U.S. Income Tax Return for an S Corporation

Section r e f e r ~ n c e sare to the tnternal
Revenue Code unless otherwise noted.

Contents

..

Photographs of Missing
Children.. . . . . . . . . . . . . . . . . . .1
Unresolved Tax Issues . . . . . . . . .
Direct Depostt of Refund . . . . . . . . . .2
How To Get Forms and
Publications . . . . . . . . . . . . . . . . .. 2
General Instructions . . . . . . . . . . . .2
Purposeof F o r m . . . . . . . . . . . . . . . .2
Who Must File . . . . . . . . . . . . . . . . . .2
Termmation of Election . . . . . . . . . . .2
Electronic Filing . . . . . . . . . . . . . . . . . 3
When TO File , , , , , , , , , , , , , , , , , , 3
where T~ File , , , , , , , , , , , , , , , , , , 3
Who Must Sign . . . . . . . . . . . . . . . . 3
Paid Preparer Authorization . . . . . . . a
2
Assembling the Return . . . . . . . . . . .4
Depository Methods of Tax
Payment . . . . . . . . . . . . . . . . . . . 4
Estimated Tax Payments . . . . . . . . . .4
Interest and Penalties . . . . . . . . . . . .4
Accounting Melhods . . . . . . . . . . . .5
Account~ngPeriod . . . . . . . . . . . . . . 5.
Rounding Off to Whole Dollars . . . .5
Recordkeeping . . . . . . . . . . . . . . . .. 6
Amended
Other Forms and Statements
That May Be Required . . . . . . . . . ,6
Passive Activity Limitations . . . . . . . .6
Extraterritorial Income
Exclusion . . . . . . . . . . . . .
Specific Instructions . . . . . . . . .
Period Ceve~ed. . . . . . . . . . . . .

ScheduleM-1.. . . . . . . . . . . . . . . 35 Missing Children
M - 2 . . . . . . . . . . . . . . . .35
.
The Inlernal Revenue Service is a
Privacy Act and Papemork
partner w~ththe National Center
Act Notice , , , , , , , , , ; -3 ~ Iproud
.c l r Mtss~ng
and E~ploitedChildren.
Business Activity
Photographs of missing chltdren
Codes . . . . . . . . . . . . . . . . . . . .r?8'
selerled by the Center may appear in
Index . . . . . . . . . . . . . . . . . . . . . . 41
.
instructions on pages that would
otherwise be blank. You can help bring
What's New
,
these children home by looking at the
;-.-photographs and calling
.1 For tax years ending on or after
1"800-THE-L0ST (1-800-843-56783
it
I December 31,2007, corporations (and
You
recognize a child.
ientities eligible to elect to be treated as!
;corporations) may be able to make an
,election to be an S corporation by f~ling; Unresolved Tax Issues
!Form 2553,Election by a Small
If Ihe corporalion has attempted to deal
I wllh
; ~~~i~~~~
,-orparation,
F~~~
an IRS problem unsuccessfully. ~t
' 1120s. For details, see the Instruction(
should contad c he Taxpayer Advocale.
j for Form 2553.
,
The Taxpayer Advocate independently
[ * A corporation that voluntarily files . represents Ihe corporation's interests
:Schedule M-3 (Form 1120s) will now
and concerns within the IRS by
'flle with the Ogden Service Center. See protecting ~ t sr~ghlsand resolving
problems that have not been f ~ x e d
: Where To File on page 3 .
, * A corporation that is a policyholder , through normal channels.
on certain life insurance contracts
While Taxpayer Advocates cannot
rssued after August 17,2006, must file i change the tax law or make a technical
F o r m 8925, Report of Employer-Owned ia,
they can clear up
: L ~ f eInsurance Contracts.
,
problems that resulted from previous
i The extraterritorial income exclustan ;
contacts and ensure that the
,generally does not apply to transact~an$ corporation's case is given a complete ratrun,and ~ t s~nstructions.

Who Must File
A corparatlon or other entity must file
Form 11205 i f (a) it elected to be an S
corporatlon hj, flling Form 2553, (b) the
IRS accepted the election, and (c) the
election remalns in effect. After filing
Form 2553, you should have received
confirmation that Form 2553 was
accepted. If you d ~ not
d receive
notification of acceptance or
nonacceptance of Ihe election williin 2
months of filing Form 2553 (5 months if
you checked box 0 1 to request a letter
ruling), take follow-up aclion by calling
1-800-829-4933. Do not f lie Forrr;
11205 for any tax year betore the year
the election takes effect.
If you have not filed Form 2553, or
did not file Form 2553 on rime, you may
be entitled to rehef for a lare filed
election to be an S corporation. See the
Instruc:ions for Form 2553 for detalts,

Current year forms. insiruclicns, and
~ublications.
\ ~ e r # n a tion of Election
Once the election is made, it stays in
k Prior year iorms, instruct~ons,and
effect until 11is terminated. If the
publications,
Bonus: Historical Tax Products DVD
election IS terminated, the corporatlon
- Ships with the final releasz,
(or a successor corporation) can make
another election on Form 2553 only
Tax Map, 2n eleclronbc research tool
and findtng aid:
wlth 1HS consent for any tax year
Tax law trecuently asked questrons,\L before the 5th tax year after the first tax
Tax TOPIC'I i:om the IRS telephone
year in which the termination took
response system;
sffect. See Regulatjons section
FIII-in, grlnt. and save features for
1.7362-5 for details.
most tax iorms;
A n electicln terminates automatically
Internal Revenue Bullelins: and
in any ol the following cases.
Toll-free and ernall technical support.
1 Ttle co~uorzlron1s no lonuer a
The GD/EVD IS released twice
smzll bu51neskcorporallor3 as dkflned
dur~ngthe year The f~rstrelease will
in seo11~n
1361(b) This kind of
termln;~Ilon oi a;n elect~onIS effective as
shfp the begrnnlng of January and the
f~nalrelease mll ship the beglnnlng of
of thr
the curporatlor~no longer
meet: 1 ' 1 '~ellrlrt~cln
~
of a small busrness
March

