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Cat. No. 11515K

ContentsVoluntary Contributions To Reduce the

Public Debt 1

Changes To Note 1

General Instructions 2

Purpose of Form 2

Who Must File 2

Termination of Election 2

When To File 2

Period Covered 2

Where To File 2

Who Must Sign 2

Accounting Methods 3

Accounting Periods 3

Rounding Off to Whole Dollars 3

Recordkeeping 3

Depositary Method of Tax Payment 3

Estimated Tax 3

Interest and Penalties 3

Unresolved Tax Problems 4

Other Forms, Returns, Schedules, andStatements That May Be Required 4

Attachments 5

Amended Return 5

Passive Activity Limitations 5

Specific Instructions 8

General Information 8

Income 9

Deductions 10

Schedule A - Cost of Goods Sold 13

Schedule B - Other Information 13

Designation of Tax MattersPerson (TMP) 14

General Instructions for Schedules Kand K-1 14

Purpose of Schedules 14

Substitute Forms 14

Shareholders Pro Rata Share Items 14

Specific Instructions(Schedule K Only) 15

Specific Instructions(Schedule K-1 Only) 15

General Information 15

Specific Items 15

Specific Instructions (Schedules K andK-1, Except as Noted) 15

Income (Loss) 15

Deductions 16

Investment Interest 17

Credits 17

Adjustments and Tax Preference Items 18

Foreign Taxes 19

Other 20

Supplemental Information 20

Specific Instructions 21

Schedule L - Balance Sheets 21

Schedule M-1 - Reconciliation ofIncome (Loss) per Books With Income(Loss) per Return 21

Schedule M-2 - Analysis ofAccumulated Adjustments Account,Other Adjustments Account, andShareholders Undistributed TaxableIncome Previously Taxed 21

Codes for Principal Business Activity 23

Voluntary Contributions ToReduce the Public DebtQuite often, inquiries are received abouthow to make voluntary contributions toreduce the public debt. A corporation maycontribute by enclosing with the tax returna check made payable to Bureau of thePublic Debt.

Changes To Note

Unemployment CompensationAmendments of 1992

For tax years beginning after June 30,1992, Public Law 102-318 increased the

percentage of the current years taxesrequired to be paid in installments duringthe tax year to 97%. See Estimated Taxon page 3 for details.

Energy Policy Act of 1992

The Energy Policy Act of 1992 madeseveral changes that affect corporations.Some of the changes are highlightedbelow. These changes affect fiscal1992-93 filers. Calendar year filers are notimpacted until 1993.

Deduction for clean-fuel vehicles andcertain refueling property.New section179A allows a deduction for part of thecost of qualified clean-fuel vehicle property

and qualified clean-fuel vehicle refuelingproperty placed in service after June 30,1993.

Qualified clean-fuel vehicle propertyincludes:

1. The part of the basis of a new vehicledesigned to use a clean-burning fuel thatis attributable to an engine that uses thatfuel (and its related fuel storage, delivery,and exhaust systems), and

2. New retrofit parts and componentsused to convert a motor vehicle to operateon a clean-burning fuel.

Clean-burning fuels are natural gas,liquefied natural gas, liquefied petroleum(LP) gas, hydrogen, electricity, and fuels

containing at least 85% alcohol (includingmethanol and ethanol) or ether.

The deduction for most motor vehicles islimited to $2,000 per vehicle. A motorvehicle is any vehicle with at least 4wheels that is made for use on publicroads. The limit is $5,000 per vehicle fortrucks and vans with a gross vehicleweight (GVW) over 10,000 pounds but notover 26,000 pounds. For trucks and vanswith a GVW over 26,000 pounds andbuses that seat at least 20 adult

Instructions for Form 1120SU.S. Income Tax Return for an S Corporation(Section references are to the Internal Revenue Code unless otherwise noted.)

Paperwork Reduction Act NoticeWe ask for the information on these forms to carry out the Internal Revenue laws of theUnited States. You are required to give us the information. We need it to ensure that youare complying with these laws and to allow us to figure and collect the right amount oftax.

The time needed to complete and file the following forms will vary depending onindividual circumstances. The estimated average times are:

Copying,assembling, andsending the form

to the IRSPreparing the

formLearning about the law

or the formForm Recordkeeping

34 hr., 27 min.1120S 63 hr., 8 min. 4 hr., 1 min.18 hr., 38 min.

9 hr., 13 min. 1 hr., 20 min.9 hr., 5 min.Sch. D (1120S) 4 hr., 13 min.

14 hr., 7 min. 1 hr., 4 min.14 hr., 35 min.Sch. K-1 (1120S) 9 hr., 43 min.

If you have comments concerning the accuracy of these time estimates or suggestionsfor making these forms more simple, we would be happy to hear from you. You can write

to both the Internal Revenue Service, Washington, DC 20224, Attention: IRS ReportsClearance Officer, T:FP; and the Office of Management and Budget, PaperworkReduction Project (1545-0130), Washington, DC 20503. DO NOT send the tax forms toeither of these offices. Instead, see Where To File on page 2.

Department of the TreasuryInternal Revenue Service

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passengers, the limit is $50,000 pervehicle.

Qualified clean-fuel vehicle refuelingproperty is new depreciable property usedto store or dispense clean-burning fuels (orto recharge an electric vehicle) that islocated at the point where the fuel isdelivered into the tank of the clean-fuelvehicle (or where the vehicle is recharged).The deduction for this property is limited to$100,000 per location.

For more details, see section 179A.

Qualified electric vehicle credit.Newsection 30 provides a credit equal to 10%of the cost of a qualified new electricvehicle, or $4,000, whichever is less, foreach vehicle placed in service after June30, 1993. Vehicles qualifying for this creditare not eligible for the deduction forclean-fuel vehicles under section 179A.Get Form 8834, Qualified Electric VehicleCredit, for more details.

Renewable electricity productioncredit.New section 45 provides a creditequal to 1.5 cents per kilowatt hour forelectricity produced by the corporationusing closed-loop biomass and sold to anunrelated person. The facility from whichthe electricity is produced must have beenoriginally placed in service after 1992. GetForm 8835, Renewable ElectricityProduction Credit, for more details.

Schedules K and K-1

Schedules K and K-1 have beenexpanded to provide separate lines fortax-exempt interest income, othertax-exempt income, and nondeductibleexpenses. The addition of these lines toSchedule K-1 will make it easier for eachshareholder to figure the basis of his or herstock and debt the corporation owes tothe shareholder.

General InstructionsNote: In addition to the publications listedthroughout these instructions, you maywish to getPub. 334, Tax Guide for SmallBusiness; Pub. 535, Business Expenses;Pub. 550, Investment Income andExpenses;Pub. 556, Examination ofReturns, Appeal Rights, and Claims forRefund; andPub. 589, Tax Information onS Corporations.

These and other publications referencedthroughout these instructions may beobtained at most IRS offices. To orderpublications and forms, call our toll-freenumber 1-800-TAX-FORM(1-800-829-3676).

Purpose of FormForm 1120S is used to report the income,deductions, gains, losses, etc., of adomestic corporation that has filed Form2553, Election by a Small BusinessCorporation, to be treated as an Scorporation, and whose election is in effectfor the tax year.

Who Must FileA corporation must file Form 1120S if (a) itelected by filing Form 2553 to be treatedas an S corporation, (b) the IRS acceptedthe election, and (c) the election remains ineffect. Do not file Form 1120S until thecorporation has been notified by the IRSthat the election has been accepted.

Termination of ElectionOnce the election is made, it stays ineffect until it is terminated. During the 5years after the tax year the election hasbeen terminated, the corporation maymake another election on Form 2553 onlywith IRS consent. See section 1362(g).

An election terminates automatically inany of the following cases:

1. The corporation is no longer a smallbusiness corporation as defined in section1361(b). The termination of an election inthis manner is effective as of the day onwhich the corporation ceases to be a smallbusiness corporation. See sections1362(d)(2) and 1362(e) for moreinformation.

2. The corporation, for each of three

consecutive tax years, (a) has subchapterC earnings and profits and (b) derivesmore than 25% of its gross receipts frompassive investment income as defined insection 1362(d)(3)(D). The electionterminates on the first day of the first taxyear beginning after the third consecutivetax year.

The corporation must pay a tax for eachyear it has excess net passive income. Seethe instructions for line 22a for details onhow to figure the tax.

3. The election is revoked. An electionmay be revoked only if shareholders whocollectively own a majority of the stock inthe corporation on the day the revocation

is made consent to the revocation. Therevocation may specify an effectiverevocation date that is on or after the daythe revocation is made. If no date isspecified, the revocation is effective at thestart of a tax year if the revocation is madeon or before the 15th day of the 3rd monthof that tax year. If no date is specified andthe revocation is made after the 15th dayof the 3rd month of the tax year, therevocation is effective at the start of thenext tax year. See section 1362(d)(1) formore information.

When To FileIn general, file Form 1120S by the 15th day

of the 3rd month after the end of the taxyear.

Extension

Use Form 7004, Application for AutomaticExtension of Time To File CorporationIncome Tax Return, to request anautomatic 6-month extension of time to fileForm 1120S.

