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US Internal Revenue Service: I1120s - 1999
US Internal Revenue Service: I1120s - 1999
Paperwork Reduction Act Notice. We ask for the information on this form to carry Contents Page
out the Internal Revenue laws of the United States. You are required to give us the Specific Instructions . . . . . . . 24
information. We need it to ensure that you are complying with these laws and to allow
us to figure and collect the right amount of tax. Schedule L—Balance Sheets per
Books . . . . . . . . . . . . . . 24
You are not required to provide the information requested on a form that is subject
to the Paperwork Reduction Act unless the form displays a valid OMB control number. Schedule M-1—Reconciliation of
Books or records relating to a form or its instructions must be retained as long as their Income (Loss) per Books With
contents may become material in the administration of any Internal Revenue law. Income (Loss) per Return . . . . 24
Generally, tax returns and return information are confidential, as required by section Schedule M-2—Analysis of
6103. Accumulated Adjustments
The time needed to complete and file this form and related schedules will vary Account, Other Adjustments
depending on individual circumstances. The estimated average times are: Account, and Shareholders'
Copying,
Undistributed Taxable Income
assembling, and Previously Taxed . . . . . . . . 24
Learning about the Preparing the sending the form Codes for Principal Business Activity 26
Form Recordkeeping law or the form form to the IRS
1120S 63 hr., 22 min. 21 hr., 21 min. 39 hr., 9 min. 4 hr., 34 min.
Sch. D (1120S) 10 hr., 31 min. 4 hr., 38 min. 9 hr., 39 min. 1 hr., 20 min.
_________________________
Sch. K-1 (1120S) 15 hr., 32 min. 10 hr., 25 min. 14 hr., 50 min. 1 hr., 4 min.
Pending Legislation
If you have comments concerning the accuracy of these time estimates or At the time of printing, Congress was
suggestions for making these forms simpler, we would be happy to hear from you. You considering legislation affecting these
can write to the Tax Forms Committee, Western Area Distribution Center, Rancho instructions. Included in the pending
Cordova, CA 95743-0001. DO NOT send the tax form to this address. Instead, see legislation are provisions that would
Where To File on page 3. change the definition of a capital asset,
modify the treatment of gains from
constructive ownership transactions,
Contents Page Contents Page repeal the use of the installment method
Pending Legislation . . . . . . . . . 1 Deductions . . . . . . . . . . . . 11 for certain taxpayers, and limit the use of
Tax and Payments . . . . . . . . 14 the nonaccrual experience method of
A Change To Note . . . . . . . . . 1
Schedule A—Cost of Goods Sold 15 accounting. See Pub. 553, Highlights of
Photographs of Missing Children . . 1 1999 Tax Changes, to find out if this
Schedule B—Other Information . . 15 legislation was enacted, and details on
Unresolved Tax Problems . . . . . 1
General Instructions for Schedules the changes.
How To Make a Contribution To Reduce K and K-1 . . . . . . . . . . . . 16
the Public Debt . . . . . . . . . . 2 A Change To Note
Purpose of Schedules . . . . . . 16
How To Get Forms and Publications 2 Substitute Forms . . . . . . . . . 16 New rules for determining whether the
General Instructions . . . . . . . . 2 Shareholder's Pro Rata Share Items 16 corporation must use the Electronic
Purpose of Form . . . . . . . . . 2 Federal Tax Payment System (EFTPS) to
Specific Instructions (Schedule K make Federal tax deposits are effective
Who Must File . . . . . . . . . . 2 Only) . . . . . . . . . . . . . . . 16 beginning January 1, 2000. See
Termination of Election . . . . . . 2 Specific Instructions (Schedule K-1 Electronic Deposit Requirement on
When To File . . . . . . . . . . . 2 Only) . . . . . . . . . . . . . . . 16 page 4.
Period Covered . . . . . . . . . . 3 General Information . . . . . . . . 16
Where To File . . . . . . . . . . . 3
Photographs of Missing Children
Special Reporting Requirements for
Who Must Sign . . . . . . . . . . 3 Corporations With Multiple The Internal Revenue Service is a proud
Activities . . . . . . . . . . . . 17 partner with the National Center for
Accounting Methods . . . . . . . 3 Missing and Exploited Children.