corporation. Attach to Form 1120S for
the final year of the S corporation a
statement notifying the 1RS of the
termination and the date it occurred.
2. The corporation, for each fit threr
consecutive tax years, (a) has
accumulated earnings and proills and
(b) derives more than 25% cf its gross
receipts from passive investment
income as defined in section
1362(d)(3)(C). The election tetminates
on the first day bf t,+ehrst tax year
beynning after the third consecutive tax
ydar The corporation must pay a tax
1cr each year ~t has excess net passive
income See the instructions for excess
net passlvc3 Income tax on line 22a on
pkge 18 for details on how to figure the
tax
3. The election is revoked. An
election can be revoked only with the
cunsent of shareholders who, at the
I ~ m ethe revocation is made, hold more
than 50% of the number of issued and
outstanding shares of stock (includ~ng
non-voting stock). The revocation can
specify an eiledlve revocation date that
is on or after the day the revocation is
filed. If nu date is specified, the
revocation is etleclne at Ihe dart of the
tax year if the revocation is made on or
before the 15th day of the 3rd month of
that tax year. If no dale IS specified and
the revocalion is made after the 15th
day of the 3rd month of the tax year,
the revocalion is effective at the stad of
the next taw year.
To revoke the election. the
corporation must file a statement w ~ t h
the service center where it filed 11s
elect~onto be an S corporation. In the
statement, the corporation must notify
the IRS thal it is revoking its election to
be an S corporation. The statement
must be signed by each shareholder
who consents to the revocation and
contain the information required by
Regulations section 1.1362-6(a)(3)

A revocation can be rescinded
before it takes effect. See Regulat~ons
section I . 1 362-6(a)(4) for details
Fo; rules on allocating income and
deduciions between an S short year
and a C short year and other special
rirles thal apply when an election is
term~naled.see section 1362(e) and
R~yulatlcnssection 1.1362-3.

It an election was terminated under 1
or 2 on page 2 , and the corporation
belleves the termlnat~onwas
~iiadvertent,the corporation can request
permission from the IRS to continue to
be treated as an S corporation. See
Regulatrons section 1 1362-4 for the
spec~ficrequirements that must be met
to quality for inadverteni termination
relief.
Instructions for Form 1120s

Electronic Filing
Corporations can generally
electron~callyf~le(e-file) Form :1205,
related forms, schedules, and
attachments, Form 7004, Form 940 and
941 employment tar returns. Form
1099 and other information returns can
also be electronically filed. However,
the option to e-filedoes not apply to
certain relurns, inctuding:
Returns with precomputed penalty
and interest,
Returns with reasonable cause for
failing to lile tlmely,
Relurns with reasonable cause for
failing to pay timely, and
Returns with request for
overpayment to be applied to anothe
account.
Required filers. Certain cor
with total asseis of $10
that file at least 250 returns a y
required to e-file Form
Regulations section 301.6037-2.
However, these corporations can
request a waiver of the electron~cfil~ng
requiremenis. See Notice 2035-88,
2005-481.R.B. 1060.

Vis~twww.irs.gov/efilefor details

When To File
Generally, an S corporatian must file
Form 1120s by the 15th day of the 3rd

Un~tedParcel Service (UPS). UPS
Next Day Air, UPS Next Day Air Saver,
UPS 2nd Day Air, UPS 2nd Day Air
A.M.. UPS Worldwide E~pressPlus,
and UPS Worldwide Express.
The privale delivery s e r v i c e can tell
you how to get written proof of the
mailing date.

month after !he end of its lax year. For
calendar year corporations, the due
date is arch 17,'2008. A corporation
that has dissolved must generally tile by
the 15th day of the 3rd month aiter the
date it dissclved.
If the due date falls cn a Saturday,
Sunday, or legal holiday, the
corporation can file on the naxt day that
is not a Saturday, Sunday, or legal
holiday
If the S corporation election was
terminated during the tax year and the
corporation reverts to a C corporation,
file Form 1120s for the S corporation's
short year by the due date (including
extensions) of the C corporation's short

Private delivery services ranno t

ifemsto P. 0,box&. YOU
must use the U.S Postal
Senice !u mail any item lo an IRS P. 0
box address.

Extension of Time To File
Fjle Form 7004, Application for
Automatic BMonth Exlension of Time
To File Certain Business Income Tax.
Information, and Other Returns, to
request a &month edensiorl sf time to
file. Gen e r a l l ~ ~ t i C t T p ufile
st
Form 7304 by the regular due date of
Ihe return.

Services
cjelivery services des~gnatedby the IRS
as timely
flling/payingVrule for tax returns and
payments. These privale delivery
sc?wicesinclude only the rollowing
DHL Express (DHL): DHL Same Day
Servrce, DHL Next Day 10:30am, DHL
Next Dav 12:OO Dm. DHL Next Dav
3:00pm: and DHL 2nd Day service.
Federal Express (FedEx): FedEx
Pr~ur~ty
Overnight, FedEx Standard
Overniqht, FedEx PDay, FedEx
lnternaiional Priority, and FedEx
lnternalional Flrst
to meet the "timely mailing

Who Must Sign
The return must be signed and dated

by:

IEI

\
Where To File
---is located in:
-,

01 Columbra, tllmois, Indiana.

Hampshire, New Jersey, New

Pennsylvania. Rhode Island.
South Carolina, Vermonr,
Virg~rr;a,West Virginla.

LV~scons~n

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Alabama, Alaska, Arizona.
Arkansas. California,
Colorado. Florida, Georgia,
Hawall, Idaho, Iowa, ~ansas.

I

Lwrslana, Minnesoia,
Mlsslsslppl Mlssoun,
Montana, Nebraska, Nevada.
New Menrco. North Dakota.
Oklahoma, Oregon, Sov:h
Dakota, Tennessee Texas,

Deparlment of the Treasury
Internal Revenue Sewlce
Cenier
Ogden. ?IT 81101-0013

$10 rnlll~on
or rrlqre or
less Ihan $10 rnillio~>and

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Department of the Treasurv
lnternar Revenue S e w ~ c c
center-.
Oqden, UT 8420i.0013

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Anv amount

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A forelgq county or U.S
possess~on

Instructions for Form 1120s

A . I ~amount

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fntcrnal Revenue Service

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Cenl~_-

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Box 409101
Ogden, UT 844UQ
P
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II
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The president, vice president,
treasurer, assistant treasurer, chef
accounting officer: or
Any other corporate officer (such as
tax affcer) authorized to slyn.
If a return is frled on behalf of a
corporation by a receiver. !rustee, or
assignee, the fiduciary must sign the
return, instead of the corporate officer.
Returns and forrrts signed by a receiver
or trustee in bankruntcv on behalf of a
corporati~nmust he accompanied by a
copy of the order or rnstructions of the
coun authorizing signing of the return
or form.
If an employee of the corporation
corrlpletes Form 1t 20s. the paid
preparer's space should remain blank.
Anyone who prepares Form 11205 but
does not charge the corporaticn should
not complete that section. Generally.
anyone who is paid to prepare the
return must sign it and fill in the "Pald
Preparer's Use Only" area.
The paid preparer must cclmplete the
required preparer ~nforma:~on
and:
Sign the return in the space provided
for the preparer's signature. .
Give a copy of the return to the
taxpayer.
Note. A paid preparer may sign
original or amended returns by r u b b ~ r
damp. mechanical device, or coniputer
software program.

