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ContentsVoluntary Contributions To Reduce the

Public Debt 1Changes To Note 1General Instructions 1Purpose of Form 1Who Must File 2Termination of Election 2When To File 2Period Covered 2Where To File 2Who Must Sign 2Accounting Methods 3Accounting Periods 3Rounding Off to Whole Dollars 3Recordkeeping 3Depositary Method of Tax Payment 3Estimated Tax 3Interest and Penalties 4Unresolved Tax Problems 4Other Forms, Returns, Schedules, and

Statements That May Be Required 4Attachments 5Amended Return 5Passive Activity Limitations 5Specific Instructions 9General Information 9Income 9Deductions 10Tax and Payments 13Schedule A—Cost of Goods Sold 14Schedule B—Other Information 14Designation of Tax Matters

Person (TMP) 15

General Instructions for Schedules Kand K-1 15

Purpose of Schedules 15Substitute Forms 15Shareholder’s Pro Rata Share Items 15Specific Instructions

(Schedule K Only) 15Specific Instructions

(Schedule K-1 Only) 15General Information 15Special Reporting Requirements for

Corporations With Multiple Activities 16Special Reporting Requirements for

At-Risk Activities 16Specific Items 16Specific Instructions (Schedules K and

K-1, Except as Noted) 16Income (Loss) 16Deductions 17Investment Interest 18Credits 18Adjustments and Tax Preference Items 19Foreign Taxes 20Other 21Supplemental Information 21Specific Instructions 22Schedule L—Balance Sheets 22Schedule M-1—Reconciliation of

Income (Loss) per Books With Income(Loss) per Return 22

Schedule M-2—Analysis ofAccumulated Adjustments Account,Other Adjustments Account, andShareholders’ Undistributed TaxableIncome Previously Taxed 22

Codes for Principal Business Activity 24

Voluntary Contributions ToReduce the Public DebtQuite often, inquiries are received abouthow to make voluntary contributions toreduce the public debt. A corporation maycontribute by enclosing with the tax returna check made payable to “Bureau of thePublic Debt.”

Changes To Note● Final regulations under section 263Ahave been adopted. These regulations,which require the capitalization andinclusion in inventory of certain costs,generally are effective for tax yearsbeginning after 1993. Changes inaccounting methods may be necessary asa result of the issuance of the finalregulations. These changes must be madeunder Rev. Proc. 94-49, 1994-30 I.R.B. 31.● For tax years beginning after 1993,certain shareholders who materiallyparticipate in real property trades orbusinesses are not subject to the passiveactivity limitations on losses from rentalreal estate activities in which theymaterially participate. For details, see item2 under Activities That Are Not PassiveActivities on page 6.● S corporations that have employees thatlived and worked in an area designated bythe Federal Government as an“empowerment zone” may be able to claimthe credit figured on Form 8844,Empowerment Zone Employment Credit.

General InstructionsNote: In addition to the publications listedthroughout these instructions, you maywish to get Pub. 334, Tax Guide for SmallBusiness; Pub. 535, Business Expenses;Pub. 550, Investment Income andExpenses; Pub. 556, Examination ofReturns, Appeal Rights, and Claims forRefund; and Pub. 589, Tax Information onS Corporations.

You can get these and other publicationsreferenced throughout these instructions atmost IRS offices. To order publications andforms, call our toll-free number1-800-TAX-FORM (1-800-829-3676).

Purpose of FormForm 1120S is used to report the income,deductions, gains, losses, etc., of adomestic corporation that has elected tobe an S corporation by filing Form 2553,Election by a Small Business Corporation,and whose election is in effect for the taxyear.

Instructions for Form 1120SU.S. Income Tax Return for an S CorporationSection references are to the Internal Revenue Code unless otherwise noted.

Paperwork Reduction Act NoticeWe ask for the information on these forms to carry out the Internal Revenue laws of theUnited States. You are required to give us the information. We need it to ensure that youare complying with these laws and to allow us to figure and collect the right amount oftax.

The time needed to complete and file the following forms will vary depending onindividual circumstances. The estimated average times are:

Copying,assembling, andsending the form

to the IRSPreparing the

formLearning about the law

or the formForm Recordkeeping36 hr., 37 min.1120S 62 hr., 40 min. 4 hr., 1 min.20 hr., 43 min.

9 hr., 13 min. 1 hr., 20 min.9 hr., 20 min.Sch. D (1120S) 4 hr., 13 min.14 hr., 44 min. 1 hr., 4 min.14 hr., 50 min.Sch. K-1 (1120S) 10 hr., 19 min.

If you have comments concerning the accuracy of these time estimates or suggestionsfor making these forms simpler, we would be happy to hear from you. You can write toboth the Internal Revenue Service, Attention: Tax Forms Committee, PC:FP,Washington, DC 20224; and the Office of Management and Budget, PaperworkReduction Project (1545-0130), Washington, DC 20503. DO NOT send the tax forms toeither of these offices. Instead, see Where To File on page 2.

Department of the TreasuryInternal Revenue Service


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Who Must FileA corporation must file Form 1120S if (a) itelected to be an S corporation by filingForm 2553, (b) the IRS accepted theelection, and (c) the election remains ineffect. Do not file Form 1120S until thecorporation has been notified by the IRSthat the election has been accepted.

Termination of ElectionOnce the election is made, it stays ineffect until it is terminated. During the 5years after the election is terminated, thecorporation (or a successor corporation)may make another election on Form 2553only with IRS consent. See Regulationssection 1.1362-5 for more details.

An election terminates automatically inany of the following cases:

1. The corporation is no longer a smallbusiness corporation as defined in section1361(b). The termination of an election inthis manner is effective as of the day onwhich the corporation no longer meets thedefinition of a small business corporation.If the election terminates for this reason,attach to Form 1120S for the final year ofthe S corporation a statement notifying theIRS of the termination and the date itoccurred.

2. The corporation, for each of threeconsecutive tax years, (a) has subchapterC earnings and profits and (b) derivesmore than 25% of its gross receipts frompassive investment income as defined insection 1362(d)(3)(D). The electionterminates on the first day of the first taxyear beginning after the third consecutivetax year. The corporation must pay a taxfor each year it has excess net passiveincome. See the instructions for line 22afor details on how to figure the tax.

3. The election is revoked. An electionmay be revoked only with the consent ofshareholders who, at the time therevocation is made, hold more than 50%of the number of issued and outstandingshares of stock (including non-votingstock). The revocation may specify aneffective revocation date that is on or afterthe day the revocation is filed. If no date isspecified, the revocation is effective at thestart of a tax year if the revocation is madeon or before the 15th day of the 3rd monthof that tax year. If no date is specified andthe revocation is made after the 15th dayof the 3rd month of the tax year, therevocation is effective at the start of thenext tax year. To revoke the election, thecorporation must file a statement with theservice center where it filed its election tobe an S corporation. In the statement, thecorporation must notify the IRS that it isrevoking its election to be an Scorporation. The statement must be signedby each shareholder who consents to therevocation and contain the informationrequired by Regulations section1.1362-6(a)(3). A revocation may berescinded before the revocation takeseffect. See Regulations section1.1362-6(a)(4) for details.

For rules on allocating income anddeductions between an S short year and a

C short year and other special rules thatapply when an election is terminated, seesection 1362(e) and Regulations section1.1362-3.

If an election was terminated under 1 or2 above, and the corporation believes thetermination was inadvertent, thecorporation may request permission fromthe IRS to continue to be treated as an Scorporation. See Regulations section1.1362-4 for the specific requirements thatmust be met to qualify for inadvertenttermination relief.

When To FileIn general, file Form 1120S by the 15th dayof the 3rd month following the date thecorporation’s tax year ended as shown atthe top of Form 1120S. For calendar yearcorporations, the due date is March 15,1995. If the due date falls on a Saturday,Sunday, or legal holiday, file on the nextbusiness day. A business day is any daythat is not a Saturday, Sunday, or legalholiday.

If the S election was terminated duringthe tax year, file Form 1120S for the Sshort year by the due date (includingextensions) of the C short year return.

ExtensionUse Form 7004, Application for AutomaticExtension of Time To File CorporationIncome Tax Return, to request anautomatic 6-month extension of time to fileForm 1120S.

Period CoveredFile the 1994 return for calendar year 1994and fiscal years beginning in 1994 andending in 1995. If the return is for a fiscalyear or a short tax year, fill in the tax yearspace at the top of the form.Note: The 1994 Form 1120S may also beused if (a) the corporation has a tax year ofless than 12 months that begins and endsin 1995 and (b) the 1995 Form 1120S isnot available by the time the corporation isrequired to file its return. However, thecorporation must show its 1995 tax year onthe 1994 Form 1120S and incorporate anytax law changes that are effective for taxyears beginning after December 31, 1994.

Where To FileUse the preaddressed envelope. If you donot have the envelope, file your return atthe applicable IRS address listed below.

If the corporation’sprincipal business, office,

or agency is located in

Use the followingInternal RevenueService Center

addressÄ Ä

New Jersey, New York(New York City andcounties of Nassau,Rockland, Suffolk, andWestchester)

Holtsville, NY 00501

New York (all othercounties), Connecticut,Maine, Massachusetts, NewHampshire, Rhode Island,Vermont

Andover, MA 05501

Florida, Georgia, SouthCarolina Atlanta, GA 39901

Indiana, Kentucky,Michigan, Ohio, WestVirginia

Cincinnati, OH 45999

Kansas, New Mexico,Oklahoma, Texas Austin, TX 73301

Alaska, Arizona, California(counties of Alpine, Amador,Butte, Calaveras, Colusa,Contra Costa, Del Norte, ElDorado, Glenn, Humboldt,Lake, Lassen, Marin,Mendocino, Modoc, Napa,Nevada, Placer, Plumas,Sacramento, San Joaquin,Shasta, Sierra, Siskiyou,Solano, Sonoma, Sutter,Tehama, Trinity, Yolo, andYuba), Colorado, Idaho,Montana, Nebraska,Nevada, North Dakota,Oregon, South Dakota,Utah, Washington,Wyoming

Ogden, UT 84201

California (all othercounties), Hawaii Fresno, CA 93888

Illinois, Iowa, Minnesota,Missouri, Wisconsin Kansas City, MO 64999

Alabama, Arkansas,Louisiana, Mississippi,North Carolina, Tennessee

Memphis, TN 37501

Delaware, District ofColumbia, Maryland,Pennsylvania, Virginia

Philadelphia, PA 19255

Who Must SignThe return must be signed and dated bythe president, vice president, treasurer,assistant treasurer, chief accountingofficer, or any other corporate officer (suchas tax officer) authorized to sign. Areceiver, trustee, or assignee must signand date any return he or she is requiredto file on behalf of a corporation.

If a corporate officer filled in Form1120S, the Paid Preparer’s space under“Signature of officer” should remain blank.If someone prepares Form 1120S anddoes not charge the corporation, thatperson should not sign the return. Certainothers who prepare Form 1120S shouldnot sign. For example, a regular, full-timeemployee of the corporation such as aclerk, secretary, etc., should not sign.

Generally, anyone paid to prepare Form1120S must sign the return and fill in theother blanks in the Paid Preparer’s UseOnly area of the return.

The preparer required to sign the returnMUST complete the required preparerinformation and:● Sign it, by hand, in the space providedfor the preparer’s signature. (Signaturestamps or labels are not acceptable.)● Give a copy of Form 1120S to thetaxpayer in addition to the copy filed withthe IRS.


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Accounting MethodsCompute ordinary income using themethod of accounting regularly used inkeeping the corporation’s books andrecords. Generally, permissible methodsinclude the cash method, the accrualmethod, or any other method permitted bythe Internal Revenue Code. In all cases,the method adopted must clearly reflectincome.

Generally, an S corporation may not usethe cash method of accounting if thecorporation is a tax shelter (as defined insection 448(d)(3)). See section 448 fordetails.

Under the accrual method, an amount isincludible in income when all the eventshave occurred that fix the right to receivethe income and the amount can bedetermined with reasonable accuracy. SeeRegulations section 1.451-1(a) for details.

Generally, an accrual basis taxpayer candeduct accrued expenses in the tax year inwhich all events that determine liabilityhave occurred, the amount of the liabilitycan be figured with reasonable accuracy,and economic performance takes placewith respect to the expense. There areexceptions for recurring items and itemsinvolving transactions between relatedtaxpayers described in section 267.

Except for certain home constructioncontracts and other real property smallconstruction contracts, long-term contractsmust generally be accounted for using thepercentage of completion methoddescribed in section 460.

Dealers in securities must use the“mark-to-market” accounting methoddescribed in section 475. Under thismethod, any security that is inventory tothe dealer must be included in inventory atits fair market value. Any security that isnot inventory and that is held at the closeof the tax year is treated as sold at its fairmarket value on the last business day ofthe tax year, and any gain or loss must betaken into account in determining grossincome. The gain or loss taken intoaccount is generally treated as ordinarygain or loss. For details, includingexceptions, see section 475.

Generally, the corporation may changeits method of accounting used to reporttaxable income (for income as a whole orfor any material item) only by gettingconsent on Form 3115, Application forChange in Accounting Method. For moreinformation, get Pub. 538, AccountingPeriods and Methods.

Accounting PeriodsGenerally, an S corporation may notchange its accounting period to a tax yearthat is not a permitted year. A “permittedyear” is a calendar year or any otheraccounting period for which thecorporation can establish to thesatisfaction of the IRS that there is abusiness purpose for the tax year.

To change an accounting period, seeRegulations section 1.442-1 and Form1128, Application to Adopt, Change, orRetain a Tax Year. Also see Pub. 538.Election of a tax year other than arequired year.—Under the provisions ofsection 444, an S corporation may elect tohave a tax year other than a permittedyear, but only if the deferral period of thetax year is not longer than 3 months. Thiselection is made by filing Form 8716,Election To Have a Tax Year Other Than aRequired Tax Year.

An S corporation may not make orcontinue an election under section 444 if itis a member of a tiered structure, otherthan a tiered structure that consistsentirely of partnerships and S corporationsthat have the same tax year. For the Scorporation to have a section 444 electionin effect, it must make the paymentsrequired by section 7519 and file Form8752, Required Payment or Refund UnderSection 7519.

A section 444 election ends if an Scorporation changes its accounting periodto a calendar year or some other permittedyear, it willfully fails to comply with therequirements of section 7519, or its Selection is terminated (unless itimmediately becomes a personal servicecorporation). If the termination results in ashort tax year, type or legibly print at thetop of the first page of Form 1120S for theshort tax year, “SECTION 444 ELECTIONTERMINATED.”

Rounding Off to WholeDollarsYou may round off cents to whole dollarson your return and accompanyingschedules. To do so, drop amounts under50 cents and increase amounts from 50 to99 cents to the next higher dollar.

RecordkeepingThe corporation’s records must be kept aslong as they may be needed for theadministration of any provision of theInternal Revenue Code. If the consolidatedaudit procedures of sections 6241 through6245 apply to the corporation, records thatsupport an item of income, deduction, orcredit on the corporation’s return usuallymust be kept for 3 years from the date thereturn is due or is filed, whichever is later.If the consolidated audit procedures do notapply, these records usually must be keptfor 3 years from the date eachshareholder’s return is due or is filed,whichever is later. Keep records that verifythe corporation’s basis in property for aslong as they are needed to figure the basisof the original or replacement property.

The corporation should also keep copiesof any returns it has filed. They help inpreparing future returns and in makingcomputations when filing an amendedreturn.

Depositary Method of TaxPaymentThe corporation must pay the tax due infull no later than the 15th day of the 3rdmonth after the end of the tax year.

Deposit corporation income taxpayments (and estimated tax payments)with Form 8109, Federal Tax DepositCoupon. Do not submit deposits directly toan IRS office; otherwise, the corporationmay have to pay a penalty. Mail or deliverthe completed Form 8109 with thepayment to a qualified depositary forFederal taxes or to the Federal Reservebank (FRB) servicing your geographic area.Make your checks or money orderspayable to that depositary or FRB.

To help ensure proper crediting, writethe corporation’s employer identificationnumber, the tax period to which thedeposit applies, and “Form 1120S” on yourcheck or money order. Be sure to darkenthe “1120” box on the coupon. Theserecords of deposit will be sent to the IRS.

For more information on deposits, seethe instructions in the coupon booklet(Form 8109) and Pub. 583, TaxpayersStarting a Business.

Estimated TaxGenerally, the corporation must makeestimated tax payments for the followingtaxes if the total of these taxes is $500 ormore: (a) the tax on certain capital gains,(b) the tax on built-in gains, (c) the excessnet passive income tax, and (d) theinvestment credit recapture tax.

The amount of estimated tax required tobe paid annually is the lesser of (a) 100%of the above taxes shown on the return forthe tax year (or if no return is filed, 100%of these taxes for the year); or (b) the sumof (i) 100% of the investment creditrecapture tax and the built-in gains tax (orthe tax on certain capital gains) shown onthe return for the tax year (or if no return isfiled, 100% of these taxes for the year),and (ii) 100% of any excess net passiveincome tax shown on the corporation’sreturn for the preceding tax year. If thepreceding tax year was less than 12months, the estimated tax must bedetermined under (a).

The estimated tax is generally payable infour equal installments. However, thecorporation may be able to lower theamount of one or more installments byusing the annualized income installmentmethod or adjusted seasonal installmentmethod under section 6655(e).

For a calendar year corporation, thepayments are due for 1995 by April 17,June 15, September 15, and December 15.For a fiscal year corporation, they are dueby the 15th day of the 4th, 6th, 9th, and12th months of the fiscal year.

The payments are made using thedepositary method described above.


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Interest and PenaltiesInterestInterest is charged on taxes not paid bythe due date, even if an extension of timeto file is granted. Interest is also chargedfrom the due date (including extensions) tothe date of payment on the failure to filepenalty, the accuracy-related penalty, andthe fraud penalty. The interest charge isfigured at a rate determined under section6621.

Late Filing of ReturnA corporation that does not file its taxreturn by the due date, includingextensions, may have to pay a penalty of5% a month, or part of a month, up to amaximum of 25%, for each month thereturn is not filed. The penalty is imposedon the net amount due. The minimumpenalty for filing a return more than 60days late is the smaller of the tax due or$100. The penalty will not be imposed ifthe corporation can show that the failure tofile on time was due to reasonable cause.If the failure is due to reasonable cause,attach an explanation to the return.

Late Payment of TaxA corporation that does not pay the taxwhen due generally may have to pay apenalty of 1⁄2 of 1% a month or part of amonth, up to a maximum of 25%, for eachmonth the tax is not paid. The penalty isimposed on the net amount due.

The penalty will not be imposed if thecorporation can show that failure to pay ontime was due to reasonable cause.

Failure To Furnish InformationTimelySection 6037(b) requires an S corporationto furnish to each shareholder a copy ofthe information shown on Schedule K-1(Form 1120S) that is attached to Form1120S. Provide Schedule K-1 to eachshareholder on or before the day on whichthe corporation files Form 1120S.

For each failure to furnish Schedule K-1to a shareholder when due and eachfailure to include on Schedule K-1 all theinformation required to be shown (or theinclusion of incorrect information), a $50penalty may be imposed with regard toeach Schedule K-1 for which a failureoccurs. If the requirement to report correctinformation is intentionally disregarded,each $50 penalty is increased to $100 or, ifgreater, 10% of the aggregate amount ofitems required to be reported. See sections6722 and 6724 for more information.

