Schedules K and K-1 (General Instructions)

Purpose of Schedules The corporation is liable for taxes on lines 23a, 23b, and 23c on Form 1120-S, page 1. Shareholders are liable for tax on their shares of the corporation’s income (reduced by any taxes paid by the corporation on income). Shareholders must include their share of the income on their tax return whether or not it is distributed to them. Unlike most partnership income, S corporation income isn’t self-employment income and isn’t subject to self-employment tax.

Schedule K. Schedule K is a summary schedule of all shareholders’ shares of the corporation’s income, deductions, credits, etc. All corporations must complete Schedule K.

Schedule K-1. Schedule K-1 shows each shareholder’s separate share. Attach a copy of each Schedule K-1 to the Form 1120-S filed with the IRS. Keep a copy for the corporation’s records and give each shareholder a copy.

For example, check “Yes” if at any time during the tax year, the S corporation:

• Received digital assets as payment for property or services provided;

• Received digital assets as a result of a reward or award;

• Received new digital assets as a result of mining, staking, and similar activities;

• Received digital assets as a result of a hard fork;

• Disposed of digital assets in exchange for property or services;

• Disposed of a digital asset in exchange or trade for another digital asset;

• Sold a digital asset; or

• Otherwise disposed of any other financial interest in a digital asset.

The S corporation has a financial interest in a digital asset if it is the owner of record of a digital asset or has an ownership stake in an account that holds one or more digital assets, including the rights and obligations to acquire a financial interest, or owns a wallet that holds digital assets.

The following actions or transactions in the tax year, alone, generally do not require the S corporation to check “Yes.”

• Holding a digital asset in a wallet or account.

• Transferring a digital asset from one wallet or account the S corporation owns or controls to another wallet or account that it owns or controls.

24 Instructions for Form 1120-S (2025)

Give each shareholder a copy of the Shareholder’s Instructions for Schedule K-1 (Form 1120-S) or specific instructions for each item reported on the shareholder’s Schedule K-1.

Substitute Forms The corporation doesn’t need IRS approval to use a substitute Schedule K-1 if it is an exact copy of the IRS schedule. The boxes must use the same numbers and titles and must be in the same order and format as on the comparable IRS Schedule K-1. The substitute schedule must include the OMB number. The corporation must provide each shareholder with the Shareholder’s Instructions for Schedule K-1 (Form 1120-S) or instructions that apply to the specific items reported on the shareholder’s Schedule K-1.

The corporation must ask for IRS approval to use other substitute Schedules K-1.

Each shareholder’s information must be on a separate sheet of paper. Therefore, separate all continuously printed substitutes before you file them with the IRS.

The corporation may be subject to a penalty if it files a substitute Schedule K-1 that doesn’t conform to the specifications discussed in Pub. 1167, General Rules and Specifications for Substitute Forms and Schedules.

For more information, see Pub. 1167.

Shareholder’s Pro Rata Share Items

General Rule

Items of income, gain, loss, deduction, or credit are allocated to a shareholder on a daily basis, according to the number of shares of stock held by the shareholder on each day of the corporation’s tax year. See the detailed instructions for item G in Part II. Information About the Shareholder, later.

Shareholders who dispose of stock are treated as shareholders for the day of their disposition. Shareholders who die are treated as shareholders for the day of their death.

Special Rules

Termination of shareholder’s interest. If a shareholder terminates shareholder’s interest in a corporation during the tax year, the corporation, with the consent of all affected shareholders (including those whose interest is terminated), may elect to allocate income and expenses, etc., as if the corporation’s tax year consisted of 2 separate tax years, the first of which ends on the date of the shareholder’s termination.

To make the election, the corporation must attach a statement to a timely filed original or amended Form 1120-S for the tax year for which the election is made. In the statement, the corporation must state that it is electing under section 1377(a)(2) and Regulations section 1.1377-1(b) to treat the tax year as if it consisted of 2 separate tax years. The statement must also explain how the shareholder’s entire interest was terminated (for example, sale or gift) and state that the corporation and each affected shareholder consent to the corporation making the election. A single statement may be filed for all terminating elections made for the tax year. If the election is made, enter “Section 1377(a)(2) Election Made” at the top of each affected shareholder’s Schedule K-1.

For more details, see Regulations section 1.1377-1(b).

Qualifying dispositions. If a qualifying disposition takes place during the tax year, the corporation may make an irrevocable election to allocate income and expenses, etc., as if the

corporation’s tax year consisted of 2 tax years, the first of which ends on the close of the day the qualifying disposition occurs.

A qualifying disposition is:

1. A disposition by a shareholder of at least 20% of the corporation’s outstanding stock in one or more transactions in any 30-day period during the tax year,

2. A redemption treated as an exchange under section 302(a) or 303(a) of at least 20% of the corporation’s outstanding stock in one or more transactions in any 30-day period during the tax year, or

3. An issuance of stock that equals at least 25% of the previously outstanding stock to one or more new shareholders in any 30-day period during the tax year.

To make the election, the corporation must attach a statement to a timely filed original or amended Form 1120-S for the tax year for which the election is made. In the statement, the corporation must state that it is electing under Regulations section 1.1368-1(g)(2)(i) to treat the tax year as if it consisted of 2 separate tax years, give the facts relating to the qualifying disposition (for example, sale, gift, stock issuance, or redemption), and state that each shareholder who held stock in the corporation during the tax year consents to the election. A single election statement may be filed for all qualifying disposition elections for the tax year.

For more details, see Regulations section 1.1368-1(g)(2).