2011 Instruction 1120 S 1362 I1120s

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2011

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
Photographs of Missing
Children . . . . . . . . . . . . . . . .
Unresolved Tax Issues . . . . . .
Direct Deposit of Refund . . . . .
How To Get Forms and
Publications . . . . . . . . . . . . .
General Instructions . . . . . . .
Purpose of Form . . . . . . . . . . .
Who Must File . . . . . . . . . . . . .
Termination of Election . . . . . .
Electronic Filing . . . . . . . . . . . .
When To File . . . . . . . . . . . . .
Where 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 . . . . . . . . .
Business Code . . . . . . . . . . . .
Schedule M-3 Information . . . .
Employer Identification
Number (EIN) . . . . . . . . . . .
Total Assets . . . . . . . . . . . . . .
Final Return, Name Change,
Address Change, Amended
Return, or S Election
Termination or Revocation . .
Income . . . . . . . . . . . . . . . . . .
Deductions . . . . . . . . . . . . . . .
Tax and Payments . . . . . . . . .
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 . . . . . . . . . . . . . . .
Jan 31, 2012

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Contents
Schedule M-1 . . . . . . . . .
Schedule M-2 . . . . . . . . .
Principal Business Activity
Codes . . . . . . . . . . . . .
Index . . . . . . . . . . . . . . .

Page
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these children home by looking at the
photographs and calling
1-800-THE-LOST (1-800-843-5678) if
you recognize a child.

. . . . . . . . 39
. . . . . . . . 42

Unresolved Tax Issues

What’s New
Merchant card and third-party
payments. For the 2011 tax year, the
IRS has deferred the requirement to
separately report on the corporation’s
return the amount of merchant card and
third party network payments from
Form 1099-K, Merchant Card and
Third-Party Network Payments.
Instead, report gross receipts or sales
from all business operations as
indicated in the instructions for lines 1a
through 1d.
Cost of goods sold. We deleted
Schedule A (Cost of Goods Sold) from
Form 1120S. Cost of goods sold is now
figured on Form 1125-A, Cost of Goods
Sold.
Change of address. Form 8822-B,
Change of Address — Business, has
been created specifically for business
use. Corporations use this form to notify
the IRS of a new business address.
See the instructions for Item H.
Form(s) 1099. On Schedule B, we
added new questions 10a and 10b
about Form(s) 1099.
Food inventory contributions. The
increased deduction for certain
charitable contributions of food
inventory expired for contributions
made after December 31, 2011. See
section 170(e)(3)(C).
Future developments. The IRS has
created a page on IRS.gov for
information about Form 1120S and its
instructions at www.irs.gov/form1120s.
Information about any future
developments affecting Form 1120S
(such as legislation enacted after we
released it) will be posted on that page.

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
Cat. No. 11515K

The Taxpayer Advocate Service (TAS)
is an independent organization within
the IRS whose employees assist
taxpayers who are experiencing
economic harm, who are seeking help
in resolving tax problems that have not
been resolved through normal
channels, or who believe that an IRS
system or procedure is not working as it
should. The service is free, confidential,
tailored to meet your needs, and is
available for businesses, as well as
individuals.
The corporation can contact the TAS
as follows.
• Call the TAS toll-free line at
1-877-777-4778 or TTY/TDD
1-800-829-4059 to see if the
corporation is eligible for assistance.
• Call or write the corporation’s local
taxpayer advocate, whose phone
number and address are listed in the
local telephone directory and in Pub.
1546, Taxpayer Advocate Service –
Your Voice at the IRS.
• File Form 911, Request for Taxpayer
Advocate Service Assistance (And
Application for Taxpayer Assistance
Order), or ask an IRS employee to
complete it on the corporation’s behalf.
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, instructions, and
publications;
• Order IRS products online;
• Research your tax questions online;
• Search publications online by topic or
keyword;

• View Internal Revenue Bulletins

(IRBs) published in recent years; and
• Sign up to receive local and national
tax news by email.
IRS Tax Products DVD. You can
order Pub. 1796, IRS Tax Products
DVD, and obtain the following.
• 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
(FAQs).
• Tax Topics from the IRS telephone
response system.
• Internal Revenue Code — Title 26 of
the U.S. Code.
• 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 in early
January.
– The final release will ship in early
March.
Buy the DVD from the 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 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, Election by
a Small Business Corporation. In the
statement, the corporation must notify

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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, 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.