The penalty will not be imposed if thecorporation can show that not furnishinginformation timely was due to reasonablecause and not due to willful neglect.

Unresolved Tax ProblemsThe IRS has a Problem ResolutionProgram for taxpayers who have beenunable to resolve their problems with theIRS. If the corporation has a tax problem ithas been unable to resolve through normal

channels, write to the corporation’s localIRS District Director or call thecorporation’s local IRS office and ask forProblem Resolution assistance.Hearing-impaired persons who haveaccess to TDD equipment may call1-800-829-4059 to ask for help. TheProblem Resolution office will ensure thatyour problem receives proper attention.Although the office cannot change the taxlaw or make technical decisions, it canhelp clear up problems that resulted fromprevious contacts.

Other Forms and StatementsThat May Be Required● Forms W-2 and W-3, Wage and TaxStatement; and Transmittal of Income andTax Statements.● Form 720, Quarterly Federal Excise TaxReturn. Use Form 720 to reportenvironmental excise taxes,communications and air transportationtaxes, fuel taxes, luxury tax on passengervehicles, manufacturers taxes, shippassenger tax, and certain other excisetaxes.Caution: A trust fund recovery penalty mayapply where certain excise taxes thatshould be collected are not collected orare not paid to the IRS. Under this penalty,certain officers or employees of thecorporation become personally liable forpayment of the taxes and may be penalizedin an amount equal to the unpaid taxes.See the Instructions for Form 720 for moredetails.● Form 940 or Form 940-EZ, Employer’sAnnual Federal Unemployment (FUTA) TaxReturn. The corporation may be liable forFUTA tax and may have to file Form 940 or940-EZ if it paid wages of $1,500 or morein any calendar quarter during the calendaryear (or the preceding calendar year) orone or more employees worked for thecorporation for some part of a day in any20 different weeks during the calendar year(or the preceding calendar year). Acorporate officer who performs substantialservices is considered an employee.Except as provided in section 3306(a),reasonable compensation for theseservices is subject to FUTA tax, no matterwhat the corporation calls the payments.● Form 941, Employer’s Quarterly FederalTax Return. Employers must file this formquarterly to report income tax withheld onwages and employer and employee socialsecurity and Medicare taxes. A corporateofficer who performs substantial services isconsidered an employee. Except asprovided in sections 3121(a) and 3401(a),reasonable compensation for theseservices is subject to employer andemployee social security and Medicaretaxes and income tax withholding, nomatter what the corporation calls thepayments. Agricultural employers must fileForm 943, Employer’s Annual Tax Returnfor Agricultural Employees, instead of Form941, to report income tax withheld andemployer and employee social security andMedicare taxes on farmworkers.

Caution: A trust fund recovery penalty mayapply where income, social security, andMedicare taxes that should be withheld arenot withheld or are not paid to the IRS.Under this penalty, certain officers oremployees of the corporation becomepersonally liable for payment of the taxesand may be penalized in an amount equalto the unpaid taxes. Get Circular E,Employer’s Tax Guide (or Circular A,Agricultural Employer’s Tax Guide), fordetails.● Form 945, Annual Return of WithheldFederal Income Tax. Use this form toreport income tax withheld from nonpayrollpayments, including pensions, annuities,IRAs, gambling winnings, and backupwithholding.● Form 966, Corporate Dissolution orLiquidation.● Forms 1042 and 1042-S, AnnualWithholding Tax Return for U.S. SourceIncome of Foreign Persons; and ForeignPerson’s U.S. Source Income Subject toWithholding. Use these forms to report andtransmit withheld tax on payments madeto nonresident alien individuals, foreignpartnerships, or foreign corporations to theextent such payments constitute grossincome from sources within the UnitedStates (see sections 861 through 865). Formore information, see sections 1441 and1442, and Pub. 515, Withholding of Tax onNonresident Aliens and ForeignCorporations.● Form 1096, Annual Summary andTransmittal of U.S. Information Returns.● Form 1098, Mortgage InterestStatement. Use this form to report thereceipt from any individual of $600 or moreof mortgage interest and points in thecourse of the corporation’s trade orbusiness.● Forms 1099-A, B, DIV, INT, MISC, OID,PATR, R, and S. You may have to filethese information returns to reportabandonments; acquisitions throughforeclosure; proceeds from broker andbarter exchange transactions; certaindividends; interest payments; medical anddental health care payments;miscellaneous income payments; originalissue discount; patronage dividends;distributions from pensions, annuities,retirement or profit-sharing plans, IRAs,insurance contracts, etc.; and proceedsfrom real estate transactions. Also usecertain of these returns to report amountsthat were received as a nominee on behalfof another person.

Use Form 1099-DIV to report actualdividends paid by the corporation. Onlydistributions from accumulated earningsand profits are classified as dividends. Donot issue Form 1099-DIV for dividendsreceived by the corporation that areallocated to shareholders on line 4b ofSchedule K-1.

For more information, see the separateInstructions for Forms 1099, 1098, 5498,and W-2G.Note: Every corporation must file Forms1099-MISC if it makes payments of rents,commissions, or other fixed or


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determinable income (see section 6041)totaling $600 or more to any one person inthe course of its trade or business duringthe calendar year.● Form 5713, International BoycottReport. Every corporation that hadoperations in, or related to, a “boycotting”country, company, or national of a countrymust file Form 5713. In addition, personswho participate in or cooperate with aninternational boycott may have to completeSchedule A or Schedule B and Schedule Cof Form 5713 to compute their loss of theforeign tax credit, the deferral of earningsof a controlled foreign corporation,IC-DISC benefits, and FSC benefits.● Form 8264, Application for Registrationof a Tax Shelter, is used by tax shelterorganizers to register tax shelters with theIRS for the purpose of receiving a taxshelter registration number.● Form 8271, Investor Reporting of TaxShelter Registration Number, is used bycorporations that have acquired an interestin a tax shelter that is required to beregistered to report the tax shelter’sregistration number. Form 8271 must beattached to any return on which adeduction, credit, loss, or other tax benefitattributable to a tax shelter is taken or anyincome attributable to a tax shelter isreported.● Form 8275, Disclosure Statement. Form8275 is used by taxpayers and income taxreturn preparers to disclose items orpositions, except those contrary to aregulation, that are not otherwiseadequately disclosed on a tax return. Thedisclosure is made to avoid the parts ofthe accuracy-related penalty imposed fordisregard of rules or substantialunderstatement of tax. Form 8275 is alsoused for disclosures relating to preparerpenalties for understatements due tounrealistic positions or for willful orreckless conduct.● Form 8275-R, Regulation DisclosureStatement, is used to disclose any item ona tax return for which a position has beentaken that is contrary to Treasuryregulations.● Form 8281, Information Return forPublicly Offered Original Issue DiscountInstruments. This form is used by issuersof publicly offered debt instruments havingOID to provide the information required bysection 1275(c).● Forms 8288 and 8288-A, U.S.Withholding Tax Return for Dispositions byForeign Persons of U.S. Real PropertyInterests; and Statement of Withholding onDispositions by Foreign Persons of U.S.Real Property Interests. Use these forms toreport and transmit withheld tax on thesale of U.S. real property by a foreignperson. See section 1445 and the relatedregulations for additional information.● Form 8300, Report of Cash PaymentsOver $10,000 Received in a Trade orBusiness. This form is used to report thereceipt of more than $10,000 in cash orforeign currency in one transaction (or aseries of related transactions).

● Form 8594, Asset AcquisitionStatement, is to be filed by both thepurchaser and seller of a group of assetsconstituting a trade or business if goodwillor a going concern value attaches, orcould attach, to such assets and if thepurchaser’s basis in the assets isdetermined only by the amount paid forthe assets.● Form 8697, Interest Computation Underthe Look-Back Method for CompletedLong-Term Contracts. Certain Scorporations that are not closely held mayhave to file Form 8697. Form 8697 is usedto figure the interest due or to be refundedunder the look-back method of section460(b)(2) on certain long-term contractsthat are accounted for under either thepercentage of completion-capitalized costmethod or the percentage of completionmethod. Closely held corporations shouldsee the instructions on page 21 for line 23,item 10, of Schedule K-1 for details on theForm 8697 information they must provideto their shareholders.Stock ownership in foreigncorporations.—If the corporation owned atleast 5% in value of the outstanding stockof a foreign personal holding company,and the corporation was required toinclude in its gross income anyundistributed foreign personal holdingcompany income, attach the statementrequired by section 551(c).

A corporation may have to file Form5471, Information Return of U.S. PersonsWith Respect to Certain ForeignCorporations, if any of the followingapplies:

1. It controls a foreign corporation.2. It acquires, disposes of, or owns 5%

or more in value of the outstanding stockof a foreign corporation.

3. It is a 10%-or-more shareholder of aforeign personal holding company.

4. It owns stock in a controlled foreigncorporation for an uninterrupted period of30 days or more during any tax year of theforeign corporation, and it owned thatstock on the last day of that year.Transfers to a corporation controlled bythe transferor.—If a person receives stockof a corporation in exchange for property,and no gain or loss is recognized undersection 351, the transferor and transfereemust each attach to their tax returns theinformation required by Regulations section1.351-3.

AttachmentsAttach Form 4136, Credit for Federal TaxPaid on Fuels, after page 4, Form 1120S.Attach schedules in alphabetical order andother forms in numerical order after Form4136.

To assist us in processing the return,please complete every applicable entryspace on Form 1120S and Schedule K-1.If you attach statements, do not write “Seeattached” instead of completing the entryspaces on Form 1120S and Schedule K-1.

If you need more space on the forms orschedules, attach separate sheets. Use the

same size and format as on the printedforms. But show the totals on the printedforms. Attach these separate sheets afterall the schedules and forms. Be sure to putthe corporation’s name and employeridentification number (EIN) on each sheet.

Amended ReturnTo correct an error in a Form 1120Salready filed, file an amended Form 1120Sand check box F(4). If the amended returnresults in a change to income, or a changein the distribution of any income or otherinformation provided to shareholders, anamended Schedule K-1 (Form 1120S) mustalso be filed with the amended Form1120S and given to each shareholder. Besure to check box D(2) on each ScheduleK-1 to indicate that it is an amendedSchedule K-1.Note: If an S corporation does not meetthe small S corporation exception underTemporary Regulations section301.6241-1T or if it is a small S corporationthat has made the election described inTemporary Regulations section301.6241-1T(c)(2)(v), and it files anamended return, the amended return willbe a request for administrative adjustmentand the tax matters person must file Form8082, Notice of Inconsistent Treatment orAmended Return (AdministrativeAdjustment Request (AAR)). See thetemporary regulations under section 6241for more information.

Passive Activity LimitationsIn general, section 469 limits the amount oflosses, deductions, and credits thatshareholders may claim from “passiveactivities.” The passive activity limitationsdo not apply to the corporation. Instead,they apply to each shareholder’s share ofany income or loss and credit attributableto a passive activity. Because thetreatment of each shareholder’s share ofcorporate income or loss and creditdepends upon the nature of the activitythat generated it, the corporation mustreport income or loss and creditsseparately for each activity.

The instructions below (pages 5 through9) and the instructions for Schedules Kand K-1 (pages 15 through 22) explain theapplicable passive activity limitation rulesand specify the type of information thecorporation must provide to itsshareholders for each activity. If thecorporation had more than one activity, itmust report information for each activity onan attachment to Schedules K and K-1.

Generally, passive activities include(a) activities that involve the conduct of atrade or business in which the shareholderdoes not materially participate and (b) anyrental activity (defined on page 6) even ifthe shareholder materially participates. Forexceptions, see Activities That Are NotPassive Activities on page 6. The level ofeach shareholder’s participation in anactivity must be determined by theshareholder.

The passive activity rules provide thatlosses and credits from passive activities


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can generally be applied only againstincome and tax from passive activities.Thus, passive losses and credits cannot beapplied against income from salaries,wages, professional fees, or a business inwhich the shareholder materiallyparticipates; against “portfolio income”(defined on page 7); or against the taxrelated to any of these types of income.

Special rules require that net incomefrom certain activities that would otherwisebe treated as passive income must berecharacterized as nonpassive income forpurposes of the passive activity limitations.

To allow each shareholder to apply thepassive activity limitations at the individuallevel, the corporation must report incomeor loss and credits separately for each ofthe following: trade or business activities,rental real estate activities, rental activitiesother than rental real estate, and portfolioincome.

Activities That Are NotPassive ActivitiesPassive activities do not include:

1. Trade or business activities in whichthe shareholder materially participated forthe tax year.

2. For tax years beginning after 1993,any rental real estate activity in which theshareholder materially participated and metboth of the following conditions for the taxyear:

a. More than half of the personalservices the shareholder performed intrades or businesses were performed inreal property trades or businesses in whichhe or she materially participated, and

b. The shareholder performed more than750 hours of services in real propertytrades or businesses in which he or shematerially participated.

For purposes of this rule, each interest inrental real estate is a separate activityunless the shareholder elects to treat allinterests in rental real estate as oneactivity.

If the shareholder is married filing jointly,either the shareholder or his or her spousemust separately meet both of the aboveconditions, without taking into accountservices performed by the other spouse.

A real property trade or business is anyreal property development, redevelopment,construction, reconstruction, acquisition,conversion, rental, operation, management,leasing, or brokerage trade or business.Services the shareholder performed as anemployee are not treated as performed ina real property trade or business unless heor she owned more than 5% of the stockin the employer.

3. The rental of a dwelling unit used by ashareholder for personal purposes duringthe year for more than the greater of 14days or 10% of the number of days thatthe residence was rented at fair rentalvalue.

4. An activity of trading personalproperty for the account of owners ofinterests in the activity. See TemporaryRegulations section 1.469-1T(e)(6).

5. An interest as a qualified investor in aqualified low-income housing project undersection 502 of the Tax Reform Act of 1986for any tax year in the relief period.

Trade or Business ActivitiesA trade or business activity is an activity(other than a rental activity or an activitytreated as incidental to an activity ofholding property for investment) that—

1. Involves the conduct of a trade orbusiness (within the meaning of section162),

2. Is conducted in anticipation of startinga trade or business, or

3. Involves research or experimentalexpenditures deductible under section 174(or that would be if you chose to deductrather than capitalize them).

If the shareholder does not materiallyparticipate in the activity, a trade orbusiness activity of the corporation is apassive activity for the shareholder.Note: The section 469(c)(3) exception for aworking interest in oil and gas properties isnot applicable to an S corporation becausestate law generally limits the liability ofcorporate shareholders, includingshareholders of an S corporation.

Accordingly, the activity of holding aworking interest in oil or gas properties is atrade or business activity and the materialparticipation rules apply to determine if theactivity is a passive activity. See TemporaryRegulations section 1.469-1T(e)(4) andRegulations section 1.469-1(e)(4).

Each shareholder must determine if heor she materially participated in an activity.As a result, while the corporation’s overalltrade or business income (loss) is reportedon page 1 of Form 1120S, the specificincome and deductions from eachseparate trade or business activity must bereported on attachments to Form 1120S.Similarly, while each shareholder’sallocable share of the corporation’s overalltrade or business income (loss) is reportedon line 1 of Schedule K-1, eachshareholder’s allocable share of theincome and deductions from each trade orbusiness activity must be reported onattachments to each Schedule K-1. SeePassive Activity Reporting Requirementson page 8 for more information.

Rental ActivitiesGenerally, except as noted below, if thegross income from an activity consists ofamounts paid principally for the use of realor personal tangible property held by thecorporation, the activity is a rental activity.

There are several exceptions to thisgeneral rule. Under these exceptions, anactivity involving the use of real or personaltangible property is not a rental activity if(a) the average period of customer use(defined below) for such property is 7 daysor less; (b) the average period of customeruse for such property is 30 days or lessand significant personal services (definedbelow) are provided by or on behalf of thecorporation; (c) extraordinary personalservices (defined below) are provided by oron behalf of the corporation; (d) rental of

the property is treated as incidental to anonrental activity of the corporation underTemporary Regulations section1.469-1T(e)(3)(vi) and Regulations section1.469-1(e)(3)(vi); or (e) the corporationcustomarily makes the property availableduring defined business hours fornonexclusive use by various customers.

In addition, if the corporation providesproperty for use in a nonrental activity of apartnership in its capacity as an owner ofan interest in such partnership, theprovision of the property is not a rentalactivity. Consequently, the corporation’sdistributive share of income from theactivity is not income from a rental activity.A guaranteed payment described insection 707(c) is not income from a rentalactivity under any circumstances. Whetherthe corporation provides property used inan activity of a partnership in thecorporation’s capacity as an owner of aninterest in the partnership is based on allthe facts and circumstances.Average period of customer use.—Compute the average period of customeruse of property by dividing the totalnumber of days in all rental periods by thenumber of rentals during the tax year. Ifthe activity involves renting more than oneclass of property, multiply the averageperiod of customer use of each class bythe ratio of the gross rental income fromthat class to the activity’s total gross rentalincome. The activity’s average period ofcustomer use equals the sum of theseclass-by-class average periods weightedby gross income. See Regulations section1.469-1(e)(3)(iii).Significant personal services.—Personalservices include only services performedby individuals. In determining whetherpersonal services are significant personalservices, consider all of the relevant factsand circumstances. Relevant facts andcircumstances include how often theservices are provided, the type andamount of labor required to perform theservices, and the value of the services inrelation to the amount charged for the useof the property.

The following services are notconsidered in determining whetherpersonal services are significant: (a)services necessary to permit the lawful useof the rental property; (b) servicesperformed in connection withimprovements or repairs to the rentalproperty that extend the useful life of theproperty substantially beyond the averagerental period; and (c) services provided inconnection with the use of any improvedreal property that are similar to thosecommonly provided in connection withlong-term rentals of high-grade commercialor residential property (e.g., cleaning andmaintenance of common areas, routinerepairs, trash collection, elevator service,and security at entrances).Extraordinary personal services.—Services provided in connection withmaking rental property available forcustomer use are extraordinary personalservices only if the services are performedby individuals and the customers’ use ofthe rental property is incidental to their


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receipt of the services. For example, apatient’s use of a hospital room generallyis incidental to the care that the patientreceives from the hospital’s medical staff.Similarly, a student’s use of a dormitoryroom in a boarding school is incidental tothe personal services provided by theschool’s teaching staff.Rental property incidental to a nonrentalactivity.—An activity is not a rental activityif the rental of the property is incidental toa nonrental activity, such as the activity ofholding property for investment, a trade orbusiness activity, or the activity of dealingin property.

Rental property is incidental to anactivity of holding property for investment ifthe main purpose for holding the propertyis to realize a gain from the appreciation ofthe property and the gross rental incomefrom such property for the tax year is lessthan 2% of the smaller of the property’sunadjusted basis or its fair market value.

Rental property is incidental to a trade orbusiness activity if (a) the corporationowns an interest in the trade or businessat all times during the year; (b) the rentalproperty was mainly used in the trade orbusiness activity during the tax year orduring at least 2 of the 5 preceding taxyears; and (c) the gross rental income fromthe property is less than 2% of the smallerof the property’s unadjusted basis or itsfair market value.

The sale or exchange of property that isalso rented during the tax year (where thegain or loss is recognized) is treated asincidental to the activity of dealing inproperty if, at the time of the sale orexchange, the property was held primarilyfor sale to customers in the ordinarycourse of the corporation’s trade orbusiness.

