 of Schedule K. In addition, the
amount of this credit must also be
reported as a property distribution on
line 16d of Schedule K.
Qualified zone academy bond credit
(for bonds issued after October 3, 2008)
(Form 8912). The amount of this credit
(excluding any credits from
partnerships, estates, and trusts) must
also be reported as interest income on
line 4 of Schedule K. In addition, the
amount of this credit must also be
reported as a property distribution on
line 16d of Schedule K.
Qualified school construction bond
credit (Form 8912). The amount of this
credit (excluding any credits from
partnerships, estates, and trusts) must
also be reported as interest income on
line 4 of Schedule K. In addition, the
amount of this credit must also be
reported as a property distribution on
line 16d of Schedule K.
Build America bond credit (Form
8912). The amount of this credit
(excluding any credits from
partnerships, estates, and trusts) must
also be reported as interest income on
line 4 of Schedule K. In addition, the
amount of this credit must also be
reported as a property distribution on
line 16d of Schedule K.
Mine rescue team training credit
(Form 8923).
Agricultural chemicals security credit
(Form 8931).
Credit for employer differential wage
payments (Form 8932).
Carbon dioxide sequestration credit
(Form 8933).
-31-

Qualified plug-in electric drive motor
vehicle credit (Form 8936).
Credit for small employer health
insurance premiums (Form 8941).
General credits from an electing large
partnership.
Schedule K-1. Enter in box 13 of
Schedule K-1 each shareholder's pro
rata share of the credits listed above.
See additional Schedule K-1 reporting
information provided in the instructions
above. Enter the applicable code, H
through P, in the column to the left of the
dollar amount entry space.
If you are reporting each
shareholder's pro rata share of only one
type of credit under code P, enter the
code with an asterisk (P*) and the dollar
amount in the entry space in box 13 and
attach a statement that shows “Box 13,
code P” and the type of credit. If you are
reporting multiple types of credit under
code P, enter the code with an asterisk
(P*) and enter “STMT” in the entry
space in box 13 and attach a statement
that shows “Box 13, code P” and the
dollar amount of each type of credit. If
the corporation has credits from more
than one activity, identify on an
attachment to Schedule K-1 the amount
of each type of credit for each separate
activity. See Passive Activity Reporting
Requirements, earlier.

Foreign Transactions

Line 14b must be completed if a
shareholder may need this information
to figure a foreign tax credit. Lines 14a
and 14c through 14n must be
completed if the corporation has foreign
income, deductions, or losses, or has
paid or accrued foreign taxes.
On Schedule K-1, for items that
require an attached statement, enter the
code followed by an asterisk and the
shareholder's pro rata share of the
dollar amount. Attach a statement to
Schedule K-1 providing the information
described below. If the corporation had
income from, or paid or accrued taxes
to, more than one country or U.S.
possession, see the requirement for an
attached statement in the instruction for
line 14a below. See Pub. 514, Foreign
Tax Credit for Individuals, and the
Instructions for Form 1116, Foreign Tax
Credit, for more information.

Line 14a. Name of Country or U.S.
Possession (Code A)
Enter the name of the foreign country or
U.S. possession from which the
corporation had income or to which the
corporation paid or accrued taxes. If the

corporation had income from, or paid or
accrued taxes to, more than one foreign
country or U.S. possession, enter “See
attached” and attach a statement for
each country for lines 14a through 14n
(codes A through N and code Q of
Schedule K-1). On Schedule K-1, if
there is more than one country, enter
code A followed by an asterisk (A*),
enter “STMT,” and attach a statement to
Schedule K-1 for each country for the
information and amounts coded A
through N and Q.

Line 14b. Gross Income From all
Sources (Code B)
Enter the corporation's gross income
from all sources (both U.S. and foreign).

Line 14c. Gross Income Sourced at
Shareholder Level (Code C)
Enter the total gross income of the
corporation that is required to be
sourced at the shareholder level. This
includes income from the sale of most
personal property, other than inventory,
depreciable property, and certain
intangible property. See Pub. 514 and
section 865 for details.

!

CAUTION

You must attach a statement to
Form 1120S showing the
following information.

The amount of this gross income
(without regard to its source) in each
category identified in the instructions for
lines 14d, 14e, and 14f.
Specifically identify gains on the sale
of personal property other than
inventory, depreciable property, and
certain intangible property on which a
foreign tax of 10% or more was paid or
accrued. Also list losses on the sale of
such property if the foreign country
would have imposed a 10% or higher
tax had the sale resulted in a gain. In
addition, separately identify the
amounts of such gains or losses within
each separate limitation category that
are long term capital gains and losses or
collectibles (28%) gains and losses.
See Determining the Source of Income
From the Sales or Exchanges of Certain
Personal Property in Pub. 514 and
section 865.

Lines 14d–14f. Foreign Gross
Income Sourced at Corporate
Level
Separately report gross income from
sources outside the United States by
category of income as follows. See Pub.

514 for more information on the
categories of income.
You must attach a statement to
Form 1120S that specifies
CAUTION
foreign source qualified
dividends, unrecaptured section 1250
gains, and net section 1231 gain (loss).

!

Line 14d. Passive category (code D).
Passive category foreign source
income.
Line 14e. General category (code E).
General category foreign source
income. Include all foreign income
sourced at the corporate level that is not
reported on lines 14d and 14f.
Line 14f. Other (code F). Attach a
statement showing the amount of
foreign source income included in each
of the following categories.
Section 901(j) income.
Income re-sourced by treaty.

Lines 14g–14h. Deductions
Allocated and Apportioned at
Shareholder Level
Line 14g. Interest expense (code G).
Enter the corporation's total interest
expense (including interest equivalents
under Temporary Regulations section
1.861-9T(b)). Do not include interest
directly allocable under Temporary
Regulations section 1.861-10T to
income from a specific property. This
type of interest is allocated and
apportioned at the corporate level and is
included on lines 14i through 14k.
Line 14h. Other (code H). Enter the
total of all other deductions or losses
that are required to be allocated at the
shareholder level. For example, include
on line 14h research and experimental
expenditures (see Regulations section
1.861-17(f)).

Lines 14i–14k. Deductions
Allocated and Apportioned at
Corporate Level to Foreign Source
Income
Separately report corporate deductions
that are apportioned at the corporate
level to (a) passive category foreign
source income, (b) general category
foreign source income, and (c) other
foreign source income (see the
instructions for lines 14d-14f). Attach a
statement showing the amount of
deductions allocated and apportioned at
the corporate level to each of the listed
categories from line 14f. See Pub. 514
for more information.
-32-

Line 14l. Total Foreign Taxes Paid
or Accrued
Enter in U.S. dollars the total foreign
taxes (described in section 901 or
section 903) that were paid or accrued
according to the corporation's method of
accounting for such taxes. Translate
these amounts into U.S. dollars by using
the applicable exchange rate (see Pub.
514).
Foreign taxes paid (code L). If the
corporation used the cash method of
accounting, check the “Paid” box and
enter foreign taxes paid during the tax
year. Report each shareholder's pro
rata share in box 14 of Schedule K-1
using code L.
Foreign taxes accrued (code M). If
the corporation used the accrual
method of accounting, check the
“Accrued” box and enter foreign taxes
accrued. Report each shareholder's pro
rata share in box 14 of Schedule K-1
using code M.
A corporation reporting foreign taxes
using the cash method can make an
irrevocable election to report the taxes
using the accrual method for the year of
the election and all future years. Make
this election by reporting all foreign
taxes using the accrual method on
line 14l and checking the “Accrued” box
(see Regulations section 1.905-1).
Attach a statement reporting the
following information.
1. The total amount of foreign taxes
(including foreign taxes on income
sourced at the shareholder level)
relating to each category of income (see
instructions for lines 14d-14f).
2. The dates on which the taxes
were paid or accrued, the exchange
rates used, and the amounts in both
foreign currency and U.S. dollars, for
the following.
a. Taxes withheld at source on
interest.
b. Taxes withheld at source on
dividends.
c. Taxes withheld at source on rents
and royalties.
d. Other foreign taxes paid or
accrued.

Line 14m. Reduction in Taxes
Available for Credit (Code N)
Enter the total reduction in taxes
available for credit. Attach a statement
showing the reductions for:
Taxes on foreign mineral income
(section 901(e)).
Instructions for Form 1120S

Taxes on foreign oil and gas
extraction income and foreign oil related
income (section 907(a)).
Taxes attributable to boycott
operations (section 908).
Failure to timely file (or furnish all of
the information required on) Forms 5471
and 8865.
Foreign income taxes paid or accrued
during the current tax year that have
been suspended under section 909.
Any other items (specify).

Do not include as a tax preference
item any qualified expenditures to which
an election under section 59(e) may
apply. Instead, report these
expenditures on line 12(c)(2). Because
these expenditures are subject to an
election by each shareholder, the
corporation cannot figure the amount of
any tax preference related to them.
Instead, the corporation must pass
through to each shareholder in box 12,
code J, of Schedule K-1 the information
needed to figure the deduction.

Line 14n. Other Foreign Tax
Information

Schedule K-1. Report each
shareholder's pro rata share of amounts
reported on lines 15a through 15f in
box 15 of Schedule K-1 using codes A
through F respectively.
If the corporation is reporting items of
income or deduction for oil, gas, and
geothermal properties, you may be
required to identify these items on a
statement attached to Schedule K-1
(see the instructions for lines 15d and
15e). Also see the requirement for an
attached statement in the instructions
for line 15f.