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, 2012. 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
Instructions for Form 1120S

is not a Saturday, Sunday, or legal
holiday.

Private delivery services cannot
deliver items to P.O. boxes. You
CAUTION must use the U.S. Postal
Service to mail any item to an IRS P.O.
box address.

!

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.
The private delivery service can tell
you how to get written proof of the
mailing date.

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.

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

Where To File
File the corporation’s return at the applicable IRS address listed below.
If the corporation’s principal And the total assets at the
business, office, or agency end of the tax year (Form
is located in:
1120S, page 1, item F) are:
Connecticut, Delaware, District
of Columbia, 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

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

Alabama, Alaska, Arizona,
Arkansas, California,
Colorado, Florida, Hawaii,
Idaho, Iowa, Kansas,
Louisiana, Minnesota,
Mississippi, Missouri,
Montana, Nebraska, Nevada,
New Mexico, North Dakota,
Oklahoma, Oregon, South
Dakota, Texas, Utah,
Washington, Wyoming

Any amount

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

A foreign country or U.S.
possession

Any amount

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

Instructions for Form 1120S

-3-

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 2011 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 2012 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 4
of Form 1120S in the following order.
1. Schedule N (Form 1120).
2. Form 8825.
3. Form 8050.
4. Form 1125-A.
5. Form 4136.
6. Form 8941.
7. Form 5884-B.
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, The Secure
Way to Pay Your Federal Taxes.
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) 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 2012 by April 17,
June 15, September 17, and December
17. 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.

-4-

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 interest and
CAUTION penalties after it files its return,
respond with 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 does not show all the information
required, unless each failure is due to
reasonable cause. See Caution above.
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 above.
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,

!

Instructions for Form 1120S

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
above.
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
• 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.
Instructions for Form 1120S

• 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.

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

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

it, the corporation must report income
or 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.

Passive Activity
Limitations

Activities That Are Not
Passive Activities

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

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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
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
Instructions for Form 1120S

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).

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.

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),
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).

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).
• 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.

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.

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

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

Instructions for Form 1120S

-7-

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
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, Rental
Real Estate Income and Expenses of a

Partnership or an S Corporation, 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.
• 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.

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• 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 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,
Instructions for Form 1120S

• 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.
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
Instructions for Form 1120S

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

-9-

the equity-financed interest income
from the activity is nonpassive income.
Note. The amount of income from the
activities in items 1 through 3 above
that any shareholder will be required to
recharacterize as nonpassive income
may be limited under Temporary
Regulations section 1.469-2T(f)(8).
Because the corporation will not have
information regarding all of a
shareholder’s activities, it must identify
all corporate activities meeting the
definitions in items 2 and 3 as activities
that may be subject to
recharacterization.
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 attachment 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).
2. On the attachment for each
activity, provide a statement, using the
same box numbers as shown on
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;
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.