See Temporary Regulations section1.469-1T(e)(3) and Regulations section1.469-1(e)(3) for more information on thedefinition of rental activities for purposes ofthe passive activity limitations.Reporting of rental activities.—Inreporting the corporation’s income orlosses and credits from rental activities,the corporation must separately report(a) rental real estate activities and(b) rental activities other than rental realestate activities.

Shareholders who actively participate ina rental real estate activity may be able todeduct part or all of their rental real estatelosses (and the deduction equivalent ofrental real estate credits) against income(or tax) from nonpassive activities.Generally, the combined amount of rentalreal estate losses and the deductionequivalent of rental real estate credits fromall sources (including rental real estateactivities 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 EstateIncome and Expenses of a Partnership oran S Corporation, and on line 2 ofSchedules K and K-1 rather than on page1 of Form 1120S. Report credits related torental real estate activities on lines 12c and

12d and low-income housing credits online 12b of Schedules K and K-1.

Report income (loss) from rentalactivities other than rental real estate online 3 and credits related to rental activitesother than rental real estate on line 12e ofSchedules K and K-1.

Portfolio IncomeGenerally, portfolio income includes allgross income, other than income derived inthe ordinary course of a trade or business,that is attributable to interest; dividends;royalties; income from a real estateinvestment trust, a regulated investmentcompany, a real estate mortgageinvestment conduit, a common trust fund,a controlled foreign corporation, a qualifiedelecting fund, or a cooperative; incomefrom the disposition of property thatproduces income of a type defined asportfolio income; and income from thedisposition of property held for investment.

Solely for purposes of the precedingparagraph, gross income derived in theordinary course of a trade or businessincludes (and portfolio income, therefore,does not include) only the following typesof income: (a) interest income on loansand investments made in the ordinarycourse of a trade or business of lendingmoney; (b) interest on accounts receivablearising from the performance of services orthe sale of property in the ordinary courseof a trade or business of performing suchservices or selling such property, but onlyif credit is customarily offered to customersof the business; (c) income frominvestments made in the ordinary course ofa trade or business of furnishing insuranceor annuity contracts or reinsuring risksunderwritten by insurance companies;(d) income or gain derived in the ordinarycourse of an activity of trading or dealingin any property if such activity constitutesa trade or business (unless the dealer heldthe property for investment at any timebefore such income or gain is recognized);(e) royalties derived by the taxpayer in theordinary course of a trade or business oflicensing intangible property; (f) amountsincluded in the gross income of a patron ofa cooperative by reason of any payment orallocation to the patron based onpatronage occurring with respect to atrade or business of the patron; and(g) other income identified by the IRS asincome derived by the taxpayer in theordinary course of a trade or business.

See Temporary Regulations section1.469-2T(c)(3) for more information onportfolio income.

Report portfolio income on line 4 ofSchedules K and K-1, rather than on page1 of Form 1120S.

Report expenses related to portfolioincome on line 9 of Schedules K and K-1.

Grouping ActivitiesGenerally, one or more trade or businessactivities or rental activities may be treatedas a single activity if the activities make upan appropriate economic unit formeasurement of gain or loss under thepassive activity rules. Whether activities

make up an appropriate economic unitdepends on all the relevant facts andcircumstances. The factors given thegreatest weight in determining whetheractivities make up an appropriateeconomic unit are—

1. Similarities and differences in types oftrades or businesses,

2. The extent of common control,3. The extent of common ownership,4. Geographical location, and5. Interdependencies among the

activities.Example: The corporation has a

significant ownership interest in a bakeryand a movie theater in Baltimore and in abakery and a movie theater in Philadelphia.Depending on the relevant facts andcircumstances, there may be more thanone reasonable method for grouping thecorporation’s activities. For instance, thefollowing groupings may or may not bepermissible: a single activity, a movietheater activity and a bakery activity, aBaltimore activity and a Philadelphiaactivity, or four separate activities.

Once the corporation chooses agrouping under these rules, it mustcontinue using that grouping in later taxyears unless a material change in the factsand circumstances makes it clearlyinappropriate.

The IRS may regroup the corporation’sactivities if the corporation’s grouping failsto reflect one or more appropriateeconomic units and one of the primarypurposes for the grouping is to circumventthe passive activity limitations.Limitation on grouping certainactivities.—The following activities maynot be grouped together—

1. A rental activity with a trade orbusiness activity unless the activities beinggrouped together make up an appropriateeconomic unit, and

a. The rental activity is insubstantialrelative to the trade or business activity orvice versa, or

b. Each owner of the trade or businessactivity has the same proportionateownership interest in the rental activity. Ifso, the portion of the rental activityinvolving the rental of property to be usedin the trade or business activity may begrouped with the trade or business activity.

2. An activity involving the rental of realproperty with an activity involving therental of personal property (except forpersonal property provided in connectionwith real property), or vice versa.

3. Any activity with another activity in adifferent type of business and in which thecorporation holds an interest as a limitedpartner or as a limited entrepreneur (asdefined in section 464(e)(2)) if that otheractivity engages in holding, producing, ordistributing motion picture films orvideotapes; farming; leasing section 1245property; or exploring for (or exploiting) oiland gas resources or geothermal deposits.Activities conducted throughpartnerships.—Once a partnershipdetermines its activities under these rules,


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the corporation as a partner may use theserules to group those activities with eachother, with activities conducted directly bythe corporation, and with activitiesconducted through other partnerships. Thecorporation may not treat as separateactivities those activities grouped togetherby the partnership.

Recharacterization of PassiveIncomeUnder Temporary Regulations section1.469-2T(f) and Regulations section1.469-2(f), net passive income from certainpassive activities must be treated asnonpassive income. Net passive income isthe excess of an activity’s passive activitygross income over its passive activitydeductions (current year deductions andprior year unallowed losses).

Income from the following six sources issubject to recharacterization. Note that anynet passive income recharacterized asnonpassive income is treated asinvestment income for purposes ofcomputing investment interest expenselimitations if it is from (a) an activity ofrenting substantially nondepreciableproperty from an equity-financed lendingactivity or (b) an activity related to aninterest in a pass-through entity thatlicenses intangible property.

1. Significant participation passiveactivities.—A significant participationpassive activity is any trade or businessactivity in which the shareholder bothparticipates for more than 100 hoursduring the tax year and does not materiallyparticipate. Because each shareholdermust determine his or her level ofparticipation, the corporation will not beable to identify significant participationpassive activities.

2. Certain nondepreciable rentalproperty activities.—Net passive incomefrom a rental activity is nonpassive incomeif less than 30% of the unadjusted basis ofthe property used or held for use bycustomers in the activity is subject todepreciation under section 167.

3. Passive equity-financed lendingactivities.—If the corporation has netincome from a passive equity-financedlending activity, the lesser of the netpassive income or equity-financed interestincome from the activity is nonpassiveincome.Note: The amount of income from theactivities in items 1 through 3 above thatany shareholder will be required torecharacterize as nonpassive income maybe limited under Temporary Regulationssection 1.469-2T(f)(8). Because thecorporation will not have informationregarding all of a shareholder’s activities, itmust identify all corporate activitiesmeeting the definitions in items 2 and 3 asactivities that may be subject torecharacterization.

4. Rental activities incidental to adevelopment activity.—Net rental activityincome is nonpassive income for ashareholder if all of the following apply:(a) the corporation recognizes gain fromthe sale, exchange, or other disposition of

the rental property during the tax year;(b) the use of the item of property in therental activity started less than 12 monthsbefore the date of disposition (the use ofan item of rental property begins on thefirst day on which (i) the corporation ownsan interest in the property, (ii) substantiallyall of the property is either rented or heldout for rent and ready to be rented, and (iii)no significant value-enhancing servicesremain to be performed); and (c) theshareholder materially participated orsignificantly participated for any tax year inan activity that involved the performance ofservices for the purpose of enhancing thevalue of the property (or any other item ofproperty, if the basis of the propertydisposed of is determined in whole or inpart by reference to the basis of that itemof property). Net rental activity income isthe excess of passive activity grossincome from renting or disposing ofproperty over passive activity deductions(current year deductions and prior yearunallowed losses) that are reasonablyallocable to the rented property.

Because the corporation cannotdetermine a shareholder’s level ofparticipation, the corporation must identifynet income from property described initems (a) and (b) above as income thatmay be subject to recharacterization.

5. Activities involving property rentedto a nonpassive activity.—If a taxpayerrents property to a trade or businessactivity in which the taxpayer materiallyparticipates, the taxpayer’s net rentalactivity income (defined above) from theproperty is nonpassive income.

6. Acquisition of an interest in apass-through entity that licensesintangible property.—Generally, netroyalty income from intangible property isnonpassive income if the taxpayeracquired an interest in the pass-throughentity after it created the intangibleproperty or performed substantial servicesor incurred substantial costs in developingor marketing the intangible property. Netroyalty income is the excess of passiveactivity gross income from licensing ortransferring any right in intangible propertyover passive activity deductions (currentyear deductions and prior year unallowedlosses) that are reasonably allocable to theintangible property.

See Temporary Regulations section1.469-2T(f)(7)(iii) for exceptions to this rule.

Passive Activity ReportingRequirementsTo allow shareholders to correctly applythe passive activity loss and creditlimitation rules, any corporation that carrieson more than one activity must:

1. Provide an attachment for eachactivity conducted through the corporationthat identifies the type of activityconducted (trade or business, rental realestate, rental activity other than rental realestate, or investment).

2. On the attachment for each activity,provide a schedule, using the same linenumbers as shown on Schedule K-1,detailing the net income (loss), credits, and

all items required to be separately statedunder section 1366(a)(1) from each trade orbusiness activity, from each rental realestate activity, from each rental activityother than a rental real estate activity, andfrom investments.

3. Identify the net income (loss) and theshareholder’s share of corporation interestexpense from each activity of renting adwelling unit that any shareholder uses forpersonal purposes during the year for morethan the greater of 14 days or 10% of thenumber of days that the residence isrented at fair rental value.

4. Identify the net income (loss) and theshareholder’s share of interest expensefrom each activity of trading personalproperty conducted through thecorporation.

5. For any gain (loss) from thedisposition of an interest in an activity or ofan interest in property used in an activity(including dispositions before 1987 fromwhich gain is being recognized after 1986):

a. Identify the activity in which theproperty was used at the time ofdisposition;

b. If the property was used in more thanone activity during the 12 monthspreceding the disposition, identify theactivities in which the property was usedand the adjusted basis allocated to eachactivity; and

c. For gains only, if the property wassubstantially appreciated at the time of thedisposition and the applicable holdingperiod specified in Regulations section1.469-2(c)(2)(iii)(A) was not satisfied,identify the amount of the nonpassive gainand indicate whether or not the gain isinvestment income under Regulationssection 1.469-2(c)(2)(iii)(F).

6. Specify the amount of gross portfolioincome, the interest expense properlyallocable to portfolio income, andexpenses other than interest expense thatare clearly and directly allocable toportfolio income.

7. Identify the ratable portion of anysection 481 adjustment (whether a netpositive or a net negative adjustment)allocable to each corporate activity.

8. Identify any gross income fromsources specifically excluded from passiveactivity gross income, including incomefrom intangible property if the shareholderis an individual and the shareholder’spersonal efforts significantly contributed tothe creation of the property; income from aqualified low-income housing project (asdefined in section 502 of the Tax ReformAct of 1986) conducted through thecorporation; income from state, local, orforeign income tax refunds; and incomefrom a covenant not to compete (in thecase of a shareholder who is an individualand who contributed the covenant to thecorporation).

9. Identify any deductions that are notpassive activity deductions.

10. If the corporation makes a full orpartial disposition of its interest in anotherentity, identify the gain (loss) allocable toeach activity conducted through the entity,


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and the gain allocable to a passive activitythat would have been recharacterized asnonpassive gain had the corporationdisposed of its interest in property used inthe activity (because the property wassubstantially appreciated at the time of thedisposition, and the gain represented morethan 10% of the shareholder’s total gainfrom the disposition).

11. Identify the following items that maybe subject to the recharacterization rulesunder Temporary Regulations section1.469-2T(f) and Regulations section1.469-2(f):

a. Net income from an activity of rentingsubstantially nondepreciable property;

b. The lesser of equity-financed interestincome or net passive income from anequity-financed lending activity;

c. Net rental activity income fromproperty developed (by the shareholder orthe corporation), rented, and sold within 12months after the rental of the propertycommenced;

d. Net rental activity income from therental of property by the corporation to atrade or business activity in which theshareholder had an interest (either directlyor indirectly); and

e. Net royalty income from intangibleproperty if the shareholder acquired theshareholder’s interest in the corporationafter the corporation created the intangibleproperty or performed substantial servicesor incurred substantial costs in developingor marketing the intangible property.

12. Identify separately the credits fromeach activity conducted by or through thecorporation.

Specific Instructions

General InformationName, Address, and EmployerIdentification NumberUse the label on the package that wasmailed to the corporation. Cross out anyerrors and print the correct information onthe label.

If the corporation did not receive a label,print or type the corporation’s true name(as set forth in the corporate charter orother legal document creating it), address,and employer identification number on theappropriate lines.

Include the suite, room, or other unitnumber after the street address. If apreaddressed label is used, please includethe information on the label. If the PostOffice does not deliver to the streetaddress and the corporation has a P.O.box, show the box number instead of thestreet address.

If the corporation changes its mailingaddress after filing its return, it can notifythe IRS by filing Form 8822, Change ofAddress.

Item B—Business Code No.See Codes for Principal BusinessActivity on page 24 of these instructions.

Item E—Total AssetsEnter the corporation’s total assets at theend of the tax year, as determined by theaccounting method regularly used inmaintaining the corporation’s books andrecords. If there are no assets at the endof the tax year, enter the total assets as ofthe beginning of the tax year.

Item F—Initial Return, FinalReturn, Change in Address, andAmended ReturnIf this is the corporation’s first return,check box F(1). If the corporation hasceased to exist, check box F(2). Alsocheck box D(1) on each Schedule K-1 toindicate that it is a final Schedule K-1.Indicate a change in address by checkingbox F(3). If this amends a previously filedreturn, check box F(4). If Schedules K-1are also being amended, check box D(2)on each Schedule K-1.

Item G—Consolidated AuditProceduresWith certain exceptions, the tax treatmentof S corporation items is determined at thecorporate level in a consolidated auditproceeding, rather than in separateproceedings with individual shareholders.Check the box for item G if any of thefollowing apply.● The S corporation had more than fiveshareholders at any time during the taxyear (for this purpose a husband and wife,and their estates, are treated as oneshareholder).● Any shareholder was other than anatural person or estate.● The small S corporation (five or fewershareholders) has elected as provided inTemporary Regulations section301.6241-1T(c)(2)(v) to be subject to therules for consolidated proceedings.Note: The S corporation does not makethe section 301.6241-1T(c)(2)(v) electionwhen it checks the box for item G. Thiselection must be made separately.

For more information on theconsolidated audit procedures for Scorporations, see sections 6241 through6245, Temporary Regulations section301.6241-1T, and Pub. 556, Examinationof Returns, Appeal Rights, and Claims forRefund.

IncomeCaution: Report only trade or businessactivity income or loss on lines 1a through6. Do not report rental activity income orportfolio income or loss on these lines.(See the instructions on Passive ActivityLimitations beginning on page 5 fordefinitions of rental income and portfolioincome.) Rental activity income andportfolio income are reported on SchedulesK and K-1 (rental real estate activities arealso reported on Form 8825).

Do not include any tax-exempt incomeon lines 1 through 5. A corporation thatreceives any exempt income other thaninterest, or holds any property or engagesin an activity that produces exempt

income, reports the amount of this incomeon line 18 of Schedules K and K-1.

Tax-exempt interest income, includingexempt-interest dividends received as ashareholder in a mutual fund or otherregulated investment company, is reportedon line 17 of Schedules K and K-1.

See Deductions on page 10 forinformation on how to report expensesrelated to tax-exempt income.

If the S corporation has had debtdischarged resulting from a title 11bankruptcy proceeding, or while insolvent,see Form 982, Reduction of Tax AttributesDue to Discharge of Indebtedness, andPub. 908, Tax Information on Bankruptcy.

Line 1—Gross Receipts or SalesEnter gross receipts or sales from all tradeor business operations except those youreport on lines 4 and 5. For reportingadvance payments, see Regulationssection 1.451-5. To report income fromlong-term contracts, see section 460.Installment sales.—Generally, theinstallment method cannot be used fordealer dispositions of property. A dealerdisposition is any disposition of personalproperty by a person who regularly sells orotherwise disposes of property of the sametype on the installment plan or anydisposition of real property held for sale tocustomers in the ordinary course of thetaxpayer’s trade or business. Thedisposition of property used or produced inthe farming business is not included as adealer disposition. See section 453(l) fordetails and exceptions.

Enter on line 1a the gross profit oncollections from installment sales for any ofthe following:● Dealer dispositions of property beforeMarch 1, 1986.● Dispositions of property used orproduced in the trade or business offarming.● Certain dispositions of timeshares andresidential lots reported under theinstallment method.

Attach a schedule showing the followinginformation for the current and the 3preceding years: (a) gross sales, (b) costof goods sold, (c) gross profits,(d) percentage of gross profits to grosssales, (e) amount collected, and (f) grossprofit on the amount collected.

Line 2—Cost of Goods SoldSee the instructions for Schedule A.

Line 4—Net Gain (Loss) FromForm 4797Caution: Include only ordinary gains orlosses from the sale, exchange, orinvoluntary conversion of assets used in atrade or business activity. Ordinary gains orlosses from the sale, exchange, orinvoluntary conversions of assets used inrental activities must be reported separatelyon Schedule K as part of the net income(loss) from the rental activity in which theproperty was used.


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A corporation that is a partner in apartnership must include on Form 4797,Sales of Business Property, its share ofordinary gains (losses) from sales,exchanges, or involuntary or compulsoryconversions (other than casualties orthefts) of the partnership’s trade orbusiness assets.

Do not include any recapture of thesection 179 expense deduction. See theinstructions on page 21 for Schedule K-1,line 23, item 3, and the Instructions forForm 4797 for more information.

Line 5—Other Income (Loss)Enter on line 5 trade or business income(loss) that is not included on lines 1athrough 4. Examples of such incomeinclude:

1. Interest income derived in the ordinarycourse of the corporation’s trade orbusiness, such as interest charged onreceivable balances;

2. Recoveries of bad debts deducted inearlier years under the specific charge-offmethod;

3. Taxable income from insuranceproceeds;

4. The amount of credit figured on Form6478, Credit for Alcohol Used as Fuel;

5. All section 481 income adjustmentsresulting from changes in accountingmethods (show the computation on anattached schedule); and

6. Ordinary income (loss) from trade orbusiness activities of a partnership (fromSchedule K-1 (Form 1065), line 1).

The corporation must include as otherincome the recapture amount for section280F if the business use of listed propertydrops to 50% or less. To figure therecapture amount, the corporation mustcomplete Part IV of Form 4797.

The corporation must also include inother income the amount of any deductionpreviously taken under section 179A that issubject to recapture. The S corporationmust recapture the benefit of any allowablededuction for qualified clean-fuel vehicleproperty (or clean-fuel vehicle refuelingproperty), if, within 3 years after the datethe property was placed in service, theproperty ceases to qualify for thededuction. See Pub. 535 for details onhow to figure the recapture.

