How to Prepare a Final K-1 for an S Corp.

By Christine Funk, J.D.

How to Prepare a Final K-1 for an S Corp.

By Christine Funk, J.D.

One of many options for business type that owners have is an S corporation, commonly referred to as an S corp. In an S corporation, profits and losses are passed on from the S corp. to the shareholders. When an S corp. pays taxes, it files an information tax return with the Internal Revenue Service (IRS) reporting its financial status. Included in this filing is a Partner's Share of Income, Deductions, Credits, etc. (Form 1065, Schedule K-1) form that provides specific information about the prorated share of each shareholder's income or loss from the S corp. Each shareholder gets a copy of the Schedule K-1 and uses that to report gains or losses on their personal tax return.

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When an S corp. goes out of business or converts to a C corporation, or C corp., there are certain steps the business must take.

1. Shut down the S corp. and create final documents.

The first step, of course, is to shut down the S corp. This means ceasing all business activities, liquidating the business's assets, and zeroing out the equity accounts. Additionally, the S corp. must pay all creditors in full.

Next, create a final balance sheet, income statement, and profit and loss statement for the S corp. Use these documents to file a final state tax return in the appropriate jurisdiction. You then need to file a final federal tax return, which is detailed in the following steps.

2. Create a final federal tax filing.

Complete a U.S. Income Tax Return for an S Corporation (Form 1120S). In line H, indicate this is the final tax filing for this S corp. Alternatively, if the S corp. is converting to a C corporation, you should designate in this line that the business is terminating or revoking its status as an S corp.

3. Detail profits and losses.

After completing Form 1120S, your S corp. needs to fill out a Schedule K-1 to detail its profits and losses that pass through to the shareholders. You must create one of these for every shareholder. If each shareholder has identical shares, each Schedule K-1 will be identical. If the shareholders have different proportions of shares, the Schedule K-1s must reflect these different amounts.

Each individual Schedule K-1 should be designated as final. Once the form is complete and signed, file it along with Form 1120S with the IRS. Additionally, send each individual shareholder a copy of their Schedule K-1 for their use when filing their personal income tax returns.

4. Observe time limits.

There are time limits for filing a Form 1120S and Schedule K-1 with the federal government. Because these rules are subject to change, you should take the time to consult with the IRS website to determine the maximum amount of time allowed after an S corp. shuts down or converts to a C corp. before it must file these forms. As with most provisions of the IRS tax code, there are mechanisms for obtaining extra time if necessary.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.

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