Accounting Periods . . . . . . . . 3 Special Reporting Requirements for Photographs of missing children selected
At-Risk Activities . . . . . . . . 17 by the Center may appear in instructions
Rounding Off to Whole Dollars . . 4
Specific Items . . . . . . . . . . . 17 on pages that would otherwise be blank.
Recordkeeping . . . . . . . . . . 4
Depository Method of Tax Payment 4 Specific Instructions (Schedules K You can help bring these children home
and K-1, Except as Noted) . . . 17 by looking at the photographs and calling
Estimated Tax . . . . . . . . . . 4 1-800-THE-LOST (1-800-843-5678) if you
Income (Loss) . . . . . . . . . . . 17
Interest and Penalties . . . . . . . 4 recognize a child.
Deductions . . . . . . . . . . . . 18
Other Forms and Statements That
May Be Required . . . . . . . . 5 Investment Interest . . . . . . . . 19 Unresolved Tax Problems
Attachments . . . . . . . . . . . . 6 Credits . . . . . . . . . . . . . . 19 Most problems can be resolved with one
Amended Return . . . . . . . . . 6 Adjustments and Tax Preference contact by calling, writing, or visiting an
Items . . . . . . . . . . . . . . 20 IRS office. But if the corporation has tried
Passive Activity Limitations . . . . 6 unsuccessfully to resolve a problem with
Foreign Taxes . . . . . . . . . . 21
Specific Instructions . . . . . . . 10 the IRS, it should contact the Taxpayer
Other . . . . . . . . . . . . . . . 22
General Information . . . . . . . . 10 Advocate's Office. The corporation will be
Supplemental Information . . . . . 22 assigned a personal advocate who is in
Income . . . . . . . . . . . . . . 10
Cat. No. 11515K
the best position to try to resolve the ● Prior year forms, instructions, and must pay a tax for each year it has excess
problem. publications. net passive income. See the instructions
Contact the Taxpayer Advocate if the ● Popular tax forms that may be filled in for line 22a for details on how to figure the
corporation: electronically, printed out for submission, tax.
● Is suffering or is about to suffer a and saved for recordkeeping. 3. The election is revoked. An election
significant hardship. ● The Internal Revenue Bulletin. may be revoked only with the consent of
● Is facing an immediate threat of Buy the CD-ROM on the Internet at shareholders who, at the time the
adverse action. www.irs.gov/cdorders from the National revocation is made, hold more than 50%
● Will incur significant costs if relief is not Technical Information Service (NTIS) for of the number of issued and outstanding
granted (including fees for professional $16 (plus a $5 handling fee), and save shares of stock (including non-voting
representation). 30%, or call 1-877-CDFORMS stock). The revocation may specify an
● Will suffer irreparable injury or (1-877-233-6767) toll free to buy the effective revocation date that is on or after
CD-ROM for $23 (plus a $5 handling fee). the day the revocation is filed. If no date
long-term adverse impact if relief is not is specified, the revocation is effective at
granted. By phone and in person. You can order
forms and publications 24 hours a day, 7 the start of a tax year if the revocation is
● Has experienced a delay of more than
days a week, by calling made on or before the 15th day of the 3rd
30 calendar days to resolve a tax problem month of that tax year. If no date is
or inquiry. 1-800-TAX-FORM (1-800-829-3676). You
can also get most forms and publications specified and the revocation is made after
● Has not received a response or the 15th day of the 3rd month of the tax
resolution to the problem by the date at your local IRS office.
year, the revocation is effective at the
promised. start of the next tax year.
The corporation may contact a To revoke the election, the corporation
Taxpayer Advocate by calling a toll-free General Instructions must file a statement with the service
assistance number, 1-877-777-4778. center where it filed its election to be an
Persons who have access to TTY/TDD Purpose of Form S corporation. In the statement, the
equipment may call 1-800-829-4059 and Form 1120S is used to report the income, corporation must notify the IRS that it is
ask for the Taxpayer Advocate. If the deductions, gains, losses, etc., of a revoking its election to be an S
corporation prefers, it may write to the domestic corporation that has elected to corporation. The statement must be
Taxpayer Advocate at the IRS office that be an S corporation by filing Form 2553, signed by each shareholder who consents
last contacted the corporation. Election by a Small Business Corporation, to the revocation and contain the
While Taxpayer Advocates cannot and whose election is in effect for the tax information required by Regulations
change the tax law or make a technical year. section 1.1362-6(a)(3). A revocation may
tax decision, they can clear up problems be rescinded before it takes effect. See
that resulted from previous contacts and Who Must File Regulations section 1.1362-6(a)(4) for
ensure that the corporation's case is given A corporation must file Form 1120S if (a) details.
