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

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.