Caution: DRAFT-NOT FOR FILING - Note: The draft you are looking for begins on the next page - Internal Revenue Service

Note: The draft you are looking for begins on the next page.
    This is an early release draft of an IRS tax form, instructions, or publication,
 which the IRS is providing for your information. Do not file draft forms and do
 not rely on draft forms, instructions, and publications for filing. We do not
 release draft forms until we believe we have incorporated all changes (except
 when explicitly stated on this coversheet). However, unexpected issues
 occasionally arise, or legislation is passed—in this case, we will post a new draft
 of the form to alert users that changes were made to the previously posted draft.
 Thus, there are never any changes to the last posted draft of a form and the
 final revision of the form. Forms and instructions generally are subject to OMB
 approval before they can be officially released, so we post only drafts of them
 until they are approved. Drafts of instructions and publications usually have
 some changes before their final release.

    Early release drafts are at and remain there after the
 final release is posted at All information about all forms,
 instructions, and pubs is at

   Almost every form and publication has a page on with a friendly
 shortcut. For example, the Form 1040 page is at; the Pub.
 501 page is at; the Form W-4 page is at; and the
 Schedule A (Form 1040/SR) page is at If typing in a link
 above instead of clicking on it, be sure to type the link into the address bar of
 your browser, not a Search box.

    If you wish, you can submit comments to the IRS about draft or final forms,
 instructions, or publications at We cannot respond to
 all comments due to the high volume we receive and may not be able to
 consider many suggestions until the subsequent revision of the product.

    If you have comments on reducing paperwork and respondent (filer) burden,
 with respect to draft or final forms, please respond to the relevant information
 collection through the Federal Register process; for more info, click here.
2020                                                                                                                                  Department of the Treasury
                                                                                                                                      Internal Revenue Service

Instructions for Form 1120-S
U.S. Income Tax Return for an S Corporation

         DRAFT AS OF
Section references are to the Internal Revenue                  Contents                                      Page         Security Act (CARES Act) allows a new
Code unless otherwise noted.                                                                                               employee retention credit for qualified
                                                                    Item J. Aggregation or
Contents                                  Page                          Grouping of Certain                                wages. Any qualified wages for which an
                                                                        Activities . . . . . . . . . . . .    .   .   13   eligible employer claims against payroll
Future Developments . . . . . . .       ..... 1                                                                            taxes for the employee retention credit
What’s New . . . . . . . . . . . . .    ..... 1                     Income . . . . . . . . . . . . . . .      .   .   13
                                                                    Deductions . . . . . . . . . . . .        .   .   14   may not be taken into account for
Photographs of Missing Children          .... 1                                                                            purposes of determining certain other

        February 4, 2021
The Taxpayer Advocate Service           ..... 2                     Tax and Payments . . . . . . . .          .   .   20
Direct Deposit of Refund . . . . .      ..... 2                 Schedule B. Other Information . . .           .   .   21
                                                                Schedules K and K-1 (General                               New items G and H added to Sched-
How To Get Forms and                                                                                                       ule K-1. Item G is added for the
    Publications . . . . . . . . . .    .   .   .   .   .   2       Instructions) . . . . . . . . . . . .     . . 22
                                                                Specific Instructions                                      shareholder's number of shares and item
General Instructions . . . . . . . .    .   .   .   .   .   2                                                              H is added for loans from the shareholder.
                                                                    (Schedule K-1 Only) . . . . . .           . . 23
    Purpose of Form . . . . . . .       .   .   .   .   .   2                                                              See Item G and Item H under Specific
                                                                Specific Instructions (Schedules K
    How To Make the Election .          .   .   .   .   .   2        and K-1, Part III) . . . . . . . . .     . . 24       Instructions (Schedule K-1 Only), later.
    Who Must File . . . . . . . .       .   .   .   .   .   2   Schedule L. Balance Sheets per                             Election for section 951A reporting.
    Termination of Election . . .       .   .   .   .   .   2       Books . . . . . . . . . . . . . . . .     . . 44       Notice 2020-69 provides an election to be
    Electronic Filing . . . . . . .     .   .   .   .   .   2   Schedule M-1. Reconciliation of                            treated as an entity for purposes of section
    When To File . . . . . . . . .      .   .   .   .   .   3       Income (Loss) per Books With                           951A. See Other Forms and Statements
    Where To File . . . . . . . . .     .   .   .   .   .   3       Income (Loss) per Return . . .            . . 44
                                                                                                                           That May Be Required and Statements
    Who Must Sign . . . . . . . .       .   .   .   .   .   3   Schedule M-2. Analysis of AAA,                             and forms required of S corporations
                                                                    PTEP, Accumulated E&P, and
    Paid Preparer Authorization         .   .   .   .   .   3       OAA . . . . . . . . . . . . . . . .       . . 45       electing to be treated as an entity under
    Assembling the Return . . .         .   .   .   .   .   4                                                              Notice 2020-69, later. Also see reporting
                                                                Principal Business Activity Codes .           . . 48
    Tax Payments . . . . . . . .        .   .   .   .   .   4                                                              codes for Section 951A income (code E)
                                                                Index . . . . . . . . . . . . . . . . . . .   . . 51       under Line 10. Other Income (Loss),
    Electronic Deposit
        Requirement . . . . . . .       .   .   .   .   .   4                                                              Section 951A category (code D) and
    Estimated Tax Payments .            .   .   .   .   .   4
                                                                Future Developments                                        Section 951A category foreign source
                                                                For the latest information about                           income (code K) under Line 14r. Other
    Interest and Penalties . . . .      .   .   .   .   .   4
                                                                developments related to Form 1120-S and                    Foreign Tax Information.
    Accounting Methods . . . .          .   .   .   .   .   5   its instructions, such as legislation
    Accounting Period . . . . . .       .   .   .   .   .   5   enacted after they were published, go to                   Temporary allowance of 100% for
    Rounding Off to Whole                                                                      business meals. A corporation is
        Dollars . . . . . . . . . . .   ..... 5                                                                            allowed a 100% deduction for certain
                                                                                                                           business meals paid or incurred in 2021
    Recordkeeping . . . . . . . .       ..... 6                 What’s New                                                 and 2022. See Travel, meals, and
    Amended Return . . . . . . .        ..... 6
    Other Forms and                                             New payroll credit for paid sick leave                     entertainment.
        Statements That May Be                                  or family leave. Under the Families First
        Required . . . . . . . . . .    ..... 6                 Coronavirus Response Act (FFCRA), as                       Reminders
    At-Risk Limitations . . . . . .     ..... 7                 amended, an eligible employer can take a
                                                                credit against payroll taxes owed for                      Election by a small business corpora-
    Passive Activity Limitations        ..... 7                                                                            tion. Don't file Form 1120-S unless the
    Net Investment Income Tax                                   amounts paid for qualified sick leave or
                                                                family leave if incurred during the allowed                corporation has filed or is attaching Form
        Reporting Requirements          . . . . 12                                                                         2553, Election by a Small Business
    Extraterritorial Income                                     period, which starts in 2020 and ends
                                                                March 31, 2021. The requirement that                       Corporation. For details, see the
        Exclusion . . . . . . . . .     .   .   .   .   12                                                                 Instructions for Form 2553.
Specific Instructions . . . . . . . .   .   .   .   .   12      employers provide the leave expired on
                                                                December 31, 2020, but the credit is still
    Period Covered . . . . . . .        .   .   .   .   12
                                                                available through March 31, 2021. There                    Photographs of
    Name and Address . . . . .          .   .   .   .   12
    Item B. Business Code . . .         .   .   .   .   13
                                                                is no double tax benefit allowed and the                   Missing Children
                                                                amounts claimed are reportable as                          The Internal Revenue Service is a proud
    Item C. Schedule M-3                                        income on line 5. See Line 5. Other
        Information . . . . . . . .     . . . . 13                                                                         partner with the National Center for
                                                                Income (Loss).                                             Missing & Exploited Children® (NCMEC).
    Item D. Employer
        Identification Number                                   Certain cash contributions made in                         Photographs of missing children selected
        (EIN) . . . . . . . . . . . .   . . . . 13              2020 or 2021. Code G of Schedule K-1                       by the Center may appear in these
    Item F. Total Assets . . . . .      . . . . 13              (Form 1120-S), box 12, is now used to                      instructions on pages that would otherwise
    Item H. Final Return, Name                                  report certain cash contributions made in                  be blank. You can help bring these
        Change, Address                                         calendar year 2020 or 2021. See                            children home by looking at the
        Change, Amended                                         Line 12a. Charitable Contributions under                   photographs and calling 1-800-THE-LOST
        Return, or S Election                                   Specific Instructions for Schedules K and                  (1-800-843-5678) if you recognize a child.
        Termination or                                          K-1.
        Revocation . . . . . . . .      . . . . 13
                                                                New employee retention credit. The
                                                                Coronavirus Aid, Relief, and Economic

