US Internal Revenue Service: i1120s--1994

8/14/2019 US Internal Revenue Service: i1120s--1994

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Cat. No. 11515K

ContentsVoluntary Contributions To Reduce the

Public Debt 1

Changes To Note 1

General Instructions 1

Purpose of Form 1

Who Must File 2

Termination of Election 2

When To File 2

Period Covered 2

Where To File 2Who Must Sign 2

Accounting Methods 3

Accounting Periods 3

Rounding Off to Whole Dollars 3

Recordkeeping 3

Depositary Method of Tax Payment 3

Estimated Tax 3

Interest and Penalties 4

Unresolved Tax Problems 4

Other Forms, Returns, Schedules, andStatements That May Be Required 4

Attachments 5

Amended Return 5

Passive Activity Limitations 5

Specific Instructions 9

General Information 9

Income 9

Deductions 10

Tax and Payments 13

Schedule ACost of Goods Sold 14

Schedule BOther Information 14

Designation of Tax MattersPerson (TMP) 15

General Instructions for Schedules Kand K-1 15

Purpose of Schedules 15

Substitute Forms 15

Shareholders Pro Rata Share Items 15

Specific Instructions(Schedule K Only) 15

Specific Instructions(Schedule K-1 Only) 15

General Information 15

Special Reporting Requirements for

Corporations With Multiple Activities 16Special Reporting Requirements for

At-Risk Activities 16

Specific Items 16

Specific Instructions (Schedules K andK-1, Except as Noted) 16

Income (Loss) 16

Deductions 17

Investment Interest 18

Credits 18

Adjustments and Tax Preference Items 19

Foreign Taxes 20

Other 21

Supplemental Information 21

Specific Instructions 22

Schedule LBalance Sheets 22

Schedule M-1Reconciliation ofIncome (Loss) per Books With Income(Loss) per Return 22

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

Codes for Principal Business Activity 24

Voluntary Contributions To

Reduce 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 in

accounting 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 getPub. 334, Tax Guide for SmallBusiness; Pub. 535, Business Expenses;Pub. 550, Investment Income andExpenses;Pub. 556, Examination ofReturns, Appeal Rights, and Claims forRefund; andPub. 589, Tax Information onS Corporations.

You can get these and other publications

referenced 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 Notice

We 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 Recordkeeping

36 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 the

service 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 thecorporations 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 (including

extensions) of the C short year return.Extension

Use 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 corporationsprincipal business, office,

or agency is located in

Use the followingInternal RevenueService Center

address

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 Preparers space underSignature 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 Preparers 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 preparers 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 corporations 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 the

corporation 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 are

exceptions 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 themark-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 close

of 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 S

election 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 corporations 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 corporations 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 eachshareholders return is due or is filed,

whichever is later. Keep records that verifythe corporations 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 the

payment 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 corporations 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 credit

recapture 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 corporationsreturn 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 installment

method 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 Penalties

Interest

Interest 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 12 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 InformationTimely

Section 6037(b) requires an S corporationto furnish to each shareholder a copy of

the 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 of

items 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 corporations localIRS District Director or call thecorporations 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 may

apply 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, EmployersAnnual 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) or

one 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, Employers 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, Employers 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. GetCircular E,Employers Tax Guide (orCircular A,Agricultural Employers Tax Guide), fordetails.

Form 945, Annual Return of Withheld

Federal 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 ForeignPersons 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 gross

income 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 corporations t rade 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 actual

dividends 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 boycottingcountry, 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 the

foreign 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 sheltersregistration number. Form 8271 must beattached to any return on which adeduction, credit, loss, or other tax benefit

attributable 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 or

reckless 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 on

Dispositions 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 thepurchasers 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 may

have 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.

Attachments

Attach 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 corporations 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 change

in 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 fileForm8082, 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 shareholders share ofany income or loss and credit attributable

to a passive activity. Because thetreatment of each shareholders 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 shareholders 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 for

purposes of the passive activity limitations.To allow each shareholder to apply the

passive 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 Activities

Passive activities do not include:

1. Trade or business activities in whichthe shareholder materially participated for

the 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 Activities

A 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, including

shareholders of an S corporation.Accordingly, the activity of holding a

working 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 corporations 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 shareholdersallocable share of the corporations overalltrade or business income (loss) is reportedon line 1 of Schedule K-1, eachshareholders 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 Activities

Generally, except as noted below, if thegross income from an activity consists ofamounts paid principally for the use of realor personal tangible property held by the

corporation, the activity is a rental activity.There are several exceptions to this

general 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 rental

activity. Consequently, the corporationsdistributive 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 thecorporations 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. If

the 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 activitys total gross rentalincome. The activitys 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 improved

real 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, apatients use of a hospital room generallyis incidental to the care that the patientreceives from the hospitals medical staff.Similarly, a students use of a dormitoryroom in a boarding school is incidental tothe personal services provided by theschools 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 or

business 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 propertysunadjusted 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 or

during at least 2 of the 5 preceding taxyears; and (c) the gross rental income fromthe property is less than 2% of the smallerof the propertys 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 corporations t rade orbusiness.