-10-

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
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
Instructions for Form 1120S

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
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 2011 return for calendar year
2011 and fiscal years that begin in
2011 and end in 2012. For a fiscal or
short tax year return, fill in the tax year
space at the top of the form.
The 2011 Form 1120S can also be
used if:
• The corporation has a tax year of
less than 12 months that begins and
ends in 2012, and
• The 2012 Form 1120S is not
available at the time the corporation is
required to file its return.
The corporation must show its 2012
tax year on the 2011 Form 1120S and
take into account any tax law changes
that are effective for tax years
beginning after December 31, 2011.
Instructions for Form 1120S

Name and Address
Enter the corporation’s true name (as
set forth in the charter or other legal
document creating it), address, and EIN
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.
• 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

-11-

“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.
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. Do not include any
cancellation of debt (COD) income that
is deferred under section 108(i) on lines
1a through 5. Report deferred COD
income that is required to be included
in income in the current year under
section 108(i) on line 10 of Schedule K
and in box 10 of Schedule K-1 using
code E (other income). See Other
income (loss) (code E), later, for details.
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
Section 1082 Basis Adjustment), and
Pub. 908, Bankruptcy Tax Guide.

Line 1a. Merchant Card and
Third-Party Payments
For the 2011 tax year, the IRS has
deferred the requirement to separately
report on your return the amount of
merchant card and third-party network
payments received. Therefore, enter
zero (-0-) on line 1a.

Line 1b. Gross Receipts or
Sales not Reported on Line
1a
Enter on line 1b gross receipts or sales
from all business operations (including
gross receipts or sales included in any
amounts reported to the corporation on
Form(s) 1099-K, Merchant Card and
Third-Party Network Payments), except
for amounts that must be reported on
lines 4 and 5.
Note. Amounts reported on Form
1099-K represent gross payments
made to you (before reduction for any
fees), and may include amounts that
are not gross income to you.
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
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,
Rev. Proc. 2008-52, 2008-36 I.R.B.
587, Rev. Proc. 2009-39, 2009-38
I.R.B. 371, and Rev. Proc. 2011-14,
2011-4 I.R.B. 330. Also see the
Instructions for Form 3115.
Installment sales. Generally, the
installment method cannot be used for
dealer dispositions of property. A
“dealer disposition” is any disposition
of: (a) personal property by a person
who regularly sells or otherwise
disposes of personal property of the
same type on the installment plan or (b)
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).

-12-

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 1b 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: (a) gross sales,
(b) cost of goods sold, (c) gross profits,
(d) percentage of gross profits to gross
sales, (e) amount collected, and (f)
gross profit on the amount collected.

Line 1d. Returns and
Allowances Plus any Other
Adjustments
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.

Line 4. Net Gain (Loss) From
Form 4797
Include only ordinary gains or
losses from the sale, exchange,
CAUTION 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 the instructions for

!

Instructions for Form 1120S

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.
• 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.
Instructions for Form 1120S

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.

-13-

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 the
Form 1125-A instructions.
• 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.
• 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.
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 that begins during the
2011 tax year, complete and attach
Form 4562.
For more details on business
start-up and organizational costs, see

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the Instructions for Form 4562. Also
see Pub. 535, Business Expenses.
Reducing certain expenses for which
credits are allowable. If the
corporation claims any of the following
credits, it may need to reduce the
otherwise allowable deductions for
expenses used to figure the credit.
• 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 to
CAUTION a corporate officer must be
treated as wages to the extent the
amounts are reasonable compensation
for services rendered to the
corporation.

!

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.
Instructions for Form 1120S

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).

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 Schedule D (Form 1120S), Capital
Gains and Losses and Built-in Gains. A
corporation that uses the cash method
of accounting cannot claim a bad debt
deduction unless the amount was
previously included in income.

Line 9. Repairs and
Maintenance

Line 12. Taxes and Licenses

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
Instructions for Form 1120S

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:

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

$18,500

After 12/31/06 but before 1/1/08

$15,500

After 12/31/04 but before 1/1/07

$15,200

After 12/31/03 but before 1/1/05

$17,500

If the lease term began before January 1, 2004, see
Pub. 463, Travel, Entertainment, Gift, and Car
Expenses, to find out if the corporation has an
inclusion amount. The inclusion amount for lease
terms beginning in 2012 will be published in the
Internal Revenue Bulletin in early 2012.

See Pub. 463 for instructions on
figuring the inclusion amount.
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

-15-

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.
• 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
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.
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.