Foreign trading gross receipts
(code O). Report each shareholder's
pro rata share of foreign trading gross
receipts from line 15 of Form 8873 in
box 14 using code O. See
Extraterritorial Income Exclusion,
earlier.
Extraterritorial income exclusion
(code P). If the corporation is not
permitted to deduct the extraterritorial
income exclusion as a non-separately
stated item, attach a statement to
Schedule K-1 showing the
shareholder's pro rata share of the
extraterritorial income exclusion
reported on line 52 of Form 8873. Also
identify the activity to which the
exclusion is related.
Other foreign transactions (code
Q). Report any other foreign transaction
information the shareholders need to
prepare their tax returns. Attach a
statement that separately identifies any
arrangement, along with the taxes paid
or accrued in connection with the
arrangement, in which the corporation
participates that would qualify as a
splitter arrangement under section 909 if
one or more shareholders are covered
persons with respect to an entity that
took into account related income from
the arrangement. Also indicate whether
the corporation has taken into account
any related income from any such
splitter arrangement. (See section 909
and the regulations thereunder).

Alternative Minimum Tax (AMT)
Items

Lines 15a through 15f must be
completed for all shareholders.

Enter items of income and
deductions that are adjustments or tax
preference items for the AMT. For more
information, see Form 6251, Alternative
Minimum Tax—Individuals, or
Schedule I (Form 1041), Alternative
Minimum Tax—Estates and Trusts.

Instructions for Form 1120S

Line 15a. Post-1986 Depreciation
Adjustment
Figure the adjustment for line 15a based
only on tangible property placed in
service after 1986 (and tangible
property placed in service after July 31,
1986, and before 1987 for which the
corporation elected to use the General
Depreciation System). Do not make an
adjustment for motion picture films,
videotapes, sound recordings, certain
public utility property (see section 168(f)
(2)), property depreciated under the
unit-of-production method (or any other
method not expressed in a term of
years), qualified Indian reservation
property, property eligible for a special
depreciation allowance, qualified
revitalization expenditures, or the
section 179 expense deduction.
For property placed in service before
1999, refigure depreciation for the AMT
as follows (using the same convention
used for the regular tax).
For section 1250 property (generally,
residential rental and nonresidential real
property), use the straight line method
over 40 years.
For tangible property (other than
section 1250 property) depreciated
using the straight line method for the
regular tax, use the straight line method
over the property's class life. Use 12
years if the property has no class life.
For any other tangible property, use
the 150% declining balance method,
-33-

switching to the straight line method the
first tax year it gives a larger deduction,
over the property's AMT class life. Use
12 years if the property has no class life.
Note. See Pub. 946 for a table of class
lives.
For property placed in service after
1998, refigure depreciation for the AMT
only for property depreciated for the
regular tax using the 200% declining
balance method. For the AMT, use the
150% declining balance method,
switching to the straight line method the
first tax year it gives a larger deduction,
and the same convention and recovery
period used for the regular tax.
Figure the adjustment by subtracting
the AMT deduction for depreciation
from the regular tax deduction and enter
the result on line 15a. If the AMT
deduction is more than the regular tax
deduction, enter the difference as a
negative amount. Depreciation
capitalized to inventory must also be
refigured using the AMT rules. Include
on this line the current year adjustment
to income, if any, resulting from the
difference.

Line 15b. Adjusted Gain or Loss
If the corporation disposed of any
tangible property placed in service after
1986 (or after July 31, 1986, if an
election was made to use the General
Depreciation System), or if it disposed
of a certified pollution control facility
placed in service after 1986, refigure the
gain or loss from the disposition using
the adjusted basis for the AMT. The
property's adjusted basis for the AMT is
its cost or other basis minus all
depreciation or amortization deductions
allowed or allowable for the AMT during
the current tax year and previous tax
years. Enter on this line the difference
between the regular tax gain (loss) and
the AMT gain (loss). If the AMT gain is
less than the regular tax gain, or the
AMT loss is more than the regular tax
loss, or there is an AMT loss and a
regular tax gain, enter the difference as
a negative amount.
If any part of the adjustment is
allocable to net short-term capital gain
(loss), net long-term capital gain (loss),
or net section 1231 gain (loss), attach a
statement that identifies the amount of
the adjustment allocable to each type of
gain or loss.
For a net long-term capital gain
(loss), also identify the amount of the

adjustment that is collectibles (28%)
gain (loss).
For a net section 1231 gain (loss),
also identify the amount of adjustment
that is unrecaptured section 1250 gain.

Line 15c. Depletion (Other Than Oil
and Gas)

1120S) to adjust the amounts in box 15,
code D or E, for any other income or
deductions from oil, gas, or geothermal
properties included in boxes 2 through
12, 16, or 17 of Schedule K-1 in order to
determine the total income and
deductions from oil, gas, and
geothermal properties for the
corporation.

Do not include any depletion on oil and
gas wells. The shareholders must figure
their oil and gas depletion deductions
and preference items separately under
section 613A.

Figure the amounts for lines 15d and
15e separately for oil and gas properties
that are not geothermal deposits and for
all properties that are geothermal
deposits.

Refigure the depletion deduction
under section 611 for mines, wells
(other than oil and gas wells), and other
natural deposits for the AMT.
Percentage depletion is limited to 50%
of the taxable income from the property
as figured under section 613(a), using
only income and deductions for the
AMT. Also, the deduction is limited to
the property's adjusted basis at the end
of the year as figured for the AMT.
Figure this limit separately for each
property. When refiguring the property's
adjusted basis, take into account any
AMT adjustments made this year or in
previous years that affect basis (other
than the current year's depletion).

Give each shareholder a statement
that shows the separate amounts
included in the computation of the
amounts on lines 15d and 15e of
Schedule K.

Enter the difference between the
regular tax and AMT deduction. If the
AMT deduction is greater, enter the
difference as a negative amount.

Oil, Gas, and Geothermal
Properties—Gross Income and
Deductions

Line 15d. Oil, Gas, and Geothermal
Properties—Gross Income
Enter the total amount of gross income
(within the meaning of section 613(a))
from all oil, gas, and geothermal
properties received or accrued during
the tax year and included on page 1,
Form 1120S.

Line 15e. Oil, Gas, and Geothermal
Properties—Deductions
Enter any deductions allowed for the
AMT that are allocable to oil, gas, and
geothermal properties.

Line 15f. Other AMT Items

Generally, the amounts to be entered on
lines 15d and 15e are only the income
and deductions for oil, gas, and
geothermal properties that are used to
figure the corporation's ordinary
business income (loss) on line 21,
page 1, Form 1120S.

Attach a statement to Form 1120S and
Schedule K-1 that shows other items
not shown on lines 15a through 15e that
are adjustments or tax preference items
or that the shareholder needs to
complete Form 6251 or Schedule I
(Form 1041). See these forms and their
instructions to determine the amount to
enter.

If there are any items of income or
deductions for oil, gas, and geothermal
properties included in the amounts that
are required to be passed through
separately to the shareholders on
Schedule K-1 (items not reported on
line 1 of Schedule K-1), give each
shareholder a statement that shows, for
the box in which the income or
deduction is included, the amount of
income or deductions included in the
total amount for that box. Do not include
any of these direct pass-through
amounts on line 15d or 15e. The
shareholder is told in the Shareholder's
Instructions for Schedule K-1 (Form

Other AMT items include the
following.
Accelerated depreciation of real
property under pre-1987 rules.
Accelerated depreciation of leased
personal property under pre-1987 rules.
Long-term contracts entered into after
February 28, 1986. Except for certain
home construction contracts, the
taxable income from these contracts
must be figured using the percentage of
completion method of accounting for the
AMT.
Losses from tax shelter farm
activities. No loss from any tax shelter
farm activity is allowed for the AMT.
-34-

Schedule K-1. If you are reporting
each shareholder's pro rata share of
only one type of AMT item under code
F, enter the code with an asterisk (F*)
and the dollar amount in the entry space
in box 15 and attach a statement that
shows the type of AMT item. If you are
reporting multiple types of AMT items
under code F, enter the code with an
asterisk (F*) and enter “STMT” in the
entry space in box 15 and attach a
statement that shows the dollar amount
of each type of AMT item.

Items Affecting Shareholder
Basis
Line 16a. Tax-Exempt Interest
Income
Enter on line 16a tax-exempt interest
income, including any exempt-interest
dividends received from a mutual fund
or other regulated investment company.
Individual shareholders must report this
information on line 8b of Form 1040.
Generally, under section 1367(a)(1)(A),
the basis of the shareholder's stock is
increased by the amount shown on this
line.

Line 16b. Other Tax-Exempt
Income
Enter on line 16b all income of the
corporation exempt from tax other than
tax-exempt interest (for example, life
insurance proceeds, but see section
101(j) for limits and reporting
requirements). Generally, under section
1367(a)(1)(A), the basis of the
shareholder's stock is increased by the
amount shown on this line.

Line 16c. Nondeductible Expenses
Enter on line 16c nondeductible
expenses paid or incurred by the
corporation.
Do not include separately stated
deductions shown elsewhere on
Schedules K and K-1, capital
expenditures, or items for which the
deduction is deferred to a later tax year.
Generally, under section 1367(a)(2)
(D), the basis of the shareholder's stock
is decreased by the amount shown on
this line.

Line 16d. Distributions
Enter the total distributions (including
cash) made to each shareholder other
than dividends reported on line 17c of
Schedule K. Include the shareholder's
pro rata share of any amounts included
Instructions for Form 1120S

in interest income with respect to new
clean renewable energy, qualified
energy conservation, qualified zone
academy (for bonds issued after
October 3, 2008), qualified school
construction, or build America bonds.
Distributions of appreciated property are
valued at fair market value. If property
other than cash was distributed, attach
a statement to provide the following
information: (1) the date the property
was acquired, (2) the date the property
was distributed, (3) the property's FMV
on the date of distribution, and (4) the
corporation's basis in the property. See
Distributions, later, for the ordering
rules.