See Temporary Regulations section1.469-1T(e)(3) and Regulations section

1.469-1(e)(3) for more information on thedefinition of rental activities for purposes ofthe passive activity limitations.

Reporting of rental activities.Inreporting the corporations 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 Income

Generally, portfolio income includes allgross income, other than income derived inthe ordinary course of a trade or business,that is att ributable to interest; d ividends;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 loans

and 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 Activities

Generally, 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, and

5. 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 thecorporations 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 must

continue using that grouping in later taxyears unless a material change in the factsand circumstances makes it clearlyinappropriate.

The IRS may regroup the corporationsactivities if the corporations 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 being

grouped 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 connection

with real property), or vice versa.3. Any activity with another activity in a

different 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 PassiveIncome

Under 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 activitys 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 lending

activity 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 income

from 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 items1 through3above thatany shareholder will be required torecharacterize as nonpassive income may

be limited under Temporary Regulationssection 1.469-2T(f)(8). Because thecorporation will not have informationregarding all of a shareholders activities, itmust identify all corporate activitiesmeeting the definitions in items2and3asactivities 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 in

an 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 shareholders 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 taxpayers 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 ReportingRequirements

To 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 theshareholders 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 is

rented at fair rental value.4. Identify the net income (loss) and the

shareholders 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 than

one 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 properly

allocable 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 shareholderspersonal efforts significantly contributed tothe creation of the property; income from aqualified low-income housing project (as

defined 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 shareholders total gainfrom the disposition).

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

1.469-2(f):a. Net income from an activity of renting

substantially 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 directly

or indirectly); ande. Net royalty income from intangible

property if the shareholder acquired theshareholders 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 Information

Name, Address, and EmployerIdentification Number

Use 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 corporations 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 BBusiness Code No.

See Codes for Principal BusinessActivity on page 24 of these instructions.

Item ETotal Assets

Enter the corporations total assets at theend of the tax year, as determined by theaccounting method regularly used inmaintaining the corporations 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 FInitial Return, FinalReturn, Change in Address, andAmended Return

If this is the corporations 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 GConsolidated AuditProceduresWith certain exceptions, the tax treatmentof S corporation items is determined at thecorporate level in a consolidated audit

proceeding, 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 or

portfolio income or loss on these lines.(See the instructions onPassive ActivityLimitationsbeginning 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 11

bankruptcy proceeding, or while insolvent,see Form 982, Reduction of Tax AttributesDue to Discharge of Indebtedness, andPub. 908, Tax Information on Bankruptcy.

Line 1Gross Receipts or Sales

Enter 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 personal

property 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 thetaxpayers 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 or

produced 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 2Cost of Goods Sold

See the instructions for Schedule A.

Line 4Net Gain (Loss) FromForm 4797

Caution: 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 partnerships 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 5Other 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 corporations t rade 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 in

other 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: Reportonlytrade 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 Deductions

Section 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 sale

in 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 to

the 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 thetaxpayers 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 preproductive

expenses but should separately reportthese expenses on line 21 of Schedule K,and each shareholders 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 researchactivities,

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, and

8. The credit for employer social securityand 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 7Compensation of Officers

Enter 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 corporations 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 thecorporations 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 health

insurance coverage for a more than 2%shareholder (including that shareholdersspouse and dependents) as an informationitem in box 14 of that shareholders 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 8Salaries 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 corporationsstock. 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 corporations 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 shareholdersspouse and dependents) as an informationitem in box 14 of that shareholders 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 9Repairs 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 10Bad DebtsEnter the total debts that becameworthless in whole or in part during the

year, 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 11RentsIf 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 the

corporation 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 vehiclesfair market value onthe first day of thelease exceeded:

After 12/31/93 $14,900

After 12/31/92 but before 1/1/94 $14,300

After 12/31/91 but before 1/1/93 $13,700

After 12/31/90 but before 1/1/92 $13,400

After 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 12Taxes 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 or

incurred 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 13InterestInclude 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 debt

used 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 expense

is 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 theshareholders own production

expenditures. 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 14DepreciationEnter 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 placed

property 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 15DepletionIf 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 under

section 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

Documents

US Internal Revenue Service: i1120s--1994