Do not include items requiring separatecomputations by shareholders that mustbe reported on Schedules K and K-1. Seethe instructions for Schedules K and K-1beginning on page 15.

If “other income” consists of only oneitem, identify it by showing the accountcaption in parentheses on line 5. Aseparate schedule need not be attached tothe return in this case.

Do not net any expense item (such asinterest) with a similar income item. Reportall trade or business expenses on lines 7through 19.

DeductionsCaution: Report only trade or businessactivity expenses on lines 7 through 19.

Do not report rental activity expenses ordeductions allocable to portfolio income onthese lines. Rental activity expenses areseparately reported on Form 8825 or line 3of Schedules K and K-1. Deductionsallocable to portfolio income are separatelyreported on line 9 of Schedules K and K-1.See Passive Activity Limitationsbeginning on page 5 for more informationon rental activities and portfolio income.

Do not report any nondeductibleamounts (such as expenses connectedwith the production of tax-exempt income)on lines 7 through 19. Instead, reportnondeductible expenses on line 19 ofSchedules K and K-1. If an expense isconnected with both taxable income andnontaxable income, allocate a reasonablepart of the expense to each kind ofincome.

Limitations on DeductionsSection 263A uniform capitalizationrules.—The uniform capitalization rules ofsection 263A require corporations tocapitalize or include in inventory certaincosts incurred in connection with theproduction of real and personal tangibleproperty held in inventory or held for salein the ordinary course of business.Tangible personal property produced by acorporation includes a film, soundrecording, video tape, book, or similarproperty. The rules also apply to personalproperty (tangible and intangible) acquiredfor resale. Corporations subject to the rulesare required to capitalize not only directcosts but an allocable portion of mostindirect costs (including taxes) that benefitthe assets produced or acquired for resale.Interest expense paid or incurred duringthe production period of certain propertymust be capitalized and is governed byspecial rules. For more information, seeNotice 88-99, 1988-2 C.B. 422. Theuniform capitalization rules also apply tothe production of property constructed orimproved by a corporation for use in itstrade or business or in an activity engagedin for profit.

Section 263A does not apply to personalproperty acquired for resale if thetaxpayer’s average annual gross receiptsfor the 3 prior tax years are $10 million orless. It does not apply to timber or to mostproperty produced under a long-termcontract. Special rules apply to certaincorporations engaged in farming (seebelow). The rules do not apply to propertyproduced for use by the taxpayer ifsubstantial construction occurred beforeMarch 1, 1986.

In the case of inventory, some of theindirect costs that must be capitalized areadministration expenses; taxes;depreciation; insurance; compensationpaid to officers attributable to services;rework labor; and contributions to pension,stock bonus, and certain profit-sharing,annuity, or deferred compensation plans.

The costs required to be capitalizedunder section 263A are not deductible untilthe property to which the costs relate issold, used, or otherwise disposed of by thecorporation.

Research and experimental costs undersection 174; intangible drilling costs for oil,gas, and geothermal property; and miningexploration and development costs areseparately reported to shareholders forpurposes of determinations under section59(e). Regulations section 1.263A-1(e)(3)specifies other indirect costs that may becurrently deducted and those that must becapitalized with respect to production orresale activities.

For more information, see Regulationssections 1.263A-1 through 1.263A-3.Special rules for certain corporationsengaged in farming.—For S corporationsnot required to use the accrual method ofaccounting, the rules of section 263A donot apply to expenses of raising any(a) animal or (b) plant that has apreproductive period of 2 years or less.Shareholders of S corporations notrequired to use the accrual method ofaccounting may elect to currently deductthe preproductive period expenses ofcertain plants that have a preproductiveperiod of more than 2 years. Because theelection to deduct these expenses is madeby the shareholder, the farming corporationshould not capitalize such preproductiveexpenses but should separately reportthese expenses on line 21 of Schedule K,and each shareholder’s share on line 23 ofSchedule K-1. See sections 263A(d) and(e) and Temporary Regulations section1.263A-4T(c) for definitions and otherdetails. Also see Notice 88-24, 1988-1 C.B.491, and section II(C) of Notice 89-67,1989-1 C.B. 723.Transactions between relatedtaxpayers.—Generally, an accrual basis Scorporation may deduct businessexpenses and interest owed to a relatedparty (including any shareholder) only inthe tax year of the corporation thatincludes the day on which the payment isincludible in the income of the relatedparty. See section 267 for details.Section 291 limitations.—If the Scorporation was a C corporation for any ofthe 3 immediately preceding years, thecorporation may be required to adjustdeductions allowed to the corporation fordepletion of iron ore and coal, and theamortizable basis of pollution controlfacilities. See section 291 to determine theamount of the adjustment.Business start-up expenses.—Businessstart-up expenses must be capitalized. Anelection may be made to amortize themover a period of not less than 60 months.See section 195.Reducing certain expenses for whichcredits are allowable.—For each of thecredits listed below, the corporation mustreduce the otherwise allowable deductionsfor expenses used to figure the credit bythe amount of the current year credit:

1. The orphan drug credit,2. The credit for increasing research

activities,3. The enhanced oil recovery credit,4. The disabled access credit,5. The jobs credit,


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6. The empowerment zone employmentcredit,

7. The Indian employment credit, and8. The credit for employer social security

and Medicare taxes paid on certainemployee tips.

If the corporation has any of thesecredits, be sure to figure each current yearcredit before figuring the deductions forexpenses on which the credit is based.

Line 7—Compensation of OfficersEnter on line 7 the total compensation ofall officers paid or incurred in the trade orbusiness activities of the corporation,including fringe benefit expenditures madeon behalf of officers owning more than 2%of the corporation’s stock. Also reportthese fringe benefits as wages in box 1 ofForm W-2. Do not include on line 7amounts paid or incurred for fringe benefitsof officers owning 2% or less of thecorporation’s stock. These amounts arereported on line 18, page 1, of Form1120S. See the instructions for that line forinformation on the types of expendituresthat are treated as fringe benefits and forthe stock ownership rules.

Report amounts paid for healthinsurance coverage for a more than 2%shareholder (including that shareholder’sspouse and dependents) as an informationitem in box 14 of that shareholder’s FormW-2.

Do not include on line 7 compensationreported elsewhere on the return, such asamounts included in cost of goods sold,elective contributions to a section 401(k)cash or deferred arrangement, or amountscontributed under a salary reduction SEPagreement.

Line 8—Salaries and WagesEnter on line 8 the amount of salaries andwages paid or incurred for the tax year,reduced by any applicable employmentcredits from Form 5884, Jobs Credit,Form 8844, Empowerment ZoneEmployment Credit, and Form 8845, IndianEmployment Credit. See the instructionsfor these forms for more information.Include fringe benefit expenditures madeon behalf of employees (other than officers)owning more than 2% of the corporation’sstock. Also report these fringe benefits aswages in box 1 of Form W-2. Do notinclude on line 8 amounts paid or incurredfor fringe benefits of employees owning2% or less of the corporation’s stock.These amounts are reported on line 18,page 1, of Form 1120S. See theinstructions for that line for information onthe types of expenditures that are treatedas fringe benefits and for the stockownership rules.

Report amounts paid for healthinsurance coverage for a more than 2%shareholder (including that shareholder’sspouse and dependents) as an informationitem in box 14 of that shareholder’s FormW-2.

Do not include on line 8 salaries andwages reported elsewhere on the return,such as amounts included in cost of goodssold, elective contributions to a section

401(k) cash or deferred arrangement, oramounts contributed under a salaryreduction SEP agreement.

If a shareholder or a member of thefamily of one or more shareholders of thecorporation renders services or furnishescapital to the corporation for whichreasonable compensation is not paid, theIRS may make adjustments in the itemstaken into account by such individuals andthe value of such services or capital. Seesection 1366(e).

Line 9—Repairs and MaintenanceEnter the costs of incidental repairs andmaintenance, such as labor and supplies,that do not add to the value of theproperty or appreciably prolong its life, butonly to the extent that such costs relate toa trade or business activity and are notclaimed elsewhere on the return. Newbuildings, machinery, or permanentimprovements that increase the value ofthe property are not deductible. They arechargeable to capital accounts and may bedepreciated or amortized.

Line 10—Bad DebtsEnter the total debts that becameworthless in whole or in part during theyear, but only to the extent such debtsrelate to a trade or business activity.Report deductible nonbusiness bad debtsas a short-term capital loss on Schedule D(Form 1120S).Caution: Cash method taxpayers cannottake a bad debt deduction unless theamount was previously included in income.

Line 11—RentsIf the corporation rented or leased avehicle, enter the total annual rent or leaseexpense paid or incurred in the trade orbusiness activities of the corporation. Alsocomplete Part V of Form 4562,Depreciation and Amortization. If thecorporation leased a vehicle for a term of30 days or more, the deduction for vehiclelease expense may have to be reduced byan amount called the inclusion amount.The corporation may have an inclusionamount if—

The lease term began:

And the vehicle’sfair market value onthe first day of thelease exceeded:

After 12/31/93 $14,900After 12/31/92 but before 1/1/94 $14,300After 12/31/91 but before 1/1/93 $13,700After 12/31/90 but before 1/1/92 $13,400After 12/31/86 but before 1/1/91 $12,800

If the lease term began after June 18,1984, but before January 1, 1987, get Pub.917, Business Use of a Car, to find out ifthe corporation has an inclusion amount.

See Pub. 917 for instructions on figuringthe inclusion amount.

Line 12—Taxes and LicensesEnter taxes and licenses paid or incurred inthe trade or business activities of thecorporation, if not reflected in cost ofgoods sold. Federal import duties andFederal excise and stamp taxes aredeductible only if paid or incurred in

carrying on the trade or business of thecorporation.

Do not deduct taxes, including state andlocal sales taxes, paid or accrued inconnection with the acquisition ordisposition of business property. Thesetaxes must be added to the cost of theproperty, or in the case of a disposition,subtracted from the amount realized. Seesection 164.

Do not deduct taxes assessed againstlocal benefits that increase the value of theproperty assessed (such as for paving,etc.), Federal income taxes, or taxesreported elsewhere on the return.

Do not deduct section 901 foreign taxes.These taxes are reported separately on line15e, Schedule K.

Do not report on line 12 taxes allocableto portfolio income or to a rental activity.Taxes allocable to a rental real estateactivity are reported on Form 8825. Taxesallocable to a rental activity other than arental real estate activity are reported online 3b of Schedule K. Taxes allocable toportfolio income are reported on line 9 ofSchedules K and K-1.

Do not deduct on line 12 taxes paid orincurred for the production or collection ofincome, or for the management,conservation, or maintenance of propertyheld to produce income. Report thesetaxes separately on line 10 of Schedules Kand K-1.

See section 263A(a) for information oncapitalization of allocable costs (includingtaxes) for any property.

Line 13—InterestInclude on line 13 only interest incurred inthe trade or business activities of thecorporation that is not claimed elsewhereon the return.

Do not include interest expense on debtused to purchase rental property or debtused in a rental activity. Interest allocableto a rental real estate activity is reportedon Form 8825 and is used in arriving at netincome (loss) from rental real estateactivities on line 2 of Schedules K and K-1.Interest allocable to a rental activity otherthan a rental real estate activity is includedon line 3b of Schedule K and is used inarriving at net income (loss) from a rentalactivity (other than a rental real estateactivity). This net amount is reported online 3c of Schedule K and line 3 ofSchedule K-1.

Do not include interest expense clearlyand directly allocable to portfolio orinvestment income. This interest expenseis reported separately on line 11a ofSchedule K.

Do not include interest on debt proceedsallocated to distributions made toshareholders during the tax year. Instead,report such interest on line 10 ofSchedules K and K-1. To determine theamount to allocate to distributions toshareholders, see Notice 89-35, 1989-1C.B. 675.

Do not include interest expense on debtrequired to be allocated to the productionof qualified property. Interest allocable to


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certain property produced by an Scorporation for its own use or for sale mustbe capitalized. The corporation must alsocapitalize any interest on debt that isallocable to an asset used to produce theabove property. A shareholder may have tocapitalize interest that the shareholderincurs during the tax year for theproduction expenditures of the Scorporation. Similarly, interest incurred byan S corporation may have to becapitalized by a shareholder for theshareholder’s own productionexpenditures. The information required bythe shareholder to properly capitalizeinterest for this purpose must be providedby the corporation in an attachment for line23 of Schedule K-1 (see the instructionson page 22 for Schedule K-1, line 23, item9). See section 263A(f) and Notice 88-99,1988-2 C.B. 422, for additional information.

Temporary Regulations section 1.163-8Tgives rules for allocating interest expenseamong activities so that the limitations onpassive activity losses, investment interest,and personal interest can be properlyfigured. Generally, interest expense isallocated in the same manner as debt isallocated. Debt is allocated by tracingdisbursements of the debt proceeds tospecific expenditures. These regulationsgive rules for tracing debt proceeds toexpenditures.

Generally, prepaid interest can only bededucted over the period to which theprepayment applies. See section 461(g) fordetails.

Line 14—DepreciationEnter on line 14a only the depreciationclaimed on assets used in a trade orbusiness activity. See the Instructions forForm 4562 or Pub. 534, Depreciation, tofigure the amount of depreciation to enteron this line. Complete and attach Form4562 only if the corporation placedproperty in service during 1994 or claimsdepreciation on any car or other listedproperty.

Do not include any section 179 expensededuction on this line. This amount is notdeductible by the corporation. Instead, it ispassed through to the shareholders on line8 of Schedule K-1.

Line 15—DepletionIf the corporation claims a deduction fortimber depletion, complete and attachForm T, Forest Industries Schedules.Caution: Do not deduct depletion for oiland gas properties. Each shareholderfigures depletion on these properties undersection 613A(c)(11). See the instructions onpage 21 for Schedule K-1, line 23, item 2,for information on oil and gas depletionthat must be supplied to the shareholdersby the corporation.

Line 17—Pension, Profit-Sharing,etc., PlansEnter the deductible contributions notclaimed elsewhere on the return made bythe corporation for its employees under aqualified pension, profit-sharing, annuity, orsimplified employee pension (SEP) plan,

and under any other deferredcompensation plan.

If the corporation contributes to anindividual retirement arrangement (IRA) foremployees, include the contribution insalaries and wages on page 1, line 8, orSchedule A, line 3, and not on line 17.

Employers who maintain a pension,profit-sharing, or other funded deferredcompensation plan, whether or notqualified under the Internal Revenue Codeand whether or not a deduction is claimedfor the current tax year, generally must fileone of the forms listed below:Form 5500, Annual Return/Report ofEmployee Benefit Plan (with 100 or moreparticipants).Form 5500-C/R, Return/Report ofEmployee Benefit Plan (with fewer than100 participants).Form 5500-EZ, Annual Return ofOne-Participant (Owners and TheirSpouses) Pension Benefit Plan.

There are penalties for failure to filethese forms on time and for overstating thepension plan deduction.

Line 18—Employee BenefitProgramsEnter amounts for fringe benefits paid orincurred on behalf of employees owning2% or less of the corporation’s stock.These fringe benefits include (a) up to$5,000 paid by reason of an employee’sdeath to his estate or beneficiary,(b) employer contributions to certainaccident and health plans, (c) the cost ofup to $50,000 of group-term life insuranceon an employee’s life, and (d) meals andlodging furnished for the employer’sconvenience.

Do not deduct amounts that are anincidental part of a pension, profit-sharing,etc., plan included on line 17 or amountsreported elsewhere on the return.

Report amounts paid on behalf of morethan 2% shareholders on line 7 or 8,whichever applies. A shareholder isconsidered to own more than 2% of thecorporation’s stock if that person owns onany day during the tax year more than 2%of the outstanding stock of the corporationor stock possessing more than 2% of thecombined voting power of all stock of thecorporation. See section 318 for attributionrules.

Line 19—Other DeductionsAttach your own schedule listing by typeand amount all allowable deductionsrelated to a trade or business activity forwhich there is no separate line on page 1of Form 1120S. Enter the total on this line.Do not include items that must be reportedseparately on Schedules K and K-1.

An S corporation may not take thededuction for net operating lossesprovided by section 172 or the specialdeductions in sections 241 through 249(except the election to amortizeorganizational expenditures under section248). Subject to limitations, thecorporation’s net operating loss is allowed

as a deduction from the shareholders’gross income. See section 1366.

Do not include qualified expenditures towhich an election under section 59(e) mayapply. See the instructions for lines 16aand 16b of Schedule K-1 for details ontreatment of these items.

Include on line 19 the deduction takenfor amortization. See the instructions forForm 4562 for more information. Completeand attach Form 4562 if the corporation isclaiming amortization of costs that beginduring its 1994 tax year.

Section 464(f) limits the deduction forcertain expenditures of S corporationsengaged in farming that use the cashmethod of accounting, and whose prepaidexpenses for feed, seed, fertilizer, andother farm supplies, and the cost of poultryare more than 50% of other deductiblefarming expenses. Generally, any excess(amount over 50%) may be deducted onlyin the tax year the items are actually usedor consumed. See section 464(f) for moreinformation.

Do not deduct amounts paid or incurredto participate or intervene in any politicalcampaign on behalf of a candidate forpublic office, or to influence the generalpublic regarding legislative matters,elections, or referendums. In addition,corporations generally cannot deductexpenses paid or incurred to influenceFederal or state legislation, or to influencethe actions or positions of certain Federalexecutive branch officials. However, certainin-house lobbying expenditures that do notexceed $2,000 are deductible. See section162(e) for more details.

Do not deduct fines or penalties paid toa government for violating any law.

A deduction is allowed for part of thecost of qualified clean-fuel vehicle propertyand qualified clean-fuel vehicle refuelingproperty. For more details, see section179A.Meals, travel, and entertainment.—Generally, the corporation can deduct only50% of the amount otherwise allowable formeals and entertainment expenses paid orincurred in its trade or business. Inaddition, meals must not be lavish orextravagant; a bona fide businessdiscussion must occur during, immediatelybefore, or immediately after the meal; andan employee of the corporation must bepresent at the meal. See section 274(k)(2)for exceptions.

Additional limitations apply to deductionsfor gifts, skybox rentals, luxury watertravel, convention expenses, andentertainment tickets. See section 274 andPub. 463, Travel, Entertainment, and GiftExpenses, for details.

Corporations are not allowed to deductamounts paid or incurred for membershipdues in any club organized for business,pleasure, recreation, or other socialpurpose. This rule applies to all types ofclubs, including business, social, athletic,luncheon, sporting, airline, and hotel clubs.In addition, no deduction is allowed fortravel expenses paid or incurred for anofficer’s or employee’s spouse or


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dependent or other individualaccompanying an officer or employee ofthe corporation, unless that spouse,dependent, or other individual is anemployee of the corporation, and thatperson’s travel is for a bona fide businesspurpose and would otherwise bedeductible by that person.

Generally, a corporation can deduct allother ordinary and necessary travel andentertainment expenses paid or incurred inits trade or business. However, it cannotdeduct an expense paid or incurred for afacility (such as a yacht or hunting lodge)used for an activity usually consideredentertainment, amusement, or recreation.Note: The corporation may be able todeduct otherwise nondeductible meals,travel, and entertainment expenses if theamounts are treated as compensation andreported on Form W-2 for an employee oron Form 1099-MISC for an independentcontractor.

See Pub. 463 for more details.

Line 21—Ordinary Income (Loss)This is nonseparately computed income orloss as defined in section 1366(a)(2)attributable to trade or business activitiesof the corporation. This income or loss isentered on line 1 of Schedule K.