Paid Preparer
Authorization
If the corporation wants to allaw the
IRS to d~scussits 2007 t a return
~
with
the paid preparer who slgned it. check

the "Yes" box in the s~gnaturearea of
the return. This authorization applies
only to the individual whose signature
appears in the "Paid Preparer's Use
Only" section of the return. It does not
apply to the firm, if any, shown in that
sectiun.

If the "Yes" box is checked, the
corporation is authorizing the IRS to call
the paid preparer to answer any
questions that may arise during the
processing of its return. The corporation
is also authorizing the paid preparer to:
Give the IRS any information that is
missing from the return,
Call the IRS for information about the
processing of the return or the status of
any related refund or payrnent(s), and
Respond to certain IRS notices about
math errors, offsets, and return
preparation.
The corporation is not authorizing
the paid preparer to receive any refund
check, bind the corporation to anything
(including any additional tax liability), or
otherwise represent the corporation
before the IRS.

The authorization will automatically
end no later than the due date
(excluding exten ns) for filing the
corporalion's ZOGtax return. if the
corporation wants to expand the paid
preparer's authorization or revoke the
authorization before it ends, see Pub.
947, Practice Before the IRS and
Power of Attorney.

Assembling the Return
To ensure that the corporation's tax
return is correctly processed, attach all
schedules and other forms after page 4
of Form 11.205 in the following order.
1. Schedule N (Form 1120).
2. Form 8825.
3. Form 8050.
4. Form 4136.
5. Additional schedules in
alphabetical order.
6. Additional forms in numerical
order.

Complete every applicable entry
space on Form 1120s and Schedule
K-1. Do not enter "See Aftached"
instead of completing the entry spaces
If more space is needed on the forms
or schedules, aftach separate sheets
using the same size and format as the
printed forms. If there are supporting
statements and attachments, arrange
them In the same order as the
schedules or forms they support and
attach them lasf. Show the totals on the
printed forms. Enter the corporation's
name and EIN on each supporting
statement or attachment.

Depository Methods
The corporation must pay any tax due
in full no later than the 15th day of the
3rd month after the end of the tax year
The two methods of depositing taxes
are discussed below.

Electronic Deposit

Requirement
The corporation must make elecfronlc
deposits of all depository taxes (such
as employment tax, excise tax, and
corporate income tax) using the
Electronic Federal Tax Payment
System (EFTPS) in 2008 if:
The total deposits of such taxes in
2006 were more than $200,000 or
The corporation was required l o use
E K P S in 2007.
If the corporation is required to use
EFTPS and fails to do so, it may be
subject to a 10' penalty. If the
corporation is not required to use
EmPS, it can participate voluntarily. To
enroll in or get more information about
EFTPS, call 1-800-555-4477.
To enroll
online, visit www.efips.gov.
Depositing on time. For EFTPS
deposits lo be made timely, the
corporation must initiate the transaction
at least 1 business day before the date
the deposit is due.

Deposits With Form 8109
If the corporation does not use E R P S .
deposit corporation income tax
payments (and estimated tax
payments) with Form 8109, Federal
Tax Deposit Coupon. I f you do not have
a preprinted Form 8109, use Form
81 09-3 to make deposits. You can get
this form by calling 1-800-829-4933or
visiting a n IRS taxpayer assistance
center. Have your EIN ready when you
call or visit.
Do not send deposits directly to an
IRS office; otherwise, the corporation
may have to pay a penalty. Mail or
deliver the completed Form 8109 with
the payment to an authorized
depositary (a commercial bank or other
financial institution authorized to accept
federal tax deposits). Make checks or
money orders payable to the
depositary.
If the corporation prefers, it can mail
the coupon and payment to: Financial
Agent, Federal Tax Deposit Processing,
P.O. Box 970030, St. Louis, MO 63197.
Make the check or money order
payable to "Financial Agent."
To help ensure proper crediting,
enter the corporation's EIN, the tax
period to which the deposit applies, and
"Form 11205" on the check or money
order. Darken the "1 120" box under
"Type of Tax" and the appropriate

"Quartet" box under T a x Period" on the
coupon. Records of these deposits will
be sent to the IRS. For more
information, see "Marking the Proper
Tax Period" in the instructions for Form
8109.
For more information on deposits,
see the instructions in the coupon
booklet (Form 8109) and Pub. 583,
Starting a Business and Keeping
Records.

Estimated Tax Payments
Generally, the corporation must make
installment payments of estimated tax
for the following taxes if the total of
these taxes is $500 or more: (a) the tax
on built-in gains, (b) the excess net
passive income tax, and (c) the
investment credit recapture tax.
The amount of estimated tax
required to be paid annually is the
smaller of: (a) the total of the above
taxes shown on the return for the tax
year (or if no return is filed, the total of
these taxes for the year) or (b) the sum
of (i) the investment credit recapture tax
and the built-in gains tax shown on the
return for the tax year (or if no return is
ftled, the total of these taxes for the tax
year) and (ii) any excess net passive
income tax shown on the corporation's
return for the preceding tax year. If the
preceding tax year was less than 12
months, the estimated tax must be
determined under {a).
The estimated tax is generally
payable in four equal installments.
However, the corporation may be able
to lower the amount of one or more
installments by using the annualized
income installment method or adjusted
seasonat installment method under
section 6655(e).
For a calendar year co oration, the
payments are due for 2003by April E,
~ u n e September
and December
For a fiscal year corporation, they
are due by the 15th day of the 4th, 6th.
91h, and 12th months of the year. If any
date falls on a Saturday, Sunday, or
legal holiday, the installment ts due on
the next day that is not a Saturday,
Sunday, or legal holiday.
The corporation must make the
payments using the depository method
described on page 4.
For information on penalties that
apply if the corporation fails to make
required payments, see the lnstruct~ons
for Form 2220.