Period CoveredFile the 1992 return for calendar year 1992and fiscal years beginning in 1992 and

ending in 1993. If the return is for a fiscalyear, fill in the tax year space at the top ofthe form.

Note: The 1992 Form 1120S may also beused if(a)the corporation has a tax year ofless than 12 months that begins and endsin 1993 and (b)the 1993 Form 1120S isnot available by the time the corporation isrequired to file its return. However, thecorporation must show its 1993 tax year onthe 1992 Form 1120S and incorporate anytax law changes that are effective for taxyears beginning after December 31, 1992.

Where To FileUse the preaddressed envelope. If you donot use the envelope, file your return at theapplicable IRS address listed below.

If the corporationsprincipal business, office,

or agency is located in

Use the followingInternal RevenueService Center

address

New Jersey, New York(New York City andcounties of Nassau,Rockland, Suffolk, andWestchester)

Holtsville, NY 00501

New York (all othercounties), Connecticut,Maine, Massachusetts, NewHampshire, Rhode Island,Vermont

Andover, MA 05501

Florida, Georgia, SouthCarolina

Atlanta, GA 39901

Indiana, Kentucky,Michigan, Ohio, WestVirginia

Cincinnati, OH 45999

Kansas, New Mexico,Oklahoma, Texas

Austin, TX 73301

Alaska, Arizona, California(counties of Alpine, Amador,Butte, Calaveras, Colusa,Contra Costa, Del Norte, El

Dorado, Glenn, Humboldt,Lake, Lassen, Marin,Mendocino, Modoc, Napa,Nevada, Placer, Plumas,Sacramento, San Joaquin,Shasta, Sierra, Siskiyou,Solano, Sonoma, Sutter,Tehama, Trinity, Yolo, andYuba), Colorado, Idaho,Montana, Nebraska,Nevada, North Dakota,Oregon, South Dakota,Utah, Washington,Wyoming

Ogden, UT 84201

California (all othercounties), Hawaii

Fresno, CA 93888

Illinois, Iowa, Minnesota,Missouri, Wisconsin

Kansas City, MO 64999

Alabama, Arkansas,Louisiana, Mississippi,North Carolina, Tennessee

Memphis, TN 37501

Delaware, District ofColumbia, Maryland,Pennsylvania, Virginia

Philadelphia, PA 19255

Who Must SignThe return must be signed and dated bythe president, vice president, treasurer,assistant treasurer, chief accountingofficer, or any other corporate officer (such

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as tax officer) authorized to sign. Areceiver, trustee, or assignee must signand date any return he or she is requiredto file on behalf of a corporation.

If a corporate officer filled in Form1120S, the Paid Preparers space underSignature of officer should remain blank.If someone prepares Form 1120S anddoes not charge the corporation, thatperson should not sign the return. Certainothers who prepare Form 1120S shouldnot sign. For example, a regular, full-timeemployee of the corporation such as a

clerk, secretary, etc., should not sign.Generally, anyone paid to prepare Form

1120S must sign the return and fill in theother blanks in the Paid Preparers UseOnly area of the return.

The preparer required to sign the returnMUST complete the required preparerinformation and:

Sign it, by hand, in the space providedfor the preparers signature. (Signaturestamps or labels are not acceptable.)

Give a copy of Form 1120S to thetaxpayer in addition to the copy filed withthe IRS.

Accounting MethodsOrdinary income must be computed usingthe method of accounting regularly used inkeeping the corporations books andrecords. Generally, permissible methodsinclude the cash method, the accrualmethod, or any other method permitted bythe Internal Revenue Code. In all cases,the method adopted must clearly reflectincome.

Generally, an S corporation may not usethe cash method of accounting if thecorporation is a tax shelter (as defined insection 448(d)(3)). See section 448 fordetails.

Under the accrual method, an amount isincludible in income when all the eventshave occurred that fix the right to receivethe income and the amount can bedetermined with reasonable accuracy. SeeRegulations section 1.451-1(a) for details.

Generally, an accrual basis taxpayer candeduct accrued expenses in the tax year inwhich all events that determine liabilityhave occurred, the amount of the liabilitycan be figured with reasonable accuracy,and economic performance takes placewith respect to the expense. There areexceptions for recurring items and itemsinvolving transactions between relatedtaxpayers described in section 267.

Except for real property constructioncontracts, long-term contracts mustgenerally be accounted for using thepercentage of completion methoddescribed in section 460.

Generally, the corporation may changeits method of accounting used to reporttaxable income (for income as a whole orfor any material item) only by gettingconsent on Form 3115, Application forChange in Accounting Method. For moreinformation, get Pub. 538, AccountingPeriods and Methods.

Accounting PeriodsGenerally, an S corporation may notchange its accounting period to a tax yearthat is not a permitted year. A permittedyear is a calendar year or any otheraccounting period for which thecorporation can establish to thesatisfaction of the IRS that there is abusiness purpose for the tax year.

To change an accounting period, seeRegulations section 1.442-1 and Form1128, Application to Adopt, Change, or

Retain a Tax Year. Also see Pub. 538.Election of a tax year other than arequired year.Under the provisions ofsection 444, an S corporation may elect tohave a tax year other than a permittedyear, but only if the deferral period of thetax year is not longer than 3 months. Thiselection is made by filing Form 8716,Election To Have a Tax Year Other Than aRequired Tax Year.

An S corporation may not make orcontinue an election under section 444 if itis a member of a tiered structure, otherthan a tiered structure that consistsentirely of partnerships and S corporationsthat have the same tax year. For the S

corporation to have a section 444 electionin effect, it must make the paymentsrequired by section 7519 and file Form8752, Required Payment or Refund UnderSection 7519.

Rounding Off to WholeDollarsYou may round off cents to whole dollarson your return and accompanyingschedules. To do so, drop amounts under50 cents and increase amounts from 50 to99 cents to the next higher dollar.

RecordkeepingThe corporations records must be kept aslong as they may be needed for theadministration of any provision of theInternal Revenue Code. Usually, recordsthat support an item of income, deduction,or credit on the corporations return mustbe kept for 3 years from the date thereturn is due or is filed, whichever is later.Keep records that verify the corporationsbasis in property for as long as they areneeded to figure the basis of the original orreplacement property.

The corporation should also keep copiesof any returns it has filed. They help inpreparing future returns and in makingcomputations when filing an amended

return.

Depositary Method of TaxPaymentThe corporation must pay the tax due infull no later than the 15th day of the 3rdmonth after the end of the tax year.

Deposit corporation income taxpayments (and estimated tax payments)with Form 8109, Federal Tax DepositCoupon. Do not submit deposits directly toan IRS office; otherwise, the corporation

may have to pay a penalty. Mail or deliverthe completed Form 8109 with thepayment to a qualified depositary forFederal taxes or to the Federal Reservebank (FRB) servicing your geographic area.Make your checks or money orderspayable to that depositary or FRB.

To help ensure proper crediting, writethe corporations employer identificationnumber, the tax period to which thedeposit applies, and Form 1120S on yourcheck or money order. Be sure to darkenthe 1120 box on the coupon. These

records of deposit will be sent to the IRS.For more information on deposits, see

the instructions in the coupon booklet(Form 8109) and Pub. 583, TaxpayersStarting a Business.

Estimated TaxGenerally, the corporation must makeestimated tax payments for the followingtaxes if the total of these taxes is $500 ormore: (a) the tax on certain capital gains,(b) the tax on built-in gains, (c) the excessnet passive income tax, and (d) theinvestment credit recapture tax.

For tax years beginning after June 30,

1992, the amount of estimated tax requiredto be paid annually is the lesser of (a) 97%of the above taxes shown on the return forthe tax year (or if no return is filed, 97% ofthese taxes for the year); or (b) the sum of(i) 97% of the sum of the investment creditrecapture tax and the built-in gains tax (orthe tax on certain capital gains) shown onthe return for the tax year (or if no return isfiled, 97% of these taxes for the year), and(ii) 100% of any excess net passiveincome tax shown on the corporationsreturn for the preceding tax year. If thepreceding tax year was less than 12months, the estimated tax must bedetermined under (a).

The estimated tax is generally payable infour equal installments. However, thecorporation may be able to lower theamount of one or more installments byusing the annualized income installmentmethod or adjusted seasonal installmentmethod under section 6655(e).

For a calendar year corporation, thepayments are due by April 15, June 15,September 15, and December 15. For afiscal year corporation, they are due by the15th day of the 4th, 6th, 9th, and 12thmonths of the fiscal year.

The payments are made using thedepositary method.

Interest and PenaltiesInterest

Interest is charged on taxes not paid bythe due date, even if an extension of timeto file is granted. Interest is also chargedfrom the due date (including extensions) tothe date of payment on the failure to filepenalty, the accuracy-related penalty, andthe fraud penalty. The interest charge isfigured at a rate determined under section6621.

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Late Filing of Return

A corporation that does not file its taxreturn by the due date, includingextensions, may have to pay a penalty of5% a month, or part of a month, up to amaximum of 25%, for each month thereturn is not filed. The penalty is imposedon the net amount due. The minimumpenalty for filing a return more than 60days late is the smaller of the tax due or$100. The penalty will not be imposed ifthe corporation can show that the failure tofile on time was due to reasonable cause.Corporations that f ile late must attach astatement explaining the reasonable cause.