Line 16e. Repayment of Loans
From Shareholders
Enter any repayments made to
shareholders during the current tax
year.
Schedule K-1. Report each
shareholder's pro rata share of amounts
reported on lines 16a, 16b, and 16c
(concerning items affecting shareholder
basis) in box 16 of Schedule K-1 using
codes A through C respectively. Report
property distributions (line 16d) and
repayment of loans from shareholders
(line 16e) on the Schedule K-1 of the
shareholder(s) that received the
distributions or repayments (using
codes D and E).

Other Information
Lines 17a and 17b. Investment
Income and Expenses
Enter on line 17a the investment income
included on lines 4, 5a, 6, and 10, of
Schedule K. Do not include other
portfolio gains or losses on this line.
Enter on line 17b the investment
expense included on line 12d of
Schedule K.
Investment income includes gross
income from property held for
investment, the excess of net gain
attributable to the disposition of property
held for investment over net capital gain
from the disposition of property held for
investment, any net capital gain from the
disposition of property held for
investment that each shareholder elects
to include in investment income under
section 163(d)(4)(B)(iii), and any
qualified dividend income that the
shareholder elects to include in
investment income. Generally,
investment income and investment
expenses do not include any income or
expenses from a passive activity. See
Instructions for Form 1120S

Regulations section 1.469-2(f)(10) for
exceptions.
Property subject to a net lease is not
treated as investment property because
it is subject to the passive loss rules. Do
not reduce investment income by losses
from passive activities.
Investment expenses are deductible
expenses (other than interest) directly
connected with the production of
investment income. See the instructions
for Form 4952 for more information.
Schedule K-1. Report each
shareholder's pro rata share of amounts
reported on lines 17a and 17b
(investment income and expenses) in
box 17 of Schedule K-1 using codes A
and B respectively.
If there are other items of investment
income or expense included in the
amounts that are required to be passed
through separately to the shareholders
on Schedule K-1, such as net short-term
capital gain or loss, net long-term capital
gain or loss, and other portfolio gains or
losses, give each shareholder a
statement identifying these amounts.

Line 17c. Dividend Distributions
Paid From Accumulated Earnings
and Profits (Schedule K Only)
Enter total dividends paid to
shareholders from accumulated
earnings and profits. Report these
dividends to shareholders on Form
1099-DIV. Do not report them on
Schedule K-1.

Line 17d. Other Items and
Amounts
Report the following information on a
statement attached to Form 1120S. On
Schedule K-1, enter the appropriate
code in box 17 for each information item
followed by an asterisk in the left-hand
column of the entry space (for example,
C*). In the right-hand column, enter
“STMT.” The codes are provided for
each information category.
Qualified rehabilitation expenditures
(other than rental real estate) (code
C). Enter total qualified rehabilitation
expenditures from activities other than
rental real estate activities. See the
Instructions for Form 3468 for details on
qualified rehabilitation expenditures.
Note. Report qualified rehabilitation
expenditures related to rental real estate
activities on line 13c.

-35-

Schedule K-1. Report each
shareholder's pro rata share of qualified
rehabilitation expenditures related to
activities other than rental real estate
activities in box 17 of Schedule K-1
using code C. Attach a statement to
Schedule K-1 that provides the
information and the shareholder's pro
rata share of the basis and expenditure
amounts the shareholder will need to
figure the amounts to report on lines 11b
through 11j and 11m of Form 3468. See
the Instructions for Form 3468 for
details. If the corporation has
expenditures from more than one
activity, identify on a statement attached
to Schedule K-1 the information and
amounts for each separate activity. See
Passive Activity Reporting
Requirements, earlier.
Basis of energy property (code D).
In box 17 of Schedule K-1, enter code D
followed by an asterisk and enter
“STMT” in the entry space for the dollar
amount. Attach a statement to
Schedule K-1 that provides the
shareholder's pro rata share of the basis
and capacity amounts the shareholder
will need to figure the amounts to report
on lines 12a-d, 12f, 12g, 12i, 12j, 12l,
12m, 12o, and 12q-12s of Form 3468.
See the Instructions for Form 3468 for
details.
Recapture of low-income housing
credit (codes E and F). If recapture of
part or all of the low-income housing
credit is required because (a) the prior
year qualified basis of a building
decreased or (b) the corporation
disposed of a building or part of its
interest in a building, see Form 8611,
Recapture of Low-Income Housing
Credit. Complete lines 1 through 7 of
Form 8611 to figure the amount of the
credit to recapture.
Use code E on Schedule K-1 to
report recapture of the low-income
housing credit from a section 42(j)(5)
partnership. Use code F to report
recapture of any other low-income
housing credit. See the instructions for
lines 13a and 13b, earlier, for more
information.
Note. If a shareholder's ownership
interest in a building decreased
because of a transaction at the
shareholder level, the corporation must
provide the necessary information to the
shareholder to enable the shareholder
to figure the recapture.
The disposal of a building or an
interest therein will generate a
CAUTION
credit recapture unless it is
reasonably expected that the building

!

will continue to be operated as a
qualified low-income building for the
remainder of the building's compliance
period.
See Form 8586, Form 8611, and
section 42 for more information.
Recapture of investment credit
(code G). Complete and attach Form
4255 if, before the end of the recapture
period, investment credit property is
disposed of or no longer qualifies for the
credit or if credit recapture is otherwise
required. See the Instructions for Form
4255 for details about when credit
recapture is required. State the type of
property at the top of Form 4255, and
complete lines 2, 4, and 5, whether or
not any shareholder is subject to
recapture of the credit.
Attach to each Schedule K-1 a
separate statement providing the
information the corporation is required
to show on Form 4255, but list only the
shareholder's pro rata share of the basis
of the property subject to recapture.
Also indicate the lines of Form 4255 on
which the shareholders should report
these amounts.
The corporation itself is liable for
investment credit recapture in certain
cases. See Investment credit recapture
tax, earlier, for details.
Recapture of other credits (code H).
On an attached statement to
Schedule K-1, provide any information
shareholders will need to report
recapture of credits (other than
recapture of low-income housing credit
and investment credit reported on
Schedule K-1 using codes E, F, and G).
Examples of credits subject to recapture
and reported using code H include:
The qualified plug-in electric vehicle
credit. See section 30(e)(5) for details.
The qualified plug-in electric drive
motor vehicle credit. See section 30D(f)
(5) for details.
The new markets credit. See Form
8874 and Form 8874-B, Notice of
Recapture Event for New Markets
Credit, for details.
The Indian employment credit. See
section 45A(d) for details.
The credit for employer-provided
childcare facilities and services. See
section 45F(d) for details.
The alternative motor vehicle credit.
See section 30B(h)(8) for details.
The alternative fuel vehicle refueling
property credit. See section 30C(e)(5)
for details.
Look-back interest—completed
long-term contracts (code I). If the

corporation is closely held (defined in
section 460(b)(4)(C)(iii)) and it entered
into any long-term contracts after
February 28, 1986, that are accounted
for under either the percentage of
completion-capitalized cost method or
the percentage of completion method, it
must attach a statement to Form 1120S
showing the information required in
items (a) and (b) of the instructions for
lines 1 and 3 of Part II of Form 8697. It
must also report the amounts for Part II,
lines 1 and 3, to its shareholders. See
the Instructions for Form 8697 for more
information.

any additional information needed by
the shareholder.
For an installment sale made during
the corporation's tax year, any
information the shareholder needs to
complete Form 6252. The corporation
also must separately report the
shareholder's pro rata share of all
payments received for the property in
future tax years. (Installment payments
received for installment sales made in
prior tax years should be reported in the
same manner used in prior tax years.)
See the instructions for Form 6252 for
details.

Look-back interest—income forecast
method (code J). If the corporation is
closely held (defined in section 460(b)
(4)(C)(iii)) and it depreciated certain
property placed in service after
September 13, 1995, under the income
forecast method, it must attach to Form
1120S the information specified in the
instructions for Form 8866, line 2, for the
3rd and 10th tax years beginning after
the tax year the property was placed in
service. It must also report the line 2
amounts to its shareholders. See the
Instructions for Form 8866 for more
details.

Recapture of section 179 deduction
(code L). This amount represents
recapture of the section 179 deduction if
business use of the property dropped to
50% or less before the end of the
recapture period. If the business use of
any property (placed in service after
1986) for which a section 179 deduction
was passed through to shareholders
dropped to 50% or less (for a reason
other than disposition), the corporation
must provide all the following
information.
The shareholder's pro rata share of
the original basis and depreciation
allowed or allowable (not including the
section 179 deduction).
The shareholder's pro rata share of
the section 179 deduction (if any)
passed through for the property and the
corporation's tax year(s) in which the
amount was passed through.
See Regulations section 1.179-1(e)
for details.

Dispositions of property with section
179 deductions (code K). This
represents gain or loss on the sale,
exchange, or other disposition of
property for which a section 179
deduction has been passed through to
shareholders. The corporation must
provide all the following information with
respect to such dispositions (see the
instructions for Form 1120S, line 4,
earlier).
Description of the property.
Date the property was acquired and
placed in service.
Date of the sale or other disposition
of the property.
The shareholder's pro rata share of
the gross sales price or amount
realized.
The shareholder's pro rata share of
the cost or other basis plus expense of
sale (reduced as explained in the
Instructions for Form 4797, line 21).
The shareholder's pro rata share of
the depreciation allowed or allowable,
determined as described in the
Instructions for Form 4797, line 22, but
excluding the section 179 deduction.
The shareholder's pro rata share of
the section 179 deduction (if any)
passed through for the property and the
corporation's tax year(s) in which the
amount was passed through.
If the disposition is due to a casualty
or theft, a statement indicating so, and
-36-

Section 453(l)(3) information (code
M). Supply any information needed by
a shareholder to compute the interest
due under section 453(l)(3). If the
corporation elected to report the
dispositions of certain timeshares and
residential lots on the installment
method, each shareholder's tax liability
must be increased by the shareholder's
pro rata share of the interest on tax
attributable to the installment payments
received during the tax year.
Section 453A(c) information (code
N). Supply any information needed by a
shareholder to compute the interest due
under section 453A(c). If an obligation
arising from the disposition of property
to which section 453A applies is
outstanding at the close of the year,
each shareholder's tax liability must be
increased by the tax due under section
453A(c) on the shareholder's pro rata
share of the tax deferred under the
installment method.