Feb 03, 2021                                                                    Cat. No. 11515K
The Taxpayer Advocate                          forms mailed to it. The corporation should          receipts from passive investment income
                                               receive its order within 10 business days.          as defined in section 1362(d)(3)(C). The
Service                                                                                            election terminates on the first day of the
The Taxpayer Advocate Service (TAS) is
an independent organization within the         General Instructions                                first tax year beginning after the third
                                                                                                   consecutive tax year. The corporation
IRS that helps taxpayers and protects                                                              must pay a tax for each year it has excess
taxpayer rights. TAS's job is to ensure that   Purpose of Form                                     net passive income. See the line 22a
every taxpayer is treated fairly and knows     Use Form 1120-S to report the income,               instructions for details on how to figure the
and understands their rights under the         gains, losses, deductions, credits, and             tax.

         DRAFT AS OF
Taxpayer Bill of Rights.                       other information of a domestic                         3. The election is revoked. An election
                                               corporation or other entity for any tax year        can be revoked only with the consent of
    As a taxpayer, the corporation has
                                               covered by an election to be an S                   shareholders who, at the time the
rights that the IRS must abide by in its
                                               corporation.                                        revocation is made, hold more than 50%
dealings with the corporation. TAS can
help the corporation if:                                                                           of the number of issued and outstanding
• A problem is causing financial difficulty    How To Make the Election                            shares of stock (including nonvoting

        February 4, 2021
for the business;                              For details about the election, see Form            stock). The revocation can specify an
• The business is facing an immediate          2553, Election by a Small Business                  effective revocation date that is on or after
threat of adverse action; or                   Corporation, and the Instructions for Form          the day the revocation is filed. If no date is
• The corporation has tried repeatedly to      2553.                                               specified, the revocation is effective at the
contact the IRS but no one has                                                                     start of the tax year if the revocation is
responded, or the IRS hasn't responded         Who Must File                                       made on or before the 15th day of the 3rd
by the date promised.                                                                              month of that tax year. If no date is
                                               A corporation or other entity must file Form
                                                                                                   specified and the revocation is made after
   TAS has offices in every state, the         1120-S if (a) it elected to be an S
                                                                                                   the 15th day of the 3rd month of the tax
District of Columbia, and Puerto Rico.         corporation by filing Form 2553, (b) the
                                                                                                   year, the revocation is effective at the start
Local advocates' numbers are in their          IRS accepted the election, and (c) the
                                                                                                   of the next tax year.
local directories and at                       election remains in effect. After filing Form The                  2553, you should have received                          To revoke the election, the corporation
corporation can also call TAS at               confirmation that Form 2553 was                     must file a statement with the appropriate
1-877-777-4778.                                accepted. If you didn't receive notification        service center listed under Where To File
                                               of acceptance or nonacceptance of the               in the Instructions for Form 2553. In the
    TAS also works to resolve large-scale      election within 2 months of filing Form             statement, the corporation must notify the
or systemic problems that affect many          2553 (5 months if you checked box Q1 to             IRS that it is revoking its election to be an
taxpayers. If the corporation knows of one     ask for a letter ruling), please follow up by       S corporation. The statement must be
of these broad issues, please report it to     calling 1-800-829-4933. Don't file Form             signed by each shareholder who consents
TAS through the Systemic Advocacy              1120-S for any tax year before the year             to the revocation and contain the
Management System at             the election takes effect.                          information required by Regulations
                                               Relief for late elections. If you haven't           section 1.1362-6(a)(3).
  For more information, go to
Advocate.                                      filed Form 2553, or didn't file Form 2553               A revocation can be rescinded before it
                                               on time, you may be entitled to relief for a        takes effect. See Regulations section
                                                                                                   1.1362-6(a)(4) for details.
Direct Deposit of Refund                       late-filed election to be an S corporation.
                                               See the Instructions for Form 2553 for
To request a direct deposit of the                                                                     For rules on allocating income and
                                               details.                                            deductions between an S corporation's
corporation's income tax refund into an
account at a U.S. bank or other financial                                                          short year and a C corporation's short year
institution, attach Form 8050, Direct          Termination of Election                             and other special rules that apply when an
Deposit of Corporate Tax Refund. See the       Once the election is made, it stays in              election is terminated, see section 1362(e)
instructions for line 27.                      effect until it is terminated. If the election is   and Regulations section 1.1362-3.
                                               terminated, the corporation (or a                       If an election was terminated under (1)
How To Get Forms                               successor corporation) can make another
                                               election on Form 2553 only with IRS
                                                                                                   or (2) above and the corporation believes
                                                                                                   the termination was inadvertent, the
and Publications                               consent for any tax year before the fifth tax       corporation can ask for permission from
Internet. You can access the IRS website       year after the first tax year in which the          the IRS to continue to be treated as an S
24 hours a day, 7 days a week, at      termination took effect. See Regulations            corporation. See Regulations section
to:                                            section 1.1362-5 for details.                       1.1362-4 for the specific requirements that
• Download forms, instructions, and                An election terminates automatically in         must be met to qualify for inadvertent
publications;                                  any of the following cases.                         termination relief.
• Order IRS products online;
• Research your tax questions online;              1. The corporation is no longer a small
                                               business corporation as defined in section
                                                                                                   Electronic Filing
• Search publications online by topic or       1361(b). This kind of termination of an             S Corporations can generally
keyword;                                                                                           electronically file (e-file) Form 1120-S,
                                               election is effective as of the day the
• View Internal Revenue Bulletins (IRBs)       corporation no longer meets the definition          related forms, schedules, statements, and
published in recent years; and                                                                     attachments; Form 7004 (automatic
                                               of a small business corporation. Attach to
• Sign up to receive local and national tax    Form 1120-S for the final year of the S             extension of time to file); and Forms 940,
news by email.                                                                                     941, and 944 (employment tax returns).
                                               corporation a statement notifying the IRS
Tax forms and publications. The                of the termination and the date it occurred.        Form 1099 and other information returns
corporation can download or print all of the                                                       can also be electronically filed. The option
                                                   2. For each of 3 consecutive tax                to e-file doesn't, however, apply to certain
forms and publications it may need on          years, the corporation (a) has Otherwise, the                                                                  returns.
                                               accumulated earnings and profits (AE&P),
corporation can go to                 and (b) derives more than 25% of its gross             Certain corporations with total assets of
OrderForms to place an order and have                                                              $10 million or more that file at least 250

