When a shareholder sells all their stock and leaves an s-corporation, there is an election that can be taken to treat the tax year as two separate tax years. How is that election made in the program?
To make a section 1377(a)(2) election to treat the tax year as two separate tax years for purposes of allocating items of income and expense to the affected shareholders on Schedule K-1 when there is a termination of a shareholder's entire interest, follow the steps below:
- On the Detail tab, select Screen 38, Elections.
- Select 1120S & Misc. Elect. under Election on the upper left panel.
- Check the box Section 1377 (a)(2) election made for tax year (code 230).
- Enter the Date of termination of shareholder's entire interest (code 231) and Explanation of termination of shareholder's interest (Ctrl+E) (code 232).
- Manually calculate the total amount of each line item to include on each affected shareholders Schedule K-1 for the tax year and enter these amounts on Screen 33, Schedule K-1 Overrides.
- The program prints an election statement with the tax return. See Elections from the Forms view.
- Each affected shareholder's Schedule K-1 includes a notation at the top of the form that a section 1377(a)(2) election was made. The program treats a shareholder as an "affected" shareholder if you make an entry in K-1 Allocation Percentage (Screen 6, code 502) or on Screen 7, Change in Ownership.