a complete and impartial review. For more it elected to be an S corporation by filing For rules on allocating income and
information about the Taxpayer Advocate, Form 2553, (b) the IRS accepted the deductions between an S short year and
see Pub. 1546, The Taxpayer Advocate election, and (c) the election remains in a C short year and other special rules that
Service of the IRS. effect. Do not file Form 1120S for any tax apply when an election is terminated, see
year before the year the election takes section 1362(e) and Regulations section
How To Make a Contribution To effect. 1.1362-3.
Reduce the Public Debt If an election was terminated under 1
To make a contribution to reduce the Termination of Election or 2 above, and the corporation believes
public debt, send a check made payable Once the election is made, it stays in the termination was inadvertent, the
to the “Bureau of the Public Debt” to effect until it is terminated. If the election corporation may request permission from
Bureau of the Public Debt, Department is terminated in a tax year beginning after the IRS to continue to be treated as an S
G, P.O. Box 2188, Parkersburg, WV 1996, the corporation (or a successor corporation. See Regulations section
26106-2188. Or, enclose a check with corporation) can make another election 1.1362-4 for the specific requirements
Form 1120S. Contributions to reduce the on Form 2553 only with IRS consent for that must be met to qualify for inadvertent
public debt are deductible, subject to the any tax year before the 5th tax year after termination relief.
rules and limitations for charitable the first tax year in which the termination
contributions. took effect. See Regulations section When To File
1.1362-5 for more details. In general, file Form 1120S by the 15th
How To Get Forms and An election terminates automatically day of the 3rd month following the date
Publications in any of the following cases: the corporation's tax year ended as
Personal computer. You can access the 1. The corporation is no longer a small shown at the top of Form 1120S. For
IRS's Internet Web Site 24 hours a day, business corporation as defined in section calendar year corporations, the due date
7 days a week at www.irs.gov to: 1361(b). The termination of an election in is March 15, 2000. If the due date falls on
● Download forms, instructions, and this manner is effective as of the day on a Saturday, Sunday, or legal holiday, file
publications. which the corporation no longer meets the on the next business day. A business day
● See answers to frequently asked tax definition of a small business corporation. is any day that is not a Saturday, Sunday,
questions. If the election terminates for this reason, or legal holiday.
● Search publications on-line by topic or attach to Form 1120S for the final year of If the S election was terminated during
keyword. the S corporation a statement notifying the tax year, file Form 1120S for the S
● Send us comments or request help by
the IRS of the termination and the date it short year by the due date (including
occurred. extensions) of the C short year return.
e-mail.
● Sign up to receive local and national tax
2. The corporation, for each of three
consecutive tax years, (a) has Private Delivery Services
news by e-mail. accumulated earnings and profits and (b) You can use certain private delivery
You can also reach us using file derives more than 25% of its gross services designated by the IRS to meet
transfer protocol at ftp.irs.gov. receipts from passive investment income the “timely mailing as timely filing/paying”
CD-ROM. Order Pub. 1796, Federal Tax as defined in section 1362(d)(3)(C). The rule for tax returns and payments. The
Products on CD-ROM, and get: election terminates on the first day of the most recent list of designated private
● Current year forms, instructions, and first tax year beginning after the third delivery services was published by the
publications. consecutive tax year. The corporation IRS in August 1999. The list includes only
the following:
!
CAUTION
Penalty above. Transmittal of U.S. Information Returns.
● Form 1098, Mortgage Interest
Shelter Registration Number.
Corporations that have acquired an
● Form 926, Return by a U.S. Transferor Statement. Use this form to report the interest in a tax shelter that is required to
of Property to a Foreign Corporation. Use receipt from any individual of $600 or be registered use Form 8271 to report the
this form to report certain information more of mortgage interest and points in tax shelter's registration number. Attach
required under section 6038B. the course of the corporation's trade or Form 8271 to any return on which a
● Form 940 or Form 940-EZ, Employer's
business. deduction, credit, loss, or other tax benefit
Annual Federal Unemployment (FUTA) ● Forms 1099-A, B, C, DIV, INT, LTC, attributable to a tax shelter is taken or any
Tax Return. The corporation may be liable MISC, MSA, OID, PATR, R, and S. You income attributable to a tax shelter is
for FUTA tax and may have to file Form may have to file these information returns reported.