                                                                     -2-                               Instructions for Form 1120-S (2020)
• Any other corporate officer (such as tax
Where To File                                                                                     officer) authorized to sign.
File the corporation's return at the applicable IRS address listed below.                            If a return is filed on behalf of a
                                                                                                  corporation by a receiver, trustee, or
                                  And the total assets at                                         assignee, the fiduciary must sign the
 If the corporation's             the end of the tax year                                         return, instead of the corporate officer.
 principal business, office,      (Form 1120-S, page 1,                                           Returns and forms signed by a receiver or
 or agency is located in:         item F) are:                 Use the following address:         trustee in bankruptcy on behalf of a

         DRAFT AS OF
                                                                                                  corporation must be accompanied by a
 Connecticut, Delaware,                                            Department of the Treasury     copy of the order or instructions of the
                                   Less than $10 million and
 District of Columbia, Georgia,                                 Internal Revenue Service Center   court authorizing signing of the return or
                                    Schedule M-3 isn't filed
 Illinois, Indiana, Kentucky,                                     Kansas City, MO 64999-0013      form.
 Maine, Maryland,
 Massachusetts, Michigan,                                                                            If an employee of the corporation
 New Hampshire, New Jersey,                                                                       completes Form 1120-S, the paid preparer

        February 4, 2021
 New York, North Carolina,           $10 million or more, or       Department of the Treasury     space should remain blank. Anyone who
 Ohio, Pennsylvania, Rhode         less than $10 million and    Internal Revenue Service Center   prepares Form 1120-S but doesn't charge
 Island, South Carolina,              Schedule M-3 is filed          Ogden, UT 84201-0013         the corporation shouldn't complete that
 Tennessee, Vermont, Virginia,                                                                    section. Generally, anyone who is paid to
 West Virginia, Wisconsin                                                                         prepare the return must sign it and fill in
 Alabama, Alaska, Arizona,
                                                                                                  the “Paid Preparer Use Only” area.
 Arkansas, California,                                                                                The paid preparer must complete the
 Colorado, Florida, Hawaii,                                                                       required preparer information and:
 Idaho, Iowa, Kansas,                                                                             • Sign the return in the space provided
 Louisiana, Minnesota,                                             Department of the Treasury     for the preparer's signature, and
 Mississippi, Missouri,                  Any amount             Internal Revenue Service Center   • Give a copy of the return to the
 Montana, Nebraska, Nevada,                                          Ogden, UT 84201-0013         taxpayer.
 New Mexico, North Dakota,
 Oklahoma, Oregon, South                                                                                  A paid preparer may sign original
 Dakota, Texas, Utah,                                                                              TIP or amended returns by rubber
 Washington, Wyoming                                                                                    stamp, mechanical device, or
                                                                                                  computer software program.
 A foreign country or U.S.                                      Internal Revenue Service Center
 possession                              Any amount                     P.O. Box 409101
                                                                        Ogden, UT 84409           Paid Preparer
                                                                                                  If the corporation wants to allow the IRS to
returns a year are required to e-file Form         IRS to meet the “timely mailing as timely      discuss its 2020 tax return with the paid
1120-S. See Regulations section                    filing” rule for tax returns. Go to            preparer who signed it, check the “Yes”
301.6037-2. However, these corporations   for the current list of            box in the signature area of the return.
can ask for a waiver of the electronic filing      designated services.                           This authorization applies only to the
requirements. See Notice 2010-13,                                                                 individual whose signature appears in the
2010-4 I.R.B. 327.                                    The PDS can tell you how to get written     “Paid Preparer Use Only” section of the
                                                   proof of the mailing date.                     return. It doesn't apply to the firm, if any,
  For more information, visit
                                                                                                  shown in that section.
Businesses.                                           For the IRS mailing address to use if
                                                   you are using PDS, go to                 If the “Yes” box is checked, the
When To File                                       PDSStreetAddresses.                            corporation is authorizing the IRS to call
Generally, an S corporation must file Form                                                        the paid preparer to answer any questions
                                                            Private delivery services can't       that may arise during the processing of its
1120-S by the 15th day of the 3rd month                     deliver items to P.O. boxes. You
after the end of its tax year. For calendar           !
                                                    CAUTION must use the U.S. Postal Service
                                                                                                  return. The corporation is also authorizing
year corporations, the due date is March                                                          the paid preparer to:
                                                   to mail any item to an IRS P.O. box            • Give the IRS any information that is
15, 2021. A corporation that has dissolved         address.
must generally file by the 15th day of the                                                        missing from the return;
3rd month after the date it dissolved.                                                            • Call the IRS for information about the
                                                   Extension of Time To File                      processing of the return or the status of
  If the due date falls on a Saturday,             File Form 7004, Application for Automatic      any related refund or payment(s); and
Sunday, or legal holiday, the corporation          Extension of Time To File Certain              • Respond to certain IRS notices about
can file on the next day that isn’t a              Business Income Tax, Information, and          math errors, offsets, and return
Saturday, Sunday, or legal holiday.                Other Returns, to ask for an extension of      preparation.
   If the S corporation election was               time to file. Generally, the corporation
                                                   must file Form 7004 by the regular due            The corporation isn't authorizing the
terminated during the tax year and the                                                            paid preparer to receive any refund check,
corporation reverts to a C corporation, file       date of the return. See the Instructions for
                                                   Form 7004.                                     bind the corporation to anything (including
Form 1120-S for the S corporation's short                                                         any additional tax liability), or otherwise
year by the due date (including                                                                   represent the corporation before the IRS.
extensions) of the C corporation's short
year return.                                       Who Must Sign                                     The authorization will automatically end
                                                   The return must be signed and dated by:        no later than the due date (excluding
Private Delivery Services                          • The president, vice president, treasurer,    extensions) for filing the corporation's
Corporations can use certain private               assistant treasurer, chief accounting          2021 tax return. If the corporation wants to
delivery services (PDS) designated by the          officer; or                                    expand the paid preparer's authorization