a

a

Interest and Penalties
Interest. Interest is charged on taxes
paid late even if an extension of trme to
file is granted. Interest is also charged
on penalties imposed for failure to file,
negligence, fraud, substantial valuation
Instructions for Form 11205

determ~nedby the IRS to have been
A 52-53 week tax year that
responsible lor collecting, accounting
reference to a year lhsled above.
Any other tax year (including a
for, and payrng over these taxes, and
52-53-week lax year) for which the
who acted willfully in not doing so. The
corporat~onestablishes a business
penalty is equal to tke unpaid trust fund
tax. See the lnstruct~onsfor Form 720,
purpose.
Pub. 15 (Circular E). Employer's Tax
h new S corporation must use Form
Guide, or Pub. 51 (Circular A).
Late filing of return. A corporation
2553 to elect a tax year. To later
Agricultural Employer's Tax Guide, for
that does not file its tax return by the
change the corporation's tax year, see
details, including the definition of
due date, including extensions, ma be
Form 1128, Application To Adopt,
&GZhecE%OTihGpZd d
h
7 responsible persons.
Change, or Retain a Tax Year,month or pan of a month the return is
can
s
Other penalties. Other p ~ ~ l a l t i e
~ r i s i r u c ~ u n l ethe
s s corporat~ona
late, up to a maximum of 25% of the
be imposed for negllgencs, substantial
makrng an election under section 444,
unpaid tax. The minimum penalty for a
understatement of tax, reporlable
discussed next).
return that is over 60 days late is the
transaction understalements, and fraud.
Electing a tax year under section
smaller of the tax due or $1 00. The
See sections 6662.6662A, and 6663.
444. Under the provisions of section
penally will not be imposed if the
4 4 4 , an S corporation can elect to have
corporation can show that the failure to
Accounting Methods
a tax year other than a permitted year,
file on time was due to reasonable
Figure income using the method of
but only if the deferral period of the tax
cause. Corporations that flle late should
accounting regularly used in keeping
year is not ronger than the shorter of 3
attach a statement ex~lainingthe
corporation's books and records.
months or the delerral period of the tax
reasonable cause. - _ - the
The method used must clearly reflect
year being changed. This election is
Late a ment of tax. - A corporation
income. Permissible methods include
made by filing Form 8716. Election To
x
h
~
i
a ~ ~xidi u~ en- cash, accrual, or any other method
Have a Tax Year Other Than a
generally may be penalized '12 of 1% of
authorized by the Internal Revenue
Required Tax Year.
the unpaid tax for each month or part of Code.
% month the tax is not pard, up to a
An S corporation may not make or
The fotlowing rules apply.
maxlrnum of 25% of the unpald lax
continue an election under section 444
Generally, an S corporation cannot
The penalty will not be imposed if the
if it is a member of a t~eredstructure,
use the cash method of accounting if it
corporation can show that the failure to
other than a tiered structure that
is a tax shelter (as defined in section
pay on time was due to reasonable
consists entirely of partnerships and S
448(d)(3)) See section 448 for details.
j cause.
--.
.
I
corporations that have the same tax
Unless it is a qualifying taxpayer or a
year. For the S corporal~onlo have a
Failure t o furnish information timelv.
qualitying small business taxpayer, a
section 444 election In effect, it musl
For each failure to furnish Schedule i - 1 corporalion must use the accrual
make the payrnenls required by section
to a shareholder when due and each
method for sales and purchases of
7519. See Form 8752, R ~ q u i r e d
failure to include on Schedule K - i all
inventory Items. See Schedule A. Cost
Payment or Refund Under Section
the information required to be shown
of Goods Sold on page 18.
7519.
(or the inclusion of incorrect
Special rules apply to long-term
~nforrnation),a $50 penalty may be
A section 444 election ends if an S
contracts. See sedion 460.
imposed w ~ t hrespect to each Schedule
Generally, dealers In securities must
corporat~on
K-1 for whach a failure occurs. If the
Changes its accounting period to a
use the mark-to-market accounting
requirement to report correct
method. Dealers in cclmrnod~tiesand
calendar year or some other permitted
information is intentionally disregarded,
traders in securities and commodities
vear,
G w -I$,*
each $50 penalty is increased to $100
;ISpenalized for willfutly failing to
can elect to use the mark-to-market
c,rpw-he
or, if greater, 10% of the aggregate
comply with the requirements of section
accounting method. See section 475.
amount of items required to be
7519
-4
- - . or- Change i n accounting method. @
reported. See sections 6722 and 6724
0-~errninatesits S election (unless it
change
the
method
of
accounting
used
for mare information.
immediately becomes a personal
to report income (for Income as a whole
The penalty will not be imposed if
service corporation).
or for the treatment of any niaterial
the corporation can show that not
item)kthe corporation milst file Form
II the termination results in a shon 7tw"?
furnishing information limely was due to 31 15, Application forthange in
tax
year, *pe or legibly print at the top
reasonable cacse.
Accounting Method.
ot the first page of Form 1120s for the
Trust fund recovery penalty. This
short tax year, "SECTION 444
See Form 31 15 and Pub. 538,
penalty may apply ii certain exdse,
ELECTION TERMINATED."
Accounting Pertods and Methods, for
income, social security. and Medicare
more information on account~ng
taxes that must be collec!ed or wlthheld
methods.
Rounding Off to
are not collected or withheld, or these
misstatements, substantial
understatements of tax, and reportable
transaction understalements from the
due date (including extensions) to the
date of payment. The interest charge is
f~uuredat a rate determined under

i

,*f
C.d

taxes are not paid. These taxes are
generally reported on:
Form 720, Quarterly Federal Excise
Tax Return;
Form 941, Employer's QUARTERLY
Federal Tax Return;
Form 943, Employer's Annual
Federal Tax Return for Agr~cultural
Employees; or
Form 945, Annual Return of Withheld
Federal Income Tax.
The trust fund recovery penalty may
be imposed on all persons who are
instructions for Form I1 20s

Accounting Period

Whole Dollars

A corporat~onmust figure its income on
the basis of a tax year. A tax year is the
annual accounting perlod a corporation
uses to keep its records and report its
income and expenses.
An S corporation must use one of
the following tax years.
A lax year ending December 31.
A natural business vear.
An ownersnap tax y&ar.
A tax year elected under section 444.

