1120-US: Preparing an 1120S return for a shareholder with a qualifying disposition for their interest during the tax year (FAQ)

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Question

How do I prepare an 1120S return when the corporation has made a qualifying election under IRC 1.1368-1(g)(2)(i)?

Answer

The corporation can elect, with the consent of all shareholders, to treat its taxable year as it if consisted of two separate taxable years when a shareholder has a qualifying disposition of their interest in the corporation. The first taxable year ends on the date of the qualifying disposition occurs. UltraTax CS allows for up to two qualifying disposition dates under Regulation 1.1368-1(g)(2)(i).

  1. Enter the date of ownership change(s) and the number of shares owned as of that particular date in the Change of Ownership spreadsheet via the View > Shareholder Information > Change of Ownership dialog.
  2. Enter the qualifying disposition dates in the IRC 1377 or 1368 Dates Only fields. The first day of the S Corporation's tax year cannot be entered in this field.
  3. 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.
  4. Enter an explanation for the qualifying disposition in the Termination, qualifying disposition explanation field in Screen 1377 in the Shr Allocation folder. UltraTax CS automatically prints the election statement for a qualifying disposition of stock.

Notes

  • A single election statement is permitted for all terminating elections made for the tax year.
  • UltraTax/1120 assumes the requirements outlined in IRC 1.1368-1(g)(2)(i) are met.

Related topic: 1120-US: Shareholder termination and qualifying dispositions FAQs

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