Instructions for Form 1120-S (2020)                                      -3-
or revoke the authorization before it ends,      the Electronic Federal Tax Payment                corporation may be able to lower the
see Pub. 947, Practice Before the IRS and        System (EFTPS). However, if the                   amount of one or more installments by
Power of Attorney.                               corporation doesn't want to use EFTPS, it         using the annualized income installment
                                                 can arrange for its tax professional,             method or adjusted seasonal installment
Assembling the Return                            financial institution, payroll service, or        method under section 6655(e).
To ensure that the corporation's tax return      other trusted third party to make deposits
                                                 on its behalf. Also, it may arrange for its           For a calendar year corporation, the
is correctly processed, attach all                                                                 payments are due for 2021 by April 15,
schedules and other forms after page 5 of        financial institution to submit a same-day
                                                 wire payment (discussed below) on its             June 15, September 15, and December
Form 1120-S in the following order.

         DRAFT AS OF
                                                 behalf. EFTPS is a free service provided          15. For a fiscal year corporation, they are
    1. Schedule N (Form 1120), Foreign           by the Department of the Treasury.                due by the 15th day of the 4th, 6th, 9th,
Operations of U.S. Corporations.                 Services provided by a tax professional,          and 12th months of the year. If any date
    2. Schedule D (Form 1120-S), Capital         financial institution, payroll service, or        falls on a Saturday, Sunday, or legal
Gains and Losses and Built-in Gains.             other third party may have a fee.                 holiday, the installment is due on the next
                                                                                                   day that isn't a Saturday, Sunday, or legal
    3. Form 8949, Sales and Other                    To get more information about EFTPS           holiday.

        February 4, 2021
Dispositions of Capital Assets.                  or to enroll in EFTPS, visit
    4. Form 8996, Qualified Opportunity or call 1-800-555-4477                 The corporation must make the
Fund.                                            (TTY/TDD 1-800-733-4829).                         payments using electronic funds transfers
                                                                                                   as described earlier.
    5. Form 8825, Rental Real Estate             Depositing on time. For any deposit
Income and Expenses of a Partnership or          made by EFTPS to be on time, the                      For information on penalties that may
an S Corporation.                                corporation must submit the deposit by 8          apply if the corporation fails to make
    6. Form 1125-A, Cost of Goods Sold.          p.m. Eastern time the day before the date         required payments, see the Instructions
                                                 the deposit is due. If the corporation uses       for Form 2220.
    7. Form 8050, Direct Deposit of              a third party to make deposits on its
Corporate Tax Refund.                            behalf, they may have different cutoff            Interest and Penalties
    8. Form 4136, Credit for Federal Tax         times.
Paid on Fuels.                                                                                               If the corporation receives a notice
                                                 Same-day wire payment option. If the                        about penalties after it files its
    9. Form 8941, Credit for Small               corporation fails to submit a deposit
                                                                                                    CAUTION return, send the IRS an
Employer Health Insurance Premiums.              transaction on EFTPS by 8 p.m. Eastern            explanation and we will determine if the
    10. Form 6252, Installment Sale              time the day before the date a deposit is         corporation meets reasonable-cause
Income.                                          due, it can still make its deposit on time by     criteria. Don't attach an explanation when
    11. Additional schedules in                  using the Federal Tax Collection Service          the corporation's return is filed.
alphabetical order.                              (FTCS). To use the same-day wire
                                                 payment method, the corporation will need         Interest. Interest is charged on taxes
    12. Additional forms in numerical order.     to make arrangements with its financial           paid late even if an extension of time to file
   Complete every applicable entry space         institution ahead of time regarding               is granted. Interest is also charged on
on Form 1120-S and Schedule K-1. Don't           availability, deadlines, and costs.               penalties imposed for failure to file,
enter “See Attached” or “Available Upon          Financial institutions may charge a fee for       negligence, fraud, substantial valuation
Request” instead of completing the entry         payment made this way. To learn more              misstatements, substantial
spaces. If more space is needed on the           about the information the corporation will        understatements of tax, and reportable
forms or schedules, attach separate              need to provide to its financial institution to   transaction understatements from the due
sheets using the same size and format as         make a same-day wire payment, go to               date (including extensions) to the date of
the printed forms.                                                   payment. The interest charge is figured at
                                                                                                   a rate determined under section 6621.
   If there are supporting statements and        Estimated Tax Payments                            Late filing of return. A penalty may be
attachments, arrange them in the same            Generally, the corporation must make
order as the schedules or forms they                                                               assessed if the return is filed after the due
                                                 installment payments of estimated tax for         date (including extensions) or the return
support and attach them last. Show the           the following taxes if the total of these
totals on the printed forms. Enter the                                                             doesn't show all the information required,
                                                 taxes is $500 or more: (a) the tax on             unless each failure is due to reasonable
corporation's name and EIN on each               built-in gains, (b) the excess net passive
supporting statement or attachment.                                                                cause. See Caution, earlier. For returns on
                                                 income tax, and (c) the investment credit         which no tax is due, the penalty is $210 for
                                                 recapture tax, each discussed later.              each month or part of a month (up to 12
Tax Payments                                         The amount of estimated tax required          months) the return is late or doesn't
Generally, the corporation must pay any          to be paid annually is the smaller of: (a)        include the required information, multiplied
tax due in full no later than the due date for   the total of the above taxes shown on the         by the total number of persons who were
filing its tax return (not including             return for the tax year (or if no return is       shareholders in the corporation during any
extensions). See the instructions for            filed, the total of these taxes for the year),    part of the corporation's tax year for which
line 25. If the due date falls on a Saturday,    or (b) the sum of (i) the investment credit       the return is due. If tax is due, the penalty
Sunday, or legal holiday, the payment is         recapture tax and the built-in gains tax          is the amount stated above plus 5% of the
due on the next day that isn't a Saturday,       shown on the return for the tax year (or if       unpaid tax for each month or part of a
Sunday, or legal holiday.                        no return is filed, the total of these taxes      month the return is late, up to a maximum
                                                 for the tax year), and (ii) any excess net        of 25% of the unpaid tax. The minimum
Electronic Deposit                               passive income tax shown on the                   penalty for a return that is more than 60
Requirement                                      corporation's return for the preceding tax        days late is the smaller of the tax due or
                                                 year. If the preceding tax year was less          $435.
Corporations must use electronic funds
transfers to make all federal tax deposits       than 12 months, the estimated tax must be         Late payment of tax. A corporation that
(such as deposits of employment, excise,         determined under (a).                             doesn't pay the tax when due generally
and corporate income tax). Generally,                The estimated tax is generally payable        may be penalized 1/2 of 1% of the unpaid
electronic funds transfers are made using        in four equal installments. However, the          tax for each month or part of a month the