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

-16-

Spouses) Retirement Plan. File this
form for a plan that only covers the
owner (or 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.
Instructions for Form 1120S

• 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, and Notice 2008-40, 2008-14
I.R.B. 725.
• 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;
Instructions for Form 1120S

• 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
corporation’s stock, the deductible
expense is limited. See section
274(e)(2) and Notice 2005-45, 2005-24
I.R.B. 1228.
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

-17-

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
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 21
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. To the left
of the total on line 22c, enter the
amount owed and “From Form 8697.”
Interest due under the look-back
method for property depreciated
under the income forecast method.
If the corporation owes this interest,
attach Form 8866. 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

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. Excess passive investment income—
Subtract line 3 from line 2
5. Enter deductions directly connected
with the production of income on line
2 (see section 1375(b)(2))*
6. Net passive income—Subtract line 5
from line 2
7. 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 line
22a, page 1, Form 1120S

*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.

-18-

Instructions for Form 1120S

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
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 6
Complete item 6 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 recognized built-in gain from prior
years. See sections 1374(c)(2) and
(d)(1).
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.
Instructions for Form 1120S

Item 7
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 2011 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 8
Total receipts is the sum of the
following amounts.
• Gross receipts or sales (page 1, line
1c).
• 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.

Item 9
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.

Questions 10a and 10b
If the corporation made any payment in
2011 that would require it to file any
Form(s) 1099, check the ‘‘Yes’’ box for
question 10a and answer question 10b.
Otherwise, check the ‘‘No’’ box. For
more information on the filing
requirements for information returns,
see the General Instructions for Certain
Information Returns.

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 income is not
self-employment income and is not
subject to self-employment tax.

-19-

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
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,
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

-20-

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.
Instructions for Form 1120S

Part II. Information About the
Shareholder
On each Schedule K-1, enter the
shareholder’s name, address,
identifying number, and percentage of
stock ownership.

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.

a

b

c (a ⫻ b)

% of total
stock owned

% of tax
year held

% of ownership
for the year

A

50
40

50
50

25
+20

45

B

50
40

50
50

25
+20

45

20

50

10

C

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)

Item F

Income (Loss)

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.
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.

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

Instructions for Form 1120S

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.

-21-

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.
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.

Line 3. Other Net Rental Income
(Loss)
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.
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
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.
Schedule K-1. Enter each
shareholder’s pro rata share of interest
income in box 4 of Schedule K-1.

Line 5a. Ordinary Dividends
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.
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 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
2006-101, 2006-47 I.R.B. 930, 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, 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 line 14c and
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 6.
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 13.
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 amounts from line 8a are
from foreign sources, see the
CAUTION instructions for line 14c and
lines 14d through 14f for additional
statements required.

!

-22-

If any gain or loss from lines 6
or 13 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 13.
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
Instructions for Form 1120S

generally must treat the gain allocable
to each installment payment as
unrecaptured section 1250 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.

!

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.
• The sale or exchange of an interest
in a partnership.
• An estate, trust, REIT, or RIC.
Instructions for Form 1120S

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 line 14c and
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)).
• 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.

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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 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 5 or 12 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).
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.

during the year that is qualified
enterprise zone, qualified section 179
Recovery Assistance, qualified section
179 disaster assistance, or qualifed real
property.

Deductions

Cash contributions must be supported
by a dated bank record or receipt.

Line 11. Section 179 Deduction

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.

A corporation can elect to expense part
of the cost of certain property the
corporation purchased during the tax
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.
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).
Identify on an attachment to
Schedules K and K-1 the cost of any
section 179 property placed in service

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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.

Line 12a. Charitable
Contributions

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.
Instructions for Form 1120S

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
before January 1, 2012, for the care of
the ill, needy, and infants. The food
must meet all the quality and 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.
Instructions for Form 1120S

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.
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

!

-25-

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.

