Preparing an 1120S return for a shareholder with a qualifying disposition or termination of interest during the tax year (1120)

Alerts and notices
Leave feedback

Contact information (optional):

Leave this blank:

Please tell us how we can make this information more helpful.


Characters left:

MFA required for electronic filing

Effective May 3rd, the 2017 version of UltraTax CS requires multi-factor authentication (MFA) to transmit e-files from CS Connect. Find out more.

When a shareholder has terminated their interest in the corporation or made 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 consisted of two separate taxable years, the first of which ends at the close of the day on which the shareholder's stock in the corporation changed, by following this procedure.

See 1120-US: Shareholder termination and qualifying dispositions FAQs for information about what constitutes a qualifying disposition or terminating election.

  1. Choose File > Open Client to open the desired S Corporation client.
  2. Choose View > Shareholder Information > Change of Ownership and enter the date of ownership changes and the number of shares owned as of that date in the Change of Ownership dialog.
  3. Enter qualifying disposition or termination dates in the IRC 1377 or 1368 Dates Only fields.

    Note: The first day of the S Corporation's tax year cannot be entered in this field.

  4. Access Screens 1377, 1377-2, and 1377-3 and enter the allocable items for the split years. It is not necessary to enter amounts allocable to the period from the last period to the end of the year. UltraTax/1120 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/1120 then allocates each item to the shareholders based on their ownership percentage for the period.
  5. Enter an explanation for the qualifying disposition or shareholder termination in the Termination, qualifying disposition explanation field in Screen 1377 in the Shr Allocation folder. UltraTax CS automatically prints the election statement.

    Note: A single election statement is permitted for all terminating elections made for the tax year.

Example

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 3/31/17 in the date of ownership change, the number of shares owned on that date, and 3/31/17 in the IRC 1377 or 1368 Dates field in the Change of Ownership dialog (View > Shareholder Information > Change of Ownership). Then, enter 25,000 in the first column field for Ordinary business income (loss) in Screen 1377.

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
$93,750 $6,250

UltraTax/1120 transfers $93,750 and $6,250 to Schedule K-1, Ordinary business income (loss), for Shareholder 1 and Shareholder 2, respectively. UltraTax/1120 also marks the Final K-1 checkbox on Schedule K-1 for Shareholder 2.

UltraTax/1120 generates Form 1120S, Schedule K Amounts Per IRC 1377(a)(2) or 1.1368-1(g)(2)(i) Worksheet, which allocates each item on Form 1120S, Schedule K to the amounts entered in Screens 1377, 1377-2, and 1377-3.

UltraTax/1120 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/1120 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.

Share This