                                                                      -4-                              Instructions for Form 1120-S (2020)
tax isn't paid, up to a maximum of 25% of         The following rules apply.                    • An ownership tax year.
the unpaid tax. The penalty won't be           • Generally, an S corporation can't use          • A tax year elected under section 444.
imposed if the corporation can show that       the cash method of accounting if it’s a tax      • A 52-53-week tax year that ends with
the failure to pay on time was due to          shelter (as defined in section 448(d)(3)).       reference to a year listed above.
reasonable cause. See Caution, earlier.        See section 448 for details.                     • Any other tax year (including a
Failure to furnish information timely.
                                                • A corporation must use an accrual             52-53-week tax year) for which the
                                               method for sales and purchases of                corporation establishes a business
For each failure to furnish Schedule K-1 to
                                               inventory items unless it is a small             purpose.
a shareholder when due and each failure
                                               business taxpayer (defined later). See the

        DRAFT AS OF
to include on Schedule K-1 all the                                                                 A new S corporation must use Form
                                               Form 1125-A instructions. If you are a
information required to be shown (or the                                                        2553 to elect a tax year. To later change
                                               small business taxpayer, you can adopt or
inclusion of incorrect information), a $280                                                     the corporation's tax year, see Form 1128,
                                               change your accounting method to
penalty may be imposed with respect to                                                          Application To Adopt, Change, or Retain a
                                               account for inventories (i) in the same
each Schedule K-1 for which a failure                                                           Tax Year, and its instructions (unless the
                                               manner as materials and supplies that are
occurs. If the requirement to report correct                                                    corporation is making an election under
                                               non-incidental, or (ii) to conform to the
information is intentionally disregarded,                                                       section 444, discussed next).

       February 4, 2021
                                               taxpayer’s treatment of inventories in an
each $280 penalty is increased to $560 or,
                                               applicable financial statement (as defined       Electing a tax year under section 444.
if greater, 10% of the aggregate amount of
                                               in section 451(b)(3)), or if the taxpayer        Under the provisions of section 444, an S
items required to be reported. See
                                               doesn’t have an applicable financial             corporation can elect to have a tax year
sections 6722 and 6724 for more
                                               statement, the method of accounting used         other than a required year, but only if the
                                               in the taxpayer’s books and records              deferral period of the tax year isn't longer
    The penalty won't be imposed if the        prepared in accordance with the                  than the shorter of 3 months or the deferral
corporation can show that not furnishing       taxpayer’s accounting procedures.                period of the tax year being changed. This
information timely was due to reasonable       Generally, IRS consent is required for           election is made by filing Form 8716,
cause. See Caution, earlier.                   changes in accounting methods. See Rev.          Election To Have a Tax Year Other Than a
Trust fund recovery penalty. This              Proc. 2018-40 for the procedures by which        Required Tax Year.
penalty may apply if certain excise,           a small business taxpayer may obtain
                                                                                                    An S corporation may not make or
income, social security, and Medicare          automatic consent to change its method of
                                                                                                continue an election under section 444 if it
taxes that must be collected or withheld       accounting to reflect the statutory changes
                                                                                                is a member of a tiered structure, other
aren't collected or withheld, or these taxes   made in this area. Also, see Change in
                                                                                                than a tiered structure that consists
aren't paid. These taxes are generally         accounting method, later.
                                                                                                entirely of partnerships and S corporations
reported on:                                    • Special rules apply to long-term              that have the same tax year. For the S
 • Form 720, Quarterly Federal Excise          contracts. See section 460.
                                                                                                corporation to have a section 444 election
Tax Return;                                     • Generally, dealers in securities must         in effect, it must make the payments
 • Form 941, Employer's QUARTERLY              use the mark-to-market accounting
                                                                                                required by section 7519. See Form 8752,
Federal Tax Return;                            method. Dealers in commodities and
                                                                                                Required Payment or Refund Under
 • Form 943, Employer's Annual Federal         traders in securities and commodities can
                                                                                                Section 7519.
Tax Return for Agricultural Employees;         elect to use the mark-to-market
                                               accounting method. See section 475.                  A section 444 election ends if an S
 • Form 944, Employer's ANNUAL                                                                  corporation:
Federal Tax Return; or                         Small business taxpayer. A small
 • Form 945, Annual Return of Withheld                                                           • Changes its accounting period to a
                                               business taxpayer is a taxpayer that (a)         calendar year or some other permitted
Federal Income Tax.                            has average annual gross receipts of $26         year,
    The trust fund recovery penalty may be     million or less for the 3 prior tax years, and    • Is penalized for willfully failing to comply
imposed on all persons who are                 (b) isn’t a tax shelter (as defined in section   with the requirements of section 7519, or
determined by the IRS to have been             448(d)(3)).                                       • Terminates its S election (unless it
responsible for collecting, accounting for,    Change in accounting method.                     immediately becomes a personal service
or paying over these taxes, and who acted      Generally, the corporation must get IRS          corporation).
willfully in not doing so. The penalty is      consent to change either an overall                  If the termination results in a short tax
equal to the full amount of the unpaid trust   method of accounting or the accounting           year, enter at the top of the first page of
fund tax. See the Instructions for Form        treatment of any material item for income        Form 1120-S for the short tax year,
720, Pub. 15 (Circular E), Employer's Tax      tax purposes. To obtain consent, the             “SECTION 444 ELECTION
Guide, or Pub. 51 (Circular A), Agricultural   corporation must generally file Form 3115,       TERMINATED.”
Employer's Tax Guide, for details,             Application for Change in Accounting
including the definition of responsible
                                               Method, during the tax year for which the        Rounding Off to
                                               change is requested. See the Instructions
Other penalties. Other penalties can be        for Form 3115 and Pub. 538, Accounting           Whole Dollars
imposed for negligence, substantial            Periods and Methods, for more                    The corporation may enter decimal points
understatement of tax, reportable              information and exceptions.                      and cents when completing its return.
transaction understatements, and fraud.                                                         However, the corporation should round off
See sections 6662, 6662A, and 6663.            Accounting Period                                cents to whole dollars on its return, forms,
                                                                                                and schedules to make completing its
                                               A corporation must figure its income on
Accounting Methods                             the basis of a tax year. A tax year is the
                                                                                                return easier. The corporation must either
                                                                                                round off all amounts on its return to whole
Figure income using the method of              annual accounting period a corporation
                                                                                                dollars, or use cents for all amounts. To
accounting regularly used in keeping the       uses to keep its records and report its
                                                                                                round, drop amounts under 50 cents and
corporation's books and records. The           income and expenses.
                                                                                                increase amounts from 50 to 99 cents to
method used must clearly reflect income.                                                        the next dollar. For example, $8.40 rounds
Permissible methods include cash,                  An S corporation must use one of the
                                               following tax years.                             to $8 and $8.50 rounds to $9.
accrual, or any other method authorized
by the Internal Revenue Code.                  • A tax year ending December 31.                     If two or more amounts must be added
                                               • A natural business year.                       to figure the amount to enter on a line,