Instructions for Form 1120S

Section 1260(b) information (code
O). Supply any information needed by a
shareholder to figure the interest due
under section 1260(b). If the corporation
had gain from certain constructive
ownership transactions, each
shareholder's tax liability must be
increased by the shareholder's pro rata
share of interest due on any deferral of
gain recognition. See section 1260(b)
for details, including how to figure the
interest.
Interest allocable to production expenditures (code P). Supply any
information needed by a shareholder to
properly capitalize interest as required
by section 263A(f). See Section 263A
uniform capitalization rules, earlier, for
more information.
CCF nonqualified withdrawal (code
Q). Report nonqualified withdrawals by
the corporation from a capital
construction fund. Attach a statement to
the shareholder's Schedule K-1
providing details of the withdrawal. See
Pub. 595.
Depletion information—oil and gas
(code R). Report gross income and
other information relating to oil and gas
well properties to shareholders to allow
them to figure the depletion deduction
for oil and gas well properties. Allocate
to each shareholder a proportionate
share of the adjusted basis of each
corporate oil or gas well property. See
section 613A(c)(11) for details.
The corporation cannot deduct
depletion on oil and gas wells. Each
shareholder must determine the
allowable amount to report on his or her
return. See Pub. 535 for more
information.
Amortization of reforestation costs
(code S). Report the amortizable basis
of reforestation expenditures paid or
incurred before October 23, 2004, for
which the corporation elected
amortization and the tax year the
amortization began for the current tax
year and the 7 preceding tax years. The
amortizable basis cannot exceed
$10,000 for each of those tax years.
Section 108(i) information (code T).
Report the shareholder's pro rata share
of the following.
Any COD income deferred under
section 108(i) that has not been
included in income in the current or prior
tax years.
Any OID deduction deferred under
section 108(i)(2)(A)(i) that has not been
deducted in the current or prior tax
years.
Instructions for Form 1120S

For information on allocating these
items to shareholders, see section
108(i); Rev. Proc. 2009-37, 2009-36
I.R.B. 309; and Temporary Regulations
section 1.108(i)-2T.
Other information (code U). Report
the following information to each
shareholder.
1. If the corporation participates in a
transaction that must be disclosed on
Form 8886 (discussed earlier). Both the
corporation and its shareholders may be
required to file Form 8886. The
corporation must determine if any of its
shareholders are required to disclose
the transaction and provide those
shareholders with information they will
need to file Form 8886. This
determination is based on the
category(s) under which a transaction
qualified for disclosures. See the
Instructions for Form 8886 for details.
2. If the corporation is involved in
farming or fishing activities, report the
gross income from these activities.
3. If the corporation has deductions
attributable to a farming business and
receives an applicable subsidy, report
the aggregate gross income or gain and
the aggregate deductions from the
farming business. See section 461(j) for
details.
4. The shareholder's pro rata share
of any amount included in interest
income on line 4 with respect to clean
renewable energy, Midwestern tax
credit, or (for bonds issued before
October 4, 2008) qualified zone
academy bonds. Shareholders need
this information to properly adjust their
stock basis. See Form 8912.
5. Any income or gain reported on
lines 1 through 10 of Schedule K that
qualifies as inversion gain, if the
corporation is an expatriated entity or is
a partner in an expatriated entity. For
details, see section 7874. Attach a
statement to Form 1120S that shows
the amount of each type of income or
gain included in the inversion gain. The
corporation must report each
shareholder's pro rata share of the
inversion gain in box 17 of Schedule K-1
using code U. Attach a statement to
Schedule K-1 that shows the
shareholder's pro rata share of the
amount of each type of income or gain
included in the inversion gain.
6. Basis in qualifying advanced coal
project property. Attach a statement to
Schedule K-1 that provides the
shareholder's pro rata share of the basis
amounts the shareholder will need to
figure the amounts to report on lines 5a,
-37-

5b, and 5c of Form 3468. See the
Instructions for Form 3468 for details.
7. Basis in qualifying gasification
project property. Attach a statement to
Schedule K-1 that provides the
shareholder's pro rata share of the basis
amounts the shareholder will need to
figure the amounts to report on lines 6a
and 6b of Form 3468. See the
Instructions for Form 3468 for details.
8. Basis in qualifying advanced
energy project property. Attach a
statement to Schedule K-1 that provides
the shareholder's pro rata share of the
basis amounts the shareholder will need
to figure the amounts to report on line 7
of Form 3468. See the Instructions for
Form 3468 for details.
9. Any other information the
shareholders need to prepare their tax
returns.

Reconciliation
Line 18. Income/Loss
Reconciliation (Schedule K
Only)

To the extent the corporation has an
amount on line 12d for code P
(Domestic production activities
information), Q (Qualified production
activities income), or R (Employer's
Form W-2 wages), exclude the
amount(s) from line 18. If the
corporation has an amount on line 14l of
Schedule K (foreign taxes paid and
accrued), add that amount for purposes
of computing the corporation's net
income (loss). The amount reported on
line 18 must be the same as the amount
reported on line 8 of Schedule M-1 or
line 26, column d, in Part II of
Schedule M-3 (Form 1120S).

Schedule L. Balance
Sheets per Books

The balance sheets should agree with
the corporation's books and records.
Schedule L is not required to be
completed if the corporation answered
“Yes” to question 10 on Schedule B. If
the corporation is required to complete
Schedule L, include total assets
reported on Schedule L, line 15, column
(d), on page 1, item F.
Corporations with total assets of $10
million or more on the last day of the tax
year must complete Schedule M-3
(Form 1120S) instead of Schedule M-1.
See the separate Instructions for
Schedule M-3 (Form 1120S) for
provisions that also affect Schedule L.

If the S election terminated during the
tax year and the corporation reverted to
a C corporation, the year-end balance
sheet generally should agree with the
books and records at the end of the C
short year. However, if the corporation
elected under section 1362(e)(3) to
have items assigned to each short year
under normal tax accounting rules, the
year-end balance sheet should agree
with the books and records at the end of
the S short year.

Line 5. Tax-Exempt Securities

Include on this line:
State and local government
obligations, the interest on which is
excludable from gross income under
section 103(a), and
Stock in a mutual fund or other
regulated investment company that
distributed exempt-interest dividends
during the tax year of the corporation.

Line 24. Retained Earnings

If the corporation maintains separate
accounts for appropriated and
unappropriated retained earnings, it
may want to continue such accounting
for purposes of preparing its financial
balance sheet. Also, if the corporation
converts to C corporation status in a
subsequent year, it will be required to
report its appropriated and
unappropriated retained earnings on
separate lines of Schedule L of Form
1120.

Line 25. Adjustments to
Shareholders' Equity

Some examples of adjustments to
report on this line include:
Unrealized gains and losses on
securities held “available for sale.”
Foreign currency translation
adjustments.
The excess of additional pension
liability over unrecognized prior service
cost.
Guarantees of employee stock
(ESOP) debt.
Compensation related to employee
stock award plans.

Corporations with total assets of $10
million or more on the last day of the tax
year must complete Schedule M-3
instead of Schedule M-1. See Item C.
Schedule M-3 Information, earlier. A
corporation filing Form 1120S that is not
required to file Schedule M-3 may
voluntarily file Schedule M-3. See the
Instructions for Schedule M-3 (Form
1120S) for more information.

Line 2

Report on this line income included on
Schedule K, lines 1, 2, 3c, 4, 5a, 6, 7,
8a, 9, and 10 not recorded on the books
this year. Describe each such item of
income. Attach a statement if
necessary.

Line 3b. Travel and
Entertainment

Include any of the following.
Meal and entertainment expenses not
deductible under section 274(n).
Expenses for the use of an
entertainment facility.
The part of business gifts over $25.
Expenses of an individual over
$2,000, which are allocable to
conventions on cruise ships.
Employee achievement awards over
$400.
The cost of entertainment tickets over
face value (also subject to 50% limit
under section 274(n)).
The cost of skyboxes over the face
value of nonluxury box seat tickets.
The part of luxury water travel
expenses not deductible under section
274(m).
Expenses for travel as a form of
education.
Other nondeductible travel and
entertainment expenses.
For more information, see Pub. 535.
Note. If the corporation has an amount
on line 14l of Schedule K (foreign taxes
paid and accrued), take that amount into
account for purposes of figuring
expenses and deductions to enter on
lines 3 and 6.

If the total adjustment to be entered
is a negative amount, enter the amount
in parentheses.

