Just as an S Corporation has a formal beginning, its end must also be formally acknowledged both by the state in which it was incorporated and by the Internal Revenue Service, which has grown accustomed to receiving an annual tax return from it. Concurrent with recording the S Corporation's end with the state, which usually involves securing a Certificate of Dissolution, the S Corporation alerts the IRS that it has dissolved by filing its final federal tax return, a process somewhat different from normal annual tax filings.
Check the box marked “Final” on page 1, section H of IRS tax return Form 1120-S. The “Final” box must also be checked on all Schedule K-1s that are issued to the S corporation’s shareholders.
Prepare the balance sheet on page 4, Schedule L of Form 1120-S. The beginning balances of the assets, liabilities and equity are the ending reported balances from the prior year’s tax return. Since you are preparing a final tax return, the ending balances of all assets, liabilities and equity should be zero. If any assets have a balance at year-end, distributions of cash or property will need to be made. If any liabilities have a balance at year-end, the capital accounts will need to be adjusted.
Prepare Schedule M-2 on page 4 of Form 1120-S. Enter the appropriate information on lines 1 through 5. Enter all distributions to shareholders on line 7. The balance at the end of the year on line 8 should be zero. If line 8 does not equal zero, review distributions and any other changes made to the capital accounts during the year.
Prepare a final tax return for the state similar to the return filed with the IRS. Remit any franchise tax due to ensure the S corporation is able to be dissolved timely.
File both the IRS and state final tax returns by the due date. The due date imposed is the fifteenth day of the third month after the S corporation dissolves. For example, if the S corporation dissolved on June 10, 2010, the final tax returns would be due Sept. 15, 2010. You can obtain an automatic six-month extension to file by filing IRS Form 7004 prior to the original due date of the tax return.
Jessica Kent started writing professionally in 2002. Her articles have appeared in publications including the New York State Bar Association's "Family Law Review," "Valuation Strategies" and "Metropolitan Corporate Counsel." Through her writing, she strives to assist people in making informed financial decisions. She is a Certified Public Accountant in New York. Kent holds a Bachelor of Science in accounting from Binghamton University.