Line 21 income is not used in figuringthe tax on line 22a or 22b. See theinstructions for line 22a for figuring taxableincome for purposes of line 22a or 22b tax.

Tax and PaymentsLine 22a—Excess Net PassiveIncome TaxIf the corporation has always been an Scorporation, the excess net passiveincome tax does not apply. If thecorporation has subchapter C earnings andprofits (defined in section 1362(d)(3)(B)) atthe close of its tax year, has passiveinvestment income for the tax year that isin excess of 25% of gross receipts, andhas taxable income at year end, thecorporation must pay a tax on the excessnet passive income. Complete lines 1through 3 and line 9 of the worksheetbelow to make this determination. If line 2

is greater than line 3 and the corporationhas taxable income (see instructions forline 9 of worksheet), it must pay the tax.Complete a separate schedule using theformat of lines 1 through 11 of theworksheet below to figure the tax. Enterthe tax on line 22a, page 1, Form 1120S,and attach the computation schedule toForm 1120S.

Reduce each item of passive incomepassed through to shareholders by itsportion of tax on line 22a. See section1366(f)(3).

Line 22b—Tax From Schedule D(Form 1120S)If the corporation elected to be an Scorporation before 1987 (or elected to bean S corporation during 1987 or 1988 andqualifies for transitional relief from thebuilt-in gains tax), see instructions for PartIII of Schedule D (Form 1120S) todetermine if the corporation is liable for thecapital gains tax.

If the corporation made its election to bean S corporation after 1986, see theinstructions for Part IV of Schedule D todetermine if the corporation is liable for thebuilt-in gains tax.Note: For purposes of line 19 of Part IIIand line 25 of Part IV of Schedule D,taxable income is defined in section1375(b)(1)(B) and is generally figured in thesame manner as taxable income for line 9of the line 22a worksheet below.

Line 22cInclude in the total for line 22c thefollowing:Investment credit recapture tax.—Section 1371(d) provides that an Scorporation is liable for investment creditrecapture attributable to credits allowed fortax years for which the corporation wasnot an S corporation.

Figure the corporation’s investmentcredit recapture tax by completing Form4255, Recapture of Investment Credit.Include the tax in the total amount to beentered on line 22c. Write to the left of theline 22c total the amount of recapture taxand the words “Tax From Form 4255,” andattach Form 4255 to Form 1120S.

LIFO recapture tax.—The corporation maybe liable for the additional tax due to LIFOrecapture under Regulations section1.1363-2 if:● The corporation used the LIFO inventorypricing method for its last tax year as a Ccorporation, or● A C corporation transferred LIFOinventory after August 18, 1993, to thecorporation in a nonrecognition transactionin which those assets were transferredbasis property.

The additional tax due to LIFO recaptureis figured for the corporation’s last tax yearas a C corporation or for the tax year ofthe transfer, whichever applies. See theInstructions for Forms 1120 and 1120-A tofigure the tax. The tax is paid in four equalinstallments. The C corporation must paythe first installment by the due date (notincluding extensions) of Form 1120 for thecorporation’s last tax year as a Ccorporation or for the tax year of thetransfer, whichever applies. The Scorporation must pay each of theremaining installments by the due date (notincluding extensions) of Form 1120S forthe 3 succeeding tax years. Include thisyear’s installment in the total amount to beentered on line 22c. Write to the left of thetotal on line 22c the installment amountand the words “LIFO tax.”Interest due under the look-backmethod for completed long-termcontracts.—If the corporation completedForm 8697, Interest Computation Underthe Look-Back Method for CompletedLong-Term Contracts, and owes interest,write to the left of the line 22c total theamount of interest and “From Form 8697.”Attach the completed form to Form 1120S.

Line 23dIf the S corporation is a beneficiary of atrust and the trust makes a section 643(g)election to credit its estimated taxpayments to its beneficiaries, include thecorporation’s share of the payment(reported to the corporation on ScheduleK-1 (Form 1041)) in the total amountentered on line 23d. Also, to the left of line23d, write “T” and the amount of thepayment.

Worksheet for Line 22a1. Enter gross receipts for the tax year

(see section 1362(d)(3)(C) for grossreceipts from the sale of capitalassets)*

2. Enter passive investment income asdefined in Regulations section1.1362-2(c)(5)*

3. Enter 25% of line 1 (If line 2 is less thanline 3, stop here. You are not liable forthis tax.)

4. Excess passive investment income—Subtract line 3 from line 2

5. Enter deductions directly connectedwith the production of income on line2 (see section 1375(b)(2))*

6. Net passive income—Subtract line 5from line 2

7. Divide amount on line 4 by amount online 2 %

8. Excess net passive income—Multiplyline 6 by line 7

9. Enter taxable income (see instructionsfor 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 line22a, 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, aswell 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 1.1374-1(d). 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 1120schedules, such as Schedule D (Form 1120) if you have capital gains or losses.


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Line 24—Estimated Tax PenaltyA corporation that fails to make estimatedtax payments when due may be subject toan underpayment penalty for the period ofunderpayment. Use Form 2220,Underpayment of Estimated Tax byCorporations, to see if the corporationowes a penalty and to figure the amount ofthe penalty. If you attach Form 2220 toForm 1120S, be sure to check the box online 24 and enter the amount of anypenalty on this line.

Schedule A—Cost ofGoods SoldSection 263A UniformCapitalization RulesThe uniform capitalization rules of section263A are discussed under Limitations onDeductions on page 10. See thoseinstructions before completing Schedule A.

Line 4—Additional Section 263ACostsAn entry is required on this line only forcorporations that have elected a simplifiedmethod of accounting.

For corporations that have elected thesimplified production method, additionalsection 263A costs are generally thosecosts, other than interest, that were notcapitalized under the corporation’s methodof accounting immediately prior to theeffective date of section 263A that are nowrequired to be capitalized under section263A. For new corporations, additionalsection 263A costs are the costs, otherthan interest, that must be capitalizedunder section 263A, but which thecorporation would not have been requiredto capitalize if it had existed before theeffective date of section 263A. For moredetails, see Regulations section1.263A-2(b).

For corporations that have elected thesimplified resale method, additional section263A costs are generally those costsincurred with respect to the followingcategories: off-site storage or warehousing;purchasing; handling, processing,assembly, and repackaging; and generaland administrative costs (mixed servicecosts). For more details, see Regulationssection 1.263A-3(d).

Enter on line 4 the balance of section263A costs paid or incurred during the taxyear not included on lines 2, 3, and 5.

Line 5—Other CostsEnter on line 5 any other inventoriablecosts paid or incurred during the tax yearnot entered on lines 2 through 4.

Line 7—Inventory at End of YearSee Regulations sections 1.263A-1 through1.263A-3 for details on figuring the coststo be included in ending inventory.

Lines 9a through 9e—InventoryValuation MethodsInventories can be valued at (a) cost,(b) cost or market value (whichever islower), or (c) any other method approvedby the IRS that conforms to the provisionsof the applicable regulations.

Corporations that use erroneousvaluation methods must change to amethod permitted for Federal income taxpurposes. To make this change, use Form3115.

On line 9a, check the method(s) used forvaluing inventories. Under “lower of cost ormarket,” market generally applies to normalmarket conditions when there is a currentbid price prevailing at the date theinventory is valued. When no regular openmarket exists or when quotations arenominal because of inactive marketconditions, use fair market prices from themost reliable sales or purchasetransactions that occurred near the datethe inventory is valued.

Inventory may be valued below costwhen the merchandise is unsalable atnormal prices or unusable in the normalway because the goods are “subnormal”due to damage, imperfections, shop wear,etc., within the meaning of Regulationssection 1.471-2(c). These goods may bevalued at a current bona fide selling priceminus direct cost of disposition (but notless than scrap value) if such a price canbe established.

If this is the first year the last-in, first-out(LIFO) inventory method was eitheradopted or extended to inventory goodsnot previously valued under the LIFOmethod provided in section 472, attachForm 970, Application To Use LIFOInventory Method, or a statement with theinformation required by Form 970. Alsocheck the LIFO box on line 9b. On line 9c,enter the amount or the percent of totalclosing inventories covered under section472. Estimates are acceptable.

If the corporation changed or extendedits inventory method to LIFO and has hadto “write up” its opening inventory to costin the year of election, report the effect ofthis write-up as income (line 5, page 1)proportionately over a 3-year period thatbegins with the tax year of the election(section 472(d)).

See Pub. 538 for more information oninventory valuation methods.

Schedule B—OtherInformationBe sure to answer the questions andprovide other information in items 1through 10.

Line 5—Foreign FinancialAccountsAnswer “Yes” to question 5 if either 1 or 2below applies to the corporation.Otherwise, check the “No” box.

1. At any time during calendar year1994, the corporation had an interest in or

signature or other authority over a bankaccount, securities account, or otherfinancial account in a foreign country; AND● The combined value of the accountswas more than $10,000 during thecalendar year; AND● The accounts were NOT with a U.S.military banking facility operated by a U.S.financial institution.

2. The corporation owns more than 50%of the stock in any corporation that wouldanswer the question “Yes” based on item1 above.

Get Form TD F 90-22.1, Report ofForeign Bank and Financial Accounts, tosee if the corporation is considered tohave an interest in or signature or otherauthority over a bank account, securitiesaccount, or other financial account in aforeign country.

If you answered “Yes” to question 5, fileForm TD F 90-22.1 by June 30, 1995, withthe Department of the Treasury at theaddress shown on the form. Form TD F90-22.1 is not a tax return, so do not file itwith Form 1120S. Form TD F 90-22.1 maybe ordered by calling our toll-free number,1-800-829-3676.

Line 9Complete line 9 if the corporation (a) filedits election to be an S corporation after1986; (b) was a C corporation before itelected to be an S corporation or thecorporation acquired an asset with a basisdetermined by reference to its basis (or thebasis of any other property) in the hands ofa C corporation; and (c) has net unrealizedbuilt-in gain (defined below) in excess ofthe net recognized built-in gain from prioryears.

The corporation is liable for section 1374tax if (a), (b), and (c) above apply and ithas a net recognized built-in gain (section1374(d)(2)) for its tax year.

Section 633(d)(8) of the Tax Reform Actof 1986 provides transitional relief from thebuilt-in gains tax for certain corporationsthat elected to be S corporations in 1987or 1988. However, the relief rule does notapply to ordinary gains or losses(determined without regard to section1239), gains or losses from the dispositionof capital assets held 6 months or less,and gains from the disposition of any assetacquired by the corporation with asubstituted basis if a principal purpose foracquiring the asset was to securetransitional relief from the built-in gains tax.See the instructions for Part IV ofSchedule D (Form 1120S) for moreinformation.

The corporation’s net unrealized built-ingain is the amount, if any, by which the fairmarket value of the assets of thecorporation at the beginning of its first Scorporation year (or as of the date theassets were acquired, for any asset with abasis determined by reference to its basis(or the basis of any other property) in thehands of a C corporation) exceeds theaggregate adjusted basis of such assets atthat time.


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Enter on line 9 the corporation’s netunrealized built-in gain reduced by the netrecognized built-in gain for prior years. Seesections 1374(c)(2) and (d)(1).

Line 10Check the box on line 10 if the corporationwas a C corporation in a prior year andhas subchapter C earnings and profits(E&P) at the close of its 1994 tax year. Forthis purpose, subchapter C E&P is E&P ofany corporation for any tax year when itwas not an S corporation. See sections1362(d)(3)(B) and 312 for other details. Ifthe corporation has subchapter C E&P, itmay be liable for tax imposed on excessnet passive income. See the instructionsfor line 22a, page 1, of Form 1120S fordetails on this tax.

Designation of Tax MattersPerson (TMP)If the S corporation is subject to sections6241 through 6245 (consolidated auditprocedures), it may designate ashareholder as the TMP for the tax year forwhich the return is filed by completing theDesignation of Tax Matters Personsection at the bottom of page 2 of Form1120S. Temporary Regulations section301.6241-1T provides an exception to theconsolidated provisions for small Scorporations with five or fewershareholders each of whom is a naturalperson or an estate. See Item G—Consolidated Audit Procedures on page9 for other details.

General Instructions forSchedules K and K-1—Shareholders’ Shares ofIncome, Credits,Deductions, etc.

Purpose of SchedulesThe corporation is liable for taxes on lines22a, b, and c, page 1, Form 1120S.Shareholders are liable for income tax ontheir shares of the corporation’s income(reduced by any taxes paid by thecorporation on income) and must includetheir share of the income on their taxreturn whether or not it is distributed tothem. Unlike most partnership income, Scorporation income is not self-employmentincome and is not subject toself-employment tax.

Schedule K is a summary schedule of allthe shareholders’ shares of thecorporation’s income, deductions, credits,etc. Schedule K-1 shows eachshareholder’s separate share. A copy ofeach shareholder’s Schedule K-1 must beattached to the Form 1120S filed with theIRS. A copy is kept as a part of thecorporation’s records, and the corporationmust give each shareholder a separatecopy.

The total pro rata share items (column(b)) of all Schedules K-1 should equal theamount reported on the same line of

Schedule K. Lines 1 through 20 ofSchedule K correspond to lines 1 through20 of Schedule K-1. Other lines do notcorrespond, but instructions will explainthe differences.

Be sure to give each shareholder a copyof the Shareholder’s Instructions forSchedule K-1 (Form 1120S). Theseinstructions are available separately fromSchedule K-1 at most IRS offices.Note: Instructions that apply only to lineitems reported on Schedule K-1 may beprepared and given to each shareholderinstead of the instructions printed by theIRS.

Substitute FormsThe corporation does not need IRSapproval to use a substitute Schedule K-1if it is an exact copy of the IRS schedule,or if it contains only those lines thetaxpayer is required to use, and the lineshave the same numbers and titles and arein the same order as on the IRS ScheduleK-1. In either case, the substitute schedulemust include the OMB number and either(a) the Shareholder’s Instructions forSchedule K-1 (Form 1120S) or(b) instructions that apply to the itemsreported on Schedule K-1 (Form 1120S).

The corporation must request IRSapproval to use other substitute SchedulesK-1. To request approval, write to InternalRevenue Service, Attention: SubstituteForms Program Coordinator, PC:FP:FS,1111 Constitution Avenue, N.W.,Washington, DC 20224.

The corporation may be subject to apenalty if it files a substitute Schedule K-1that does not conform to the specificationsof Rev. Proc. 94-34, 1994-18 I.R.B. 19.

Shareholder’s Pro RataShare ItemsGeneral RuleItems of income, loss, deductions, etc., areallocated to a shareholder on a daily basis,according to the number of shares of stockheld by the shareholder on each dayduring the tax year of the corporation. SeeItem A on page 16.

A transferee shareholder (rather than thetransferor) is considered to be the owner ofstock on the day it is transferred.

Special RulesTermination of shareholder’s interest.—Ifa shareholder terminates his or her interestin a corporation during the tax year, thecorporation, with the consent of allshareholders (including the one whoseinterest is terminated), may elect toallocate income and expenses, etc., as ifthe corporation’s tax year consisted of 2tax years, the first of which ends on thedate of the shareholder’s termination. Tomake the election, the corporation mustattach a statement to Form 1120S for thetax year for which the election is made. Inthe statement, the corporation must statethat it is electing under section 1377(a)(2)to have the rules of section 1377(a)(1)

applied as if the tax year consisted of 2tax years. The statement must give thedate and manner of the termination (e.g.,sale of the shareholder’s entire interest),and it must be signed by a corporateofficer on behalf of the corporation. Also,the corporation must attach a statement ofconsent signed by each person who was ashareholder at any time during the taxyear. If the election is made, write “Section1377(a)(2) Election Made” at the top ofeach Schedule K-1.Qualifying dispositions.—If a qualifyingdisposition takes place during the tax year,the corporation may make an irrevocableelection to allocate income and expenses,etc., as if the corporation’s tax yearconsisted of 2 tax years, the first of whichends on the close of the day on which thequalifying disposition occurs. A qualifyingdisposition is:

1. A disposition by a shareholder of atleast 20% of the corporation’s outstandingstock in one or more transactions in any30-day period during the tax year,

2. A redemption treated as an exchangeunder section 302(a) or 303(a) of at least20% of the corporation’s outstandingstock in one or more transactions in any30-day period during the tax year, or

3. An issuance of stock that equals atleast 25% of the previously outstandingstock to one or more new shareholders inany 30-day period during the tax year.

To make the election, the corporationmust attach a statement to a timely filedoriginal or amended Form 1120S for thetax year for which the election is made. Inthe statement, the corporation must statethat it is electing under Regulations section1.1368-1(g)(2)(i) to treat the tax year as if itconsisted of separate tax years. Thestatement must also give the facts relatingto the qualifying disposition (e.g., sale, gift,stock issuance, or redemption), and statethat each shareholder who held stock inthe corporation during the tax yearconsents to the election. A corporateofficer must sign the statement underpenalties of perjury on behalf of thecorporation. A single election statementmay be filed for all elections made underthis special rule for the tax year.

For more details on the election, seeRegulations section 1.1368-1(g)(2).

Specific Instructions(Schedule K Only)Enter the total pro rata share amount foreach applicable line item on Schedule K.

Specific Instructions(Schedule K-1 Only)

General InformationOn each Schedule K-1, complete the datespaces at the top; enter the names,addresses, and identifying numbers of theshareholder and corporation; completeitems A through D; and enter theshareholder’s pro rata share of each item.


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Schedule K-1 must be prepared andgiven to each shareholder on or beforethe day on which Form 1120S is filed.Note: Space has been provided on line 23(Supplemental Information) of ScheduleK-1 for the corporation to provideadditional information to shareholders. Thisspace, if sufficient, should be used in placeof any attached schedules required for anylines on Schedule K-1, or other amountsnot shown on lines 1 through 22 ofSchedule K-1. Please be sure to identifythe applicable line number next to theinformation entered below line 23.

Special ReportingRequirements forCorporations With MultipleActivitiesIf items of income, loss, deduction, orcredit from more than one activity(determined for purposes of the passiveactivity loss and credit limitations) arereported on lines 1, 2, or 3 of ScheduleK-1, the corporation must provideinformation for each activity to itsshareholders. See Passive ActivityReporting Requirements on page 8 fordetails on the reporting requirements.

Special ReportingRequirements for At-RiskActivitiesIf the corporation is involved in one ormore at-risk activities for which a loss isreported on Schedule K-1, the corporationmust report information separately for eachat-risk activity. See section 465(c) for adefinition of at-risk activities.

For each at-risk activity, the followinginformation must be provided on anattachment to Schedule K-1:

1. A statement that the information is abreakdown of at-risk activity loss amounts.

2. The identity of the at-risk activity; theloss amount for the activity; other incomeand deductions; and other information thatrelates to the activity.

Specific ItemsItem AIf there was no change in shareholders orin the relative interest in stock theshareholders owned during the tax year,enter the percentage of total stock ownedby each shareholder during the tax year.For example, if shareholders X and Y eachowned 50% for the entire tax year, enter50% in item A for each shareholder. Eachshareholder’s pro rata share items (lines 1through 20 of Schedule K-1) are figured bymultiplying the Schedule K amount on thecorresponding line of Schedule K by thepercentage in item A.

If there was a change in shareholders orin the relative interest in stock theshareholders owned during the tax year,each shareholder’s percentage ofownership is weighted for the number ofdays in the tax year that stock was owned.