The corporation can round oil cents to
whole dollars on its return and
schedules. If the corporation does
round to whole dollars. it must round all
amounts. To round. drop amourlts
under 50 cents and Increase amounts
from 50 to 99 cents to Ihe next dollar.
For example, $1.39 becomes $1 and
$2.50 becomes $3

-5-

If two or more amounts must be
added to figure the amount to enter on

their tax returns filed by the due date
2 Any Lii?ll'~'.zti~n
offered under
(including extensions) for the tax year in
cona~rlvnscf zcnf~dfintialityfor which
the csrporation c ~ an
d advisor a fee of
whlch the transaction occurred. Once
made, the election is irrevocable. See
at least S50.i3@0
Record keeping
:! Cert;:ln trznsnctions for which the section 362(e)(2)(C) and Notice
K w p Ihe corporallon's records for as
corpo!atlon has contractual protection
2005-70
long as IIie)~rnby be needed lor the
hyillnst ~ i ~ ~ l l r ~ vof~ the
a r ~tax
c ebenefits. Other forms and statements. See
a d m ~ n ~ s l ~ d lGI
~ rany
; n provision of the
4 . Certain transectlons resulting in a
Pub. 542 for a list of other forms and
lnlernal Revenup Code Usually,
loss of al I?ast 22 rn~lllonin any single
stetements a corporation may need to
records thai suppon an lterrl bl Income,
year or 54 ~nillior~
1r1any combination of
file in addition to the forms and
deduslion or credli on the return must
years
slatements discussed throughout these
t ~ ckept lor 3 years frclm the date each
5. Cefialn Ir~!lsadirjnsresulting In a instructions.
st~arenolder'sreturn IS due or f~led,
tax credrt of more than $25G,000, rf the
whichever 1s later. Keep records that
corporation held the asset generktlng
Passive Activity
VPIII~
the corporation's basis In property
_the
credi! for45_dayxo~!ess___
for as long as tney are needed to flgure
6. Any transaction identified by Ihe
Limitations
the basrs of the orrglnal or replacement
IRS in published g ~ ~ i d a n cas
ea
' In seneral section 469 llmlts Ihe
property.
"transaction of interest" (a Iransactlon
amsrunt of losses, deductions, and
The corporation should keep copies
that the IRS believes has a potential tor : c:ed\ts that shareholders can c l a m
of all filed returns. They help in
tax avoic'ance or evasion, but h a s net
tram 'passlve activities." The passive
preparing future and amended returns.
yet been identified as a listed
a ~ i r n t yI~m,!ationsdo not apply to the
transaction).
corpcrratlon.
Instead they apply to each
- -Amended Return
shaleholder's share of any income err
Penalties. The corporation may
I ~ s and
s c r e d ~altr~butable
l
to a passlve
To correct a previously filed Form
have to pay a penalty if it is required tp
actlvlty Because the treatment of each
'*lku p'501 1 2 0 file
~ ~an amended Form 1120s
disclose a reportable transaction tinder
shareholder's share clf corporate
and check box H(4) on page 1. Attach a section 601 1 and fails to properly
Ilicurne or loss and credlt depends on
statement that identifies the line
conipiete and file Fo:m 8886.
l h nature
~
of Ihe activlty that generated
number of each amended item, the
.
,
.
11.Ihe corporalion lnusl repon rncome
'b?Aif corrected amount or treatment of the
r
p
e
tivlm
,.t, ,
and an explanation of the reasons
,
or loss and credlts separately lor each A
to file Form
activllv
I
for each change.
8886
with
its
corporate
returnIs
tollowing instructions and ihe <*tli
If the income. deductions, credits, or &I&W to provide a copy of Form 8886
in~tloctionsfor Schedules K and K - 1
other information provided to any
to%e Office of Tax Shelter Analysis
(pages20thiough34)expia1nihe ,>.rdL*drR
shareholder on Schedule K-1 is
(OTSA),Olher penalties, such as an
applicable passive act~vitytirnltallor~
incorrect, file an amended Schedule
accuracy-related penalty under section
h:*JJ
rules and scjecify ihe ivpe of
.
K - I (Form 1 1205) for that shareholder
6662A. may also apply See the
,\I
r*fi~wh
with the amended Form I12DS.Also
Instructions for Form 8886 for delails on intormat~on'lhe;orpor>iion musl
provide to iis sharetlolders tor each
glve a copy of the amended Schedule
these and other penalties.
actlv~fy I1 the corporation had rnoir r4)i'J
K - l to that shareholder. Check the
- -by material
Reportable -transactions
Inan
it must report ;rC(r&j i*'lr'
"Amended K-t " box at the top of the
advi soy s. ,M ~ ~ a ! ~ $ f k o j . ~ ~ ~ one
- aciiviiy,
ir~fnirnalon
lor
each
activity on an ;,&,,hu-)0
Schedule K-1 to indicate that it I S an
~tiachrnentto Schedules K and K - 1 .
amended Schedule K - I .
to any reportable
Generally, passive activities include
A change to the corporation's federal t ransaction/ must ftle Form 8918,
IirA uu
(a) activities !hat involve the conduct of
Material Advisor ~ R c l o s u r eStatement,
return may affect its state return. This
a trade or business if the shareholder
:
includes changes made as the result of
does not materially parlicipate in the
~ R S
w t d * ~an IRS examination. For more
aclivlty and (b) all rental activities
information,
contact
the
state
tax
&
v9'49rr(.w
(defined betow) reqardless of the
,.*k zgerlcy lor the state(s) in which the
shareholder's partikipation. For
Fern
c ~ r p o r ~ ~ t ~rfiturn
a n ' s was flied
.. . . .
-- --.-.-. - -.,,
exceptions, see Activittes Thai Are Not
Trar~sfersto a corporation coritroiled
Passive Activities below. The tevei of b.I ' - by the transferor. If a person
Other Forms and
each shareholder's parlicipation In an ,JdSr,,
&r
rncslves stock of a corporiltton In
activ~tvmust be determined bv the
.
.
Statements That May Be e x c h a n g ~for prfiperly, and no c?'.ln or
shareholder.
isc(riv4
loss IS recogn17edunder section 351,
Required
The passive activity rules provide
ihat losses and credits from passive
Reportable transaction disclosure
activ~tiescan generally be applied only
statemeni. Disclose infvrrnaiiun fur
against income and tax from passive
each repoflnble Iransarllon 111ivtilch the
activities. Thus, passive losses and
corporation parflcipaled Form 9PB6.
credits cannot be applied against
Reportable T l n n s a d i ~ nDlsclclsi~re
Election to reduce hasis under
income from salaries, wages,
Statement, mud be filed for each tax
section 362(e)(2)(C). The transferor
professional lees, or a buslness in
year the corpnration parliclpated rn Ihp
b n d trsnsfzree 111certain sect~on351
which the shareholder materially
transaction. The cclrporatlon may have
rrhnsactions can make a lolnl election
parllc~pates;against "portfolio income"
to pay a penaltv 11 11 is required tc file
~ l r ~ d section
er
362(e)(2](C) to l ~ n ~the
rt
(deflned on page 8); or against the tax
Fo:m 8886 and does not do sc The
Irarjsleror's bdsis In the stock received
related to any of these types of Income.
follo~vingare reportable trarlsactlons
lrlslead of the traosferee's bas13in the
1 Any listed Iransaction. whlch 1s a
lranslerred prcperty. The transletor and
Special rules require that net Income
trhnsieree may mzke the electlon by
trilnsacfion thal IS Ihe same as or
from certain activities that would
9.tl;lchlng the sla!ement as provided 1!i
substantially similar to lax avotdance
otherwise be treated as passive income
FsIot~~f?
2005-7rj, 2005-41 1 k.8 694, La
must be recharacterized as nonpassfve
transactions ideril~f~ed
by the IRS