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 on page 18
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
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

-26-

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:
• 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.
Instructions for Form 1120S

• 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.
• 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 commencing
before January 1, 2012, 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) 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 original issue discount
(OID) that is subject to section 108(i)(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
Instructions for Form 1120S

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
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

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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.

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

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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.
• 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).
Instructions for Form 1120S

• 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
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 forestry 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
Instructions for Form 1120S

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).
• 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.

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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. See
Determining the Source of Income
From the Sales or Exchanges of
Certain Personal Property in Pub. 514
and section 865.
• Specify foreign source capital gains
or losses within each separate limitation
category. Also separately identify
foreign source gains or losses within
each separate limitation category that
are collectibles (28%) gains and losses

or unrecaptured section 1250 gains.
Also separately identify qualified
dividends within each separate
limitation category.

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 and foreign source capital
gains (losses) within each separate
limitation category.
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.

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)).
• Taxes on foreign oil and gas
extraction income and foreign oil
related income (section 907(a)).

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• Taxes attributable to boycott

operations (section 908).
• Failure to timely file (or furnish all of
the information required on) Forms
5471 and 8865.
• Any other items (specify).

Line 14n. Other Foreign Tax
Information
• 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 on
page 11.
• 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.
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,
Instructions for Form 1120S

code J, of Schedule K-1 the information
needed to figure the deduction.
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.

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,
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.
Instructions for Form 1120S

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.

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).

Line 15b. Adjusted Gain or
Loss

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

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)

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

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.
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 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.
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.

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.

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.

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

Line 15d. Oil, Gas, and
Geothermal Properties—Gross
Income

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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
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.
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.
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
in interest income with respect to new
clean renewable energy, qualified
energy conservation, qualified forestry
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

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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 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
Instructions for Form 1120S

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.
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
Instructions for Form 1120S

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(e)(8) for details.
• The new markets credit. See Form
8874 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.

!

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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.
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.
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
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.
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.
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.
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.
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

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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, 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.
Instructions for Form 1120S

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 8 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.
Instructions for Form 1120S

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.
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 8 on Schedule B.
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).

-35-

• 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.
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.

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
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).

Distributions

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
2011 tax year. If there is a beginning
balance for the 2011 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.
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.

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
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).

Schedule M-2 Worksheet

Keep for Your Records

1. Balance at beginning of tax year . . . .

(a) Accumulated
adjustments account

(b) Other adjustments
account

-0-

-0-

2

Ordinary income from page 1, line 21

10,000

3

Other additions . . . . . . . . . . . . . . . .

20,000

4

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

(

5

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

(

36,000

)

6

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

(

6,000

)

7

Distributions other than dividend
distributions . . . . . . . . . . . . . . . . . .

8

Balance at end of tax year. Subtract
line 7 from line 6 . . . . . . . . . . . . . . .

5,000
)

-0(

(c) Shareholders’
undistributed taxable income
previously taxed

(

)
5,000
5,000

6,000

)

-36-

-0-

Instructions for Form 1120S

5. Reduce any remaining
shareholders’ equity accounts.
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
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.

Instructions for Form 1120S

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, paragraph 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.
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

-37-

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
below.
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.

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.

Sch. D (1120S)

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.

-38-

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
the largest percentage of its “total receipts.” Total
receipts is defined as the sum of gross receipts or
sales (page 1, line 1c); 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 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).