For example, A and B each held 50% forhalf the tax year and A, B, and C held40%, 40%, and 20%, respectively, for theremaining half of the tax year. Thepercentage of ownership for the year for A,B, and C is figured as follows and is thenentered in item A.

a b c (a 3 b)

% of total % of tax % of ownershipstock owned year held for the year

A 50 50 2540 50 +20 45

B 50 50 2540 50 +20 45

C 20 50 10 10

Total 100%

If there was a change in shareholders orin the relative interest in stock theshareholders owned during the tax year,each shareholder’s pro rata share itemsgenerally are figured by multiplying theSchedule K amount by the percentage initem A. However, if a shareholderterminated his or her entire interest in thecorporation during the year or a qualifyingdisposition took place, the corporation mayelect to allocate income and expenses,etc., as if the tax year consisted of 2 taxyears, the first of which ends on the day ofthe termination or qualifying disposition.See Special Rules on page 15 for moredetails. Each shareholder’s pro rata shareitems are figured separately for eachperiod on a daily basis, based on thepercentage of stock held by theshareholder on each day.

Item BEnter the Internal Revenue Service Centeraddress where the Form 1120S, to which acopy of this K-1 was attached, was or willbe filed.

Item CIf the corporation is a registration-requiredtax shelter, it must enter its tax shelterregistration number in item C. If thecorporation invested in a registration-required shelter, the corporation must alsofurnish a copy of its Form 8271 to itsshareholders. See Form 8271 for moreinformation.

Specific Instructions(Schedules K and K-1,Except as Noted)

Income (Loss)Reminder: Before entering income itemson Schedule K or K-1, be sure to reducethe items of income for the following:

1. Built-in gains tax (Schedule D, PartIV, line 31).—Each recognized built-in gainitem (within the meaning of section1374(d)(3)) is reduced by its proportionateshare of the built-in gains tax.

2. Capital gains tax (Schedule D, PartIII, line 23).—The section 1231 gain

included on line 5 or 6 of Schedule K isreduced by this tax.

3. Excess net passive income tax (line22a, page 1, Form 1120S).—Each item ofpassive investment income (within themeaning of Regulations section1.1362-2(c)(5)) is reduced by itsproportionate share of the net passiveincome tax.

Line 1—Ordinary Income (Loss)From Trade or Business ActivitiesEnter the amount from line 21, page 1.Enter the income or loss without referenceto (a) shareholders’ basis in the stock ofthe corporation and in any indebtedness ofthe corporation to the shareholders(section 1366(d)), (b) shareholders’ at-risklimitations, and (c) shareholders’ passiveactivity limitations. These limitations, ifapplicable, are determined at theshareholder level.

If the corporation is involved in morethan one trade or business activity, seePassive Activity Reporting Requirementson page 8 for details on the information tobe reported for each activity. If an at-riskactivity loss is reported on line 1, seeSpecial Reporting Requirements forAt-Risk Activities above.

Line 2—Net Income (Loss) FromRental Real Estate ActivitiesEnter the net income or loss from rentalreal estate activities of the corporationfrom Form 8825, Rental Real EstateIncome and Expenses of a Partnership oran S Corporation. Each Form 8825 hasspace for reporting the income andexpenses of up to eight properties.

If the corporation has income or lossfrom more than one rental real estateactivity reported on line 2, see PassiveActivity Reporting Requirements on page8 for details on the information to bereported for each activity. If an at-riskactivity loss is reported on line 2, seeSpecial Reporting Requirements forAt-Risk Activities above.

If a loss from a qualified low-incomehousing project is reported on line 2,identify this loss on a statement attachedto the Schedule K-1 of each shareholderwho is a qualified investor in the project.Any loss sustained by a qualified investorin a qualified low-income housing projectfor any tax year in the relief period is notsubject to the passive activity losslimitations under section 502 of the TaxReform Act of 1986. See Act section 502for definitions and other information onqualified low-income housing projects.

Line 3—Income and Expenses ofOther Rental ActivitiesEnter on lines 3a and 3b of Schedule K(line 3 of Schedule K-1) the income andexpenses of rental activities other than theincome and expenses reported on Form8825. If the corporation has more than onerental activity reported on line 3, seePassive Activity Reporting Requirementson page 8 for details on the information tobe reported for each activity. If an at-risk


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activity loss is reported on line 3, seeSpecial Reporting Requirements forAt-Risk Activities on page 16. Also seeRental activities on page 6 for a definitionand other details on other rental activities.

Lines 4a Through 4f—PortfolioIncome (Loss)Enter portfolio income (loss) on lines 4athrough 4f. See Portfolio income on page7 for a definition of portfolio income. Donot reduce portfolio income by deductionsallocated to it. Report such deductions(other than interest expense) on line 9 ofSchedules K and K-1. Interest expenseallocable to portfolio income is generallyinvestment interest expense and isreported on line 11a of Schedules K andK-1.Lines 4a and 4b.—Enter only taxableinterest and dividends that are portfolioincome. Interest income derived in theordinary course of the corporation’s tradeor business, such as interest charged onreceivable balances, is reported on line 5,page 1, Form 1120S. See TemporaryRegulations section 1.469-2T(c)(3).Lines 4d and 4e.—Enter on line 4d the netshort-term capital gain or loss from line 6of Schedule D (Form 1120S) that isportfolio income. Enter on line 4e the netlong-term capital gain or loss from line 12of Schedule D (Form 1120S) that isportfolio income. If any gain or loss fromlines 6 and 12 of Schedule D is notportfolio income (e.g., gain or loss from thedisposition of nondepreciable personalproperty used in a trade or business), donot report this income or loss on lines 4dand 4e. Instead, report it on line 6 ofSchedules K and K-1. If the income or lossis attributable to more than one activity,report the income or loss amountseparately for each activity on anattachment to Schedule K-1 and identifythe activity to which the income or lossrelates.Line 4f.—Enter any other portfolio incomenot reported on lines 4a through 4e.

If the corporation holds a residualinterest in a REMIC, report on anattachment for line 4f each shareholder’sshare of taxable income (net loss) from theREMIC (line 1b of Schedule Q (Form1066)); excess inclusion (line 2c ofSchedule Q (Form 1066)); and section 212expenses (line 3b of Schedule Q (Form1066)). Because Schedule Q (Form 1066) isa quarterly statement, the corporation mustfollow the Schedule Q (Form 1066)Instructions for Residual Interest Holder tofigure the amounts to report toshareholders for the corporation’s tax year.

Line 5—Net Gain (Loss) UnderSection 1231 (Other Than Due toCasualty or Theft)Enter the gain (loss) under section 1231shown on line 8 of Form 4797. Do notinclude net gains or losses from involuntaryconversions due to casualties or thefts onthis line. Instead, report them on line 6.

If the corporation is involved in morethan one trade or business or rental

activity, see Passive Activity ReportingRequirements on page 8 for details on theinformation to be reported for each activity.If an at-risk activity loss is reported on line5, see Special Reporting Requirementsfor At-Risk Activities on page 16.

Line 6—Other Income (Loss)Enter any other item of income or loss notincluded on lines 1 through 5, such as:

1. Recoveries of tax benefit items(section 111).

2. Gambling gains and losses (section165(d)).

3. Net gain (loss) from involuntaryconversions due to casualty or theft. Theamount for this item is shown on Form4684, Casualties and Thefts, line 38a or38b.

4. Any net gain or loss from section1256 contracts from Form 6781, Gainsand Losses From Section 1256 Contractsand Straddles.

If the corporation is involved in morethan one trade or business or rentalactivity, see Passive Activity ReportingRequirements on page 8 for details on theinformation to be reported for each activity.If an at-risk activity loss is reported on line6, see Special Reporting Requirementsfor At-Risk Activities on page 16.

DeductionsLine 7—Charitable ContributionsEnter the amount of charitablecontributions paid by the corporationduring its tax year. On an attachment toSchedules K and K-1, show separately thedollar amount of contributions subject toeach of the 50%, 30%, and 20% ofadjusted gross income limits.

Generally, no deduction is allowed forany contribution of $250 or more unlessthe corporation obtains a writtenacknowledgement from the charitableorganization that shows the amount ofcash contributed, describes any propertycontributed, and gives an estimate of thevalue of any goods or services provided inreturn for the contribution. Theacknowledgment must be obtained by thedue date (including extensions) of thecorporation’s return, or if earlier, the datethe corporation files its return. Do notattach the acknowledgment to the taxreturn, but keep it with the corporation’srecords. These rules apply in addition tothe filing requirements for Form 8283described below.

Certain contributions made to anorganization conducting lobbying activitiesare not deductible. See section 170(f)(9) formore details.

If the corporation contributes propertyother than cash and the deduction claimedfor such property exceeds $500, completeForm 8283, Noncash CharitableContributions, and attach it to Form1120S. The corporation must give a copyof its Form 8283 to every shareholder if thededuction for any item or group of similaritems of contributed property exceeds

$5,000, even if the amount allocated toany shareholder is $5,000 or less.

If the deduction for an item or group ofsimilar items of contributed property is$5,000 or less, the corporation must reporteach shareholder’s pro rata share of theamount of noncash contributions to enableindividual shareholders to complete theirown Forms 8283. See the Instructions forForm 8283 for more information.

If the corporation made a qualifiedconservation contribution under section170(h), also include the fair market value ofthe underlying property before and afterthe donation, as well as the type of legalinterest contributed, and describe theconservation purpose furthered by thedonation. Give a copy of this information toeach shareholder.

Line 8—Section 179 ExpenseDeductionAn S corporation may elect to expensepart of the cost of certain tangible propertythat the corporation purchased during thetax year for use in its trade or business orcertain rental activities. See theInstructions for Form 4562 for moreinformation.

Complete Part I of Form 4562 to figurethe corporation’s section 179 expensededuction. The corporation does not claimthe deduction itself, but instead passes itthrough to the shareholders. Attach Form4562 to Form 1120S and show the totalsection 179 expense deduction onSchedule K, line 8. Report each individualshareholder’s pro rata share on ScheduleK-1, line 8. Do not complete line 8 ofSchedule K-1 for any shareholder that isan estate or trust.

If the corporation is an enterprise zonebusiness, also report on an attachment toSchedule K and K-1 the cost of section179 property placed in service during theyear that is qualified zone property.

See the instructions for line 23 ofSchedule K-1, item 3, for any recapture ofa section 179 amount.

Line 9—Deductions Related toPortfolio Income (Loss)Enter on line 9 the deductions clearly anddirectly allocable to portfolio income (otherthan interest expense). Interest expenserelated to portfolio income is investmentinterest expense and is reported on line11a of Schedules K and K-1. Generally,the line 9 expenses are section 212expenses and are subject to section 212limitations at the shareholder level.Note: No deduction is allowed undersection 212 for expenses allocable to aconvention, seminar, or similar meeting.Because these expenses are notdeductible by shareholders, the corporationdoes not report these expenses on line 9or line 10. The expenses are nondeductibleand are reported as such on line 19 ofSchedules K and K-1.

Line 10—Other DeductionsEnter any other deductions not included onlines 7, 8, 9, and 15e. On an attachment,


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identify the deduction and amount, and ifthe corporation has more than one activity,the activity to which the deduction relates.

Examples of items to be reported on anattachment to line 10 include:● Amounts (other than investment interestrequired to be reported on line 11a ofSchedules K and K-1) paid by thecorporation that would be allowed asitemized deductions on a shareholder’sincome tax return if they were paid directlyby a shareholder for the same purpose.These amounts include, but are not limitedto, expenses under section 212 for theproduction of income other than from thecorporation’s trade or business.● Any penalty on early withdrawal ofsavings not reported on line 9 because thecorporation withdrew funds from its timesavings deposit before its maturity.● Soil and water conservationexpenditures (section 175).● Expenditures paid or incurred for theremoval of architectural and transportationbarriers to the elderly and disabled that thecorporation has elected to treat as acurrent expense. See section 190.● Interest expense allocated todebt-financed distributions. See Notice89-35, 1989-1 C.B. 675, for moreinformation.● If there was a gain (loss) from a casualtyor theft to property not used in a trade orbusiness or for income producingpurposes, provide each shareholder withthe needed information to complete Form4684.

Investment InterestLines 11a and 11b must be completed forall shareholders.

Line 11a—Investment InterestExpenseInclude on this line the interest properlyallocable to debt on property held forinvestment purposes. Property held forinvestment includes property that producesincome (unless derived in the ordinarycourse of a trade or business) frominterest, dividends, annuities, or royalties;and gains from the disposition of propertythat produces those types of income or isheld for investment.

Investment interest expense does notinclude interest expense allocable to apassive activity.

Report investment interest expense onlyon line 11a of Schedules K and K-1.

The amount on line 11a will be deductedby individual shareholders on Schedule A(Form 1040), line 13, after applying theinvestment interest expense limitations ofsection 163(d).

For more information, see Form 4952,Investment Interest Expense Deduction.

Lines 11b(1) and 11b(2)—Investment Income and ExpensesEnter on line 11b(1) only the investmentincome included on lines 4a, b, c, and f of

Schedule K-1. Do not include otherportfolio gains or losses on this line.

Enter on line 11b(2) only the investmentexpense included on line 9 of ScheduleK-1.

If there are other items of investmentincome or expense included in theamounts that are required to be passedthrough separately to the shareholders onSchedule K-1, such as net short-termcapital gain or loss, net long-term capitalgain or loss, and other portfolio gains orlosses, give each shareholder a scheduleidentifying these amounts.

Investment income includes grossincome from property held for investment,the excess of net gain attributable to thedisposition of property held for investmentover net capital gain from the dispositionof property held for investment, and anynet capital gain from the disposition ofproperty held for investment that eachshareholder elects to include in investmentincome under section 163(d)(4)(B)(iii).Generally, investment income andinvestment expenses do not include anyincome or expenses from a passiveactivity. See Regulations section1.469-2(f)(10) for exceptions.

Property subject to a net lease is nottreated as investment property because itis subject to the passive loss rules. Do notreduce investment income by losses frompassive activities.

Investment expenses are deductibleexpenses (other than interest) directlyconnected with the production ofinvestment income. See the Instructions forForm 4952 for more information oninvestment income and expenses.

CreditsNote: If the corporation has credits frommore than one trade or business activity online 12a or 13, or from more than onerental activity on line 12b, 12c, 12d, or 12e,it must report separately on an attachmentto Schedule K-1, the amount of each creditand provide any other applicable activityinformation listed in Passive ActivityReporting Requirements on page 8.

Line 12a—Credit for Alcohol Usedas FuelEnter on line 12a of Schedule K the creditfor alcohol used as fuel attributable totrade or business activities. Enter on line12d or 12e the credit for alcohol used asfuel attributable to rental activities. Figurethe credit on Form 6478, Credit for AlcoholUsed as Fuel, and attach it to Form 1120S.The credit must be included in income onpage 1, line 5, of Form 1120S. See section40(f) for an election the corporation canmake to have the credit not apply.

Enter each shareholder’s share of thecredit for alcohol used as fuel on line 12a,12d, or 12e of Schedule K-1.

If this credit includes the small ethanolproducer credit, identify on a statementattached to each Schedule K-1 (a) theamount of the small producer creditincluded in the total credit allocated to the

shareholder, (b) the number of gallons ofqualified ethanol fuel production allocatedto the shareholder, and (c) theshareholder’s pro rata share in gallons ofthe corporation’s productive capacity foralcohol.

Line 12b—Low-Income HousingCreditSection 42 provides for a low-incomehousing credit that may be claimed byowners of low-income residential rentalbuildings. If shareholders are eligible toclaim the low-income housing credit,complete the applicable parts of Form8586, Low-Income Housing Credit, andattach it to Form 1120S. Enter the creditfigured by the corporation on Form 8586,and any low-income housing creditreceived from other entities in which thecorporation is allowed to invest, on theapplicable line as explained below. Thecorporation must also complete and attachForm 8609, Low-Income Housing CreditAllocation Certification, and Schedule A(Form 8609), Annual Statement, to Form1120S. See the Instructions for Form 8586and Form 8609 for information oncompleting these forms.Note: No credit may be claimed for anybuilding in a qualified low-income housingproject for which any person was allowedto claim a loss from the project by reasonof not being subject to the passive activitylimitations (see section 502 of the TaxReform Act of 1986 for details).Line 12b(1).—If the corporation invested ina partnership to which the provisions ofsection 42(j)(5) apply, report on line 12b(1)the credit the partnership reported to thecorporation on line 13b(1) of Schedule K-1(Form 1065). If the corporation investedbefore 1990 in a section 42(j)(5)partnership, also include on this line anycredit the partnership reported to thecorporation on line 13b(3) of Schedule K-1(Form 1065).Line 12b(2).—Report on line 12b(2) anylow-income housing credit for propertyplaced in service before 1990 and notreported on line 12b(1). This includes anycredit from a building placed in servicebefore 1990 in a project owned by thecorporation and any credit from apartnership reported to the corporation online 13b(2) of Schedule K-1 (Form 1065).Also include on this line any credit from apartnership reported to the corporation online 13b(4) of Schedule K-1 (Form 1065), ifthe corporation invested in that partnershipbefore 1990.Line 12b(3).—If the corporation investedafter 1989 in a partnership to which theprovisions of section 42(j)(5) apply, reporton line 12b(3) the credit the partnershipreported to the corporation on line 13b(3)of Schedule K-1 (Form 1065).Line 12b(4).—Report on line 12b(4) anylow-income housing credit for propertyplaced in service after 1989 and notreported on any other line. This includesany credit from a building placed in serviceafter 1989 in a project owned by thecorporation and any credit from apartnership reported to the corporation on


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line 13b(4) of Schedule K-1 (Form 1065), ifthe corporation invested in that partnershipafter 1989.

Line 12c—Qualified RehabilitationExpenditures Related to RentalReal Estate ActivitiesEnter total qualified rehabilitationexpenditures related to rental real estateactivities of the corporation. For line 12c ofSchedule K, complete the applicable linesof Form 3468, Investment Credit, thatapply to qualified rehabilitationexpenditures for property related to rentalreal estate activities of the corporation forwhich income or loss is reported on line 2of Schedule K. See Form 3468 for detailson qualified rehabilitation expenditures.Attach Form 3468 to Form 1120S.

For line 12c of Schedule K-1, enter eachshareholder’s pro rata share of theexpenditures. On the dotted line to the leftof the entry space for line 12c, enter theline number of Form 3468 on which theshareholder should report theexpenditures. If there is more than onetype of expenditure, or the expendituresare from more than one line 2 activity,report this information separately for eachexpenditure or activity on an attachment toSchedules K and K-1.Note: Qualified rehabilitation expendituresnot related to rental real estate activitiesmust be listed separately on line 23 ofSchedule K-1.

Line 12d—Credits (Other ThanCredits Shown on Lines 12b and12c) Related to Rental Real EstateActivitiesEnter on line 12d any other credit (otherthan credits on lines 12b and 12c) relatedto rental real estate activities. On thedotted line to the left of the entry space forline 12d, identify the type of credit. If thereis more than one type of credit or thecredit is from more than one line 2 activity,report this information separately for eachcredit or activity on an attachment toSchedules K and K-1. These credits mayinclude any type of credit listed in theinstructions for line 13.