Late Payment of Tax

A corporation that does not pay the taxwhen due generally may have to pay apenalty of 12 of 1% a month or part of amonth, up to a maximum of 25%, for eachmonth the tax is not paid. The penalty isimposed on the net amount due.

The penalty will not be imposed if thecorporation can show that failure to pay ontime was due to reasonable cause.

Failure To Furnish Information

TimelySection 6037(b) requires an S corporationto furnish to each shareholder a copy ofthe information shown on Schedule K-1(Form 1120S) that is attached to Form1120S. Provide Schedule K-1 to eachshareholder on or before the day on whichthe corporation files Form 1120S.

For each failure to furnish Schedule K-1to a shareholder when due and eachfailure to include on Schedule K-1 all ofthe information required to be shown (orthe inclusion of incorrect information), apenalty of $50 may be imposed withregard to each Schedule K-1 for which afailure occurs. If the requirement to report

correct information is intentionallydisregarded, each $50 penalty is increasedto $100 or, if greater, 10% of theaggregate amount of items required to bereported. See sections 6722 and 6724 formore information.

The penalty will not be imposed if thecorporation can show that not furnishinginformation timely was due to reasonablecause and not due to willful neglect.

Unresolved Tax ProblemsThe IRS has a Problem ResolutionProgram for taxpayers who have beenunable to resolve their problems with theIRS. If the corporation has a tax problem ithas been unable to resolve through normalchannels, write to the corporations localIRS District Director or call thecorporations local IRS office and ask forProblem Resolution assistance.Hearing-impaired persons who haveaccess to TDD equipment may call1-800-829-4059 to ask for help. TheProblem Resolution office will ensure thatyour problem receives proper attention.Although the office cannot change the taxlaw or make technical decisions, it canhelp clear up problems that resulted fromprevious contacts.

Other Forms, Returns,Schedules, and StatementsThat May Be RequiredForms W-2 and W-3, Wage and TaxStatement; and Transmittal of Income andTax Statements.

Form 720, Quarterly Federal Excise TaxReturn. Use Form 720 to report the 10%excise tax on the first retail sale of thefollowing items sold to the extent the salesprice exceeds the amounts shown:

(a) passenger vehicles, $30,000; (b) boatsand yachts, $100,000; (c) aircraft,$250,000; and (d)jewelry and furs,$10,000. Form 720 is also used to reportenvironmental excise taxes,communications and air transportationtaxes, fuel taxes, manufacturers taxes, shippassenger tax, and certain other excisetaxes.

Caution: A 100% penalty may apply wherecertain excise taxes that should becollected are not collected or are not paidto the IRS. Under this penalty, certainofficers or employees of the corporationbecome personally liable for payment ofthe taxes and may be penalized in anamount equal to the unpaid taxes. See theInstructions for Form 720 for more details.

Form 940 or Form 940-EZ, EmployersAnnual Federal Unemployment (FUTA) TaxReturn. The corporation may be liable forFUTA tax and may have to file Form 940 or940-EZ if it paid wages of $1,500 or morein any calendar quarter or one or moreemployees worked for the corporation forsome part of a day in any 20 differentweeks during the calendar year.

Form 941, Employers Quarterly FederalTax Return. Employers must file this formquarterly to report income tax withheld andemployer and employee social security andMedicare taxes. Agricultural employersmust file Form 943, Employers Annual TaxReturn for Agricultural Employees, insteadof Form 941, to report income tax withheldand employer and employee social securityand Medicare taxes on farmworkers.

Caution: A 100% penalty may apply whereincome, social security, and Medicare taxesthat should be withheld are not withheld orare not paid to the IRS. Under this penalty,certain officers or employees of thecorporation become personally liable forpayment of the taxes and may be penalizedin an amount equal to the unpaid taxes.GetCircular E, Employers Tax Guide (orCircular A, Agricultural Employers TaxGuide), for details.

Form 966, Corporate Dissolution orLiquidation.

Forms 1042 and 1042S, AnnualWithholding Tax Return for U.S. SourceIncome of Foreign Persons; and ForeignPersons U.S. Source Income Subject toWithholding. Use these forms to report andtransmit withheld tax on payments madeto nonresident alien individuals, foreignpartnerships, or foreign corporations to theextent such payments constitute grossincome from sources within the UnitedStates (see sections 861 through 865). Formore information, see sections 1441 and

1442, and Pub. 515, Withholding of Tax onNonresident Aliens and ForeignCorporations.

Form 1096, Annual Summary andTransmittal of U.S. Information Returns.

Form 1098, Mortgage Interest Statement.Use this form to report the receipt fromany individual of $600 or more of mortgageinterest and points in the course of thecorporations trade or business.

Forms 1099-A, B, DIV, INT, MISC, OID,PATR, R, and S. You may have to file

these information returns to reportabandonments; acquisitions throughforeclosure; proceeds from broker andbarter exchange transactions; certaindividends; interest payments; medical anddental health care payments;miscellaneous income payments; originalissue discount; patronage dividends;distributions from pensions, annuities,retirement or profit-sharing plans, IRAs,insurance contracts, etc.; and proceedsfrom real estate transactions. Also usecertain of these returns to report amountsthat were received as a nominee on behalfof another person.

Use Form 1099-DIV to report actualdividends paid by the corporation. Onlydistributions from accumulated earningsand profits are classified as dividends. Donot issue Form 1099-DIV for dividendsreceived by the corporation that areallocated to shareholders on line 4b ofSchedule K-1.

For more information, see the separateInstructions for Forms 1099, 1098, 5498,and W-2G.

Note: Every corporation must file Forms1099-MISC if it makes payments of rents,commissions, or other fixed ordeterminable income (see section 6041)totaling $600 or more to any one person inthe course of its trade or business duringthe calendar year.

Form 5713, International Boycott Report.Every corporation that had operations in,or related to, a boycotting country,company, or national of a country must fileForm 5713. In addition, persons whoparticipate in or cooperate with aninternational boycott may have to completeSchedule A or Schedule B and Schedule Cof Form 5713 to compute their loss of theforeign tax credit, the deferral of earningsof a controlled foreign corporation,IC-DISC benefits, and FSC benefits.

Form 8264, Application for Registration ofa Tax Shelter, is used by tax shelterorganizers to register tax shelters with theIRS for the purpose of receiving a taxshelter registration number.

Form 8271, Investor Reporting of TaxShelter Registration Number, is used bycorporations that have acquired an interestin a tax shelter that is required to beregistered to report the tax sheltersregistration number. Form 8271 must beattached to any return on which adeduction, credit, loss, or other tax benefitattributable to a tax shelter is taken or anyincome attributable to a tax shelter isreported.

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Form 8275, Disclosure Statement. Form8275 is used by taxpayers and income taxreturn preparers to disclose items orpositions, except those contrary to aregulation, that are not otherwiseadequately disclosed on a tax return. Thedisclosure is made to avoid the parts ofthe accuracy-related penalty imposed fornegligence, disregard of rules, orsubstantial understatement of tax. Form8275 is also used for disclosures relatingto preparer penalties for understatementsdue to unrealistic positions or for willful or

reckless conduct .Form 8275-R, Regulation DisclosureStatement, is used to disclose any item ona tax return for which a position has beentaken that is contrary to Treasuryregulations.

Form 8281, Information Return for PubliclyOffered Original Issue DiscountInstruments. This form is used by issuersof publicly offered debt instruments havingOID to provide the information required bysection 1275(c).

Forms 8288 and 8288-A, U.S. WithholdingTax Return for Dispositions by ForeignPersons of U.S. Real Property Interests;and Statement of Withholding on

Dispositions by Foreign Persons of U.S.Real Property Interests. Use these forms toreport and transmit withheld tax on thesale of U.S. real property by a foreignperson. See section 1445 and the relatedregulations for additional information.

Form 8300, Report of Cash PaymentsOver $10,000 Received in a Trade orBusiness. This form is used to report thereceipt of more than $10,000 in cash orforeign currency in one transaction (or aseries of related transactions).

Form 8594, Asset Acquisition Statement,is to be filed by both the purchaser andseller of a group of assets constituting atrade or business if goodwill or a going

concern value attaches, or could attach, tosuch assets and if the purchasers basis inthe assets is determined only by theamount paid for the assets.

Form 8697, Interest Computation Underthe Look-Back Method for CompletedLong-Term Contracts. Certain Scorporations that are not closely held mayhave to file Form 8697. Form 8697 is usedto figure the interest due or to be refundedunder the look-back method of section460(b)(2) on certain long-term contractsthat are accounted for under either thepercentage of completion-capitalized costmethod or the percentage of completionmethod. Closely held corporations should

see the instructions for line 23, item 11, ofSchedule K-1 for details on the Form 8697information they must provide to theirshareholders.

Stock ownership in foreigncorporations.If the corporation owned atleast 5% in value of the outstanding stockof a foreign personal holding company,and the corporation was required toinclude in its gross income anyundistributed foreign personal holdingcompany income, attach the statementrequired by section 551(c).