Code

Code

Code

Code

Agriculture, Forestry, Fishing
and Hunting

Heavy and Civil Engineering
Construction
237100 Utility System Construction
237210 Land Subdivision
237310 Highway, Street, & Bridge
Construction
237990 Other Heavy & Civil
Engineering Construction
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)

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
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
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

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

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 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
315230 Women’s & Girls’ Cut & Sew
Apparel Mfg
315290 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

-39-

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

Principal Business Activity Codes (continued)
Code

Code

Code

Code

423500 Metal & Mineral (except
Petroleum)
423600 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
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

445120
445210
445220
445230
445291
445292
445299

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)

Finance and Insurance

Retail Trade
Motor Vehicle and Parts Dealers
441110 New Car Dealers
441120 Used Car Dealers
441210 Recreational Vehicle Dealers
441221 Motorcycle Dealers
441222 Boat Dealers
441229 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
443111 Household Appliance Stores
443112 Radio, Television, & Other
Electronics Stores
443120 Computer & Software Stores
443130 Camera & Photographic
Supplies 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

Convenience Stores
Meat Markets
Fish & Seafood Markets
Fruit & Vegetable Markets
Baked Goods Stores
Confectionery & Nut Stores
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
451220 Prerecorded Tape, Compact
Disc, & Record Stores
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
454311 Heating Oil Dealers
454312 Liquefied Petroleum Gas
(Bottled Gas) Dealers
454319 Other Fuel Dealers
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

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)

-40-

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 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)
531114 Cooperative Housing
(including equity REITs)
531120 Lessors of Nonresidential
Buildings (except
Miniwarehouses) (including
equity REITs)
531130 Lessors of Miniwarehouses &
Self-Storage Units (including
equity REITs)

Principal Business Activity Codes (continued)
Code

Code

Code

Code

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)

541920 Photographic Services
541930 Translation & Interpretation
Services
541940 Veterinary Services
541990 All Other Professional,
Scientific, & Technical
Services

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

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
722110 Full-Service Restaurants
722210 Limited-Service Eating
Places
722300 Special Food Services
(including food service
contractors & caterers)
722410 Drinking Places (Alcoholic
Beverages)

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)
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

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

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

-41-

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
A
Accounting methods . . . . . . . . 5
Accounting period . . . . . . . . . . 5
Accumulated adjustments
account . . . . . . . . . . . . . . . . . 35
Amended return . . . . . . . . . . . . 5
Amortization . . . . . . . . . . . . . . . 14
Assembling return . . . . . . . . . . 3
At-risk activities – reporting
requirements . . . . . . . . . . . . 20
B
Bad debt deduction . . . . . . . . 15
Balance sheets – Sch.
L . . . . . . . . . . . . . . . . . . . . . . . . 35
Business startup
expenses . . . . . . . . . . . . . . . . 14
C
Change in accounting
method . . . . . . . . . . . . . . . . . . . 5
Charitable
contributions . . . . . . . . . . . . 24
Cost of goods sold . . . . . . . . . 12
D
Deductions . . . . . . . . . . . . 13, 24
Deductions from oil and gas
properties . . . . . . . . . . . . . . . 31
Deductions, limitations
on . . . . . . . . . . . . . . . . . . . . . . . 13
Depletion . . . . . . . . . . . . . . . . . . 16
Depletion (other than oil and
gas) . . . . . . . . . . . . . . . . . . . . . 31
Depreciation . . . . . . . . . . . . . . . 16
Direct deposit of refund . . . . 1,
18
Distributions . . . . . . . . . . . . . . . 36
Distributions, property . . . . . . 32
E
Election, termination of . . . . . 2
Electronic filing . . . . . . . . . . . . . 2