Schedule M-1.
Reconciliation of Income
(Loss) per Books With
Income (Loss) per Return

Schedule M-1 is not required to be
completed if the corporation answered
“Yes” to question 10 on Schedule B.
-38-

Schedule M-2. Analysis of
Accumulated Adjustments
Account, Other
Adjustments Account, and
Shareholders'
Undistributed Taxable
Income Previously Taxed
Column (a). Accumulated
Adjustments Account

The accumulated adjustments account
(AAA) is an account of the S corporation
that generally reflects the accumulated
undistributed net income of the
corporation for the corporation's
post-1982 years. S corporations with
accumulated E&P must maintain the
AAA to determine the tax effect of
distributions during S years and the
post-termination transition period. An S
corporation without accumulated E&P
does not need to maintain the AAA in
order to determine the tax effect of
distributions. Nevertheless, if an S
corporation without accumulated E&P
engages in certain transactions to which
section 381(a) applies, such as a
merger into an S corporation with
accumulated E&P, the S corporation
must be able to calculate its AAA at the
time of the merger for purposes of
determining the tax effect of
post-merger distributions. Therefore, it
is recommended that the AAA be
maintained by all S corporations.
On the first day of the corporation's
first tax year as an S corporation, the
balance of the AAA is zero. At the end
of the tax year, adjust the AAA for the
items as explained below and in the
order listed.
1. Increase the AAA by income
(other than tax-exempt income) and the
excess of the deduction for depletion
over the basis of the property subject to
depletion (unless the property is an oil
and gas property the basis of which has
been allocated to shareholders).
2. Generally, decrease the AAA by
deductible losses and expenses,
nondeductible expenses (other than
expenses related to tax-exempt
income), and the sum of the
shareholders' deductions for depletion
for any oil or gas property held by the
corporation as described in section
1367(a)(2)(E). If deductible losses and
expenses include the fair market value
of certain contributed property
(discussed earlier), further adjust AAA
by adding back the fair market value of
the contributed property and subtracting
instead the property's adjusted basis. If
Instructions for Form 1120S

the total decreases under (2) exceed
the total increases under (1) above, the
excess is a “net negative adjustment.” If
the corporation has a net negative
adjustment, do not take it into account
under (2). Instead, take it into account
only under (4) below.
3. Decrease AAA (but not below
zero) by property distributions (other
than dividend distributions from
accumulated E&P), unless the
corporation elects to reduce
accumulated E&P first. See
Distributions, later, for definitions and
other details.
4. Decrease AAA by any net
negative adjustment. For adjustments to
the AAA for redemptions,
reorganizations, and corporate
separations, see Regulations section
1.1368-2(d).
Note. The AAA may have a negative
balance at year end. See section
1368(e).

Column (b). Other Adjustments
Account

The other adjustments account is
adjusted for tax-exempt income (and
related expenses) and federal taxes
attributable to a C corporation tax year.
After these adjustments are made, the
account is reduced for any distributions
made during the year. See Distributions,
later.

Column (c). Shareholders'
Undistributed Taxable Income
Previously Taxed

The shareholders' undistributed taxable
income previously taxed account, also
called previously taxed income (PTI), is
maintained only if the corporation had a

balance in this account at the start of its
2012 tax year. If there is a beginning
balance for the 2012 tax year, no
adjustments are made to the account
except to reduce the account for
distributions made under section
1375(d) (as in effect before the
enactment of the Subchapter S
Revision Act of 1982). See Distributions
next for the order of distributions from
the account.

basis in his or her stock in the
corporation.
3. Reduce accumulated E&P.
Generally, the S corporation has
accumulated E&P only if it has not
distributed E&P accumulated in prior
years when the S corporation was a C
corporation (section 1361(a)(2)). See
section 312 for information on E&P. The
only adjustments that can be made to
the accumulated E&P of an S
corporation are (a) reductions for
dividend distributions; (b) adjustments
for redemptions, liquidations,
reorganizations, etc.; and (c) reductions
for investment credit recapture tax for
which the corporation is liable. See
sections 1371(c) and (d)(3).
4. Reduce the other adjustments
account (OAA).
5. Reduce any remaining
shareholders' equity accounts.

Each shareholder's right to
nontaxable distributions from PTI is
personal and cannot be transferred to
another person. The corporation is
required to keep records of each
shareholder's net share of PTI.

Distributions
General rule. Unless the corporation
makes one of the elections described
below, property distributions (including
cash) are applied in the following order
(to reduce accounts of the S corporation
that are used to figure the tax effect of
distributions made by the corporation to
its shareholders):
1. Reduce the AAA determined
without regard to any net negative
adjustment for the tax year (but not
below zero). If distributions during the
tax year exceed the AAA at the close of
the tax year determined without regard
to any net negative adjustment for the
tax year, the AAA is allocated pro rata to
each distribution made during the tax
year. See section 1368.
2. Reduce shareholders' PTI
account for any section 1375(d) (as in
effect before 1983) distributions. A
distribution from the PTI account is tax
free to the extent of a shareholder's

Elections relating to source of distributions. The corporation may modify
the above ordering rules by making one
or more of the following elections.
Election to distribute
accumulated E&P first. If the
corporation has accumulated E&P and
wants to distribute from this account
before making distributions from the
AAA, it may elect to do so with the
consent of all its affected shareholders
(section 1368(e)(3)(B)). This election is
irrevocable and applies only for the tax
year for which it is made. For details on
making the election, see Statement
regarding elections, later.
Election to make a deemed
dividend. If the corporation wants to
distribute all or part of its accumulated
E&P through a deemed dividend, it may

Schedule M-2 Worksheet

1.

Keep for Your Records
(a)
Accumulated adjustments
account

(b)
Other adjustments
account

-0-

-0-

3.

Balance at beginning of tax
year . . . . . . . . . . . . . . . . . . . . . . .
Ordinary income from page 1,
line 21 . . . . . . . . . . . . . . . . . . . . .
Other additions . . . . . . . . . . . . . .

4.

Loss from page 1, line 21 . . . . . . .

(

5.

Other reductions . . . . . . . . . . . . .

(36,000)

6.

Combine line 1 through 5 . . . . . . .

( 6,000)

5,000

7.

Distributions other than dividend
distributions . . . . . . . . . . . . . . . . .
Balance at end of tax year.
Subtract line 7 from line 6 . . . . . . .

-0-

5,000

( 6,000)

-0-

2.

8.

Instructions for Form 1120S

10,000
20,000

5,000

)
(

-39-

)

(c)
Shareholders' undistributed
taxable income previously
taxed

elect to do so with the consent of all its
affected shareholders (section 1368(e)
(3)(B)). Under this election, the
corporation will be treated as also
having made the election to distribute
accumulated E&P first. The amount of
the deemed dividend cannot exceed the
accumulated E&P at the end of the tax
year. The E&P at year end is first
reduced by any actual distributions of
accumulated E&P made during the tax
year. A deemed dividend is treated as if
it were a pro rata distribution of money
to the shareholders, received by the
shareholders, and immediately
contributed back to the corporation, all
on the last day of the tax year. This
election is irrevocable and applies only
for the tax year for which it is made. For
details on making the election, see
Statement regarding elections, later.
Election to forego PTI. If the
corporation wants to forego distributions
of PTI, it may elect to do so with the
consent of all its affected shareholders
(section 1368(e)(3)(B)). Under this
election, item (2) under General rule,
earlier, does not apply to any
distribution made during the tax year.
This election is irrevocable and applies
only for the tax year for which it is made.
For details on making the election, see
Statement regarding elections next.
Statement regarding elections. To
make any of the above elections, the
corporation must attach a statement to a
timely filed original or amended Form
1120S for the tax year for which the

election is made. In the statement, the
corporation must identify the election it
is making and must state that each
shareholder consents to the election.
The statement of election to make a
deemed dividend must include the
amount of the deemed dividend
distributed to each shareholder. For
more details on the election, see
Regulations section 1.1368-1(f)(5).

Example

The following example shows how the
Schedule M-2 accounts are adjusted for
items of income (loss), deductions, and
distributions reported on Form 1120S. In
this example, the corporation has no PTI
or accumulated E&P.

Items per return are:
1. Page 1, line 21
income—$10,000;
2. Schedule K, line 2
loss—($3,000);
3. Schedule K, line 4
income—$4,000;
4. Schedule K, line 5a
income—$16,000;
5. Schedule K, line 12a
deduction—$24,000;
6. Schedule K, line 12d
deduction—$3,000;
7. Schedule K, line 13g work
opportunity credit—$6,000;
8. Schedule K, line 16a tax-exempt
interest—$5,000;

9. Schedule K, line 16c
nondeductible expenses—$6,000
(reduction in salaries and wages for
work opportunity credit); and
10. Schedule K, line 16d
distributions—$65,000.
Based on items (1) through (10)
above and starting balances of zero, the
columns for the AAA and the other
adjustments account are completed as
shown in the Schedule M-2 Worksheet,
earlier.
For the AAA, the worksheet
line 3—$20,000 amount is the total of
the Schedule K, lines 4 and 5a income
of $4,000 and $16,000. The worksheet
line 5—$36,000 amount is the total of
the Schedule K, line 2 loss of ($3,000),
line 12a (code A) deduction of $24,000,
line 12d (code R) deduction of $3,000,
and the line 16c nondeductible
expenses of $6,000. The worksheet
line 7 is zero. The AAA at the end of the
tax year (figured without regard to
distributions and the net negative
adjustment of $6,000) is zero, and
distributions cannot reduce the AAA
below zero.
For the other adjustments account,
the worksheet line 3 amount is the
Schedule K, line 16a, tax-exempt
interest income of $5,000. The
worksheet line 7 amount is $5,000,
reducing the other adjustments account
to zero. The remaining $60,000 of
distributions are not entered on
Schedule M-2.

Paperwork Reduction Act Notice. We ask for the information on these forms to carry out the Internal Revenue laws of the
United States. You are required to give us the information. We need it to ensure that you are complying with these laws and to
allow us to figure and collect the right amount of tax.
You are not required to provide the information requested on a form that is subject to the Paperwork Reduction Act unless
the form displays a valid OMB control number. Books or records relating to a form or its instructions must be retained as long
as their contents may become material in the administration of any Internal Revenue law. Generally, tax returns and return
information are confidential, as required by section 6103.
The time needed to complete and file the following forms will vary depending on individual circumstances. The estimated
average times are:
Form

Recordkeeping

Learning about the
law or the form

Preparing the form

Copying, assembling, and
sending the form to the IRS

1120S

62 hr., 10 min.

30 hr., 28 min.

56 hr., 3 min.

6 hr., 42 min.

Sch. D (1120S)

7 hr., 53 min.

4 hr., 30 min.

Sch. K-1 (1120S)

8 hr., 15 min.

6 hr., 3 min.

10 hr., 22 min.

1 hr., 4 min.

Sch. M-3 (1120S)

63 hr., 51 min.

3 hr., 3 min.

5 hr., 9 min.

0 hr., 16 min.