940 or 940-EZ if it paid wages of $1,500 to report acquisitions or abandonments ● Form 8275, Disclosure Statement. File
or more in any calendar quarter during the of secured property; proceeds from broker Form 8275 to disclose items or positions,
calendar year (or the preceding calendar and barter exchange transactions; except those contrary to a regulation, that
year) or one or more employees worked cancellation of debt; certain dividends and are not otherwise adequately disclosed
for the corporation for some part of a day distributions; interest payments; payments on a tax return. The disclosure is made
in any 20 different weeks during the of long-term care and accelerated death to avoid the parts of the accuracy-related
calendar year (or the preceding calendar benefits; miscellaneous income penalty imposed for disregard of rules or
year). A corporate officer who performs payments; distributions from a medical substantial understatement of tax. Form
substantial services is considered an savings account (MSA) or 8275 is also used for disclosures relating
employee. Except as provided in section Medicare+Choice MSA; original issue to preparer penalties for understatements
3306(a), reasonable compensation for discount; distributions from cooperatives due to unrealistic positions or disregard
these services is subject to FUTA tax, no to their patrons; distributions from of rules.
matter what the corporation calls the pensions, annuities, retirement or ● Form 8275-R, Regulation Disclosure
payments. profit-sharing plans, IRAs, insurance Statement, is used to disclose any item
● Form 941, Employer's Quarterly
contracts, etc.; and proceeds from real on a tax return for which a position has
Federal Tax Return. Employers must file estate transactions. Also use certain of been taken that is contrary to Treasury
this form quarterly to report income tax these returns to report amounts that were regulations.
withheld on wages and employer and received as a nominee on behalf of ● Form 8281, Information Return for
employee social security and Medicare another person. Publicly Offered Original Issue Discount
taxes. A corporate officer who performs Use Form 1099-DIV to report actual Instruments. This form is used by issuers
substantial services is considered an dividends paid by the corporation. Only of publicly offered debt instruments
employee. Except as provided in sections distributions from accumulated earnings having OID to provide the information
3121(a) and 3401(a), reasonable and profits are classified as dividends. Do required by section 1275(c).
compensation for these services is not issue Form 1099-DIV for dividends ● Forms 8288 and 8288-A, U.S.
subject to employer and employee social received by the corporation that are Withholding Tax Return for Dispositions
security and Medicare taxes and income allocated to shareholders on line 4b of by Foreign Persons of U.S. Real Property
Schedule K-1.
Instructions for Form 1120S Page 5
Interests; and Statement of Withholding instructions on page 24 for line 23, item to a passive activity. Because the
on Dispositions by Foreign Persons of 17, of Schedule K-1 for details on the treatment of each shareholder's share of
U.S. Real Property Interests. Use these Form 8866 information they must provide corporate income or loss and credit
forms to report and transmit withheld tax to their shareholders. depends upon the nature of the activity
on the sale of U.S. real property by a that generated it, the corporation must
foreign person. See section 1445 and the Statements report income or loss and credits
related regulations for additional Stock ownership in foreign separately for each activity.
information. corporations. If the corporation owned The instructions below (pages 6
● Form 8300, Report of Cash Payments at least 5% in value of the outstanding through 10) and the instructions for
Over $10,000 Received in a Trade or stock of a foreign personal holding Schedules K and K-1 (pages 16 through
Business. File this form to report the company, and the corporation was 24) explain the applicable passive activity
receipt of more than $10,000 in cash or required to include in its gross income any limitation rules and specify the type of
foreign currency in one transaction (or a undistributed foreign personal holding information the corporation must provide
series of related transactions). company income, attach the statement to its shareholders for each activity. If the
● Form 8594, Asset Acquisition required by section 551(c). corporation had more than one activity, it
Statement. Both the purchaser and seller Transfers to a corporation controlled must report information for each activity
of a group of assets constituting a trade by the transferor. If a person receives on an attachment to Schedules K and
or business must file this form if section stock of a corporation in exchange for K-1.