a 11ne.lniludc 2er:I:: ivhen 2tAding \ h e
anicunts and

I

G

L

c ~l i only
~
lhe lcial.

>

- , p- -p
A.

3

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he

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A

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,

4

Instructions for Form 7 1 20s

income for purposes of Ihe passive
activity I~mitations.See
Recharacterization of Psssive Income
on page 9.

To allow eacn shareholder to
correctly apply the passive aciivily
limitations, the mrporalion must report
income or loss and credits separately
tor each of the follclwjng trade or
business activities, renlal real estate
activrties, rental aclrv~tiesother than
rental real estate. and pottfolio income

Activities That Are Not
Passive Activities
She followingare not passive activities.
1. Trade or business activities in
which the shareholder rnaterialky
participated for :he tax year.
2. Any rental real estate activity in
which the shareholder materlally
participated if the shareholder met both
of the following conditions for the tax
year.
a. More than half of the personal
services the shareholder performed in
trades or bus.inesseswere performed in
real properiy trades or businesses in
which he or she materially pacicipated.
b. The shareholder perl~rmedmore
than 750 hours of services 1 0real
property trades or bus~nessesIn which
he or she rnaterlally participated.
For purposes of this rule, each
interest in rental real estate is a
separate activity unless the shareholder
elects to treat ail interests In rental real
estate as one activity.
If the shareholder I S married filing
jointly, either the shareholder or his or
her spouse must separately meel both
of the above conditions, without taking
into account services performed by the
other spouse.
A real property Irarle c: business is
any real property development,
redevelopment, construct~on,
reconstructi~n,acqu~sit~on,
conversion,
rental, operatron, management, leasing,
or brokerage trade or business.
Services the shareholder performed as
an employee are not treated as
performed in a real property trade or
brls~nessunless he or she owned more
than 596 of the stock In the employer.
3. The rental of a d~vell~ng
unit uses
by a sharehcirler for personal purposes
during the year for more than the
greater of 14 days or 10% of the
number of days that the ws~dencewas
rented at far renlal value.
4. An activity ol trading personal
property for the account of owners of
interests in the actlv~ty For purposes of
this rule, personal property means
property that IS actively iiaded, such as
stocks, bonds, and other securities.
See Temporary Regulat~rjnssection
1.469-1T(e)(Gj
Instructions for Form l t 205

Note. The secrlon 469(c)(3) exception

lor a working interest in oil and gas
properttes does no1 apply to an S
corporation because state law generally
Ihrnits the liability of shareholders.

Trade or B u s i n e s s Activifies
A trade or business activify is an
activity (ather than a rental activity or
an activity treated as incidental to an
activity of holding property for
~nvestrnent)that:
1 . Involves tne conduct of a trade ot
buslness (within the meaning of section
1 62),
2. Is conducted in anticpation of
starting a trade or business, or
3. Involves research or experimental
expenditures deductible under section
174 (or that would be ~f you chose to
deduct rather lhan capitalize them)
It the shareholder does not
malenally participate in the activity, a
trade or business activity of the
corporation is a passive activity for the
shareholder.
Each shareholder must determine if
he or she matenally participated in an
aclivity As a result, while the
corporation's ordinary buaness income
{!ossj is reported on page 1 of Form
1120s. the specif~cIncome and
deductions from each separate trade or
business acllvrly must be reported OR
attachments to Form 1120s. S~rnYarly,
whlle each shareholder's allocable
share of the corporation's ord~nary
business Income (loss) is reported in
box 1 of Schedule K-1, each
shareholder's allocabte share of the

income and dedhctlons from each trade
or business acttv~tymust be reporteo on
attachments to each Schedule K - 1 See
Passive Activity Reporfrng
Reaurrements on page 10 10r more
information

Rental Activities
Generally, except as noted below, if the
gross income from an activity consists
of amounts pard principally for 'h
, e use
of real or personal tangible property
held by the corporation, the activity is a
rental activity
There are several exceptions to this
general rule. Under these exceptions,
an activity involving the use of real or
personal tangible property is not a
rental acl~vityif any ot the folfowing
apply
The average period of customer use
(defined on pagF: 7) lor such property is
7 days or less
The average period of customer use
for such property is 30 days or less and
sign~ficantpersonal services (defined
on Fago 7) are prov~dedby or on behalf
of the corporation.