6 hr., 42 min.

0 hr., 32 min.

If you have comments concerning the accuracy of these time estimates or suggestions for making these forms simpler, we
would be happy to hear from you. You can write to the Internal Revenue Service, Tax Products Coordinating Committee,
SE:W:CAR:MP:T:M:S, 1111 Constitution Ave. NW, IR-6526, Washington, DC 20224. Do not send the tax form to this address.
Instead, see Where To File, earlier.

-40-

Instructions for Form 1120S

Principal Business Activity Codes
This list of principal business activities and their
associated codes is designed to classify an
enterprise by the type of activity in which it is
engaged to facilitate the administration of the Internal
Revenue Code. These principal business activity
codes are based on the North American Industry
Classification System.
Using the list of activities and codes below,
determine from which activity the company derives

Agriculture, Forestry, Fishing
and Hunting

Crop Production
111100 Oilseed & Grain Farming
111210 Vegetable & Melon Farming
(including potatoes & yams)
111300 Fruit & Tree Nut Farming
111400 Greenhouse, Nursery, &
Floriculture Production
111900 Other Crop Farming (including
tobacco, cotton, sugarcane,
hay, peanut, sugar beet & all
other crop farming)
Animal Production
112111 Beef Cattle Ranching &
Farming
112112 Cattle Feedlots
112120 Dairy Cattle & Milk Production
112210 Hog & Pig Farming
112300 Poultry & Egg Production
112400 Sheep & Goat Farming
112510 Aquaculture (including shellfish
& finfish farms & hatcheries)
112900 Other Animal Production
Forestry and Logging
113110 Timber Tract Operations
113210 Forest Nurseries & Gathering
of Forest Products
113310 Logging
Fishing, Hunting and Trapping
114110 Fishing
114210 Hunting & Trapping
Support Activities for Agriculture and
Forestry
115110 Support Activities for Crop
Production (including cotton
ginning, soil preparation,
planting, & cultivating)
115210 Support Activities for Animal
Production
115310 Support Activities For Forestry

Mining
211110
212110
212200
212310
212320

Oil & Gas Extraction
Coal Mining
Metal Ore Mining
Stone Mining & Quarrying
Sand, Gravel, Clay, & Ceramic
& Refractory Minerals Mining &
Quarrying
212390 Other Nonmetallic Mineral
Mining & Quarrying
213110 Support Activities for Mining

Utilities

221100 Electric Power Generation,
Transmission & Distribution
221210 Natural Gas Distribution
221300 Water, Sewage & Other
Systems
221500 Combination Gas & Electric

Construction

Construction of Buildings
236110 Residential Building
Construction
236200 Nonresidential Building
Construction
Heavy and Civil Engineering
Construction
237100 Utility System Construction
237210 Land Subdivision
237310 Highway, Street, & Bridge
Construction
237990 Other Heavy & Civil
Engineering Construction

the largest percentage of its “total receipts.” Total
receipts is defined as the sum of gross receipts or
sales (page 1, line 1a); all other income (page 1, lines
4 and 5); income reported on Schedule K, lines 4, 5a,
and 6; income or net gain reported on Schedule K,
lines 7, 8a, 9, and 10; and income or net gain
reported on Form 8825, lines 2, 19, and 20a. If the
company purchases raw materials and supplies them
to a subcontractor to produce the finished product,
but retains title to the product, the company is

Specialty Trade Contractors
238100 Foundation, Structure, &
Building Exterior Contractors
(including framing carpentry,
masonry, glass, roofing, &
siding)
238210 Electrical Contractors
238220 Plumbing, Heating, &
Air-Conditioning Contractors
238290 Other Building Equipment
Contractors
238300 Building Finishing Contractors
(including drywall, insulation,
painting, wallcovering, flooring,
tile, & finish carpentry)
238900 Other Specialty Trade
Contractors (including site
preparation)

Manufacturing

Food Manufacturing
311110 Animal Food Mfg
311200 Grain & Oilseed Milling
311300 Sugar & Confectionery Product
Mfg
311400 Fruit & Vegetable Preserving &
Specialty Food Mfg
311500 Dairy Product Mfg
311610 Animal Slaughtering and
Processing
311710 Seafood Product Preparation &
Packaging
311800 Bakeries, Tortilla, & Dry Pasta
Mfg
311900 Other Food Mfg (including
coffee, tea, flavorings &
seasonings)
Beverage and Tobacco Product
Manufacturing
312110 Soft Drink & Ice Mfg
312120 Breweries
312130 Wineries
312140 Distilleries
312200 Tobacco Manufacturing
Textile Mills and Textile Product Mills
313000 Textile Mills
314000 Textile Product Mills
Apparel Manufacturing
315100 Apparel Knitting Mills
315210 Cut & Sew Apparel Contractors
315220 Men's & Boys' Cut & Sew
Apparel Mfg
315240 Women's, Girls', & Infants' Cut
& Sew Apparel Mfg
315280 Other Cut & Sew Apparel Mfg
315990 Apparel Accessories & Other
Apparel Mfg
Leather and Allied Product
Manufacturing
316110 Leather & Hide Tanning &
Finishing
316210 Footwear Mfg (including rubber
& plastics)
316990 Other Leather & Allied Product
Mfg
Wood Product Manufacturing
321110 Sawmills & Wood Preservation
321210 Veneer, Plywood, &
Engineered Wood Product Mfg
321900 Other Wood Product Mfg
Paper Manufacturing
322100 Pulp, Paper, & Paperboard
Mills
322200 Converted Paper Product Mfg

considered a manufacturer and must use one of the
manufacturing codes (311110-339900).
Once the principal business activity is
determined, enter the six-digit code from the list
below on page 1, item B. Also enter the business
activity on page 2, Schedule B, line 2(a) and a brief
description of the principal product or service of the
business on line 2(b).

Printing and Related Support
Activities
323100 Printing & Related Support
Activities
Petroleum and Coal Products
Manufacturing
324110 Petroleum Refineries (including
integrated)
324120 Asphalt Paving, Roofing, &
Saturated Materials Mfg
324190 Other Petroleum & Coal
Products Mfg
Chemical Manufacturing
325100 Basic Chemical Mfg
325200 Resin, Synthetic Rubber, &
Artificial & Synthetic Fibers &
Filaments Mfg
325300 Pesticide, Fertilizer, & Other
Agricultural Chemical Mfg
325410 Pharmaceutical & Medicine
Mfg
325500 Paint, Coating, & Adhesive Mfg
325600 Soap, Cleaning Compound, &
Toilet Preparation Mfg
325900 Other Chemical Product &
Preparation Mfg
Plastics and Rubber Products
Manufacturing
326100 Plastics Product Mfg
326200 Rubber Product Mfg
Nonmetallic Mineral Product
Manufacturing
327100 Clay Product & Refractory Mfg
327210 Glass & Glass Product Mfg
327300 Cement & Concrete Product
Mfg
327400 Lime & Gypsum Product Mfg
327900 Other Nonmetallic Mineral
Product Mfg
Primary Metal Manufacturing
331110 Iron & Steel Mills & Ferroalloy
Mfg
331200 Steel Product Mfg from
Purchased Steel
331310 Alumina & Aluminum
Production & Processing
331400 Nonferrous Metal (except
Aluminum) Production &
Processing
331500 Foundries
Fabricated Metal Product
Manufacturing
332110 Forging & Stamping
332210 Cutlery & Handtool Mfg
332300 Architectural & Structural
Metals Mfg
332400 Boiler, Tank, & Shipping
Container Mfg
332510 Hardware Mfg
332610 Spring & Wire Product Mfg
332700 Machine Shops; Turned
Product; & Screw, Nut, & Bolt
Mfg
332810 Coating, Engraving, Heat
Treating, & Allied Activities
332900 Other Fabricated Metal Product
Mfg
Machinery Manufacturing
333100 Agriculture, Construction, &
Mining Machinery Mfg
333200 Industrial Machinery Mfg
333310 Commercial & Service Industry
Machinery Mfg
333410 Ventilation, Heating,
Air-Conditioning, &
Commercial Refrigeration
Equipment Mfg
333510 Metalworking Machinery Mfg

-41-

333610 Engine, Turbine & Power
Transmission Equipment Mfg
333900 Other General Purpose
Machinery Mfg
Computer and Electronic Product
Manufacturing
334110 Computer & Peripheral
Equipment Mfg
334200 Communications Equipment
Mfg
334310 Audio & Video Equipment Mfg
334410 Semiconductor & Other
Electronic Component Mfg
334500 Navigational, Measuring,
Electromedical, & Control
Instruments Mfg
334610 Manufacturing & Reproducing
Magnetic & Optical Media
Electrical Equipment, Appliance, and
Component Manufacturing
335100 Electric Lighting Equipment
Mfg
335200 Household Appliance Mfg
335310 Electrical Equipment Mfg
335900 Other Electrical Equipment &
Component Mfg
Transportation Equipment
Manufacturing
336100 Motor Vehicle Mfg
336210 Motor Vehicle Body & Trailer
Mfg
336300 Motor Vehicle Parts Mfg
336410 Aerospace Product & Parts Mfg
336510 Railroad Rolling Stock Mfg
336610 Ship & Boat Building
336990 Other Transportation
Equipment Mfg
Furniture and Related Product
Manufacturing
337000 Furniture & Related Product
Manufacturing
Miscellaneous Manufacturing
339110 Medical Equipment & Supplies
Mfg
339900 Other Miscellaneous
Manufacturing

