Shareholder'S Instructions For Schedule K-1 (Form 1120s)

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Department of the Treasury

Internal Revenue Service

Shareholder’s Instructions

for Schedule K-1

(Form 1120S)

Shareholder’s Share of Income, Deductions, Credits, etc.

(For Shareholder’s Use Only)

Section references are to the Internal Revenue Code unless otherwise noted.

Any deficiency that results from making the

Additional Information

What’s New

amounts consistent may be assessed

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For more information on the treatment of S

Schedule K-1 has been redesigned. Codes

immediately.

corporation income, deductions, credits, etc.,

are used to identify many of the items on the

see Pub. 535, Business Expenses; Pub. 550,

Errors

schedule and, if necessary, statements are

Investment Income and Expenses; and Pub.

attached to provide additional information. See

If you believe the corporation has made an

925, Passive Activity and At-Risk Rules.

the instructions for Part III on page 4 for more

error on your Schedule K-1, notify the

information on the codes and attached

corporation and ask for a corrected Schedule

To get forms and publications, see the

statements.

K-1. Do not change any items on your copy of

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instructions for your tax return.

You can use the new worksheet on page 2

Schedule K-1. Be sure that the corporation

to keep track of the basis of your stock.

sends a copy of the corrected Schedule K-1 to

Limitations on Losses,

the IRS. If you are unable to reach agreement

General Instructions

with the corporation regarding the

Deductions, and Credits

inconsistency, you must file Form 8082.

There are three separate potential limitations

Purpose of Schedule K-1

on the amount of losses passed to the

International Boycotts

The corporation uses Schedule K-1 (Form

shareholder that you may deduct on your

Every corporation that had operations in, or

1120S) to report your pro rata share of the

return. These limitations and the order in which

related to, a boycotting country, company, or

corporation’s income (reduced by any tax the

you must apply them are as follows: the basis

national of a country, must file Form 5713,

corporation paid on the income), deductions,

rules, the at-risk limitations, and the passive

International Boycott Report.

credits, etc. Keep it for your records. Do not file

activity limitations. Each of these limitations is

it with your tax return. The corporation has filed

If the corporation cooperated with an

discussed separately below.

a copy with the IRS.

international boycott, it must give you a copy of

its Form 5713. You must file your own Form

Other limitations may apply to specific

Although the corporation may have to pay a

5713 to report the corporation’s activities and

deductions (for example, the section 179

built-in gains tax and an excess net passive

any other boycott operations that you may

expense deduction). Generally, specific

income tax, you are liable for income tax on

have. You may lose certain tax benefits if the

limitations apply before the basis, at-risk, and

your share of the corporation’s income,

corporation participated in, or cooperated with,

passive limitations.

whether or not distributed, and you must

an international boycott. See Form 5713 and

include your share on your tax return if a return

its instructions for more information.

is required. Your pro rata share of S

Basis Rules

corporation income is not self-employment

Generally, the deduction for your share of

Elections

income and it is not subject to self-employment

aggregate losses and deductions reported on

Generally, the corporation decides how to

tax.

Schedule K-1 is limited to the basis of your

figure taxable income from its operations. For

Schedule K-1 does not show the amount of

stock (determined with regard to distributions

example, it chooses the accounting method

actual dividend distributions the corporation

received during the tax year) and loans from

and depreciation methods it will use. However,

made to you. The corporation must report such

you to the corporation. The basis of your stock

certain elections are made by you separately

amounts totaling $10 or more for the calendar

is figured at year-end. Any losses and

on your income tax return and not by the

year on Form 1099-DIV, Dividends and

deductions not allowed this year because of

corporation. These elections are made under

Distributions.

the basis limit can be carried forward

the following code sections:

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indefinitely and deducted in a later year subject

Section 59(e) (deduction of certain qualified

Inconsistent Treatment of Items

to the basis limit for that year.

expenditures ratably over the period of time

Generally, you must report subchapter S items

specified in that section). For more information,

shown on your Schedule K-1 (and any

You are responsible for maintaining records

see the instructions for code K in box 12.

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attached schedules) the same way that the

to show the computation of the basis of your

Section 263A(d) (preproductive expenses).

corporation treated the items on its return.

stock in the corporation. Schedule K-1 provides

See the instructions for code M in box 12.

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information to help you make the computation

If the treatment on your original or amended

Section 617 (deduction and recapture of

at the end of each corporate tax year. The

certain mining exploration expenditures), and

return is inconsistent with the corporation’s

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basis of your stock (generally, its cost) is

Section 901 (foreign tax credit).

treatment, or if the corporation has not filed a

adjusted as follows and, except as noted, in

return, you must file Form 8082, Notice of

If the corporation attaches a statement to

the order listed. In addition, basis may be

Inconsistent Treatment or Administrative

Schedule K-1 indicating that it has changed its

adjusted under other provisions of the Internal

Adjustment Request (AAR), with your original

tax year and that you may elect to report your

Revenue Code. You may use the worksheet on

or amended return to identify and explain any

pro rata share of the income attributable to that

the next page to figure your aggregate stock

inconsistency (or to note that a corporate

change ratably over 4 tax years, see Rev.

basis.

return has not been filed).

Proc. 2003-79, 2003-45 I.R.B. 1036 for details

1. Basis is increased by (a) all income

If you are required to file Form 8082, but fail

on making the election. To make the election,

(including tax-exempt income) reported on

to do so, you may be subject to the

you must file Form 8082 with your income tax

Schedule K-1 and (b) the excess of the

accuracy-related penalty. This penalty is in

return for each of the 4 tax years. File Form

deduction for depletion (other than oil and gas

addition to any tax that results from making

8082 for this purpose in accordance with Rev.

depletion) over the basis of the property

your amount or treatment of the item consistent

Proc. 2003-79 instead of the Form 8082

subject to depletion.

with that shown on the corporation’s return.

instructions.

Cat. No. 11521O

Shareholder'S Instructions For Schedule K-1 (Form 1120s) - 2004

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