No. Per IRC section 1377(a)(1), items of income, gain, loss, deduction, or credit are allocated to the shareholder on a per share, per day basis. S Corporation items cannot be specifically allocated to shareholders.

Per IRC section 1377(a)(2), if any shareholder terminates their entire interest in the S Corporation, the S Corporation, with the consent of all affected shareholders, can elect to have the rules providing for pro rata shares apply as if the tax year consisted of two tax years.

The S Corporation can also elect to treat the year as if the year consisted of separate taxable years in the case of a qualifying disposition under IRC Regulation 1.1368-1(g)(2).

For more information, see Shareholder termination and qualifying dispositions FAQs.

Under Notice 2008-1, in order for a two percent shareholder-employee to deduct the amount of the health insurance premiums under IRC Section 162(l), the S Corporation must report the health insurance premiums paid or reimbursed as wages on the two percent shareholder-employee's Form W-2 in that same year. In addition, the shareholder must report the premium payments or reimbursements from the S Corporation as gross income on their Form 1040.

However, if the health insurance premiums were not included in the shareholder's Form W-2, and you want to show the premiums on Form 1120S, Schedules K and K-1, enter the appropriate amount in the Shareholder health insurance field for each shareholder via the View > Shareholder Information > Other Info tab.

UltraTax CS transfers the shareholder health insurance to Schedules K and K-1 based on the option entered in the Shareholder health insurance shown on Schedules K and K-1 field in Screen K. If you enter 1 in this field or if the field is blank, UltraTax CS transfers the amount to Nondeductible expenses on Schedules K and K-1. If you enter 2 in this field, UltraTax CS transfers the amount to Other items and amounts on Schedules K and K-1.

If the health / medical insurance premiums are included in the shareholder's Form W-2, you should not enter the amount in the Shareholder health insurance field in the Other Info tab in the Shareholder Information window unless you want to show the health insurance premiums as Other items and amounts on Schedules K and K-1. To do this, enter 2 in the Shareholder health insurance shown on Schedules K and K-1 field in Screen K.

Each individual shareholder's pro rata share of Section 179 expense is reported on Schedule K-1, Box 11. However, per Form 1120S instructions for Box 11: "Do not complete Box 11 of Schedule K-1 for any shareholder that is an estate or trust." The Section 179 expense for the remaining shareholders is not adjusted for the amount that would have been allocated to the estate or trust.

Per IRC Regulation 1.179-1(f)(3), the S Corporation's basis in Section 179 property shall not be reduced to reflect any portion of the Section 179 expense that is allocable to the trust or estate. The S Corporation can claim a depreciation deduction for the amount of Section 179 that have been allocated to the trust or estate shareholder.

There are two ways of entering shareholder supplemental information.

• Enter amounts in Screen KSep in the Schedule K folder if you want an item to be allocated to all shareholders based on their ownership percentage. Enter a description and amount in the fields in the bottom section of the input screen. UltraTax CS allocates these items to each shareholder based on their respective ownership percentage.
• Enter amounts in the statement dialog for the Supplemental information field via the View > Shareholder Information > Other Info tab for each shareholder to allocate items to specific shareholders or based on an allocation method other than the shareholder's ownership percentage.

Per the Form 4797 instructions, S Corporations that dispose of property for which a section 179 expense deduction was previously passed through to the shareholder, do not complete Form 4797, 4684, 6252, or 8824 with respect to these types of dispositions. The gain or loss on disposal of section 179 assets is not a part of the Schedule K, Income (loss) calculation, but the gain or loss is included in the S Corporation's book income or loss.

Since the gain or loss on the disposal of a section 179 asset is not included in the taxable income of the S Corporation, but is included in the corporation's book income, UltraTax/1120 creates a Schedule M-1 adjustment equal to the entire amount of the book gain or loss. If you do not want this Schedule M-1 adjustment to appear, enter the amount of the gain or loss reported on the tax return in the 4797 gain (loss) - book field in Screen Ms and adjust the Net income (loss) per books field as necessary.

UltraTax CS transfers Schedule M-1 items that have a code entered in the Sch M-2 column of the following Schedule M-1 statement dialogs in Screen Ms.

• Taxable income not on books
• Book expenses not deducted
• Income on books not on return
• Return deductions not on books

Also, if you enter code A, O, or R in the Carry book/tax differences to Schedule M-2 field in Screen Ms, UltraTax CS transfers the tax accrual adjustment, rounding adjustment, and Schedule M-1 book / tax differences for depreciation, depletion, amortization, organization or start-up deduction, and Form 4797 gain or loss to Schedule M-2.