197 intangibles attach, or could attach, to property, and no gain or loss is Generally, passive activities include (a)
such assets and if the purchaser's basis recognized under section 351, the activities that involve the conduct of a
in the assets is determined only by the transferor and transferee must each trade or business in which the
amount paid for the assets. attach to their tax returns the information shareholder does not materially
● Form 8697, Interest Computation required by Regulations section 1.351-3. participate and (b) any rental activity
Under the Look-Back Method for (defined on page 7) even if the
Completed Long-Term Contracts. Certain Attachments shareholder materially participates. For
S corporations that are not closely held Attach Form 4136, Credit for Federal Tax exceptions, see Activities That Are Not
may have to file Form 8697. Form 8697 Paid on Fuels, after page 4, Form 1120S. Passive Activities below. The level of
is used to figure the interest due or to be Attach schedules in alphabetical order each shareholder's participation in an
refunded under the look-back method of and other forms in numerical order after activity must be determined by the
section 460(b)(2) on certain long-term Form 4136. shareholder.
contracts that are accounted for under To assist us in processing the return, The passive activity rules provide that
either the percentage of please complete every applicable entry losses and credits from passive activities
completion-capitalized cost method or the space on Form 1120S and Schedule can generally be applied only against
percentage of completion method. Closely K-1. If you attach statements, do not write income and tax from passive activities.
held corporations should see the “See attached” instead of completing the Thus, passive losses and credits cannot
instructions on page 23 for line 23, item entry spaces on Form 1120S and be applied against income from salaries,
10, of Schedule K-1 for details on the Schedule K-1. wages, professional fees, or a business
Form 8697 information they must provide If you need more space on the forms in which the shareholder materially
to their shareholders. or schedules, attach separate sheets. Use participates; against “portfolio income”
● Form 8865, Return of U.S. Persons the same size and format as on the (defined on page 8); or against the tax
With Respect to Certain Foreign printed forms. But show the totals on related to any of these types of income.
Partnerships. The corporation may have the printed forms. Attach these separate Special rules require that net income
to file this form if it contributed property sheets after all the schedules and forms. from certain activities that would
after August 5, 1997, to a foreign Be sure to put the corporation's name and otherwise be treated as passive income
partnership in exchange for a partnership employer identification number (EIN) on must be recharacterized as nonpassive
interest and (a) immediately after the each sheet. income for purposes of the passive
contribution, the corporation owned, activity limitations.
directly or indirectly, at least a 10% Amended Return To allow each shareholder to apply the
interest in the foreign partnership or (b) To correct an error on a Form 1120S passive activity limitations at the individual
the fair market value of the property already filed, file an amended Form level, the corporation must report income
contributed to the foreign partnership in 1120S and check box F(4). If the or loss and credits separately for each of
exchange for the partnership interest, amended return results in a change to the following: trade or business activities,
when added to other contributions of income, or a change in the distribution of rental real estate activities, rental
property made to the partnership during any income or other information provided activities other than rental real estate, and
the preceding 12-month period, exceeds any shareholder, an amended Schedule portfolio income.
$100,000. Also, the corporation may have K-1 (Form 1120S) must also be filed with
to file Form 8865 to report certain the amended Form 1120S and given to Activities That Are Not Passive
dispositions by the foreign partnership of that shareholder. Be sure to check box Activities
property previously contributed to it by the D(2) on each Schedule K-1 to indicate Passive activities do not include:
corporation if the corporation was still a that it is an amended Schedule K-1. 1. Trade or business activities in
partner at the time of disposition. For A change to the corporation's Federal which the shareholder materially
more details, including penalties that may return may affect its state return. This participated for the tax year.
apply, see Form 8865 and its separate includes changes made as the result of 2. Any rental real estate activity in
instructions. an IRS examination of Form 1120S. For which the shareholder materially
● Form 8866, Interest Computation more information, contact the state tax participated and met both of the following
Under the Look-Back Method for Property agency for the state in which the conditions for the tax year:
Depreciated Under the Income Forecast corporation's return was filed. a. More than half of the personal
Method. Certain S corporations that are services the shareholder performed in
not closely held may have to file Form Passive Activity Limitations trades or businesses were performed in
8866. Form 8866 is used to figure the In general, section 469 limits the amount real property trades or businesses in
interest due or to be refunded under the of losses, deductions, and credits that which he or she materially participated,
look-back method of section 167(g)(2) for shareholders may claim from “passive and
certain property placed in service after activities.” The passive activity limitations
September 13, 1995, and depreciated b. The shareholder performed more
do not apply to the corporation. Instead, than 750 hours of services in real property
under the income forecast method. they apply to each shareholder's share of
Closely held corporations should see the trades or businesses in which he or she
any income or loss and credit attributable materially participated.