Line 12e—Credits Related to OtherRental ActivitiesEnter on line 12e any credit related toother rental activities for which income orloss is reported on line 3 of Schedules Kand K-1. On the dotted line to the left ofthe entry space for line 12e, identify thetype of credit. If there is more than onetype of credit or the credit is from morethan one line 3 activity, report thisinformation separately for each credit oractivity on an attachment to Schedules Kand K-1. These credits may include anytype of credit listed in the instructions forline 13.

Line 13—Other CreditsEnter on line 13 any other credit, exceptcredits or expenditures shown or listed forlines 12a through 12e of Schedules K and

K-1 or the credit for Federal tax paid onfuels (which is reported on line 23c of page1). On the dotted line to the left of theentry space for line 13, identify the type ofcredit. If there is more than one type ofcredit or the credit is from more than oneactivity, report this information separatelyfor each credit or activity on an attachmentto Schedules K and K-1.

The credits to be reported on line 13 andother required attachments follow:● Nonconventional source fuel credit.Figure this credit on a separate scheduleand attach it to Form 1120S. See section29 for rules on figuring the credit.● Unused investment credit fromcooperatives. If the corporation is amember of a cooperative that passes anunused investment credit through to itsmembers, the credit is in turn passedthrough to the corporation’s shareholders.● Credit for backup withholding ondividends, interest, or patronage dividends.● Credit for increasing research activitiesand orphan drug credit (Form 6765).● Jobs credit (Form 5884).● Disabled access credit (Form 8826).● Enhanced oil recovery credit (Form8830).● Qualified electric vehicle credit (Form8834).● Renewable electricity production credit(Form 8835).● Empowerment zone employment credit(Form 8844).● Indian employment credit (Form 8845).● Credit for employer social security andMedicare taxes paid on certain employeetips (Form 8846).● Credit for contributions to selectedcommunity development corporations(Form 8847).

See the instructions for line 21 (ScheduleK) and line 23 (Schedule K-1) to reportexpenditures qualifying for the(a) rehabilitation credit not related to rentalreal estate activities, (b) energy credit, or(c) reforestation credit.

Adjustments and TaxPreference ItemsLines 14a through 14e must be completedfor all shareholders.

Enter items of income and deductionsthat are adjustments or tax preferenceitems. Get Form 6251, AlternativeMinimum Tax—Individuals, or Schedule Hof Form 1041, U.S. Income Tax Return forEstates and Trusts, to determine theamounts to enter and for other information.

Do not include as a tax preference itemany qualified expenditures to which anelection under section 59(e) may apply.Because these expenditures are subject toan election by each shareholder, thecorporation cannot figure the amount ofany tax preference related to them.Instead, the corporation must pass throughto each shareholder on lines 16a and 16bof Schedule K-1 the information needed tocompute the deduction.

Line 14a—DepreciationAdjustment on Property Placed inService After 1986Figure the adjustment for line 14a basedonly on tangible property placed in serviceafter 1986 (and tangible property placed inservice after July 31, 1986, and before1987 for which the corporation elected touse the General Depreciation System). Donot make an adjustment for motion picturefilms, videotapes, sound recordings,certain public utility property (as defined insection 168(f)(2)), or property depreciatedunder the unit-of-production method (orany other method not expressed in a termof years).

Using the same convention thecorporation used for regular tax purposes,refigure depreciation as follows:● For property that is neither real propertynor property depreciated using the straightline method, use the 150% decliningbalance method over the property’s classlife (instead of the recovery period),switching to straight line for the first taxyear that method gives a better result. SeePub. 534 for a table of class lives. Forproperty having no class life, use 12 years.● For property depreciated using thestraight line method (other than realproperty), use the straight line method overthe property’s class life (instead of therecovery period). For property having noclass life, use 12 years.● For residential rental and nonresidentialreal property, use the straight line methodover 40 years.

Determine the depreciation adjustmentby subtracting the recomputeddepreciation from the depreciation claimedon Form 4562. If the recomputeddepreciation exceeds the depreciationclaimed on Form 4562, enter the differenceas a negative amount. See the instructionsfor Form 6251 and Form 4562 for moreinformation.

Line 14b—Adjusted Gain or LossIf the corporation disposed of any tangibleproperty placed in service after 1986 (orafter July 31, 1986, if an election wasmade to use the General DepreciationSystem), or if it disposed of a certifiedpollution control facility placed in serviceafter 1986, refigure the gain or loss fromthe disposition using the adjusted basis foralternative minimum tax (AMT) purposes.The property’s adjusted basis for AMTpurposes is its cost or other basis minusall depreciation or amortization deductionsallowed or allowable for AMT purposesduring the current tax year and previoustax years. Enter on this line the differencebetween the gain (or loss) reported forregular tax purposes and the gain (or loss)recomputed for AMT purposes. If the gainrecomputed for AMT purposes is less thanthe gain computed for regular taxpurposes, OR if the loss recomputed forAMT purposes is more than the losscomputed for regular tax purposes, OR ifthere is a loss for AMT purposes and again for regular tax purposes, enter thedifference as a negative amount.


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Line 14c—Depletion (Other ThanOil and Gas)Do not include any depletion on oil andgas wells. The shareholders must computetheir depletion deductions separately undersection 613A.

In the case of mines, wells, and othernatural deposits, other than oil and gaswells, enter the amount by which thededuction for depletion under section 611(including percentage depletion forgeothermal deposits) is more than theadjusted basis of such property at the endof the tax year. Figure the adjusted basiswithout regard to the depletion deductionand figure the excess separately for eachproperty.

Lines 14d(1) and 14d(2)Generally, the amounts to be entered onthese lines are only the income anddeductions for oil, gas, and geothermalproperties that are used to figure theamount on line 21, page 1, Form 1120S.

If there are any items of income ordeductions for oil, gas, and geothermalproperties included in the amounts that arerequired to be passed through separatelyto the shareholders on Schedule K-1, giveeach shareholder a schedule that shows,for the line on which the income ordeduction is included, the amount ofincome or deductions included in the totalamount for that line. Do not include any ofthese direct passthrough amounts on line14d(1) or 14d(2). The shareholder is told inthe Shareholder’s Instructions for ScheduleK-1 (Form 1120S) to adjust the amountson lines 14d(1) and 14d(2) for any otherincome or deductions from oil, gas, orgeothermal properties included on lines 2through 10 and 23 of Schedule K-1 inorder to determine the total income anddeductions from oil, gas, and geothermalproperties for the corporation.

Figure the amounts for lines 14d(1) and14d(2) separately for oil and gas propertieswhich are not geothermal deposits and forall properties that are geothermal deposits.

Give the shareholders a schedule thatshows the separate amounts included inthe computation of the amounts on lines14d(1) and 14d(2).Line 14d(1). Gross income from oil, gas,and geothermal properties.—Enter thetotal amount of gross income (within themeaning of section 613(a)) from all oil, gas,and geothermal properties received oraccrued during the tax year and includedon page 1, Form 1120S.Line 14d(2). Deductions allocable to oil,gas, and geothermal properties.—Enterthe amount of any deductions allocable tooil, gas, and geothermal propertiesreduced by the excess intangible drillingcosts included on page 1, Form 1120S, onproperties for which the corporation madean election to expense intangible drillingcosts in tax years beginning before 1983.Do not include nonproductive well costsincluded on page 1.

Figure excess intangible drilling costs asfollows: From the allowable intangibledrilling and development costs (except for

costs in drilling a nonproductive well),subtract the amount that would have beenallowable if the corporation had capitalizedthese costs and either amortized themover the 120 months that started whenproduction began, or treated themaccording to any election the corporationmade under section 57(b)(2).

See section 57(a)(2) for more information.

Line 14e—Other Adjustments andTax Preference ItemsAttach a schedule that shows eachshareholder’s share of other items notshown on lines 14a through 14d(2) that areadjustments or tax preference items or thatthe shareholder needs to complete Form6251 or Schedule H of Form 1041. Seethese forms and their instructions todetermine the amount to enter. Otheradjustments or tax preference itemsinclude the following:● Accelerated depreciation of real propertyunder pre-1987 rules.● Accelerated depreciation of leasedpersonal property under pre-1987 rules.● Amortization of certified pollution controlfacilities. The deduction allowable undersection 169 for any facility placed inservice after 1986 must be refigured usingthe alternative depreciation system undersection 168(g).● Long-term contracts entered into afterFebruary 28, 1986. Except for certainhome construction contracts, the taxableincome from these contracts must befigured using the percentage of completionmethod of accounting for alternativeminimum tax purposes.● Installment sales after March 1, 1986, ofproperty held primarily for sale tocustomers in the ordinary course of thecorporation’s trade or business. Generally,the installment method may not be usedfor these sales in computing alternativeminimum taxable income.● Losses from tax shelter farm activities.No loss from any tax shelter farm activity isallowed for alternative minimum taxpurposes.

Foreign TaxesLines 15a through 15g must be completedwhether or not a shareholder is eligible forthe foreign tax credit, if the corporationhas foreign income, deductions, or losses,or has paid or accrued foreign taxes.

In addition to the instructions below, seeForm 1116, Foreign Tax Credit (Individual,Estate, Trust, or Nonresident AlienIndividual), and the related instructions.

Line 15a—Type of IncomeEnter the type of income from outside theUnited States as follows:● Passive income.● High withholding tax interest.● Financial services income.● Shipping income.● Dividends from a DISC or former DISC.

● Certain distributions from a foreign salescorporation (FSC) or former FSC.● Dividends from each noncontrolledsection 902 corporation.● Taxable income attributable to foreigntrade income (within the meaning ofsection 923(b)).● General limitation income (all otherincome from sources outside the UnitedStates, including income from sourceswithin U.S. possessions).

If, for the country or U.S. possessionshown on line 15b, the corporation hadmore than one type of income, enter “Seeattached” and attach a schedule for eachtype of income for lines 15c through 15g.

Line 15b—Foreign Country or U.S.PossessionEnter the name of the foreign country orU.S. possession. If, for the type of incomeshown on line 15a, the corporation hadincome from, or paid taxes to, more thanone foreign country or U.S. possession,enter “See attached” and attach aschedule for each country for lines 15aand 15c through 15g.

Line 15c—Total Gross IncomeFrom Sources Outside the UnitedStatesEnter in U.S. dollars the total gross incomefrom sources outside the United States.Attach a schedule that shows each type ofincome listed in the instructions for line15a.

Line 15d—Total ApplicableDeductions and LossesEnter in U.S. dollars the total applicabledeductions and losses attributable toincome on line 15c. Attach a schedule thatshows each type of deduction or loss asfollows:● Expenses directly allocable to each typeof income listed above.● Pro rata share of all other deductionsnot directly allocable to specific items ofincome.● Pro rata share of losses from otherseparate limitation categories.

Line 15e—Total Foreign TaxesEnter in U.S. dollars the total foreign taxes(described in section 901) paid or accruedby the corporation to foreign countries orU.S. possessions. Attach a schedule thatshows the dates the taxes were paid oraccrued, and the amount in both foreigncurrency and in U.S. dollars, as follows:● Taxes withheld at source on dividends.● Taxes withheld at source on rents androyalties.● Other foreign taxes paid or accrued.

Line 15f—Reduction in TaxesAvailable for CreditEnter in U.S. dollars the total reduction intaxes available for credit. Attach aschedule that shows separately the:● Reduction for foreign mineral income.


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● Reduction for failure to furnish returnsrequired under section 6038.● Reduction for taxes attributable toboycott operations (section 908).● Reduction for foreign oil and gasextraction income (section 907(a)).● Reduction for any other items (specify).

Line 15g—Other Foreign TaxInformationEnter in U.S. dollars any items not coveredon lines 15c through 15f that shareholdersneed to complete Form 1116 (e.g., grossincome from all sources).

OtherLines 16a and 16bGenerally, section 59(e) allows eachshareholder to make an election to deductthe shareholder’s pro rata share of thecorporation’s otherwise deductiblequalified expenditures ratably over 10years (3 years for circulation expenditures),beginning with the tax year in which theexpenditures were made (or for intangibledrilling and development costs, over the60-month period beginning with the monthin which such costs were paid or incurred).The term “qualified expenditures” includesonly the following types of expenditurespaid or incurred during the tax year:circulation expenditures, research andexperimental expenditures, intangibledrilling and development costs, and miningexploration and development costs. If ashareholder makes this election, theseitems are not treated as tax preferenceitems.

Because the shareholders are generallyallowed to make this election, thecorporation cannot deduct these amountsor include them as adjustments or taxpreference items on Schedule K-1. Instead,on lines 16a and 16b of Schedule K-1, thecorporation passes through the informationthe shareholders need to compute theirseparate deductions.

Enter on line 16a the qualifiedexpenditures paid or incurred during thetax year to which an election under section59(e) may apply. Enter this amount for allshareholders whether or not anyshareholder makes an election undersection 59(e). On line 16b, enter the typeof expenditure claimed on line 16a. If theexpenditure is for intangible drilling anddevelopment costs, enter the month inwhich the expenditure was paid or incurred(after the type of expenditure on line 16b).If there is more than one type ofexpenditure included in the total shown online 16a (or intangible drilling anddevelopment costs were paid or incurredfor more than 1 month), report thisinformation separately for each type ofexpenditure (or month) on an attachmentto Schedules K and K-1.

Line 17—Tax-Exempt InterestIncomeEnter on line 17 tax-exempt interestincome, including any exempt-interestdividends received from a mutual fund or

other regulated investment company. Thisinformation must be reported by individualson line 8b of Form 1040. Generally, thebasis of the shareholder’s stock isincreased by the amount shown on thisline under section 1367(a)(1)(A).

Line 18—Other Tax-ExemptIncomeEnter on line 18 all income of thecorporation exempt from tax other thantax-exempt interest (e.g., life insuranceproceeds). Generally, the basis of theshareholder’s stock is increased by theamount shown on this line under section1367(a)(1)(A).

Line 19—Nondeductible ExpensesEnter on line 19 nondeductible expensespaid or incurred by the corporation. Do notinclude separately stated deductionsshown elsewhere on Schedules K and K-1,capital expenditures, or items thededuction for which is deferred to a latertax year. Generally, the basis of theshareholder’s stock is decreased by theamount shown on this line under section1367(a)(2)(D).

Line 20Enter total distributions made to eachshareholder other than dividends reportedon line 22 of Schedule K. Noncashdistributions of appreciated property arevalued at fair market value. See theSchedule M-2 instructions for the orderingrules on distributions.

Line 21 (Schedule K Only)Attach a statement to Schedule K to reportthe corporation’s total income,expenditures, or other information for items1 through 15 of the line 23 (Schedule K-1Only) instruction below.

Line 22 (Schedule K Only)Enter total dividends paid to shareholdersfrom accumulated earnings and profits.Report these dividends to shareholders onForm 1099-DIV. Do not report them onSchedule K-1.

Lines 22a and 22b (Schedule K-1Only)—Recapture of Low-IncomeHousing CreditIf recapture of part or all of the low-incomehousing credit is required because (a) prioryear qualified basis of a building decreasedor (b) the corporation disposed of abuilding or part of its interest in a building,get Form 8611, Recapture of Low-IncomeHousing Credit. The instructions for Form8611 indicate when Form 8611 iscompleted by the corporation and whatinformation is provided to shareholderswhen recapture is required.Note: If a shareholder’s ownership interestin a building decreased because of atransaction at the shareholder level, thecorporation must provide the necessaryinformation to the shareholder to enablethe shareholder to compute the recapture.

If the corporation posted a bond asprovided in section 42(j)(6) to avoidrecapture of the low-income housingcredit, no entry should be made on line 22of Schedule K-1.

See Form 8586, Form 8611, and section42 for more information.

Supplemental InformationLine 23 (Schedule K-1 Only)Enter in the line 23 SupplementalInformation space of Schedule K-1, or onan attached schedule if more space isneeded, each shareholder’s share of anyinformation asked for on lines 1 through 22that is required to be reported in detail,and items 1 through 15 below. Pleaseidentify the applicable line number next tothe information entered in theSupplemental Information space. Showincome or gains as a positive number.Show losses in parentheses.

1. Taxes paid on undistributed capitalgains by a regulated investment company.As a shareholder of a regulated investmentcompany, the corporation will receivenotice on Form 2439, Notice toShareholder of Undistributed Long-TermCapital Gains, that the company paid taxon undistributed capital gains.

2. Gross income and other informationrelating to oil and gas well properties thatare reported to shareholders to allow themto figure the depletion deduction for oil andgas well properties. See section613A(c)(11) for details.

The corporation cannot deduct depletionon oil and gas wells. Each shareholdermust determine the allowable amount toreport on his or her return. See Pub. 535for more information.

3. Recapture of section 179 expensededuction. For property placed in serviceafter 1986, the section 179 deduction isrecaptured at any time the business use ofproperty drops to 50% or less. Enter theamount originally passed through and thecorporation’s tax year in which it waspassed through. Inform the shareholder ifthe recapture amount was caused by thedisposition of the section 179 property.See section 179(d)(10) for moreinformation. Do not include this amount online 4 or 5, page 1, Form 1120S.

4. Recapture of certain miningexploration expenditures (section 617).

5. Any information or statements thecorporation is required to furnish toshareholders to allow them to comply withrequirements under section 6111(registration of tax shelters) or section6662(d)(2)(B)(ii) (regarding adequatedisclosure of items that may cause anunderstatement of income tax).

6. If the corporation is involved infarming or fishing activities, report thegross income from these activities toshareholders.

7. Any information needed by ashareholder to compute the interest dueunder section 453(l)(3). If the corporationelected to report the dispositions of certaintimeshares and residential lots on the


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installment method, each shareholder’s taxliability must be increased by theshareholder’s pro rata share of the intereston tax attributable to the installmentpayments received during the tax year.

8. Any information needed by ashareholder to compute the interest dueunder section 453A(c). If an obligationarising from the disposition of property towhich section 453A applies is outstandingat the close of the year, each shareholder’stax liability must be increased by the taxdue under section 453A(c) on theshareholder’s pro rata share of the taxdeferred under the installment method.

9. Any information needed by ashareholder to properly capitalize interestas required by section 263A(f). SeeSection 263A uniform capitalization ruleson page 10 for additional information. SeeNotice 88-99, 1988-2 C.B. 422, for moreinformation.

10. If the corporation is a closely held Scorporation (defined in section 460(b)) andit entered into any long-term contractsafter February 28, 1986, that areaccounted for under either the percentageof completion-capitalized cost method orthe percentage of completion method, itmust attach a schedule to Form 1120Sshowing the information required in items(a) and (b) of the instructions for lines 1and 3 of Part II for Form 8697, InterestComputation Under the Look-Back Methodfor Completed Long-Term Contracts. Itmust also report the amounts for Part II,lines 1 and 3, to its shareholders. See theinstructions for Form 8697 for moreinformation.

11. Expenditures qualifying for the(a) rehabilitation credit not related to rentalreal estate activities, (b) energy credit, or(c) reforestation credit. Complete andattach Form 3468 to Form 1120S. SeeForm 3468 and related instructions forinformation on eligible property and thelines on Form 3468 to complete. Do notinclude that part of the cost of the propertythe corporation has elected to expenseunder section 179. Attach to eachSchedule K-1 a separate schedule in aformat similar to that shown on Form 3468detailing each shareholder’s pro rata shareof qualified expenditures. Also indicate thelines of Form 3468 on which theshareholders should report these amounts.