ExIraordinary personal services
(defined on page 8) are provided by or
on behalf of the corporation.
Rental of the properly is treated as
Incidental to a nonrental activity 01 the
corporation under Temporary
Regulations s r c t ~ o r1.469-1
~
T(e)(3)(vi)
and Regulations section
1.469- I (e)(3j(vi)
The corporation cuslornarily makes
the property available during defined
business hours for nonexclusive use by
various customers
The corporat:on provides property for
use in a nonrental activity of a
partnership in ~ t scapacity as an owner
of an ~nterestin such partnership.
Whether the corporat~onprovides
praperty used in an acrrvity of a
partnership in the corporation's capacity
as an owner ol an interest in the
partnership IS determined on Ihe basis
of all the lack and circumstances.
In addition, a guaranteed payment
descr~bedin section 707(c)IS never
income from a rental activity.
Average period of customer use.
Figure the average period of customer
use for a class of property by dividing
the total number of days in all rental
periods by the number of rentals during
the tax year If the activity involves
renting more than one c!ass of
property, multiply the average period of
customer use ot each class by the ratio
of the gross rental income from that
class lo the activity's total gross rental
income. The activity's average period of
customer use equals the sum ot these
class-by-class average periods
weighted by 91-05sincwne. See
Regulations section I 469-l(e)(B)(iii).
Significant personal services.
Personal servlces include only services
perlormed by individuals. To determine
if personal services are signilicant
personal services, cons~derall the
relevant facts and circumstances.
Relevant facts and circumstances
include:
How often the services are provided,
The type and amount of labor
required to perform the sen/ices, and
The value of the services in relation
to Ihe amount charged for use of the
property.
The following services are not
considered In determining whether
personal sev,~cesare significant.
Services necessary to.perrnrI the
lawful use of the rental prope,*v.
Services perforrned in connection
with ~rnprovementsor repairs to the
rental properly thal exlend the useful
life of the property substantially beyond
the average ie!ltal penod.
Serv~cesprovided in c o n n e d i o ~with
the use of ally Improved real properly
that are s~rnilarLo those cbrnmonly
provided in connection wrtn long-term

rentals of high-grade commercial or
residential property. Examples Include
cleaning and maintenance of common
areas, routine repairs, trash collection,
elevator semlce, and security at
entrances.
Extraordinary personal services.
Services provided in connection with
making rental properly available for
customer use are extraordinary
personal services only if the services
are performed by individuals and the
customers' use of the rental property is
incidental to their receipt of the
services.
For example, a patient's use of a
hospital room generally is incidental to
the care received from the hospital's
medical staff. Similarly, a student's use
of a dormitory room in a boarding
school is incidental to the personal
services provided by the school's
teaching staff.
Rental activity incidental to a
nonrental activity. An activity is not a
rental activity if the rental of the
property is incidental to a nonrental
activity, such as the activity of holding
property for investment, a trade or
business activity, or the activity of
dealing in property.
Rental of property is incidental to an
activity of holding property for
investment if both of the following
apply.
The main purpose for holding the
properly is to real& a gain from the
appreciation of the properly.
The gross rental income from such
property for the tax year is less than 296
of the smaller of the property's
unadjusted basis or its fair market
value.
Rental of property is incidental to a
trade or business activity ~f all of the
following apply.
The corporation owns an interest in
the trade or business at all times during
the year.

The rental property was mainly used
in the trade or business activity during
the tax year or dur~nga1 least 2 of the 5
preceding tax years.
The gross rental lncome from the
property for the tax year IS less than 2%
of the smaller of the property's
unadjusted basis or its fair market
value.
The sale or exchange of property
that is also rented during the tax year
{in which the gain or loss IS recognized)
is treated as incidental to the activity of
dealing in property ti,at the time of the
sale or exchange, the property was
held primarily for sale to customers in
the ordinary course of the corporatiun's
trade or business.
See Temporary Regulations section
1.469- 1T(e)(3) and Regulations section

1.469-1(e)(3)
for more information on
the definition of rental activities for
purposes of the passive activity
limitations.
Reporting of rental activities. In
reporting the corporation's income or
losses and credils from renlal activities.
tile corporation musl separately report
rental real estate activities and rental
activ~tiesother than rental real estate
activities.
Shareholders who activety
participate in a rental real estate activity
may be able to deduct part or all of their
rental real estate losses (and the
deduction equivalent of rental real
estate credits) against income (or tax)
from nonpassive activities. Generally,
the combined amount of rental real
estate losses and the deduction
equivalent of rental real estate credits
from all sources (including rental real
estate activities not held through the
corporation) that may be claimed is
limited to $25,000.
Report rental real estate activity
income (lossj on Form 8825, Rental
Real Estate lncome and Expenses of a
Partnership or an S Corporation, and
line 2 of Schedule K and box 2 of
Schedule K-1 , rather than on page 1 of
Form 11205.Report credits related to
rental real estate activities on lines 13c
and 13d of Schedule K (box 13, codes
C and D, of Schedule K-1) and
low-tncome housing credits on lines
13a and f 3b of Schedule U (box 13.
codes A and 3.of Schedule K-I}.
Report Income (loss) from rental
acttv~t~es(aher.thm~~ental
real estate
on line 3:of
Scheju!eHand credits
related to rental activ~t~es
other than
rental real estate on lhne 1 3e of
Schedule K and In box 13, code E, of
Schedule K - l

Portfolio Income
Generally, portfolio income includes all
gross income, other than income
derived in the ordinary course of a
trade or business, that is attributable to
interest; cirvidends; royalties; income
from a real estate investment trust, a
regulated investment company, a real
estate mortgage investment conduit, a
common trust fund, a controlled foreign
corporation, a qualified electing fund, or
a cooperatrue, lncome from the
disposition of property that produces
income of a type defined as portfolio
income: and income from the
dispositron of property held for
investment. See Self-charged Interest
on page 8 for an exception.
Solely for purposes of the preceding
paragraph. gross income derived in the
ordinary course of a trade or business
includes (and portfolio income,
therefore, does not include) the
following types of income.

Interest income on loans and
investments made in the ordinary
course of a trade or business of lending

money.
Interest on accounts receivable
arising from the performance of
services or the sale of properly in the
ordinary course of a trade or business
of performing such services or selling
such property, but only if credit is
customarily offered to customers of the
business.
lncorne from investments made in
the ordinary course of a trade or
business of furnishing insurance or
annuity contracts or reinsuring risks
underwritten by insurance companies.
lncome or gain derived in the
ordinary course of an activity of trading
or dealing in any property if such
activity constitutes a trade or business
(unless the dealer held the property for
investment at any time before such
income or gain is recognized).
Royalt~esderived by the taxpayer in
the ordinary course of a trade or
business of licensing intangible
property.
Amounts included in the gross
income of a patron of a cooperative by
reason of any payment or allocation to
the patron based on patronage
occurring with respect to a trade or
business of the patron.
Other Income identified by the IRS as
income derived by the taxpayer in the
ordinary course of a trade or business.
See Temporary Regulations section
1.469-2T(c)(3) for more information on
portfolio income.
Report portfolio income and related
deductions on Schedule K rather than
on page 1 of Form 11205.