Page 6 Instructions for Form 1120S
For purposes of this rule, each interest activity must be reported on attachments relation to the amount charged for the use
in rental real estate is a separate activity to each Schedule K-1. See Passive of the property.
unless the shareholder elects to treat all Activity Reporting Requirements on The following services are not
interests in rental real estate as one page 9 for more information. considered in determining whether
activity. personal services are significant:
If the shareholder is married filing Rental Activities
● Services necessary to permit the lawful
jointly, either the shareholder or his or her Generally, except as noted below, if the use of the rental property.
spouse must separately meet both gross income from an activity consists of ● Services performed in connection with
conditions 2a and b on page 6, without amounts paid principally for the use of improvements or repairs to the rental
taking into account services performed by real or personal tangible property held by property that extend the useful life of the
the other spouse. the corporation, the activity is a rental property substantially beyond the average
A real property trade or business is any activity. rental period.
real property development, There are several exceptions to this ● Services provided in connection with
redevelopment, construction, general rule. Under these exceptions, an the use of any improved real property that
reconstruction, acquisition, conversion, activity involving the use of real or are similar to those commonly provided in
rental, operation, management, leasing, personal tangible property is not a rental connection with long-term rentals of
or brokerage trade or business. Services activity if any of the following apply: high-grade commercial or residential
the shareholder performed as an ● The average period of customer use
property. Examples include cleaning and
employee are not treated as performed in (defined below) for such property is 7 maintenance of common areas, routine
a real property trade or business unless days or less. repairs, trash collection, elevator service,
he or she owned more than 5% of the ● The average period of customer use for and security at entrances.
stock in the employer. such property is 30 days or less and Extraordinary personal services.
3. The rental of a dwelling unit used significant personal services (defined Services provided in connection with
by a shareholder for personal purposes below) are provided by or on behalf of the making rental property available for
during the year for more than the greater corporation. customer use are extraordinary personal
of 14 days or 10% of the number of days ● Extraordinary personal services services only if the services are performed
that the residence was rented at fair rental (defined below) are provided by or on by individuals and the customers' use of
value. behalf of the corporation. the rental property is incidental to their
4. An activity of trading personal ● Rental of the property is treated as receipt of the services. For example, a
property for the account of owners of incidental to a nonrental activity of the patient's use of a hospital room generally
interests in the activity. For purposes of corporation under Temporary Regulations is incidental to the care that the patient
this rule, personal property means section 1.469-1T(e)(3)(vi) and receives from the hospital's medical staff.
property that is actively traded, such as Regulations section 1.469-1(e)(3)(vi). Similarly, a student's use of a dormitory
stocks, bonds, and other securities. See ● The corporation customarily makes the room in a boarding school is incidental to
Temporary Regulations section property available during defined the personal services provided by the
1.469-1T(e)(6). business hours for nonexclusive use by school's teaching staff.
Note: The section 469(c)(3) exception for various customers. Rental property incidental to a
a working interest in oil and gas properties ● The corporation provides property for nonrental activity. An activity is not a
does not apply to an S corporation use in a nonrental activity of a partnership rental activity if the rental of the property
because state law generally limits the in its capacity as an owner of an interest is incidental to a nonrental activity, such
liability of shareholders. in such partnership. Whether the as the activity of holding property for
Trade or Business Activities corporation provides property used in an investment, a trade or business activity,
activity of a partnership in the or the activity of dealing in property.
A trade or business activity is an activity corporation's capacity as an owner of an Rental of property is incidental to an
(other than a rental activity or an activity interest in the partnership is based on all activity of holding property for investment
treated as incidental to an activity of the facts and circumstances. if both of the following apply:
holding property for investment) that— In addition, a guaranteed payment ● The main purpose for holding the
1. Involves the conduct of a trade or described in section 707(c) is not income property is to realize a gain from the
business (within the meaning of section from a rental activity under any appreciation of the property.