A corporation may have to file Form5471, Information Return of U.S. PersonsWith Respect to Certain ForeignCorporations, if any of the followingapplies:

1. It controls a foreign corporation.

2. It acquires, disposes of, or owns 5%or more in value of the outstanding stockof a foreign corporation.

3. It is a 10%-or-more shareholder of aforeign personal holding company.

4. It owns stock in a controlled foreign

corporation for an uninterrupted period of30 days or more during any tax year of theforeign corporation, and it owned thatstock on the last day of that year.

Transfers to a corporation controlled bythe transferor.If a person receives stockof a corporation in exchange for property,and no gain or loss is recognized undersection 351, the transferor and transfereemust each attach to their tax returns theinformation required by Regulations section1.351-3.

AttachmentsAttach Form 4136, Credit for Federal Tax

Paid on Fuels, after page 4, Form 1120S.Attach schedules in alphabetical order andother forms in numerical order after Form4136.

To assist us in processing the return,please complete every applicable entryspace on Form 1120S and Schedule K-1.If you attach statements, do not write Seeattached instead of completing the entryspaces on Form 1120S and Schedule K-1.

If you need more space on the forms orschedules, attach separate sheets andshow the information in the same order ason the printed forms. But show the totalson the printed forms. Please use sheetsthat are the same size as the forms and

schedules. Attach these separate sheetsafter all the schedules and forms. Be sureto put the corporations name andemployer identification number (EIN) oneach sheet.

Amended ReturnTo correct an error in a Form 1120Salready filed, file an amended Form 1120Sand check box F(4). If the amended returnresults in a change to income, or a changein the distribution of any income or otherinformation provided to shareholders, anamended Schedule K-1 (Form 1120S) mustalso be filed with the amended Form1120S and given to each shareholder. Be

sure to check box D(2) on each ScheduleK-1 to indicate that it is an amendedSchedule K-1.

Note: If an S corporation does not meetthe small S corporation exception underTemporary Regulations section301.6241-1T or if it is a small S corporationthat has made the election described inTemporary Regulations section301.6241-1T(c)(2)(v), and it files anamended return, the amended return willbe a request for administrative adjustmentand the tax matters person must fileForm8082, Notice of Inconsistent Treatment or

Amended Return (AdministrativeAdjustment Request (AAR)). See thetemporary regulations under section 6241for more information.

Passive Activity LimitationsIn general, section 469 limits the amount oflosses, deductions, and credits thatshareholders may claim from passiveactivities. The passive activity limitationsdo not apply to the corporation. Instead,they apply to each shareholders share of

any income or loss and credit attributableto a passive activity. Because thetreatment of each shareholders share ofcorporate income or loss and creditdepends upon the nature of the activitythat generated it, the corporation mustreport income or loss and creditsseparately for each activity.

The instructions below (pages 5 through8) and the instructions for Schedules Kand K-1 (pages 14 through 20) explain theapplicable passive activity limitation rulesand specify the type of information thecorporation must provide to itsshareholders for each activity. If thecorporation had more than one activity, itmust report information for each activity onan attachment to Schedules K and K-1.

Generally, passive activities include(a) activities that involve the conduct of atrade or business in which the shareholderdoes not materially participate and (b) anyrental activity (see definition on page 6)even if the shareholder materiallyparticipates. The level of eachshareholders participation in an activitymust be determined by the shareholder.

The passive activity rules provide thatlosses and credits from passive activitiescan generally be applied only againstincome and tax from passive activities.Thus, passive losses and credits cannot beapplied against income from salaries,wages, professional fees, or a business inwhich the shareholder materiallyparticipates; against portfolio income(see definition on page 7); or against thetax related to any of these types ofincome.

Special transitional rules apply to lossesincurred by investors in qualifiedlow-income housing projects. In addition,special rules require that net income fromcertain activities that would otherwise betreated as passive income must berecharacterized as nonpassive income forpurposes of the passive activity limitations.

To allow each shareholder to apply thepassive activity limitations at the individuallevel, the corporation must report incomeor loss and credits separately for each ofthe following: trade or business activities,rental real estate activities, rental activitiesother than rental real estate, and portfolioincome. For definitions of each type ofactivity or income, see Types of Activitiesand Income below. For details on thespecial reporting requirements for passiveactivities, see Passive Activity ReportingRequirements on page 8.

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Types of Activities and Income

Trade or business activities.A trade orbusiness activity is an activity (other than arental activity or an activity treated asincidental to an activity of holding propertyfor investment) that

1. Involves the conduct of a trade orbusiness (within the meaning of section162),

2. Is conducted in anticipation of startinga trade or business, or

3. Involves research or experimentalexpenditures deductible under section 174(or that would be if you chose to deductrather than capitalize them).

If the shareholder does not materiallyparticipate in the activity, a trade orbusiness activity of the corporation is apassive activity for the shareholder.

Note: The section 469(c)(3) exception for aworking interest in oil and gas properties isnot applicable to an S corporation becausestate law generally limits the liability ofcorporate shareholders, includingshareholders of an S corporation.

Accordingly, the activity of holding aworking interest in oil or gas properties is a

trade or business activity and the materialparticipation rules apply to determine if theactivity is a passive activity. See TemporaryRegulations section 1.469-1T(e)(4) andRegulations section 1.469-1(e)(4).

Each shareholder must determine if heor she materially participated in an activity.As a result, while the corporations overalltrade or business income (loss) is reportedon page 1 of Form 1120S, the specificincome and deductions from eachseparate trade or business activity must bereported on attachments to Form 1120S.Similarly, while each shareholdersallocable share of the corporations overalltrade or business income (loss) is reportedon line 1 of Schedule K-1, eachshareholders allocable share of theincome and deductions from each trade orbusiness activity must be reported onattachments to each Schedule K-1. SeePassive Activity Reporting Requirementson page 8 for more information.

Rental activities.Generally, except asnoted below, if the gross income from anactivity consists of amounts paidprincipally for the use of real or personaltangible property held by the corporation,the activity is a rental activity.

There are several exceptions to thisgeneral rule. Under these exceptions, anactivity involving the use of real or personaltangible property is not a rental activity if(a) the average period of customer use(see definition below) for such property is 7days or less; (b) the average period ofcustomer use for such property is 30 daysor less and significant personal services(see definition below) are provided by or onbehalf of the corporation; (c) extraordinarypersonal services (see definition below) areprovided by or on behalf of thecorporation; (d) rental of the property istreated as incidental to a nonrental activityof the corporation under TemporaryRegulations section 1.469-1T(e)(3)(vi) andRegulations section 1.469-1(e)(3)(vi); or (e)

the corporation customarily makes theproperty available during defined businesshours for nonexclusive use by variouscustomers. In addition, if a corporationowns an interest in a partnership thatconducts a nonrental activity, and thecorporation provides property for use inthat activity in the corporations capacityas an owner of an interest in thepartnership, the provision of the property isnot a rental activity. Consequently, thecorporations distributive share of incomefrom the activity is not income from a

rental activity. A guaranteed paymentdescribed in section 707(c) is not incomefrom a rental activity under anycircumstances.

Whether the corporation providesproperty used in an activity of apartnership in the corporations capacity asan owner of an interest in the partnershipis based on all the facts andcircumstances.

Average period of customer use.Theaverage period of customer use of propertyis computed by dividing the total numberof days in all rental periods by the numberof rentals during the tax year. If the activityinvolves renting more than one class of

property, multiply the average period ofcustomer use of each class by the ratio ofthe gross rental income from that class tothe activitys total gross rental income. Theactivitys average period of customer useequals the sum of these class-by-classaverage periods weighted by grossincome. See Regulations section1.469-1(e)(3)(iii).

Significant personal services.Personalservices include only services performedby individuals. In determining whetherpersonal services are significant personalservices, all of the relevant facts andcircumstances are considered. Relevantfacts and circumstances include how oftenthe services are provided, the type andamount of labor required to perform theservices, and the value of the services inrelation to the amount charged for the useof the property. The following services areexcluded from consideration in determiningwhether personal services are significant:(a) services necessary to permit the lawfuluse of the rental property; (b) servicesperformed in connection withimprovements or repairs to the rentalproperty that extend the useful life of theproperty substantially beyond the averagerental period; and (c) services provided inconnection with the use of any improvedreal property that are similar to thosecommonly provided in connection with

long-term rentals of high-grade commercialor residential property (e.g., cleaning andmaintenance of common areas, routinerepairs, trash collection, elevator service,and security at entrances).

Extraordinary personal services.Services provided in connection withmaking rental property available forcustomer use are extraordinary personalservices only if the services are performedby individuals and the customers use ofthe rental property is incidental to theirreceipt of the services. For example, apatients use of a hospital room generally

is incidental to the care that the patientreceives from the hospitals medical staff.Similarly, a students use of a dormitoryroom in a boarding school is incidental tothe personal services provided by theschools teaching staff.

Rental property incidental to a nonrentalactivity.An activity is not a rental activityif the rental of the property is incidental toa nonrental activity, such as the activity ofholding property for investment, a trade orbusiness activity, or the activity of dealingin property.

Rental property is incidental to anactivity of holding property for investment ifthe main purpose for holding the propertyis to realize a gain from the appreciation ofthe property and the gross rental incomefrom such property for the tax year is lessthan 2% of the smaller of the propertysunadjusted basis or its fair market value.