Instructions for Form 1120-S (2020)                                 -5-
include cents when adding the amounts           published guidance as a listed                   basis in the stock received instead of
and round off only the total.                   transaction.                                     reducing the acquiring corporation's basis
                                                    2. Any transaction offered under             in the property transferred. Once made,
Recordkeeping                                   conditions of confidentiality for which the      the election is irrevocable. For more
Keep the corporation's records for as long      corporation (or a related party) paid an         information, see section 362(e)(2) and
as they may be needed for the                   advisor a fee of at least $50,000.               Regulations section 1.362-4. If an election
administration of any provision of the                                                           is made, a statement must be filed in
                                                    3. Certain transactions for which the        accordance with Regulations section
Internal Revenue Code. Usually, records         corporation (or a related party) has
that support an item of income, deduction,                                                       1.362-4(d)(3).

         DRAFT AS OF
                                                contractual protection against
or credit on the return must be kept for 3      disallowance of the tax benefits.                Regulations section 1.1411-10(g) (sec-
years from the date each shareholder's                                                           tion 1411 election with respect to
                                                    4. Certain transactions resulting in a
return is due or filed, whichever is later.                                                      CFCs and QEFs). A corporation that
                                                loss of at least $2 million in any single year
Keep records that verify the corporation's                                                       directly or indirectly owns stock of a
                                                or $4 million in any combination of years.
basis in property for as long as they are                                                        controlled foreign corporation (CFC)
needed to figure the basis of the original or       5. Any transaction identified by the         (within the meaning of section 953(c)(1)

        February 4, 2021
replacement property.                           IRS by notice, regulation, or other              (B) or section 957(a)) or a passive foreign
                                                published guidance as a “transaction of          investment company (within the meaning
    The corporation should keep copies of       interest.”                                       of section 1297(a)) that the corporation
all filed returns. They help in preparing
                                                    For more information, see Regulations        treats as a qualified electing fund (QEF)
future and amended returns.
                                                section 1.6011-4. Also see the Instructions      under section 1293 may make the election
                                                                                                 provided in Regulations section
Amended Return                                  for Form 8886.
                                                                                                 1.1411-10(g). The election must be made
To correct a previously filed Form 1120-S,          Penalties. The corporation may have          no later than the first tax year beginning
file an amended Form 1120-S and check           to pay a penalty if it is required to disclose   after 2013 during which the corporation: (i)
box H(4) on page 1. Attach a statement          a reportable transaction under section           includes an amount in gross income for
that identifies the line number of each         6011 and fails to properly complete and          chapter 1 purposes under section 951(a)
amended item, the corrected amount or           file Form 8886. Penalties may also apply         or section 1293(a) for the CFC or QEF,
treatment of the item, and an explanation       under section 6707A if the corporation           and (ii) has a direct or indirect owner that
of the reasons for each change.                 fails to file Form 8886 with its corporate       is subject to tax under section 1411 or
                                                return, fails to provide a copy of Form          would have been if the election were
    If the income, deductions, credits, or      8886 to the Office of Tax Shelter Analysis       made. This election must be made on an
other information provided to any               (OTSA), or files a form that fails to include    entity-by-entity basis, and applies only to
shareholder on Schedule K-1 is incorrect,       all the information required (or includes        the particular CFCs and QEFs for which
file an amended Schedule K-1 (Form              incorrect information). Other penalties,         an election is made. In general, for
1120-S) for that shareholder with the           such as an accuracy-related penalty under        purposes of section 1411, if an election is
amended Form 1120-S. Also give a copy           section 6662A, may also apply. See the           in effect for a CFC or QEF, the amounts
of the amended Schedule K-1 to that             Instructions for Form 8886 for details on        included in income under section 951 and
shareholder. Check the “Amended K-1”            these and other penalties.                       section 1293 derived from the CFC or
box at the top of the Schedule K-1 to                                                            QEF are included in net investment
indicate that it is an amended                  Reportable transactions by material
                                                advisors. Material advisors to any               income, and distributions described in
Schedule K-1.                                                                                    section 959(d) or section 1293(c) are
                                                reportable transaction must disclose
   A change to the corporation's federal        certain information about the reportable         excluded from net investment income. An
return may affect its state return. This        transaction by filing Form 8918, Material        election that is made under Regulations
includes changes made as the result of an       Advisor Disclosure Statement, with the           section 1.1411-10(g) can't be revoked. For
IRS examination. For more information,          IRS. For details, see the Instructions for       more information regarding this election,
contact the state tax agency for the            Form 8918.                                       see Regulations section 1.1411-10(g).
state(s) in which the corporation's return                                                           The election must be made in a
was filed.                                      Transfers to a corporation controlled            statement that is filed with the
                                                by the transferor. Every significant             corporation's original or amended return
                                                transferor (as defined in Regulations
Other Forms and                                 section 1.351-3(d)) that receives stock of
                                                                                                 for the tax year in which the election is
Statements That May Be                          a corporation in exchange for property in a
                                                                                                 made. An election can be made on an
                                                                                                 amended return only if the tax year for
Required                                        nonrecognition event must include the            which the election is made, and all tax
                                                statement required by Regulations section        years affected by the election, aren't
Reportable transaction disclosure               1.351-3(a) on or with the transferor's tax
statement. Disclose information for each                                                         closed by the period of limitations on
                                                return for the tax year of the exchange.         assessments under section 6501. The
reportable transaction in which the             The transferee corporation must include
corporation participated. Form 8886,                                                             statement must include:
                                                the statement required by Regulations             • The name and EIN of the corporation
Reportable Transaction Disclosure               section 1.351-3(b) on or with its return for
Statement, must be filed for each tax year                                                       making the election;
                                                the tax year of the exchange, unless all the      • A declaration that all of its shareholders
the corporation participated in the             required information is included in any
transaction. The corporation may have to                                                         consent to each election made in the
                                                statement(s) provided by a significant           statement;
pay a penalty if it is required to file Form    transferor that is attached to the same
8886 and doesn't do so. The following are                                                         • A declaration that the corporation elects
                                                return for the same section 351 exchange.        under Regulations section 1.1411-10(g) to
reportable transactions.
                                                Election to reduce basis under section           apply the rules in Regulations section
   1. Any listed transaction that is, a         362(e)(2)(C). If property is transferred to      1.1411-10(g) to the CFCs and QEFs
transaction that is the same as or              a corporation subject to section 362(e)(2),      identified in the statement; and
substantially similar to one of the types of    the transferor and the acquiring                  • The following information for each CFC
transactions that the IRS has determined        corporation may elect, under section             and QEF for which an election is made: (i)
to be a tax avoidance transaction and           362(e)(2)(C), to reduce the transferor's         the name of the CFC or QEF; and (ii)
identified by notice, regulation, or other