There should be no amounts entered in the following end-of-year fields in Screen L-2.

• Retained earnings - Unappropriated
• Accumulated adjustments account (S Corp)
• Other adjustments account (S Corp)
• Undistributed taxed income (S Corp)

Additionally, Write-Up CS tax code 467, 468, 469, or 470 should not be assigned to these fields.

By leaving these fields blank, the Schedule L end-of-year retained earnings reflect the sum of the Schedule M-2 accounts from the Retained Earnings Reconciliation Worksheet.

The Schedule M-2 accounts on the Retained Earnings Reconciliation Worksheet are:

• Accumulated Adjustments Account
• Other Adjustments Account
• Undistributed Previously Taxed Income
• Retained Earnings Unappropriated / Timing Differences

The last account, Retained Earnings Unappropriated / Timing Differences, is used to track prior C Corporation retained earnings and S Corporation book / tax timing differences. It is not reflected in the Schedule M-2 on Form 1120S, Page 5. If you reconcile Schedule M-2 to Schedule L on a tax basis, the Retained Earnings Unappropriated / Timing Differences account may be used. If you reconcile Schedule M-2 to Schedule L on a book basis, this account should never be used, and, therefore, there should be no amounts entered in the Retained Earnings Unappropriated / Timing Differences column in Screen Ms.

Per Rev. Rul. 2008-42, premiums paid by the S Corporation on an employer-owned life insurance contract which the corporation owns and is a beneficiary of, do not reduce the S Corporation's Accumulated Adjustment Account. Similarly, the life insurance proceeds received by an S Corporation on the death of an individual who was employed by the S Corporation within the last 12 months or who is a director or highly compensated employee, do not increase its Accumulated Adjustment Account.

Although the Revenue Ruling does not explain this reasoning, it would seem that even though no deduction is allowed for premiums paid on any life insurance policy where the taxpayer is directly or indirectly the beneficiary, the nondeductible expense does not reduce the S Corporation's Accumulated Adjustment Account because the expense is related to tax-exempt income.

Therefore, UltraTax CS assumes amounts entered in the Officer life insurance premiums field in Screen Ms should transfer to Schedule M-2, Other Adjustments Account - Other reductions. Also, amounts entered in the Cash surrender value-officer life field in Screen Ms should transfer to Schedule M-2, Other Adjustments Account - Other additions.

If you want UltraTax CS to transfer amounts entered in the Officer life insurance premiums field to Schedule M-2, Accumulated Adjustments Account - Other reductions, enter code A in the Schedule M-2 code field. Also, if you want UltraTax CS to transfer amounts entered in the Cash surrender value-officer life field to Schedule M-2, Accumulated Adjustments Account - Other additions, enter code A in the Schedule M-2 code field.

If you do not want UltraTax CS to automatically transfer these amounts to Schedule M-2, do not enter amounts in the Officer life insurance premiums and Cash surrender value-officer life fields in Screen Ms. Instead, enter the amounts in the Book expenses not deducted and Income on books not on return statement dialogs in Screen Ms, respectively. Also, do not enter a Schedule M-2 code for the amounts in the statement dialog.

Per the 1120S Schedule M-2 instructions, the accumulated adjustments account is adjusted in the following order:

1. Increased by income items, other than tax-exempt income.
2. Generally, decreased by deductible losses and expenses, nondeductible expenses, other than expenses related to tax-exempt income. However, if the total decreases, exceeds the total increases, the excess is a net negative adjustment. If the corporation has a net negative adjustment, do not take the negative adjustment into account. Instead, take the negative adjustment into account only under step 4, below.
3. Decreased, but not less than zero, by property distributions, other than dividend distributions from accumulated E & P, unless the corporation elects to reduce accumulated E & P first.
4. Decreased by any net negative adjustment.

If the S Corporation has a net negative adjustment, the accumulated adjustments account is first reduced by the distributions, but not less than zero. Any remaining amount of the accumulated adjustment account is then reduced by the net negative adjustment.

Yes. Use Screen StmtS3 in the Review folder to override or delete the Schedule M-2 calculated amounts. Enter 0 in the appropriate field if you do not want the calculated amount, or enter a different amount to override the calculated amount.

See Printing only the shareholder, partner, beneficiary, or participant package.