Rental property is incidental to a trade orbusiness activity if (a) the corporationowns an interest in the trade or businessat all times during the year; (b) the rentalproperty was mainly used in the trade orbusiness activity during the tax year orduring at least 2 of the 5 preceding taxyears; and (c) the gross rental income from

the property is less than 2% of the smallerof the propertys unadjusted basis or itsfair market value.

The sale or exchange of property that isalso rented during the tax year (where thegain or loss is recognized) is treated asincidental to the activity of dealing inproperty if, at the time of the sale orexchange, the property was held primarilyfor sale to customers in the ordinarycourse of the corporations t rade orbusiness.

See Temporary Regulations section1.469-1T(e)(3) and Regulations section1.469-1(e)(3) for more information on thedefinition of rental activities for purposes of

the passive activity limitations.Reporting of rental activities.Inreporting the corporations income orlosses and credits from rental activities,the corporation must separately report(a) rental real estate activities and(b) rental activities other than rental realestate activities.

Shareholders who actively participate ina rental real estate activity may be able todeduct part or all of their rental real estatelosses (and the deduction equivalent ofrental real estate credits) against income(or tax) from nonpassive activities.Generally, the combined amount of rentalreal estate losses and the deduction

equivalent of rental real estate credits fromall sources (including rental real estateactivities not held through the corporation)that may be claimed is limited to $25,000.

Special transitional rules apply toinvestors in qualified low-income housingprojects. See section 502 of the TaxReform Act of 1986 and Pub. 925, PassiveActivity and At-Risk Rules, for moreinformation.

Rental real estate activity income (loss)is reported on Form 8825, Rental RealEstate Income and Expenses of a

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Partnership or an S Corporation, and online 2 of Schedules K and K-1 rather thanon page 1 of Form 1120S.

Credits related to rental real estateactivities are reported on lines 12c and 12dof Schedules K and K-1. Low-incomehousing credits are reported on line 12b ofSchedules K and K-1.

Income (loss) from rental activities otherthan rental real estate is reported on line 3of Schedules K and K-1. Credits related torental activities other than rental real estateare reported on line 12e of Schedules Kand K-1.

Portfolio income.Generally, portfolioincome includes all gross income, otherthan income derived in the ordinary courseof a trade or business, that is attributableto interest; dividends; royalties; incomefrom a real estate investment trust, aregulated investment company, a realestate mortgage investment conduit, acommon trust fund, a controlled foreigncorporation, a qualified electing fund, or acooperative; income from the disposition ofproperty that produces income of a typedefined as portfolio income; and incomefrom the disposition of property held forinvestment.

Solely for purposes of the precedingparagraph, gross income derived in theordinary course of a trade or businessincludes (and portfolio income, therefore,does not include) only the following typesof income: (a) interest income on loansand investments made in the ordinarycourse of a trade or business of lendingmoney; (b) interest on accounts receivablearising from the performance of services orthe sale of property in the ordinary courseof a trade or business of performing suchservices or selling such property, but onlyif credit is customarily offered to customersof the business; (c) income frominvestments made in the ordinary course of

a trade or business of furnishing insuranceor annuity contracts or reinsuring risksunderwritten by insurance companies;(d) income or gain derived in the ordinarycourse of an activity of trading or dealingin any property if such activity constitutesa trade or business (unless the dealer heldthe property for investment at any timebefore such income or gain is recognized);(e) royalties derived by the taxpayer in theordinary course of a trade or business oflicensing intangible property; (f) amountsincluded in the gross income of a patron ofa cooperative by reason of any payment orallocation to the patron based onpatronage occurring with respect to atrade or business of the patron; and

(g) other income identified by the IRS asincome derived by the taxpayer in theordinary course of a trade or business.

See Temporary Regulations section1.469-2T(c)(3) for more information onportfolio income.

Portfolio income is reported on line 4 ofSchedules K and K-1, rather than on page1 of Form 1120S.

Expenses related to portfolio income arereported on line 9 of Schedules K and K-1.

Grouping Activities

Caution: At the time these instructionswent to print, former TemporaryRegulations section 1.469-4T had expiredand final regulations defining the termactivity had not been issued. Thefollowing rules are based on ProposedRegulations section 1.469-4. When theseregulations are finalized, the IRS willannounce any changes made to theproposed rules. The proposed regulationsprovide that the new rules will be effectivefor tax years ending after May 10, 1992.For tax years ending before May 11, 1992,former Temporary Regulations section1.469-4T applies. For the corporations taxyear that includes May 10, 1992, theproposed regulations allow the corporationto follow either the new rules or formerTemporary Regulations section 1.469-4T.

Generally, one or more trade or businessactivities or rental activities are treated asa single activity if the activities make up anappropriate economic unit formeasurement of gain or loss for purposesof the passive activity rules. Whetheractivities are treated as a single activitydepends on all the relevant facts andcircumstances. The factors given the

greatest weight in determining whetheractivities make up an appropriateeconomic unit are

1. Similarities and differences in types ofbusinesses,

2. The extent of common control,

3. The extent of common ownership,

4. Geographical location, and

5. Interdependencies among theactivities.

Example: The corporation has asignificant ownership interest in a bakeryand a movie theater in Baltimore and in abakery and a movie theater in Philadelphia.Depending on the relevant facts andcircumstances, the corporation couldgroup the movie theaters and bakeries intoa single activity, into a movie theateractivity and a bakery activity, into aBaltimore activity and a Philadelphiaactivity, or into four separate activities.

Once the corporation chooses agrouping under these rules, it mustcontinue using that grouping in later taxyears unless a material change in the factsand circumstances makes it clearlyinappropriate.

The IRS may regroup the corporationsactivities if the corporations grouping failsto reflect one or more appropriateeconomic units and one of the primarypurposes for the grouping is to circumventthe passive activity limitations.

Limitation on grouping certainactivities.The following activities maynot be grouped together

1. A rental activity with a trade orbusiness activity (unless the rental activityis insubstantial in relation to the trade orbusiness activity or vice versa),

2. An activity involving the rental of realproperty with an activity involving therental of personal property (except for

personal property provided in connectionwith real property), or

3. Any activity with another activity inwhich the corporation holds an interest asa limited partner or as a limitedentrepreneur (as defined in section464(e)(2)) if that other activity engages inholding, producing, or distributing motionpicture films or videotapes; farming;leasing section 1245 property; or, exploringfor (or exploiting) oil and gas resources orgeothermal deposits. See ProposedRegulations section 1.469-4(f) for

exceptions.Activities conducted throughpartnerships.Once a partnershipdetermines its activities under these rules,the corporation as a partner uses theserules to group those activities withactivities conducted directly by thecorporation or through other partnerships.

Recharacterization of PassiveIncome

Under Temporary Regulations section1.469-2T(f) and Regulations section1.469-2(f), net passive income from certainpassive activities must be treated asnonpassive income. Net passive income isthe excess of an activitys passive activitygross income over its passive activitydeductions (current year deductions andprior year unallowed losses).

Income from the following six sources issubject to recharacterization. Note that anynet passive income recharacterized asnonpassive income is treated asinvestment income for purposes ofcomputing investment interest expenselimitations if it is from (a) an activity ofrenting substantially nondepreciableproperty from an equity-financed lendingactivity or (b) an activity related to aninterest in a pass-through entity thatlicenses intangible property.

1. Significant participation passiveactivities.A significant participationpassive activity is any trade or businessactivity in which the shareholder bothparticipates for more than 100 hoursduring the tax year and does not materiallyparticipate. Because each shareholdermust determine his or her level ofparticipation, the corporation will not beable to identify significant participationpassive activities.

2. Certain nondepreciable rentalproperty activities.Net passive incomefrom a rental activity is nonpassive incomeif less than 30% of the unadjusted basis ofthe property used or held for use by

customers in the activity is subject todepreciation under section 167.

3. Passive equity-financed lendingactivities.If the corporation has netincome from a passive equity-financedlending activity, the lesser of the netpassive income or equity-financed interestincome from the activity is nonpassiveincome.

Note: The amount of income from theactivities in items 1 through 3 above thatany shareholder will be required torecharacterize as nonpassive income may

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be limited under Temporary Regulationssection 1.469-2T(f)(8). Because thecorporation will not have informationregarding all of a shareholders activities, itmust identify all corporate activitiesmeeting the definitions in items 1 through 3as activities that may be subject torecharacterization.

4. Rental activities incidental to adevelopment activity.Net rental activityincome is nonpassive income for ashareholder if all of the following apply:(a) the corporation recognizes gain from

the sale, exchange, or other disposition ofthe rental property during the tax year;(b) the use of the item of property in therental activity started less than 12 monthsbefore the date of disposition (the use ofan item of rental property begins on thefirst day on which (i) the corporation ownsan interest in the property, (ii) substantiallyall of the property is either rented or heldout for rent and ready to be rented, and (iii)no significant value-enhancing servicesremain to be performed); and (c) theshareholder materially participated orsignificantly participated for any tax year inan activity that involved the performance ofservices for the purpose of enhancing thevalue of the property (or any other item ofproperty, if the basis of the propertydisposed of is determined in whole or inpart by reference to the basis of that itemof property). Net rental activity income isthe excess of passive activity grossincome from renting or disposing ofproperty over passive activity deductions(current year deductions and prior yearunallowed losses) that are reasonablyallocable to the rented property.