                                                                     -6-                            Instructions for Form 1120-S (2020)
either the EIN of the CFC or QEF, or, if the    For more information, see the Instructions         3. Leasing section 1245 property,
CFC or QEF doesn't have an EIN, the             for Form 8975.                                  including personal property and certain
reference ID number of the CFC or QEF.                                                          other tangible property that is depreciable
                                                Statements and forms required of S
     In addition, for each CFC or QEF held                                                      or amortizable.
                                                corporations electing to be treated as
by the corporation for which an election        an entity under Notice 2020-69. If the             4. Exploring for, or exploiting, oil and
under Regulations section 1.1411-10(g)          corporation is electing entity treatment for    gas.
has already been made by the                    purposes of section 951A under Notice              5. Exploring for, or exploiting,
corporation, the statement should include:      2020-69 for the first tax year ending on or     geothermal deposits (for wells started
(i) the name of the CFC or QEF, and (ii)

         DRAFT AS OF
                                                after September 1, 2020, the corporation        after September 1978).
either the EIN of the CFC or QEF, or, if the    must attach a statement to its timely filed
CFC or QEF doesn't have an EIN, the                                                                6. Any other activity not included in (1)
                                                (including extensions) original return for      through (5) that is carried on as a trade or
reference ID number of the CFC or QEF.          that year. For tax years of the corporation     business or for the production of income.
Annual information reporting by speci-          ending before September 1, 2020, and
fied domestic entities under section            after June 21, 2019, the corporation and        Aggregation of Activities
                                                all of its shareholders may elect for the

        February 4, 2021
6038D. Certain domestic corporations                                                            Activities described in (6) under Activities
that are formed or availed of to hold           corporation to be treated as an entity for
                                                                                                Covered by the At-Risk Rules, earlier, that
specified foreign financial assets              purposes of section 951A by attaching a
                                                                                                constitute a trade or business are treated
(“specified domestic entities”) must file       statement to their timely filed (including
                                                                                                as one activity if:
Form 8938, Statement of Specified               extensions) original returns or on
                                                amended returns filed by March 15, 2021.
                                                                                                • You actively participate in the
Foreign Financial Assets. Form 8938 must                                                        management of the trade or business, or
be filed each year the value of the             In either case, the election statement
                                                must: (i) identify the election for the
                                                                                                • The trade or business is carried on by a
corporation's specified foreign financial                                                       partnership or S corporation and 65% or
assets meets or exceeds the reporting           corporation to be treated as an entity for
                                                                                                more of its losses for the tax year are
threshold. For more information on              purposes of section 951A pursuant to the
                                                                                                allocable to persons who actively
domestic corporations that are specified        Notice; (ii) include the amount of the
                                                                                                participate in the management of the trade
domestic entities and the types of foreign      corporation's transition AE&P (as
                                                                                                or business.
financial assets that must be reported, see     described in section 3.02(3) of the Notice);
the Instructions for Form 8938, generally,      and (iii) be signed by a person authorized         Similar rules apply to activities
and in particular, Who Must File, Specified     to sign the return required to be filed under   described in (1) through (5) of that earlier
Domestic Entity, Reporting Thresholds,          section 6037. The corporation must also         discussion. For more information, see
Specified Foreign Financial Assets,             prepare Form 1120-S, Schedules K-1              Pub. 925. If you aggregate your activities
Interests in Specified Foreign Financial        (Form 1120-S), and Form 8892, U.S.              under these rules for section 465
Assets, Assets Not Required To Be               Shareholder Calculation of Global               purposes, check the appropriate box in
Reported, and Exceptions to Reporting.          Intangible Low-Taxed Income (GILTI)             item J.
                                                consistent with the corporation's election
    In addition, a domestic corporation         for shareholders to comply with section         At-Risk Activity Reporting
required to file Form 8938 with its Form
1120-S for the tax year should check
                                                6037(c).                                        Requirements
“Yes” to Schedule N (Form 1120),                Other forms and statements. See Pub.            If the corporate items of income, loss, or
question 8, and also include that schedule      542, Corporations, for a list of other forms    deduction reported on Schedule K-1 are
with its Form 1120-S.                           and statements a corporation may need to        from more than one activity covered by the
                                                file in addition to the forms and statements    at-risk rules, the corporation must report
Certification as a qualified opportunity        discussed throughout these instructions.        information separately for each activity.
fund. If the corporation is organized to
invest in qualified opportunity zone
property, it must attach Form 8996 to           At-Risk Limitations                                The following information must be
                                                                                                provided on an attachment to
Form 1120-S to self-certify as a QOF. In        In general, section 465 limits the amount       Schedule K-1 for each activity.
addition, the corporation files Form 8996       of deductible net losses shareholders can
                                                                                                 • A statement that the information is a
annually to report that the QOF meets the       claim from certain activities. The at-risk      breakdown of the items of income, loss, or
investment standard of section 1400Z-2 or       limitations don't apply to the corporation,     deduction by at-risk activity.
to figure the penalty if it fails to meet the   but instead apply to each shareholder's
                                                                                                 • The identity of the at-risk activity; the
investment standard. The corporation            share of net losses attributable to each        items of income, loss, or deduction for the
must also complete line 15 of Schedule B.       activity. Because the treatment of each         activity; other items of income, loss, or
For more information, see the Instructions      shareholder's share of corporate net            deduction; and any other information that
for Form 8996.                                  losses depends on the nature of the             relates to the activity (that is, distributions,
                                                activity that generated it, the corporation     shareholder loans, etc.).
Qualified opportunity fund investment.          must report the items of income, loss, and
If the corporation deferred a capital gain in   deduction separately for each activity. See
a qualified opportunity fund (QOF), the         Pub. 925, Passive Activity and At-Risk          Passive Activity
corporation must file its return with           Rules, for additional information.              Limitations
Schedule D (Form 1120-S), Form 8949,                                                            In general, section 469 limits the amount
and Form 8997 attached. The corporation         Activities Covered by the                       of losses, deductions, and credits that
will need to file Form 8997 annually until it   At-Risk Rules                                   shareholders can claim from “passive
disposes of the investment. See the                                                             activities.” The passive activity limitations
                                                If the S corporation is involved in one of
instructions for Form 8997 for details.                                                         don't apply to the corporation. Instead,
                                                the following activities as a trade or
Form 8975. Certain U.S. persons that            business or for the production of income,       they apply to each shareholder's share of
are the ultimate parent entity of a U.S.        the shareholder may be subject to the           any income or loss and credit attributable
multinational enterprise group with annual      at-risk rules.                                  to a passive activity. Because the
revenue for the preceding reporting period           1. Holding, producing, or distributing     treatment of each shareholder's share of
of $850 million or more are required to file    motion picture films or video tapes.            corporate income or loss and credit
Form 8975, Country-by-Country Report.                                                           depends on the nature of the activity that
                                                     2. Farming.                                generated it, the corporation must report