Wholesale Trade

Merchant Wholesalers, Durable
Goods
423100 Motor Vehicle & Motor Vehicle
Parts & Supplies
423200 Furniture & Home Furnishings
423300 Lumber & Other Construction
Materials
423400 Professional & Commercial
Equipment & Supplies
423500 Metal & Mineral (except
Petroleum)
423600 Household Appliances &
Electrical & Electronic Goods
423700 Hardware, & Plumbing &
Heating Equipment & Supplies
423800 Machinery, Equipment, &
Supplies
423910 Sporting & Recreational Goods
& Supplies
423920 Toy & Hobby Goods &
Supplies
423930 Recyclable Materials
423940 Jewelry, Watch, Precious
Stone, & Precious Metals
423990 Other Miscellaneous Durable
Goods
Merchant Wholesalers, Nondurable
Goods
424100 Paper & Paper Products
424210 Drugs & Druggists' Sundries

Principal Business Activity Codes (Continued)
424300 Apparel, Piece Goods, &
Notions
424400 Grocery & Related Products
424500 Farm Product Raw Materials
424600 Chemical & Allied Products
424700 Petroleum & Petroleum
Products
424800 Beer, Wine, & Distilled
Alcoholic Beverages
424910 Farm Supplies
424920 Book, Periodical, &
Newspapers
424930 Flower, Nursery Stock, &
Florists' Supplies
424940 Tobacco & Tobacco Products
424950 Paint, Varnish, & Supplies
424990 Other Miscellaneous
Nondurable Goods
Wholesale Electronic Markets and
Agents and Brokers
425110 Business to Business
Electronic Markets
425120 Wholesale Trade Agents &
Brokers

Retail Trade

Motor Vehicle and Parts Dealers
441110 New Car Dealers
441120 Used Car Dealers
441210 Recreational Vehicle Dealers
441222 Boat Dealers
441228 Motorcycle, ATV, & All Other
Motor Vehicle Dealers
441300 Automotive Parts, Accessories,
& Tire Stores
Furniture and Home Furnishings
Stores
442110 Furniture Stores
442210 Floor Covering Stores
442291 Window Treatment Stores
442299 All Other Home Furnishings
Stores
Electronics and Appliance Stores
443141 Household Appliance Stores
443142 Electronics Stores (including
Audio, Video, Computer, &
Camera Stores)
Building Material and Garden
Equipment and Supplies Dealers
444110 Home Centers
444120 Paint & Wallpaper Stores
444130 Hardware Stores
444190 Other Building Material Dealers
444200 Lawn & Garden Equipment &
Supplies Stores
Food and Beverage Stores
445110 Supermarkets and Other
Grocery (except Convenience)
Stores
445120 Convenience Stores
445210 Meat Markets
445220 Fish & Seafood Markets
445230 Fruit & Vegetable Markets
445291 Baked Goods Stores
445292 Confectionery & Nut Stores
445299 All Other Specialty Food Stores
445310 Beer, Wine, & Liquor Stores
Health and Personal Care Stores
446110 Pharmacies & Drug Stores
446120 Cosmetics, Beauty Supplies, &
Perfume Stores
446130 Optical Goods Stores
446190 Other Health & Personal Care
Stores
Gasoline Stations
447100 Gasoline Stations (including
convenience stores with gas)
Clothing and Clothing Accessories
Stores
448110 Men's Clothing Stores
448120 Women's Clothing Stores
448130 Children's & Infants' Clothing
Stores
448140 Family Clothing Stores
448150 Clothing Accessories Stores
448190 Other Clothing Stores
448210 Shoe Stores
448310 Jewelry Stores

448320 Luggage & Leather Goods
Stores
Sporting Goods, Hobby, Book, and
Music Stores
451110 Sporting Goods Stores
451120 Hobby, Toy, & Game Stores
451130 Sewing, Needlework, & Piece
Goods Stores
451140 Musical Instrument & Supplies
Stores
451211 Book Stores
451212 News Dealers & Newsstands
General Merchandise Stores
452110 Department Stores
452900 Other General Merchandise
Stores
Miscellaneous Store Retailers
453110 Florists
453210 Office Supplies & Stationery
Stores
453220 Gift, Novelty, & Souvenir
Stores
453310 Used Merchandise Stores
453910 Pet & Pet Supplies Stores
453920 Art Dealers
453930 Manufactured (Mobile) Home
Dealers
453990 All Other Miscellaneous Store
Retailers (including tobacco,
candle, & trophy shops)
Nonstore Retailers
454110 Electronic Shopping &
Mail-Order Houses
454210 Vending Machine Operators
454310 Fuel Dealers (including Heating
Oil & Liquefied Petroleum)
454390 Other Direct Selling
Establishments (including
door-to-door retailing, frozen
food plan providers, party plan
merchandisers, & coffee-break
service providers)

Transportation and
Warehousing

Air, Rail, and Water Transportation
481000 Air Transportation
482110 Rail Transportation
483000 Water Transportation
Truck Transportation
484110 General Freight Trucking, Local
484120 General Freight Trucking,
Long-distance
484200 Specialized Freight Trucking
Transit and Ground Passenger
Transportation
485110 Urban Transit Systems
485210 Interurban & Rural Bus
Transportation
485310 Taxi Service
485320 Limousine Service
485410 School & Employee Bus
Transportation
485510 Charter Bus Industry
485990 Other Transit & Ground
Passenger Transportation
Pipeline Transportation
486000 Pipeline Transportation
Scenic & Sightseeing Transportation
487000 Scenic & Sightseeing
Transportation
Support Activities for Transportation
488100 Support Activities for Air
Transportation
488210 Support Activities for Rail
Transportation
488300 Support Activities for Water
Transportation
488410 Motor Vehicle Towing
488490 Other Support Activities for
Road Transportation
488510 Freight Transportation
Arrangement
488990 Other Support Activities for
Transportation
Couriers and Messengers
492110 Couriers
492210 Local Messengers & Local
Delivery

Warehousing and Storage
493100 Warehousing & Storage
(except lessors of
miniwarehouses & self-storage
units)

Information

Publishing Industries (except
Internet)
511110 Newspaper Publishers
511120 Periodical Publishers
511130 Book Publishers
511140 Directory & Mailing List
Publishers
511190 Other Publishers
511210 Software Publishers
Motion Picture and Sound Recording
Industries
512100 Motion Picture & Video
Industries (except video rental)
512200 Sound Recording Industries
Broadcasting (except Internet)
515100 Radio & Television
Broadcasting
515210 Cable & Other Subscription
Programming
Telecommunications
517000 Telecommunications (including
paging, cellular, satellite, cable
& other program distribution,
resellers, other
telecommunications, & Internet
service providers)
Data Processing Services
518210 Data Processing, Hosting, &
Related Services
Other Information Services
519100 Other Information Services
(including news syndicates,
libraries, Internet publishing, &
broadcasting)

Finance and Insurance

Depository Credit Intermediation
522110 Commercial Banking
522120 Savings Institutions
522130 Credit Unions
522190 Other Depository Credit
Intermediation
Nondepository Credit Intermediation
522210 Credit Card Issuing
522220 Sales Financing
522291 Consumer Lending
522292 Real Estate Credit (including
mortgage bankers &
originators)
522293 International Trade Financing
522294 Secondary Market Financing
522298 All Other Nondepository Credit
Intermediation
Activities Related to Credit
Intermediation
522300 Activities Related to Credit
Intermediation (including loan
brokers, check clearing, &
money transmitting)
Securities, Commodity Contracts,
and Other Financial Investments and
Related Activities
523110 Investment Banking &
Securities Dealing
523120 Securities Brokerage
523130 Commodity Contracts Dealing
523140 Commodity Contracts
Brokerage
523210 Securities & Commodity
Exchanges
523900 Other Financial Investment
Activities (including portfolio
management & investment
advice)
Insurance Carriers and Related
Activities
524140 Direct Life, Health, & Medical
Insurance & Reinsurance
Carriers
524150 Direct Insurance &
Reinsurance (except Life,
Health, & Medical) Carriers
524210 Insurance Agencies &
Brokerages
524290 Other Insurance Related
Activities (including third-party

-42-

administration of insurance and
pension funds)
Funds, Trusts, and Other Financial
Vehicles
525100 Insurance & Employee Benefit
Funds
525910 Open-End Investment Funds
(Form 1120-RIC)
525920 Trusts, Estates, & Agency
Accounts
525990 Other Financial Vehicles
(including mortgage REITs &
closed-end investment funds)
“Offices of Bank Holding Companies”
and “Offices of Other Holding
Companies” are located under
Management of Companies (Holding
Companies) below.

Real Estate and Rental and
Leasing

Real Estate
531110 Lessors of Residential
Buildings & Dwellings
(including equity REITs)
531120 Lessors of Nonresidential
Buildings (except
Miniwarehouses) (including
equity REITs)
531130 Lessors of Miniwarehouses &
Self-Storage Units (including
equity REITs)
531190 Lessors of Other Real Estate
Property (including equity
REITs)
531210 Offices of Real Estate Agents &
Brokers
531310 Real Estate Property Managers
531320 Offices of Real Estate
Appraisers
531390 Other Activities Related to Real
Estate
Rental and Leasing Services
532100 Automotive Equipment Rental
& Leasing
532210 Consumer Electronics &
Appliances Rental
532220 Formal Wear & Costume
Rental
532230 Video Tape & Disc Rental
532290 Other Consumer Goods Rental
532310 General Rental Centers
532400 Commercial & Industrial
Machinery & Equipment Rental
& Leasing
Lessors of Nonfinancial Intangible
Assets (except copyrighted works)
533110 Lessors of Nonfinancial
Intangible Assets (except
copyrighted works)

Professional, Scientific, and
Technical Services

Legal Services
541110 Offices of Lawyers
541190 Other Legal Services
Accounting, Tax Preparation,
Bookkeeping, and Payroll Services
541211 Offices of Certified Public
Accountants
541213 Tax Preparation Services
541214 Payroll Services
541219 Other Accounting Services
Architectural, Engineering, and
Related Services
541310 Architectural Services
541320 Landscape Architecture
Services
541330 Engineering Services
541340 Drafting Services
541350 Building Inspection Services
541360 Geophysical Surveying &
Mapping Services
541370 Surveying & Mapping (except
Geophysical) Services
541380 Testing Laboratories
Specialized Design Services
541400 Specialized Design Services
(including interior, industrial,
graphic, & fashion design)