Because the corporation cannotdetermine a shareholders level ofparticipation, the corporation must identifynet income from property described initems (a) and (b) above as income that maybe subject to recharacterization.

5. Activities involving property rentedto a nonpassive activity.If a taxpayerrents property to a trade or businessactivity in which the taxpayer materiallyparticipates, the taxpayers net rentalactivity income from the property isnonpassive income. Net rental activityincome is the excess of passive activitygross income from renting or disposing ofproperty over passive activity deductions(current year deductions and prior yearunallowed losses) that are reasonablyallocable to the rented property.

6. Acquisition of an interest in apass-through entity that licensesintangible property.Generally, net

royalty income from intangible property isnonpassive income if the taxpayeracquired an interest in the pass-throughentity after it created the intangibleproperty or performed substantial servicesor incurred substantial costs in developingor marketing the intangible property. Netroyalty income is the excess of passiveactivity gross income from licensing ortransferring any right in intangible propertyover passive activity deductions (currentyear deductions and prior year unallowedlosses) that are reasonably allocable to theintangible property.

See Temporary Regulations section1.469-2T(f)(7)(iii) for exceptions to this rule.

Passive Activity ReportingRequirements

To allow shareholders to correctly applythe passive activity loss and creditlimitation rules, any corporation that carrieson more than one activity must:

1. Provide an attachment for eachactivity conducted through the corporationthat identifies the type of activity

conducted (trade or business, rental realestate, rental activity other than rental realestate, or investment).

2. On the attachment for each activity,provide a schedule, using the same linenumbers as shown on Schedule K-1,detailing the net income (loss), credits, andall items required to be separately statedunder section 1366(a)(1) from each trade orbusiness activity, from each rental realestate activity, from each rental activityother than a rental real estate activity, andfrom investments.

3. Identify the net income (loss) and theshareholders share of corporation interestexpense from each activity of renting a

dwelling unit that the shareholder also usesfor personal purposes during the year formore than the greater of 14 days or 10%of the number of days that the residence isrented at fair rental value.

4. Identify the net income (loss) and theshareholders share of interest expensefrom each activity of trading personalproperty conducted through thecorporation.

5. For any gain (loss) from thedisposition of an interest in an activity or ofan interest in property used in an activity(including dispositions before 1987 fromwhich gain is being recognized after 1986):

a. Identify the activity in which the

property was used at the time ofdisposition;

b. If the property was used in more thanone activity during the 12 monthspreceding the disposition, identify theactivities in which the property was usedand the adjusted basis allocated to eachactivity; and

c. For gains only, if the property wassubstantially appreciated at the time of thedisposition and the applicable holdingperiod specified in Regulations section1.469-2(c)(2)(iii)(A) was not satisfied,identify the amount of the nonpassive gainand indicate whether or not the gain isinvestment income under Regulations

section 1.469-2(c)(2)(iii)(F).6. Specify the amount of gross portfolio

income, the interest expense properlyallocable to portfolio income, andexpenses other than interest expense thatare clearly and directly allocable toportfolio income.

7. Identify the ratable portion of anysection 481 adjustment (whether a netpositive or a net negative adjustment)allocable to each corporate activity.

8. Identify any gross income fromsources specifically excluded from passive

activity gross income, including incomefrom intangible property if the shareholderis an individual and the shareholderspersonal efforts significantly contributed tothe creation of the property; income from aqualified low-income housing project (asdefined in section 502 of the Tax ReformAct of 1986) conducted through thecorporation; income from state, local, orforeign income tax refunds; and incomefrom a covenant not to compete (in thecase of a shareholder who is an individualand who contributed the covenant to the

corporation).9. Identify any deductions that are not

passive activity deductions.

10. If the corporation makes a full orpartial disposition of its interest in anotherentity, identify the gain (loss) allocable toeach activity conducted through the entity,and the gain allocable to a passive activitythat would have been recharacterized asnonpassive gain had the corporationdisposed of its interest in property used inthe activity (because the property wassubstantially appreciated at the time of thedisposition, and the gain represented morethan 10% of the shareholders total gainfrom the disposition).

11. Identify the following items that maybe subject to the recharacterization rulesunder Temporary Regulations section1.469-2T(f) and Regulations section1.469-2(f):

a. Net income from an activity of rentingsubstantially nondepreciable property;

b. The lesser of equity-financed interestincome or net passive income from anequity-financed lending activity;

c. Net rental activity income fromproperty developed (by the shareholder orthe corporation), rented, and sold within 12months after the rental of the propertycommenced;

d. Net rental activity income from therental of property by the corporation to atrade or business activity in which theshareholder had an interest (either directlyor indirectly); and

e. Net royalty income from intangibleproperty if the shareholder acquired theshareholders interest in the corporationafter the corporation created the intangibleproperty or performed substantial servicesor incurred substantial costs in developingor marketing the intangible property.

12. Identify separately the credits fromeach activity conducted by or through thecorporation.

Specific Instructions

General Information

Name, Address, and EmployerIdentification Number

Use the label on the package that wasmailed to the corporation. Cross out anyerrors and print the correct information onthe label.

If the corporation did not receive a label,print or type the corporations true name

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(as set forth in the corporate charter orother legal document creating it), address,and employer identification number on theappropriate lines.

Include the suite, room, or other unitnumber after the street address. If apreaddressed label is used, please includethe information on the label. If the PostOffice does not deliver to the streetaddress and the corporation has a P.O.box, show the box number instead of thestreet address.

If the corporation changes its mailingaddress after filing its return, it can notifythe IRS by filing Form 8822, Change ofAddress.

Item BBusiness Code No.

See Codes for Principal BusinessActivity on page 23 of these instructions.

Item ETotal Assets

Enter the corporations total assets at theend of the tax year, as determined by theaccounting method regularly used inmaintaining the corporations books andrecords. If there are no assets at the endof the tax year, enter the total assets as ofthe beginning of the tax year.

Item FInitial Return, FinalReturn, Change in Address, andAmended Return

If this is the corporations first return,check box F(1). If the corporation hasceased to exist, check box F(2). Alsocheck box D(1) on each Schedule K-1 toindicate that it is a final Schedule K-1.Indicate a change in address by checkingbox F(3). If this amends a previously filedreturn, check box F(4). If Schedules K-1are also being amended, check box D(2)on each Schedule K-1.

Item GConsolidated AuditProcedures

With certain exceptions, the tax treatmentof S corporation items is determined at thecorporate level in a consolidated auditproceeding, rather than in separateproceedings with individual shareholders.Check the box for item G if any of thefollowing apply.

The S corporation had more than fiveshareholders at any time during the taxyear (for this purpose a husband and wife,and their estates, are treated as oneshareholder).

Any shareholder was other than anatural person or estate.

The small S corporation (five or fewershareholders) has elected as provided inTemporary Regulations section301.6241-1T(c)(2)(v) to be subject to therules for consolidated proceedings.

Note: The S corporation does not makethe section 301.6241-1T(c)(2)(v) electionwhen it checks the box for item G. Thiselection must be made separately.

For more information on theconsolidated audit procedures for Scorporations, see sections 6241 through6245, Temporary Regulations section

301.6241-1T, and Pub. 556, Examinationof Returns, Appeal Rights, and Claims forRefund.

IncomeCaution: Report only trade or businessactivity income or loss on lines 1a through6. Do not report rental activity income orportfolio income or loss on these lines.(See the instructions onPassive ActivityLimitationsbeginning on page 5 fordefinitions of rental income and portfolio

income.) Rental activity income andportfolio income are reported on SchedulesK and K-1 (rental real estate activities arealso reported on Form 8825).

Do not include any tax-exempt incomeon lines 1 through 5. A corporation thatreceives any exempt income other thaninterest, or holds any property or engagesin an activity that produces exemptincome, reports the amount of this incomeon line 18 of Schedules K and K-1.

Tax-exempt interest income, includingexempt-interest dividends received as ashareholder in a mutual fund or otherregulated investment company, is reportedon line 17 of Schedules K and K-1.

See Deductions below for informationon how to report expenses related totax-exempt income.

Line 1Gross Receipts or Sales

Enter gross receipts or sales from all tradeor business operations except those youreport on lines 4 and 5. For reportingadvance payments, see Regulationssection 1.451-5. To report income fromlong-term contracts, see section 460.

Installment sales.Generally, theinstallment method cannot be used fordealer dispositions of property. A dealerdisposition is any disposition of personalproperty by a person who regularly sells or

otherwise disposes of property of the sametype on the installment plan or anydisposition of real property held for sale tocustomers in the ordinary course of thetaxpayers trade or business. Thedisposition of property used or produced inthe farming business is not included as adealer disposition. See section 453(l) fordetails and exceptions.

Enter on line 1a the gross profit oncollections from installment sales for any ofthe following:

Dealer dispositions of property beforeMarch 1, 1986.

Dispositions of property used orproduced in the trade or business offarming.

Certain dispositions of timeshares andresidential lots reported under theinstallment method.