Instructions for Form 1120-S (2020)                                  -7-
income or loss and credits separately for              b. The shareholder performed more            ordinary business income (loss) is
each activity.                                     than 750 hours of services in real property      reported on page 1 of Form 1120-S, the
                                                   trades or businesses in which he or she          specific income and deductions from each
    The following instructions and the
                                                   materially participated.                         separate trade or business activity must
instructions for Schedules K and K-1,
                                                       For purposes of this rule, each interest     be reported on attachments to Form
later, explain the applicable passive
                                                   in rental real estate is a separate activity     1120-S. Similarly, while each
activity limitation rules and specify the type
                                                   unless the shareholder elects to treat all       shareholder's allocable share of the
of information the corporation must
                                                   interests in rental real estate as one           corporation's ordinary business income
provide to its shareholders for each
                                                   activity.                                        (loss) is reported in box 1 of Schedule K-1,

         DRAFT AS OF
activity. If the corporation had more than
                                                                                                    each shareholder's allocable share of the
one activity, it must report information for           If the shareholder is married filing         income and deductions from each trade or
each activity on an attachment to                  jointly, either the shareholder or his or her    business activity must be reported on
Schedules K and K-1.                               spouse must separately meet both of the          statements attached to each
    Generally, passive activities include (a)      above conditions, without taking into            Schedule K-1. See Passive Activity
activities that involve the conduct of a           account services performed by the other          Reporting Requirements, later, for more

        February 4, 2021
trade or business if the shareholder                                                                information.
doesn't materially participate in the                  A real property trade or business is any
activity, and (b) all rental activities (defined   real property development,                       Rental Activities
later) regardless of the shareholder's             redevelopment, construction,                     Generally, except as noted below, if the
participation. For exceptions, see                 reconstruction, acquisition, conversion,         gross income from an activity consists of
Activities That Are Not Passive Activities,        rental, operation, management, leasing, or       amounts paid principally for the use of real
later. The level of each shareholder's             brokerage trade or business. Services the        or personal tangible property held by the
participation in an activity must be               shareholder performed as an employee             corporation, the activity is a rental activity.
determined by the shareholder.                     aren't treated as performed in a real
                                                   property trade or business unless he or              There are several exceptions to this
   The passive activity rules provide that         she owned more than 5% of the stock in           general rule. Under these exceptions, an
losses and credits from passive activities         the employer.                                    activity involving the use of real or
can generally be applied only against                                                               personal tangible property isn't a rental
income and tax (respectively) from                     3. The rental of a dwelling unit used        activity if any of the following apply.
passive activities. Thus, passive losses           by a shareholder for personal purposes            • The average period of customer use
can't be applied against income from               during the year for more than the greater        (defined later) for such property is 7 days
salaries, wages, professional fees, or a           of 14 days or 10% of the number of days          or less.
business in which the shareholder                  that the residence was rented at fair rental      • The average period of customer use for
materially participates or against “portfolio      value.                                           such property is 30 days or less and
income” (defined later). Passive credits               4. An activity of trading personal           significant personal services (defined
can't be applied against the tax related to        property for the account of owners of            later) are provided by or on behalf of the
any of these types of income.                      interests in the activity. For purposes of       corporation.
   Special rules require that net income           this rule, personal property means                • Extraordinary personal services
                                                   property that is actively traded, such as        (defined later) are provided by or on behalf
from certain activities that would otherwise
                                                   stocks, bonds, and other securities. See         of the corporation.
be treated as passive income must be
recharacterized as nonpassive income for           Temporary Regulations section                     • The rental of such property is treated as
                                                   1.469-1T(e)(6).                                  incidental to a nonrental activity of the
purposes of the passive activity
                                                                                                    corporation under Regulations section
limitations. See Recharacterization of                     The section 469(c)(3) exception          1.469-1(e)(3)(vi).
Passive Income, later.                              TIP for a working interest in oil and gas        • The corporation customarily makes the
    To allow each shareholder to correctly                  properties doesn't apply to an S        property available during defined business
apply the passive activity limitations, the        corporation because state law generally          hours for nonexclusive use by various
corporation must report income or loss             limits the liability of shareholders.            customers.
and credits separately by activity for each                                                          • The corporation provides property for
of the following.                                  Trade or Business Activities                     use in a nonrental activity of a partnership
• Trade or business activities.                    A trade or business activity is an activity      in its capacity as an owner of an interest in
• Rental real estate activities.                   (other than a rental activity or an activity     such partnership. Whether the corporation
• Rental activities other than rental real         treated as incidental to an activity of          provides property used in an activity of a
estate.                                            holding property for investment) that:           partnership in the corporation's capacity
• Portfolio income.                                   1. Involves the conduct of a trade or         as an owner of an interest in the
                                                   business (within the meaning of section          partnership is determined on the basis of
Activities That Are Not Passive                                                                     all the facts and circumstances.
                                                      2. Is conducted in anticipation of               In addition, a guaranteed payment
The following aren't passive activities.           starting a trade or business, or                 described in section 707(c) is never
   1. Trade or business activities in                 3. Involves research or experimental          income from a rental activity.
which the shareholder materially                   expenditures deductible under section
participated for the tax year.                                                                      Average period of customer use.
                                                   174 (or that would be if you chose to            Figure the average period of customer use
   2. Any rental real estate activity in           deduct rather than capitalize them).             for a class of property by dividing the total
which the shareholder materially                                                                    number of days in all rental periods by the
participated if the shareholder met both of           If the shareholder doesn't materially
                                                   participate in the activity, a trade or          number of rentals during the tax year. If
the following conditions for the tax year.                                                          the activity involves renting more than one
                                                   business activity of the corporation is a
   a. More than half of the personal               passive activity for the shareholder.            class of property, multiply the average
services the shareholder performed in                                                               period of customer use of each class by
trades or businesses were performed in                Each shareholder must determine if he         the ratio of the gross rental income from
real property trades or businesses in              or she materially participated in an activity.   that class to the activity's total gross rental
which he or she materially participated.           As a result, while the corporation's             income. The activity's average period of

                                                                        -8-                             Instructions for Form 1120-S (2020)
You can also read