Principal Business Activity Codes (Continued)
Computer Systems Design and
Related Services
541511 Custom Computer
Programming Services
541512 Computer Systems Design
Services
541513 Computer Facilities
Management Services
541519 Other Computer Related
Services
Other Professional, Scientific, and
Technical Services
541600 Management, Scientific, &
Technical Consulting Services
541700 Scientific Research &
Development Services
541800 Advertising & Related Services
541910 Marketing Research & Public
Opinion Polling
541920 Photographic Services
541930 Translation & Interpretation
Services
541940 Veterinary Services
541990 All Other Professional,
Scientific, & Technical Services

Management of Companies
(Holding Companies)
551111 Offices of Bank Holding
Companies
551112 Offices of Other Holding
Companies

Administrative and Support and
Waste Management and
Remediation Services
Administrative and Support Services
561110 Office Administrative Services
561210 Facilities Support Services
561300 Employment Services
561410 Document Preparation
Services
561420 Telephone Call Centers
561430 Business Service Centers
(including private mail centers
& copy shops)
561440 Collection Agencies
561450 Credit Bureaus
561490 Other Business Support
Services (including
repossession services, court
reporting, & stenotype
services)
561500 Travel Arrangement &
Reservation Services
561600 Investigation & Security
Services
561710 Exterminating & Pest Control
Services
561720 Janitorial Services
561730 Landscaping Services

561740 Carpet & Upholstery Cleaning
Services
561790 Other Services to Buildings &
Dwellings
561900 Other Support Services
(including packaging & labeling
services, & convention & trade
show organizers)
Waste Management and Remediation
Services
562000 Waste Management &
Remediation Services

Educational Services

611000 Educational Services (including
schools, colleges, &
universities)

Health Care and Social
Assistance

Offices of Physicians and Dentists
621111 Offices of Physicians (except
mental health specialists)
621112 Offices of Physicians, Mental
Health Specialists
621210 Offices of Dentists
Offices of Other Health Practitioners
621310 Offices of Chiropractors
621320 Offices of Optometrists
621330 Offices of Mental Health
Practitioners (except
Physicians)
621340 Offices of Physical,
Occupational & Speech
Therapists, & Audiologists
621391 Offices of Podiatrists
621399 Offices of All Other
Miscellaneous Health
Practitioners
Outpatient Care Centers
621410 Family Planning Centers
621420 Outpatient Mental Health &
Substance Abuse Centers
621491 HMO Medical Centers
621492 Kidney Dialysis Centers
621493 Freestanding Ambulatory
Surgical & Emergency Centers
621498 All Other Outpatient Care
Centers
Medical and Diagnostic Laboratories
621510 Medical & Diagnostic
Laboratories
Home Health Care Services
621610 Home Health Care Services
Other Ambulatory Health Care
Services
621900 Other Ambulatory Health Care
Services (including ambulance
services & blood & organ
banks)

Hospitals
622000 Hospitals
Nursing and Residential Care
Facilities
623000 Nursing & Residential Care
Facilities
Social Assistance
624100 Individual & Family Services
624200 Community Food & Housing, &
Emergency & Other Relief
Services
624310 Vocational Rehabilitation
Services
624410 Child Day Care Services

Arts, Entertainment, and
Recreation

Performing Arts, Spectator Sports,
and Related Industries
711100 Performing Arts Companies
711210 Spectator Sports (including
sports clubs & racetracks)
711300 Promoters of Performing Arts,
Sports, & Similar Events
711410 Agents & Managers for Artists,
Athletes, Entertainers, & Other
Public Figures
711510 Independent Artists, Writers, &
Performers
Museums, Historical Sites, and
Similar Institutions
712100 Museums, Historical Sites, &
Similar Institutions
Amusement, Gambling, and
Recreation Industries
713100 Amusement Parks & Arcades
713200 Gambling Industries
713900 Other Amusement &
Recreation Industries
(including golf courses, skiing
facilities, marinas, fitness
centers, & bowling centers)

Accommodation and Food
Services

Accommodation
721110 Hotels (except Casino Hotels)
& Motels
721120 Casino Hotels
721191 Bed & Breakfast Inns
721199 All Other Traveler
Accommodation
721210 RV (Recreational Vehicle)
Parks & Recreational Camps
721310 Rooming & Boarding Houses
Food Services and Drinking Places
722300 Special Food Services
(including food service
contractors & caterers)
722410 Drinking Places (Alcoholic
Beverages)
722511 Full Service Restaurants

-43-

722513 Limited Service Restaurants
722514 Cafeterias & Buffets
722515 Snack & Non-alcoholic
Beverage Bars

Other Services

Repair and Maintenance
811110 Automotive Mechanical &
Electrical Repair &
Maintenance
811120 Automotive Body, Paint,
Interior, & Glass Repair
811190 Other Automotive Repair &
Maintenance (including oil
change & lubrication shops &
car washes)
811210 Electronic & Precision
Equipment Repair &
Maintenance
811310 Commercial & Industrial
Machinery & Equipment
(except Automotive &
Electronic) Repair &
Maintenance
811410 Home & Garden Equipment &
Appliance Repair &
Maintenance
811420 Reupholstery & Furniture
Repair
811430 Footwear & Leather Goods
Repair
811490 Other Personal & Household
Goods Repair & Maintenance
Personal and Laundry Services
812111 Barber Shops
812112 Beauty Salons
812113 Nail Salons
812190 Other Personal Care Services
(including diet & weight
reducing centers)
812210 Funeral Homes & Funeral
Services
812220 Cemeteries & Crematories
812310 Coin-Operated Laundries &
Drycleaners
812320 Drycleaning & Laundry
Services (except
Coin-Operated)
812330 Linen & Uniform Supply
812910 Pet Care (except Veterinary)
Services
812920 Photofinishing
812930 Parking Lots & Garages
812990 All Other Personal Services
Religious, Grantmaking, Civic,
Professional, and Similar
Organizations
813000 Religious, Grantmaking, Civic,
Professional, & Similar
Organizations (including
condominium and homeowners
associations)

Index

To help us develop a more useful index, please let us know if you have ideas for index entries.
See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.

A
Accounting methods ....... 5
Accounting period ......... 5
Accumulated adjustments
account ................. 38
Amended return ............ 6
Amortization ............... 15
Assembling return ......... 4
At-risk activities–reporting
requirements .......... 22
B
Bad debt deduction ...... 16
Balance sheets–Sch.
L .......................... 37
Business startup
expenses ............... 15
C
Change in accounting
method .................... 5
Charitable
contributions .......... 26
Cost of goods sold ....... 13
D
Deductions ............ 14, 26
Deductions, limitations
on ........................ 14
Deductions from oil and gas
properties .............. 34
Depletion ................... 17
Depletion (other than oil
and gas) ................ 34
Depreciation ............... 17
Direct deposit of
refund ................. 1, 20
Distributions ............... 39
Distributions,
property ................ 34
E
Election, termination of ... 2

Electronic filing ........ ...... 2
Employee benefit
programs ............... 17
Employer identification
number (EIN) .......... 12
Estimated tax
payment .............. 4, 20
Estimated tax penalty ... . 20
Expenses, nondeductible–
Sch. K or K-1 ........... 34
Extension of time to
file .......................... 3
Extraterritorial income
exclusion ............... 11
F
Farming, special rules ... 14
Final return ................ 12
Foreign transactions–Sch. K
or K-1 .................... 31
Forms and Publications,
how to get ................ 1
G
Gain, ordinary ............. 13
Gain (loss), section 1231–
Sch. K or K-1 ........... 25
Gross receipts ............ 12
I
Income ............. .......... 12
Income, rental
activities ................ 23
Income, tax-exempt ...... 34
Income, trade or business
activities ................ 23
Income from oil and gas
properties .............. 34
Installment sales ...... .... 13
Interest deduction ........ 16
Interest due on tax
payment .................. 4
Interest expense,
investment ........ ...... 27
Inventory ................... 14

Investment income and
expenses ............... 35
L
Loans from
shareholders ........... 35
Lobbying expenses,
nondeductibility ....... 18
Low-income housing
credit .................... 29
Low-income housing credit
recapture ............... 35
M
Multiple activities–reporting
requirements .......... 22
O
Officer compensation .... . 15
P
Passive activities–
rental ...................... 7
Passive activities–reporting
requirements .......... 10
Passive activity
limitations ................ 6
Penalties ..................... 4
Pension, profit-sharing, etc.,
plans .................... 17
Portfolio income ........ 8, 23
Preparer, tax return ........ 3
Private delivery
services ................... 3
Property distributions ... 34
Q
Qualified rehabilitation
expenditures ........... 29
R
Recapture, low-income
housing credit ......... 35

-44-

Recapture, section 179
deduction ............... 36
Recordkeeping .............. 6
Reforestation ...... 19, 28, 37
Related party
transactions ........ ..... 14
Rental activities, income
and expenses .......... 23
Rental deduction ...... .... 16
Return, amended ........... 6
S
Salaries and wages ...... 15
Sales ........................ 12
Schedule L ................. 37
Schedule M-1 .............. 38
Schedule M-2 .............. 38
Schedule M-3 .............. 12
Section 179 expense ..... 26
Section 263A rules ....... 14
Section 59(e)(2)
expenditures ........... 27
Self-charged interest ...... 9
Substitute Sch. K-1 ....... 21
T
Taxes and licenses
deduction ............... 16
Taxes due .................. 19
Tax issues, unresolved .... 1
Termination of S
election ................... 2
Travel and entertainment
deduction ............... 18
W
When to file ..................
Where to file .......... ........
Who must file ................
Who must sign ..............

3
3
2
3