Once the S-Corporation's Form 1120S is prepared, you are ready to begin preparing Schedule K-1 for each shareholder.
Schedule K-1 of Form 1120S is used to report each shareholder's pro-rated share of net income or loss from an S-Corporation, along with various separately stated income and deduction items. Schedule K-1 can also be used to summarize a shareholder's beginning and ending stock basis for the year.
Here's the minimum you need to prepare the Schedule K-1:
- a completed 1120S tax return for the S-Corporation,
- a complete transaction history and summary statement of each shareholder's capital accounts,
- tax software that prepares 1120S tax returns.
- complete information about each shareholder: name, address, and SSN.
S-Corporation Shareholder Allocations
If shareholders have owned their S-Corporation stock during the entire tax year, then stock basis will determine their pro-rated share of income and expenses. If stocks have been bought, sold, or transferred during the year, then income and expenses need to be pro-rated first on a per-day basis, and secondly on a per-share basis. If a shareholder has terminated her entire equity position in the S-Corporation, then the S-Corporation may choose to allocate income and expense items according to the company's books and records instead of using the per-day method.Reporting Net Profit or Loss
The S-Corporation nets non-separately stated income and expenses, and reports the net income or loss to shareholders.The profit or loss is allocated in strict proportion to the shareholder's percentage of ownership in the S-Corporation.
Separately Stated Items Reported on Schedule K-1
The S-Corporation must report certain income and expenses separately from the net profit or loss amount. These income and expense items retain their tax characteristics when passed-through to the shareholder, and are subject to the limits and tax rates on each shareholder's personal Form 1040. Separately stated items are the following:- Section 1231 gains and losses,
- Net short-term capital gains and losses,
- Net long-term capital gains and losses,
- Dividends eligible for the dividends received deduction (if a shareholder is a C-Corporation),
- Charitable contributions,
- Taxes paid to a foreign country,
- Tax-exempt interest and related expenses,
- Investment income and expenses,
- Amounts previously deducted, such as bad debts,
- Real estate income and expenses,
- Section 179 deductions,
- Tax credits, and
- Non-deductible expenses, such as 50% of meals and entertainment expenses.