Employee benefit
programs . . . . . . . . . . . . . . . . 16
Employer identification
number (EIN) . . . . . . . . . . . . 11
Estimated tax payment . . . . 4,
18
Estimated tax penalty . . . . . . 18
Expenses,
nondeductible – Sch. K or
K-1 . . . . . . . . . . . . . . . . . . . . . . 32
Extension of time to file . . . . . 3
Extraterritorial income
exclusion . . . . . . . . . . . . . . . . 10
F
Farming, special rules . . . . . 14
Final return . . . . . . . . . . . . . . . . 11
Foreign transactions – Sch. K
or K-1 . . . . . . . . . . . . . . . . . . . 29
Forms and Publications, how
to get . . . . . . . . . . . . . . . . . . . . 1
G
Gain (loss), section
1231 – Sch. K or K-1 . . . . . 23
Gain, ordinary . . . . . . . . . . . . . 12
Gross receipts . . . . . . . . . . . . . 12
I
Income . . . . . . . . . . . . . . . . . . . . 12
Income from oil and gas
properties . . . . . . . . . . . . . . . 31
Income, rental
activities . . . . . . . . . . . . . . . . . 21
Income, tax-exempt . . . . . . . . 32
Income, trade or business
activities . . . . . . . . . . . . . . . . . 21
Installment sales . . . . . . . . . . . 12
Interest deduction . . . . . . . . . 15
Interest due on tax
payment . . . . . . . . . . . . . . . . . . 4
Interest expense,
investment . . . . . . . . . . . . . . 25
Inventory . . . . . . . . . . . . . . . . . . 13

Investment income and
expenses . . . . . . . . . . . . . . . . 32
L
Loans from
shareholders . . . . . . . . . . . . 32
Lobbying expenses,
nondeductibility . . . . . . . . . . 17
Low-income housing
credit . . . . . . . . . . . . . . . . . . . . 27
Low-income housing credit
recapture . . . . . . . . . . . . . . . . 33
M
Multiple activities – reporting
requirements . . . . . . . . . . . . 20
O
Officer compensation . . . . . . 14
P
Passive activities – rental . . . . 7
Passive activities – reporting
requirements . . . . . . . . . . . . 10
Passive activity
limitations . . . . . . . . . . . . . . . . 6
Penalties . . . . . . . . . . . . . . . . . . . 4
Pension, profit-sharing, etc.,
plans . . . . . . . . . . . . . . . . . . . . 16
Portfolio income . . . . . . . . 8, 21
Preparer, tax return . . . . . . . . . 3
Private delivery services . . . . 3
Property distributions . . . . . . 32
Q
Qualified rehabilitation
expenditures . . . . . . . . . . . . 27
R
Recapture, low-income
housing credit . . . . . . . . . . . 33
Recapture, section 179
deduction . . . . . . . . . . . . . . . 34

-42-

Recordkeeping . . . . . . . . . . . . . 5
Reforestation . . . . . . 17, 26, 34
Related party
transactions . . . . . . . . . . . . . 14
Rental activities, income and
expenses . . . . . . . . . . . . . . . . 21
Rental deduction . . . . . . . . . . 15
Return, amended . . . . . . . . . . . 5
S
Salaries and wages . . . . . . . . 14
Sales . . . . . . . . . . . . . . . . . . . . . . 12
Schedule L . . . . . . . . . . . . . . . . 35
Schedule M-1 . . . . . . . . . . . . . . 35
Schedule M-2 . . . . . . . . . . . . . . 35
Schedule M-3 . . . . . . . . . . . . . . 11
Section 179 expense . . . . . . 24
Section 263A rules . . . . . . . . 13
Section 59(e)(2)
expenditures . . . . . . . . . . . . 25
Self-charged interest . . . . . . . . 8
Substitute Sch. K-1 . . . . . . . . 19
T
Tax issues, unresolved . . . . . 1
Taxes and licenses
deduction . . . . . . . . . . . . . . . 15
Taxes due . . . . . . . . . . . . . . . . . 18
Termination of S
election . . . . . . . . . . . . . . . . . . 2
Travel and entertainment
deduction . . . . . . . . . . . . . . . 17
W
When to file . . . . . . . . . . . . . . . . 2
Where to file . . . . . . . . . . . . . . . . 2
Who must file . . . . . . . . . . . . . . . 2
Who must sign . . . . . . . . . . . . . 3

■



---

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Title                           : 2011 Instruction 1120-S
Description                     : Instructions for Form 1120-S, U.S. Income Tax Return for an S Corporation
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Subject                         : Instructions for Form 1120-S, U.S. Income Tax Return for an S Corporation
Author                          : W:CAR:MP:FP

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