Attach a schedule showing the followinginformation for the current and the 3preceding years: (a) gross sales, (b) costof goods sold, (c) gross profits,(d) percentage of gross profits to grosssales, (e) amount collected, and (f) grossprofit on the amount collected.

Line 2Cost of Goods Sold

See the instructions for Schedule A.

Line 4Net Gain (Loss) FromForm 4797

Caution: Include only ordinary gains orlosses from the sale, exchange, orinvoluntary conversion of assets used in atrade or business activity. Ordinary gains orlosses from the sale, exchange, orinvoluntary conversions of assets used inrental activities must be reported separately

on Schedule K as part of the net income(loss) from the rental activity in which theproperty was used.

A corporation that is a partner in apartnership must include on Form 4797,Sales of Business Property, its share ofordinary gains (losses) from sales,exchanges, or involuntary or compulsoryconversions (other than casualties orthefts) of the partnerships trade orbusiness assets.

Do not include any recapture of thesection 179 expense deduction. See theinstructions for Schedule K-1, line 23, item4, and the Instructions for Form 4797 formore information.

Line 5Other Income (Loss)

Enter on line 5 trade or business income(loss) that is not included on lines 1athrough 4. Examples of such incomeinclude:

1. Interest income derived in the ordinarycourse of the corporations t rade orbusiness, such as interest charged onreceivable balances;

2. Recoveries of bad debts deducted inearlier years under the specific charge-offmethod;

3. Taxable income from insuranceproceeds;

4. The amount of credit figured on Form6478, Credit for Alcohol Used as Fuel; and

5. All section 481 income adjustmentsresulting from changes in accountingmethods.

Show the computation of the section481 adjustment on an attached schedule.

The corporation must include as otherincome the recapture amount for section280F if the business use of listed propertydrops to 50% or less. To figure therecapture amount, the corporation mustcomplete Part V of Form 4797.

Do not include items requiring separatecomputations by shareholders that must

be reported on Schedules K and K-1. Seethe instructions for Schedules K and K-1beginning on page 14.

If other income consists of only oneitem, identify it by showing the accountcaption in parentheses on line 5. Aseparate schedule need not be attached tothe return in this case.

Do not net any expense item (such asinterest) with a similar income item. Reportall trade or business expenses on lines 7through 19.

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DeductionsCaution: Reportonlytrade or businessactivity expenses on lines 7 through 19.

Do not report rental activity expenses ordeductions allocable to portfolio income onthese lines. Rental activity expenses areseparately reported on Form 8825 or line 3of Schedules K and K-1. Deductionsallocable to portfolio income are separatelyreported on line 9 of Schedules K and K-1.See Passive Activity Limitationsbeginning on page 5 for more information

on rental activities and portfolio income.Do not report any nondeductible

amounts (such as expenses connectedwith the production of tax-exempt income)on lines 7 through 19. Instead, reportnondeductible expenses on line 19 ofSchedules K and K-1. If an expense isconnected with both taxable income andnontaxable income, allocate a reasonablepart of the expense to each kind ofincome.

Limitations on Deductions

Section 263A uniform capitalizationrules.The uniform capitalization rules ofsection 263A require corporations to

capitalize or include in inventory certaincosts incurred in connection with theproduction of real and personal tangibleproperty held in inventory or held for salein the ordinary course of business.Tangible personal property produced by acorporation includes a film, soundrecording, video tape, book, or similarproperty. The rules also apply to personalproperty (tangible and intangible) acquiredfor resale. Corporations subject to the rulesare required to capitalize not only directcosts but an allocable portion of mostindirect costs (including taxes) that benefitthe assets produced or acquired for resale.Interest expense paid or incurred duringthe production period of certain propertymust be capitalized and is governed byspecial rules. For more information, seeNotice 88-99, 1988-2 C.B. 422. Theuniform capitalization rules also apply tothe production of property constructed orimproved by a corporation for use in itstrade or business or in an activity engagedin for profit.

Section 263A does not apply to personalproperty acquired for resale if thetaxpayers annual average gross receiptsare $10 million or less. It does not apply totimber or to most property produced undera long-term contract. Special rules apply tocertain corporations engaged in farming(see below). The rules do not apply to

property produced for use by the taxpayerif substantial construction occurred beforeMarch 1, 1986.

In the case of inventory, some of theindirect costs that must be capitalized areadministration expenses; taxes;depreciation; insurance; compensationpaid to officers attributable to services;rework labor; and contributions to pension,stock bonus, and certain profit-sharing,annuity, or deferred compensation plans.

The costs required to be capitalizedunder section 263A are not deductible until

the property to which the costs relate issold, used, or otherwise disposed of by thecorporation.

Research and experimental costs undersection 174, intangible drilling costs for oiland gas and geothermal property, andmining exploration and development costsare separately reported to shareholders forpurposes of determinations under section59(e). Temporary Regulations section1.263A-1T specifies other indirect coststhat may be currently deducted and thosethat must be capitalized with respect to

production or resale activities. For moreinformation, see Temporary Regulationssection 1.263A-1T; Notice 88-86, 1988-2C.B. 401; and Notice 89-67, 1989-1 C.B.723.

Special rules for certain corporationsengaged in farming.For S corporationsnot required to use the accrual method ofaccounting, the rules of section 263A donot apply to expenses of raising any(a) animal or (b) plant that has apreproductive period of 2 years or less.Shareholders of S corporations notrequired to use the accrual method ofaccounting may elect to currently deductthe preproductive period expenses of

certain plants that have a preproductiveperiod of more than 2 years. Because theelection to deduct these expenses is madeby the shareholder, the farming corporationshould not capitalize such preproductiveexpenses but should separately reportthese expenses on line 21 of Schedule K,and each shareholders share on line 23 ofSchedule K-1. See sections 263A(d) and(e) and Temporary Regulations section1.263A-1T(c) for definitions and otherdetails. Also see Notice 88-24, 1988-1 C.B.491 and Notice 89-67.

Transactions between relatedtaxpayers.Generally, an accrual basis Scorporation may deduct businessexpenses and interest owed to a relatedparty (including any shareholder) only inthe tax year of the corporation thatincludes the day on which the payment isincludible in the income of the relatedparty. See section 267 for details.

Section 291 limitations.If the Scorporation was a C corporation for any ofthe 3 immediately preceding years, thecorporation may be required to adjustdeductions allowed to the corporation fordepletion of iron ore and coal, and theamortizable basis of pollution controlfacilities. See section 291 to determine theamount of the adjustment.

Business start-up expenses.Businessstart-up expenses must be capitalized. Anelection may be made to amortize themover a period of not less than 60 months.See section 195.

Line 7Compensation of Officers

Enter on line 7 the total compensation ofall officers paid or incurred in the trade orbusiness activities of the corporation,including fringe benefit expenditures madeon behalf of officers owning more than 2%of the corporations stock. Also reportthese fringe benefits as wages in box 10 ofForm W-2 (1992). Do not include on line 7

amounts paid or incurred for fringe benefitsof officers owning 2% or less of thecorporations stock. These amounts arereported on line 18, page 1, of Form1120S. See the instructions for that line forinformation on the types of expendituresthat are treated as fringe benefits and forthe stock ownership rules.

Report amounts paid for healthinsurance coverage for a more than 2%shareholder (including that shareholdersspouse and dependents) as an informationitem in box 18 of that shareholders Form

W-2 (1992). State separately: Amounts paid before July 1, 1992, forcoverage before that date; and

Amounts paid after June 30, 1992, oramounts paid for coverage after that date.

A more than 2% shareholder may beallowed to deduct on Form 1040, line 26,up to 25% of the amounts paid before July1, 1992, for coverage before that date.

Do not include on line 7 compensationreported elsewhere on the return, such asamounts included in cost of goods sold,elective contributions to a section 401(k)cash or deferred arrangement, or amountscontributed under a salary reduction SEP

agreement.Line 8Salaries and Wages

Enter on line 8a the amount of salaries andwages paid or incurred for the tax year,including fringe benefit expenditures madeon behalf of employees (other than officers)owning more than 2% of the corporationsstock. Also report these fringe benefits aswages in box 10 of Form W-2 (1992). Donot include on line 8a amounts paid orincurred for fringe benefits of employeesowning 2% or less of the corporationsstock. These amounts are reported on line18, page 1, of Form 1120S. See theinstructions for that line for information onthe types of expenditures that are treatedas fringe benefits and for the stockownership rules.

Report amounts paid for healthinsurance coverage for a more than 2%shareholder (including that shareholdersspouse and dependents) as an informationitem in box 18 of that shareholders FormW-2 (1992). State separately:

Amounts paid before July 1, 1992, forcoverage before that date; and

Amounts paid after June 30, 1992, oramounts paid for coverage after that date.

A more than 2% shareholder may beallowed to deduct on Form 1040, line 26,up to 25% of the amounts paid before July

1, 1992, for coverage before that date.Do not include on line 8a salaries and

wages reported elsewhere on the return,such as amounts included in cost of goodssold, elective contributions to a section401(k) cash or deferred arrangement, oramounts contributed under a salaryreduction SEP agreement.

Enter on line 8b the applicable jobscredit from Form 5884, Jobs Credit. Seethe instructions for Form 5884 for moreinformation.

