How to Prepare a Final K-1 for an S Corp

An S corporation functions much like a partnership, at least in tax-related matters. Just as in a partnership, S corporations use IRS Form 1120 and Schedule K-1 when filing annual income taxes. Schedule K-1 is an informational report that lists each partner-s -- or in the case of an S corporation, each shareholder’s -- share of income, losses, deductions and credits. Shareholders use the information on the K-1 to report this information on their individual tax returns. When an S corporation dissolves, it must prepare a final tax return and an informational Schedule K-1.

Closing the doors on an S corporation -- or any corporation -- is a three-phase operation. The first phase involves making an official decision to dissolve the corporation. The second phase consists of winding up the business and the third involves asset liquidation. During asset liquidation, the corporation distributes whatever cash and other assets remain after fulfilling outstanding debt and tax obligations. Once each phase in the dissolution is complete, the corporation can start the process of preparing a final K-1 schedule.

Start by completing IRS Form 1120S, the income tax form required for an S corporation. There’s a box on the form you’ll need to check to notify the IRS that this will be the S corporation’s final return. Then, report income distributions made to corporate shareholders by filling out a separate Schedule K-1 for each individual shareholder. The only difference between completing an ongoing and a final K-1 is that you need to check the box at the top of the second column indicating this will be the S corporation's final K-1. You’ll also need to complete IRS Form 966, Corporate Dissolution or Liquidation, to report the corporate dissolution.

Submit IRS Form 966 within 30 days of adopting a corporate resolution to dissolve an S corporation. IRS Form 1120S and a copy of each Schedule K-1 must be submitted to the IRS no later than the 15th of the third month after dissolution. Although filing requirements are mandatory, you can apply for a six-month filing extension by filling out IRS Form 7004. Notify the IRS you’re requesting an extension on a filing a final return by checking the appropriate box on Line 5b in section three.

Shareholders are required to return all of their outstanding shares of stock after receiving a final distribution or a final K-1 if the corporation has no leftover assets after paying taxes and creditors. Shareholders then transfer and report the information on a Schedule K-1 on their personal income taxes. If the distribution is less than the original investment, a shareholder can report a capital loss on annual income taxes. If the distribution exceeds the original investment, a shareholder is subject to paying capital gains tax.