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

By Terry Masters

An S corporation is a special type of corporation that has elected to be taxed as a pass-through entity. Instead of paying income taxes itself, an S corporation passes profits and losses through to its shareholders. The shareholders pay taxes at the individual rate on their proportionate share of profits and losses by recording the amount on their personal income tax returns. Every year, an S corporation files an information tax return with the IRS, reporting the financial status of the company. Part of the information return is the preparation of Schedule K-1, which details each shareholder's pro-rated share of income or loss from the company. The S corporation sends each shareholder his copy of the K-1 annually, so the shareholder can use it to prepare his personal income tax return. When an S corporation goes out of business, or when it terminates its special tax election, it must prepare a final tax return and a K-1 that details the final allocation of profits and losses to shareholders under this method of accounting.

Step 1

Prepare the corporation's final set of financial statements. An S corporation files its final tax return and K-1 only after winding up its financial affairs. This will include paying all creditors and liquidating assets if the corporation is closing down, or zeroing out equity accounts that are particular to an S corporation if the S corporation is terminating its election and reverting back to a regular, or C, corporation. Shareholders receive a proportionate share of any remaining corporate assets if the corporation is dissolving. The S corporation's bookkeeper or accountant should close out the company's books properly and generate a final balance sheet, income statement and profit and loss statement for the S corporation.

Step 2

Download IRS form 1120S, U.S. Income Tax Return for an S Corporation, from the IRS website. Alternatively, if you use an electronic accounting and tax return preparation system, the tax return will be the automatic option for an S corporation.

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Step 3

Transfer the information from your accounting system to form 1120S. Part of form 1120S is Schedule K, which is a summary of the profits and losses that will be passed through to shareholders.

Step 4

Mark form 1120S as a final return. Complete item H by checking "final return" if the S corporation is dissolving, or check "S election termination or revocation" if the corporation is reverting to a regular corporation. Sign and date form 1120S. Set it aside for filing.

Step 5

Download Schedule K-1, Shareholder’s Share of Income, Deductions, Credits, etc., from the IRS website. Alternatively, access this form in your electronic tax preparation system.

Step 6

Complete an individual Schedule K-1 for every shareholder. The shareholder's individual K-1 should reflect his proportionate share of the corporation's profits and losses. These amounts carry over from your accounting system and financial statements.

Step 7

Mark the individual K-1s as final. At the very top of the form, there is a little box titled "Final K-1." Check the box.

Step 8

Mail the shareholders their copies of their K-1s. Mail or electronically transmit form 1120S and a copy of all of the individual K-1s to the IRS.

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How to Remove a Shareholder From an S-corp
 

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Switching Ownership of the S Corp

An S corporation begins its life as a regular corporation. At some point after creation, the corporation makes a Subchapter S election with the Internal Revenue Service for special tax treatment. To be approved, the corporation must meet the IRS eligibility requirements. S corporations remain subject to the laws of the state as they apply to all corporations, including laws on transfers of ownership. If the change in ownership destroys its IRS eligibility, the corporation will automatically lose its S corporation status.

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