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If a shareholder or a member of thefamily of one or more shareholders of thecorporation renders services or furnishescapital to the corporation for whichreasonable compensation is not paid, theIRS may make adjustments in the itemstaken into account by such individuals andthe value of such services or capital. Seesection 1366(e).

Line 9Repairs

Enter the cost of incidental repairs, suchas labor and supplies, that do not add to

the value of the property or appreciablyprolong its life, but only to the extent thatsuch repairs relate to a trade or businessactivity and are not claimed elsewhere onthe return. New buildings, machinery, orpermanent improvements that increase thevalue of the property are not deductible.They are chargeable to capital accountsand may be depreciated or amortized.

Line 10Bad Debts

Enter the total debts that becameworthless in whole or in part during theyear, but only to the extent such debtsrelate to a trade or business activity.

Caution: Cash method taxpayers cannot

take a bad debt deduction unless theamount was previously included in income.

Line 11Rents

If the corporation rented or leased avehicle, enter the total annual rent or leaseexpense paid or incurred in the trade orbusiness activities of the corporation. Alsocomplete Part V of Form 4562,Depreciation and Amortization. If thecorporation leased a vehicle for a term of30 days or more, the deduction for vehiclelease expense may have to be reduced byan amount called the inclusion amount.The corporation may have an inclusionamount if

The lease term began:

And the vehiclesfair market value onthe first day of thelease exceeded:

After 12/31/91 $14,000

After 12/31/90 but before 1/1/92 $13,400

After 12/31/86 but before 1/1/91 $12,800

If the lease term began after June 18,1984, but before January 1, 1987, get Pub.917, Business Use of a Car, to find out ifthe corporation has an inclusion amount.

See Pub. 917 for instructions on figuringthe inclusion amount.

Line 12Taxes

Enter taxes paid or incurred in the trade orbusiness activities of the corporation, if notreflected in cost of goods sold. Federalimport duties and Federal excise andstamp taxes are deductible only if paid orincurred in carrying on the trade orbusiness of the corporation.

Do not deduct taxes, including state andlocal sales taxes, paid or accrued inconnection with the acquisition ordisposition of business property. Thesetaxes must be added to the cost of theproperty, or in the case of a disposition,

subtracted from the amount realized. Seesection 164.

Do not deduct taxes assessed againstlocal benefits that increase the value of theproperty assessed (such as for paving,etc.), Federal income taxes, or taxesreported elsewhere on the return.

Do not deduct section 901 foreign taxes.These taxes are reported separately on line15e, Schedule K.

Do not report on line 12 taxes allocableto portfolio income or to a rental activity.

Taxes allocable to a rental real estateactivity are reported on Form 8825. Taxesallocable to a rental activity other than areal estate rental activity are reported online 3b of Schedule K. Taxes allocable toportfolio income are reported on line 9 ofSchedules K and K-1.

Do not deduct on line 12 taxes paid orincurred for the production or collection ofincome, or for the management,conservation, or maintenance of propertyheld to produce income. Report thesetaxes separately on line 10 of Schedules Kand K-1.

See section 263A(a) for information oncapitalization of allocable costs (including

taxes) for any property.Line 13Interest

Include on line 13 only interest incurred inthe trade or business activities of thecorporation that is not claimed elsewhereon the return.

Do not include interest expense on debtused to purchase rental property or debtused in a rental activity. Interest allocableto a rental real estate activity is reportedon Form 8825 and is used in arriving at netincome (loss) from rental real estateactivities on line 2 of Schedules K and K-1.Interest allocable to a rental activity otherthan a rental real estate activity is included

on line 3b of Schedule K and is used inarriving at net income (loss) from a rentalactivity (other than a rental real estateactivity). This net amount is reported online 3c of Schedule K and line 3 ofSchedule K-1.

Do not include interest expense clearlyand directly allocable to portfolio orinvestment income. This interest expenseis reported separately on line 11a ofSchedule K.

Do not include interest on debt proceedsallocated to distributions made toshareholders during the tax year. Instead,report such interest on line 10 ofSchedules K and K-1. To determine the

amount to allocate to distributions toshareholders, see Notice 89-35, 1989-1C.B. 675.

Do not include interest expense on debtrequired to be allocated to the productionof qualified property. Interest allocable tocertain property produced by an Scorporation for its own use or for sale mustbe capitalized. The corporation must alsocapitalize any interest on debt that isallocable to an asset used to produce theabove property. A shareholder may have tocapitalize interest that the shareholderincurs during the tax year for the

production expenditures of the Scorporation. Similarly, interest incurred byan S corporation may have to becapitalized by a shareholder for theshareholders own productionexpenditures. The information required bythe shareholder to properly capitalizeinterest for this purpose must be providedby the corporation in an attachment for line23 of Schedule K-1 (see the instructionsfor Schedule K-1, line 23, item 10). Seesection 263A(f) and Notice 88-99, 1988-2C.B. 422, for additional information.

Temporary Regulations section 1.163-8Tgives rules for allocating interest expenseamong activities so that the limitations onpassive activity losses, investment interest,and personal interest can be properlyfigured. Generally, interest expense isallocated in the same manner as debt isallocated. Debt is allocated by tracingdisbursements of the debt proceeds tospecific expenditures. These regulationsgive rules for tracing debt proceeds toexpenditures.

Generally, prepaid interest can only bededucted over the period to which theprepayment applies. See section 461(g) fordetails.

Line 14Depreciation

Enter on line 14a only the depreciationclaimed on assets used in a trade orbusiness activity. See the Instructions forForm 4562 or Pub. 534, Depreciation, tofigure the amount of depreciation to enteron this line. Complete and attach Form4562 only if the corporation placedproperty in service during 1992 or claimsdepreciation on any car or other listedproperty.

Do not include any section 179 expensededuction on this line. This amount is notdeductible by the corporation. Instead, it ispassed through to the shareholders on line

8 of Schedule K-1.

Line 15Depletion

If the corporation claims a deduction fortimber depletion, complete and attachForm T, Forest Industries Schedules.

Caution: Do not report depletiondeductions for oil and gas properties onthis line. Each shareholder figures depletionon these properties under section613A(c)(11). See the instructions for line 23of Schedule K-1 for information on oil andgas depletion that must be supplied to theshareholders by the corporation.

Line 17Pension, Profit-Sharing,

etc., PlansEnter the deductible contributions notclaimed elsewhere on the return made bythe corporation for its employees under aqualified pension, profit-sharing, annuity, orsimplified employee pension (SEP) plan,and under any other deferredcompensation plan.

If the corporation contributes to anindividual retirement arrangement (IRA) foremployees, include the contribution insalaries and wages on page 1, line 8a, orSchedule A, line 3, and not on line 17.

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Employers who maintain a pension,profit-sharing, or other funded deferredcompensation plan, whether or notqualified under the Internal Revenue Codeand whether or not a deduction is claimedfor the current tax year, generally arerequired to file one of the forms listedbelow:

Form 5500, Annual Return/Report ofEmployee Benefit Plan (with 100 or moreparticipants).

Form 5500-C/R, Return/Report ofEmployee Benefit Plan (with fewer than100 participants).

Form 5500EZ, Annual Return ofOne-Participant (Owners and TheirSpouses) Pension Benefit Plan. Completethis form for a one-participant plan.

There are penalties for failure to filethese forms on time and for overstating thepension plan deduction.

Line 18Employee BenefitPrograms

Enter amounts for fringe benefits paid orincurred on behalf of employees owning2% or less of the corporations stock.These fringe benefits include (a) up to

$5,000 paid by reason of an employeesdeath to his estate or beneficiary,(b) employer contributions to certainaccident and health plans, (c) the cost ofup to $50,000 of group-term life insuranceon an employees life, and (d) meals andlodging furnished for the employersconvenience.

Do not deduct amounts that are anincidental part of a pension, profit-sharing,etc., plan included on line 17 or amountsreported elsewhere on the return.

Report amounts paid on behalf of morethan 2% shareholders on line 7 or 8,whichever applies. A shareholder isconsidered to own more than 2% of the

corporations stock if that person owns onany day during the tax year more than 2%of the outstanding stock of the corporationor stock possessing more than 2% of thecombined voting power of all stock of thecorporation. See section 318 for attributionrules.

Line 19Other Deductions

Attach your own schedule listing by typeand amount all allowable deductions

related to a trade or business activity forwhich there is no separate line on page 1of Form 1120S. Enter the total on this line.Do not include items that must be reportedseparately on Schedules K and K-1.

An S corporation may not take thededuction for net operating lossesprovided by section 172 or the specialdeductions in sections 241 through 249(except the election to amortizeorganizational expenditures under section248). Subject to limitations, thecorporations net operating loss is allowed

as a deduction from the shareholdersgross income. See section 1366.

Do not include qualified expenditures towhich an election under section 59(e) mayapply. See instructions for lines 16a and16b of Schedule K-1 for details ontreatment of these items.

Include on line 19 the deduction takenfor amortization. See instructions for Form4562 for more information. Complete andattach Form 4562 if the corporation isclaiming amortization of costs that beginduring its 1992 tax year.

Section 464(f) limits the deduction forcertain expenditures of S corpor