162), circumstances. ● The gross rental income from such
2. Is conducted in anticipation of Average period of customer use. property for the tax year is less than 2%
starting a trade or business, or Figure the average period of customer of the smaller of the property's unadjusted
3. Involves research or experimental use of property by dividing the total basis or its fair market value.
expenditures deductible under section number of days in all rental periods by the Rental of property is incidental to a
174 (or that would be if you chose to number of rentals during the tax year. If trade or business activity if all of the
deduct rather than capitalize them). the activity involves renting more than one following apply:
If the shareholder does not materially class of property, multiply the average ● The corporation owns an interest in the
participate in the activity, a trade or period of customer use of each class by trade or business at all times during the
business activity of the corporation is a the ratio of the gross rental income from year.
passive activity for the shareholder. that class to the activity's total gross rental ● The rental property was mainly used in
Each shareholder must determine if he income. The activity's average period of the trade or business activity during the
or she materially participated in an customer use equals the sum of these tax year or during at least 2 of the 5
activity. As a result, while the class-by-class average periods weighted preceding tax years.
corporation's overall trade or business by gross income. See Regulations section ● The gross rental income from the
income (loss) is reported on page 1 of 1.469-1(e)(3)(iii).
property is less than 2% of the smaller of
Form 1120S, the specific income and Significant personal services. Personal the property's unadjusted basis or its fair
deductions from each separate trade or services include only services performed market value.
business activity must be reported on by individuals. In determining whether
attachments to Form 1120S. Similarly, personal services are significant personal The sale or exchange of property that
while each shareholder's allocable share services, consider all of the relevant facts is also rented during the tax year (where
of the corporation's overall trade or and circumstances. Relevant facts and the gain or loss is recognized) is treated
business income (loss) is reported on line circumstances include how often the as incidental to the activity of dealing in
1 of Schedule K-1, each shareholder's services are provided, the type and property if, at the time of the sale or
allocable share of the income and amount of labor required to perform the exchange, the property was held primarily
deductions from each trade or business services, and the value of the services in for sale to customers in the ordinary
*Income and deductions on lines 1, 2, and 5 are from total operations for the tax year. This includes applicable income and expenses from page 1, Form 1120S, as
well as those reported separately on Schedule K. See section 1375(b)(4) for an exception regarding lines 2 and 5.
deductions allowed or allowable for the 1120S) to adjust the amounts on lines ● Shipping income.
AMT during the current tax year and 14d(1) and 14d(2) for any other income ● Dividends from a DISC or former DISC.
previous tax years. Enter on this line the or deductions from oil, gas, or geothermal ● Certain distributions from a foreign
difference between the regular tax gain properties included on lines 2 through 10 sales corporation (FSC) or former FSC.
(loss) and the AMT gain (loss). If the AMT and 23 of Schedule K-1 in order to
● Section 901(j) income.
gain is less than the regular tax gain, OR determine the total income and
● Income re-sourced by treaty.
the AMT loss is more than the regular tax deductions from oil, gas, and geothermal
properties for the corporation. ● General limitation income (all other
loss, OR there is an AMT loss and a
regular tax gain, enter the difference as a Figure the amounts for lines 14d(1) and income from sources outside the United
negative amount. 14d(2) separately for oil and gas States, including income from sources
properties that are not geothermal within U.S. possessions).
If any part of the adjustment is allocable
to net short-term capital gain (loss), net deposits and for all properties that are If, for the country or U.S. possession
long-term capital gain (loss), or net geothermal deposits. shown on line 15b, the corporation had
section 1231 gain (loss), attach a Give the shareholders a schedule that more than one type of income, enter “See
schedule that identifies the amount of the shows the separate amounts included in attached” and attach a schedule for each
adjustment allocable to each type of gain the computation of the amounts on lines type of income for lines 15c through 15g.
or loss. For a net long-term capital gain 14d(1) and 14d(2). Line 15b—Foreign Country or U.S.
(loss), also identify the amount of the Line 14d(1)—Gross income from oil, Possession
adjustment that is 28% rate gain (loss). gas, and geothermal properties. Enter
For a net section 1231 gain (loss), also the total amount of gross income (within Enter the name of the foreign country or
identify the amount of adjustment that is the meaning of section 613(a)) from all U.S. possession. If, for the type of
unrecaptured section 1250 gain. oil, gas, and geothermal properties income shown on line 15a, the
received or accrued during the tax year corporation had income from, or paid
and included on page 1, Form 1120S. taxes to, more than one foreign country