12. Recapture of investment credit.Complete and attach Form 4255,Recapture of Investment Credit, wheninvestment credit property is disposed of,or it no longer qualifies for the credit,before the end of the recapture period orthe useful life applicable to the property.State the type of property at the top ofForm 4255, and complete lines 2, 3, 4, and8, whether or not any shareholder issubject to recapture of the credit. Attach toeach Schedule K-1 a separate scheduleproviding the information the corporation isrequired to show on Form 4255, but listonly the shareholder’s pro rata share of thecost of the property subject to recapture.Also indicate the lines of Form 4255 onwhich the shareholders should report theseamounts.

The corporation itself is liable forinvestment credit recapture in certaincases. See the instructions for line 22c,page 1, Form 1120S, for details.

13. Any information needed by ashareholder to compute the recapture ofthe qualified electric vehicle credit. SeePub. 535 for more information.

14. Any information a shareholder mayneed to figure recapture of the Indianemployment credit. Generally, if thecorporation terminates a qualifiedemployee less than 1 year after the date ofinitial employment, any Indian employmentcredit allowed for a prior tax year byreason of wages paid or incurred to thatemployee must be recaptured. For details,see section 45A(d).

15. Any other information theshareholders need to prepare their taxreturns.

Specific Instructions

Schedule L—Balance SheetsThe balance sheets should agree with thecorporation’s books and records. Includecertificates of deposit as cash on line 1 ofSchedule L.

Line 5—Tax-Exempt SecuritiesInclude on this line—

1. State and local governmentobligations, the interest on which isexcludible from gross income undersection 103(a), and

2. Stock in a mutual fund or otherregulated investment company thatdistributed exempt-interest dividendsduring the tax year of the corporation.

Line 24—Retained EarningsIf the corporation maintains separateaccounts for appropriated andunappropriated retained earnings, it maywant to continue such accounting forpurposes of preparing its financial balancesheet. Also, if the corporation converts toC corporation status in a subsequent year,it will be required to report its appropriatedand unappropriated retained earnings onseparate lines of Schedule L of Form 1120.

Schedule M-1—Reconciliation of Income(Loss) per Books WithIncome (Loss) per ReturnLine 3b—Travel and EntertainmentInclude on this line 50% of meals andentertainment not allowed under section274(n); expenses for the use of anentertainment facility; the part of businessgifts in excess of $25; expenses of anindividual allocable to conventions oncruise ships in excess of $2,000; employeeachievement awards in excess of $400; thecost of entertainment tickets in excess offace value (also subject to 50%disallowance); the cost of skyboxes inexcess of the face value of nonluxury box

seat tickets; the part of the cost of luxurywater travel not allowed under section274(m); expenses for travel as a form ofeducation; nondeductible club dues; andother travel and entertainment expensesnot allowed as a deduction.

Schedule M-2—Analysis ofAccumulated AdjustmentsAccount, Other AdjustmentsAccount, and Shareholders’Undistributed TaxableIncome Previously TaxedColumn (a)—AccumulatedAdjustments AccountThe accumulated adjustments account(AAA) is an account of the S corporationthat generally reflects the accumulatedundistributed net income of the corporationfor the corporation’s post-1982 years. Scorporations with accumulated earningsand profits must maintain the AAA todetermine the tax effect of distributionsduring S years and the post-terminationtransition period. An S corporation withoutaccumulated earnings and profits does notneed to maintain the AAA in order todetermine the tax effect of distributions.Nevertheless, if an S corporation withoutaccumulated earnings and profits engagesin certain transactions to which section381(a) applies, such as a merger into an Scorporation with accumulated earnings andprofits, the S corporation must be able tocalculate its AAA at the time of the mergerfor purposes of determining the tax effectof post-merger distributions. Therefore, it isrecommended that the AAA be maintainedby all S corporations.

At the end of the tax year, the AAA isdetermined by taking into account thetaxable income, deductible losses andexpenses, and nondeductible losses andexpenses for the tax year (other thanexpenses related to tax-exempt incomeand Federal taxes attributable to a Ccorporation tax year). See Regulationssection 1.1368-2. After the year-endincome and expense adjustments aremade, the AAA is reduced by distributionsmade during the tax year. SeeDistributions on page 23 for distributionrules. For adjustments to the AAA forredemptions, reorganizations, andcorporate separations, see Regulationssection 1.1368-2(d).Note: The AAA may have a negativebalance at year end. See section 1368(e).

Column (b)—Other AdjustmentsAccountThe other adjustments account is adjustedfor tax-exempt income (and relatedexpenses) and Federal taxes attributable toa C corporation tax year. After theseadjustments are made, the account isreduced for any distributions made duringthe year. See Distributions on page 23.


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Column (c)—Shareholders’Undistributed Taxable IncomePreviously TaxedThe shareholders’ undistributed taxableincome previously taxed account, alsocalled previously taxed income (PTI), ismaintained only if the corporation had abalance in this account at the start of its1994 tax year. If there is a beginningbalance for the 1994 tax year, noadjustments are made to the accountexcept to reduce the account fordistributions made under section 1375(d)(as in effect before the enactment of theSubchapter S Revision Act of 1982). SeeDistributions below for the order ofdistributions from the account.

Each shareholder’s right to nontaxabledistributions from PTI is personal andcannot be transferred to another person.The corporation is required to keep recordsof each shareholder’s net share of PTI.

DistributionsGeneral rule.—Unless the corporationmakes one of the elections describedbelow, property distributions (includingcash) are applied in the following order toreduce accounts of the S corporation thatare used to compute the tax effect ofdistributions made by the corporation to itsshareholders:

1. Reduce AAA (but not below zero). Ifdistributions during the tax year exceedthe AAA at the close of the tax year, theAAA is allocated pro rata to eachdistribution made during the tax year. Seesection 1368(c).

2. Reduce shareholders’ PTI account forany section 1375(d) (as in effect before1983) distributions. A distribution from thePTI account is tax free to the extent of ashareholder’s basis in his or her stock inthe corporation.

3. Reduce accumulated E&P. Generally,the S corporation has accumulated E&Ponly if it has not distributed E&Paccumulated in prior years when the Scorporation was a C corporation (section1361(a)(2)) or a small business corporationprior to 1983 (section 1371 of prior law).See section 312 for information on E&P.The only adjustments that can be made tothe accumulated E&P of an S corporationare (a) reductions for dividenddistributions; (b) adjustments forredemptions, liquidations, reorganizations,

etc.; and (c) reductions for investmentcredit recapture tax for which thecorporation is liable. See sections 1371(c)and (d)(3).

4. Reduce the other adjustmentsaccount.

5. Reduce any remaining shareholders’equity accounts.Elections relating to source ofdistributions.—The corporation maymodify the above ordering rules by makingone or more of the following elections:

1. Election to distribute accumulatedE&P first.—If the corporation hasaccumulated E&P and wants to distributethis E&P before making distributions fromthe AAA, it may elect to do so with theconsent of all its affected shareholders(section 1368(e)(3)(B)). This election isirrevocable and applies only for the taxyear for which it is made. For details onmaking the election, see Statementregarding elections below.

2. Election to make a deemeddividend.—If the corporation wants todistribute all or part of its subchapter CE&P through a deemed dividend, it mayelect to do so with the consent of all itsaffected shareholders (section1368(e)(3)(B)). Under this election, thecorporation will be treated as also havingmade the election to distributeaccumulated E&P first. The amount of thedeemed dividend cannot exceed thesubchapter C E&P at the end of the taxyear, reduced by any actual distributions ofsubchapter C E&P made during the taxyear. A deemed dividend is treated as if itwere a pro rata distribution of money tothe shareholders, received by theshareholders, and immediately contributedback to the corporation, all on the last dayof the tax year. This election is irrevocableand applies only for the tax year for whichit is made. For details on making theelection, see Statement regardingelections below.

3. Election to forego PTI.—If thecorporation wants to forego distributions ofPTI, it may elect to do so with the consentof all its affected shareholders (section1368(e)(3)(B)). Under this election,paragraph 2 under the General rule abovedoes not apply to any distribution madeduring the tax year. This election isirrevocable and applies only for the taxyear for which it is made. For details on

making the election, see Statementregarding elections below.Statement regarding elections.—To makeany of the above elections, the corporationmust attach a statement to a timely filedoriginal or amended Form 1120S for thetax year for which the election is made. Inthe statement, the corporation mustidentify the election it is making and muststate that each shareholder consents tothe election. A corporate officer must signthe statement under penalties of perjury onbehalf of the corporation. The statement ofelection to make a deemed dividend mustinclude the amount of the deemeddividend distributed to each shareholder.

ExampleThe following example shows how theSchedule M-2 accounts are adjusted foritems of income (loss), deductions, anddistributions reported on Form 1120S.

Items per return are:1. Page 1, line 21 income—$219,0002. Schedule K, line 2 loss—($3,000)3. Schedule K, line 4a income—$4,0004. Schedule K, line 4b income—$16,0005. Schedule K, line 7 deduction—

$24,0006. Schedule K, line 8 deduction— $3,0007. Schedule K, line 13 jobs credit—

$6,0008. Schedule K, line 17 tax-exempt

interest—$5,0009. Schedule K, line 19 nondeductible

expenses—$6,000 (reduction in salariesand wages for jobs credit), and

10. Schedule K, line 20 distributions—$65,000.

Based on return items 1 through 10 andstarting balances of zero, the columns forthe AAA and the other adjustmentsaccount are completed as shown in theSchedule M-2 Worksheet below.Note: For the AAA account, the worksheetline 3—$20,000 amount is the total of theSchedule K, lines 4a and 4b incomes of$4,000 and $16,000. The worksheet line5—$36,000 amount is the total of theSchedule K, line 2 loss of ($3,000), line 7deduction of $24,000, line 8 deduction of$3,000, and the line 19 nondeductibleexpenses of $6,000. For the otheradjustments account, the worksheet line 3amount is the Schedule K, line 17,tax-exempt interest income of $5,000.Other worksheet amounts areself-explanatory.

Schedule M-2

(c) Shareholders’ undistributedtaxable income previously taxed

(b) Other adjustmentsaccount

(a) Accumulatedadjustments account

-0--0-Balance at beginning of tax year 1219,000Ordinary income from page 1, line 21 2

5,00020,000Other additions 3( )Loss from page 1, line 21 4

36,000Other reductions 55,000203,000Combine lines 1 through 5 6

-0-65,000Distributions other than dividend distributions7Balance at end of tax year. Subtract line 7from line 6

85,000138,000

( ) ( )

Worksheet


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Codes for Principal Business ActivityThese codes for the Principal Business Activityare designed to classify enterprises by the typeof activity in which they are engaged to facilitatethe administration of the Internal Revenue Code.Though similar in format and structure to theStandard Industrial Classification (SIC) codes,they should not be used as SIC codes.

Using the list below, enter on page 1, underB, the code number for the specific industrygroup from which the largest percentage of

“total receipts” is derived. Total receipts meansthe total of: gross receipts on line 1a, page 1; allother income on lines 4 and 5, page 1; allincome on lines 2, 19, and 20a of Form 8825;and income (receipts only) on lines 3a and 4athrough 4f of Schedule K.

On page 2, Schedule B, line 2, state theprincipal business activity and principal productor service that account for the largestpercentage of total receipts. For example, if the

principal business activity is “Grain millproducts,” the principal product or service maybe “Cereal preparations.”

If, as its principal business activity, thecorporation: (1) purchases raw materials, (2)subcontracts out for labor to make a finishedproduct from the raw materials, and (3) retainstitle to the goods, the corporation is consideredto be a manufacturer and must enter one of thecodes (2010–3998) under “Manufacturing.”

Agriculture, Forestry, andFishingCode0400 Agricultural production.0600 Agricultural services (except

veterinarians), forestry, fishing,hunting, and trapping.

MiningMetal mining:1010 Iron ores.1070 Copper, lead and zinc, gold and

silver ores.1098 Other metal mining.1150 Coal mining.

Oil and gas extraction:1330 Crude petroleum, natural gas, and

natural gas liquids.1380 Oil and gas field services.

Nonmetallic minerals, except fuels:1430 Dimension, crushed and broken

stone; sand and gravel.1498 Other nonmetallic minerals, except

fuels.

ConstructionGeneral building contractors andoperative builders:1510 General building contractors.1531 Operative builders.

1600 Heavy construction contractors.

Special trade contractors:1711 Plumbing, heating, and air

conditioning.1731 Electrical work.1798 Other special trade contractors.

ManufacturingFood and kindred products:2010 Meat products.2020 Dairy products.2030 Preserved fruits and vegetables.2040 Grain mill products.2050 Bakery products.2060 Sugar and confectionery products.2081 Malt liquors and malt.2088 Alcoholic beverages, except malt

liquors and malt.2089 Bottled soft drinks, and flavorings.2096 Other food and kindred products.

2100 Tobacco manufacturers.

Textile mill products:2228 Weaving mills and textile finishing.2250 Knitting mills.2298 Other textile mill products.

Apparel and other textile products:2315 Men’s and boys’ clothing.2345 Women’s and children’s clothing.2388 Other apparel and accessories.2390 Miscellaneous fabricated textile

products.

Lumber and wood products:2415 Logging, sawmills, and planing mills.2430 Millwork, plywood, and related

products.2498 Other wood products, including

wood buildings and mobile homes.

2500 Furniture and fixtures.

Paper and allied products:2625 Pulp, paper, and board mills.2699 Other paper products.

Printing and publishing:2710 Newspapers.2720 Periodicals.2735 Books, greeting cards, and

miscellaneous publishing.2799 Commercial and other printing, and

printing trade services.

CodeChemicals and allied products:2815 Industrial chemicals, plastics

materials and synthetics.2830 Drugs.2840 Soap, cleaners, and toilet goods.2850 Paints and allied products.2898 Agricultural and other chemical

products.

Petroleum refining and related industries(including those integrated withextraction):2910 Petroleum refining (including

integrated).2998 Other petroleum and coal products.

Rubber and misc. plastics products:3050 Rubber products: plastics footwear,

hose, and belting.3070 Misc. plastics products.

Leather and leather products:3140 Footwear, except rubber.3198 Other leather and leather products.

Stone, clay, and glass products:3225 Glass products.3240 Cement, hydraulic.3270 Concrete, gypsum, and plaster

products.3298 Other nonmetallic mineral products.

Primary metal industries:3370 Ferrous metal industries; misc.

primary metal products.3380 Nonferrous metal industries.

Fabricated metal products:3410 Metal cans and shipping containers.3428 Cutlery, hand tools, and hardware;

screw machine products, bolts, andsimilar products.

3430 Plumbing and heating, exceptelectric and warm air.

3440 Fabricated structural metal products.3460 Metal forgings and stampings.3470 Coating, engraving, and allied

services.3480 Ordnance and accessories, except

vehicles and guided missiles.3490 Misc. fabricated metal products.

Machinery, except electrical:3520 Farm machinery.3530 Construction and related machinery.3540 Metalworking machinery.3550 Special industry machinery.3560 General industrial machinery.3570 Office, computing, and accounting

machines.3598 Other machinery except electrical.

Electrical and electronic equipment:3630 Household appliances.3665 Radio, television, and

communications equipment.3670 Electronic components and

accessories.3698 Other electrical equipment.

3710 Motor vehicles and equipment.

Transportation equipment, except motorvehicles:3725 Aircraft, guided missiles and parts.3730 Ship and boat building and repairing.3798 Other transportation equipment,

except motor vehicles.

Instruments and related products:3815 Scientific instruments and measuring

devices; watches and clocks.3845 Optical, medical, and ophthalmic

goods.3860 Photographic equipment and

supplies.

3998 Other manufacturing products.

Transportation and PublicUtilitiesCodeTransportation:4000 Railroad transportation.4100 Local and interurban passenger

transit.4200 Trucking and warehousing.4400 Water transportation.4500 Transportation by air.4600 Pipe lines, except natural gas.4700 Miscellaneous transportation

services.

Communication:4825 Telephone, telegraph, and other

communication services.4830 Radio and television broadcasting.

Electric, gas, and sanitary services:4910 Electric services.4920 Gas production and distribution.4930 Combination utility services.4990 Water supply and other sanitary

services.

Wholesale TradeDurable:5008 Machinery, equipment, and supplies.5010 Motor vehicles and automotive

equipment.5020 Furniture and home furnishings.5030 Lumber and construction materials.5040 Sporting, recreational, photographic,

and hobby goods, toys and supplies.5050 Metals and minerals, except

petroleum and scrap.5060 Electrical goods.5070 Hardware, plumbing and heating

equipment and supplies.5098 Other durable goods.

Nondurable:5110 Paper and paper products.5129 Drugs, drug proprietaries, and

druggists’ sundries.5130 Apparel, piece goods, and notions.5140 Groceries and related products.5150 Farm-product raw materials.5160 Chemicals and allied products.5170 Petroleum and petroleum products.5180 Alcoholic beverages.5190 Misc. nondurable goods.

Retail TradeBuilding materials, garden supplies, andmobile home dealers:5220 Building materials dealers.5251 Hardware stores.5265 Garden supplies and mobile home

dealers.

5300 General merchandise stores.

Food stores:5410 Grocery stores.5490 Other food stores.

Automotive dealers and service stations:5515 Motor vehicle dealers.5541 Gasoline service stations.5598 Other automotive dealers.

5600 Apparel and accessory stores.5700 Furniture and home furnishings

stores.

5800 Eating and drinking places.

Misc. retail stores:5912 Drug stores and proprietary stores.5921 Liquor stores.5995 Other retail stores.

Finance, Insurance, and RealEstateCodeBanking:6030 Mutual savings banks.6060 Bank holding companies.6090 Banks, except mutual savings banks

and bank holding companies.

Credit agencies other than banks:6120 Savings and loan associations.6140 Personal credit institutions.6150 Business credit institutions.6199 Other credit agencies.

Security, commodity brokers andservices:6210 Security brokers, dealers, and

flotation companies.6299 Commodity contracts brokers and

dealers; security and commodityexchanges; and allied services.

Insurance:6355 Life Insurance.6356 Mutual insurance, except life or

marine and certain fire or floodinsurance companies.

6359 Other insurance companies.6411 Insurance agents, brokers, and

service.

Real estate:6511 Real estate operators and lessors of

buildings.6516 Lessors of mining, oil, and similar

property.6518 Lessors of railroad property and

other real property.6530 Condominium management and

cooperative housing associations.6550 Subdividers and developers.6599 Other real estate.

Holding and other investment companies,except bank holding companies:6744 Small business investment

companies.6749 Other holding and investment

companies, except bank holdingcompanies.

Services7000 Hotels and other lodging places.7200 Personal services.

Business services:7310 Advertising.7389 Business services, except

advertising.

Auto repair; miscellaneous repairservices:7500 Auto repair and services.7600 Misc. repair services.

Amusement and recreation services:7812 Motion picture production,

distribution, and services.7830 Motion picture theaters.7900 Amusement and recreation services,

except motion pictures.

Other services:8015 Offices of physicians, including

osteopathic physicians.8021 Offices of dentists.8040 Offices of other health practitioners.8050 Nursing and personal care facilities.8060 Hospitals.8071 Medical laboratories.8099 Other medical services.8111 Legal services.8200 Educational services.8300 Social services.8600 Membership organizations.8911 Architectural and engineering

services.8930 Accounting, auditing, and

bookkeeping.8980 Miscellaneous services (including

veterinarians).

Printed on recycled paper

1994 inst 1120s · page 2 of 24 of instructions for form 1120s 4 page 2 the type and rule above...

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