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Prepare a Form 1120-S return for a shareholder with a qualifying disposition or termination of interest
When a shareholder terminates their interest, or makes a qualifying disposition of their interest in the corporation, the corporation can elect, with the consent of all affected shareholders, to treat its taxable year as if it consists of 2 separate taxable years, the 1st of which ends at the close of the day on which the shareholder's stock in the corporation changed. Follow these steps to prepare the Form 1120-S return.
- SelectFile, thenOpen Clientto open the S Corporation client.
- SelectView,Shareholder Information, thenChange of Ownershipand enter the date of ownership changes and the number of shares owned as of that date.
- Enter qualifying disposition or termination dates in theIRC 1377 or 1368 Dates Onlyfields.noteDon't enter the 1st day of the S Corporation's tax year in this field. If the change of ownership happened on the 1st day of the S Corporation’s tax year, enter the 2nd day of the tax year in theChange of Ownershipwindow.
- Go to the 1377, 1377-2, 1377-3, and 1377-4 screens and enter the allocable items for the split years. You don't need to enter amounts allocable to the period from the last period to the end of the year. UltraTax CS automatically determines the amount allocable to this period by subtracting the amounts entered in each period from the total amount on Schedule K for each item, respectively. UltraTax CS then allocates each item to the shareholders based on their ownership percentage for the period.
- Enter an explanation for the qualifying disposition or shareholder termination in theTermination, qualifying disposition explanationfield in the 1377 screen in the Shr Allocation folder. UltraTax CS automatically prints the election statement.noteYou can enter a single election statement for all terminating elections made for the tax year.
Shareholder 1 owns 7,500 shares of the S Corporation for the entire period. Shareholder 2 owns 2,500 shares and terminates her entire interest on March 31 of the current year. The corporation's only allocable item is ordinary income of $100,000, of which $25,000 is allocable for the period from January 1 to March 31, and $75,000 is allocable from April 1 to December 31.
In this case, to make the IRC 1377(a)(2) election, enter
3/31/2022
in the date of ownership change, the number of shares owned on that date, and 3/31/2022
in the IRC 1377 or 1368 Dates
field in the Change of Ownership
window (View
, Shareholder Information
, then Change of Ownership
). Enter 25,000
in the 1st column field for Ordinary business income (loss)
in the 1377 screen.UltraTax CS calculates shareholder ownership percentages and allocates ordinary income to each shareholder as follows:
Ownership percentage
Date | Shareholder 1 | Shareholder 2 |
|---|---|---|
Jan. 1 - March 31 | 75% (7,500/10,000) | 25% (2,500/10,000) |
April 1 - Dec. 31 | 100% | 0% |
Ordinary income allocation
Date | Shareholder 1 | Shareholder 2 |
|---|---|---|
Jan. 1 - March 31 | $25,000 X 75% = $18,750 | $25,000 X 25% = $6,250 |
April 1 - Dec. 31 | $75,000 X 100% = 75,000 | $75,000 X 0% = 0 |
Total year | $93,750 | $6,250 |
UltraTax CS transfers $93,750 and $6,250 to Schedule K-1, Ordinary business income (loss), for Shareholder 1 and Shareholder 2, respectively. UltraTax CS also marks the Final K-1 checkbox on Schedule K-1 for Shareholder 2.
UltraTax CS generates Form 1120-S, Schedule K Amounts Per IRC 1377(a)(2) or 1.1368-1(g)(2)(i) Worksheet, which allocates each item on Form 1120-S, Schedule K to the amounts entered in the 1377, 1377-2, 1377-3, and 1377-4 screens.
UltraTax CS also generates the Shareholder's Allocation Per IRC 1377(a)(2) or 1.1368-1(g)(2)(i) Worksheet, which calculates the shareholder's portion of the Schedule K items allocated to each period based on the shareholder's ownership percentage.
UltraTax CS transfers the amounts in the Total column of this worksheet to the respective line on Form Schedule K-1. UltraTax CS includes this worksheet in the shareholder package at print time.
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Screen 1377 - IRC Section 1377(a)(2) or 1.1368-1(g)(2)(i) Election (1120)
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