Self-Cha rged l nterest
Certain self-charged interest income
and deductions may be treated as
passive activity gross income and
passive activity deductions if the loan
proceeds are used in a passive activity.
Generally, self-charged interest income
and deduct~onsresult from loans
between the corporation and its
shareholders. Self-charged interest also
occurs in loans between the corporation
and another S corporation or
partnership if each owner in the
borrowing entity has the same
proportional ownership interest in the
lending entity
The self-charged interest rules do
not apply to a shareholder's interest in
an S corporation if the S corporation
makes an election under Regulations
section 1.469-7Ig)k avoid the
application of these rules. To make the
election, the S corporation must attach
to its original or amended Form 1120s
a statement that ~ncludesthe name.
address, and EIN of the S corporation

Instructions for Farm 21205

and a declaration that the electlon is
being made under Regulations section
1.469-7(g). The election will apply to
the tax year for which it was made and
all subsequ~nttax years. Once made,
the election can only be revoked with
the consent of the IRS.
For more details on the self-charged
interest rules, see Regulations section
1.369-7.

Grouping Activities
Generally, one or more trade or
business or rental activities may be
treated as a single activity if the
activities make up an appropriate
economic unit lor measurement of gain
or loss under the passive activity rules
Whether activ~tiesmake up an
appropriate economic unit depends on
all the relevant facts and
cjrcumstances. The factors given the
greatest weight in determining whether
activities make up an appropriate
economic unit are:
Similarities and differences in types
of trades or businesses,
The extent ot common control,
The extent of common ownership,
Geographical location, and
Rel~ancebelween or among the
activities.
Example. The corporation has a
significant ownership interest in a
bakety and a movie theater in Baltimore
and a bakery and a movie theater in
Philadelphia. Depending on the
relevant facts and circumstances, there
may be more Ihan one reasonable
method lor grouping the corporalion's
activiiies. For Instance, the following
groupings may or may not be
permissible.
A single activity.
A movie theater activity and a bakery
activity.
A Baltimore activily and a
Philadelphia act~vity.
Four separate activities.
Once the corporation chooses a
grouplng under these rules, it must
conllnue uslng that grouping In later tax
years unless a material change in the
t a m and circumstances makes it
clearly rnappropriate.
The IRS may regroup the
corporation's aclivil~esif the
corporation's grouping fails to reflect
one or more appropriate economic units
and one of the primarj purposes for the
grouping is lo avo~dthe passive activity
limitations.
Lirnilation on grouping certain
activities. The following activities may
cat be grouped together.
1 . A rental activity with a trade or
business activity unless the actiwties
being grouped togelher make up an
appropriate economic unit and:
Instructions for Form 11205

a. The renlal activ:ty is insubstantial
relative to the Irade or business activity
or vice versa or
b. Each hwner of the trade or
business activity tlas the same
prcporlionate ownership ~nterestin the
rentai activity. If so, the port~onof the
rffltal activity involving the renlal of
property to be used in the trade or
business activity can be groclped with
the trade or business activity.
2. An aclivity involving the rental of
real properly wllh an activity involving
the rental of personal property (except
personal property provided in
connection w~ththe real property or vice
versa).
3 Any activity with another activity
rn a different type of b u s ~ n e s sand In
wh~chthe corporation holds an Interest
as a limited partner or as a itmlted
entrepreneur (as defined in section
464(e)(2)) if that other activ~tyengages
in hold~ng,producing, or distributing
motion pldure films or videotapes;
farming, leasing section 1245 properly,
or exploring for or exploiting oil and gas
resources or geothermal deposits.
Activities conducied through
partnerships. Once a parlnership
determines its activiti~sunder these
rules, the corporation as a partner can
use these rules to g r ~ ~those
l p activities
with

Each other,
Aclivities conducted directly by the
corporation, or
Aclivities conducted through other
parirlerships
The corporation cannot treat as
separate activities Ihose activities
grouped together by a partnership.

Recharacterization of
Passive Income
Under Temporary Regulations section
1 469-2T(f) and Regulations sectlon
1 469-2(f),net passive income from
certain passive activities must be
treated as nonpassive income. Nat
passtve income is the excess of an
activity's passjve activity gross income
over its passive actrvily deductions
(current year dedudions and prior year
unallowed losses)

income from the follc~wingsix
sources is subject to recharacterization.

Note. Any net passive incotne
recharacterized as nonpassive Income
is treated as investment income for
purposes of figuring investment interest
expense limitations if it is from (a! an
activity of renting substantially
nondeprec~abteproperty from an
equity-financed lending activ~tyor (b) an
activity related to an Interest in a
pass-through entity that licenses
intangible property.

1. Significant participation
passive activities. A significant
parlicipation passive activily IS any
trade or business activity in which the
shareholder participated for more than
100 hours during the tax year but d ~ d
not materially participate. Because
each shareholder musf determine his or
her level of participation, the
corporation will not be able to identify
significant participation passive
activities.
2. Certain nondepreciable rental
property activities. Net passive
income from a rental activity is
nonpassive income if less than 30% of
the unadjusted basis of the property
used or held for use by customers in
the activity is subject to depreciation
under section 167.
3. Passive equity-financed
lending activities. If the corporation
has net income horn a passive
equity-financed lending activity, the
smaller of the net passive income or
!he equity-financed interest income
from the activity is nonpassive income.

Note. The amount of i ~ c o m efrom the
activities in items 1 through 3 above
that any shareholder will be required to
recharacterize as nonpassive income
may bc limited under Temporary
Regulalions section 1.469-2T(f)(8).
Because the corporation will not have
information regarding all of a
s,+areholder'sactivities, it must Identity
all corporate activities meeting the
definitions in items 2 and 3 as activities
that may be subject to
recharacterization.
4. Rental of property incidental to
a development activity. Net rental
act~vityincome is the excess of passive
activity gross income from renling or
disposing of property over passwe
activity deductions (current year
deductions and prior year unallowed
losses) that are reasonably aliocable to
the rented property. Net rental act~v~ty
income is nonpassive income for a
shareholder if all of the following apply.
a. The corporation recognizes gain
from the sale, exchange, or other
disposition of the rental property during
the tax year.
b. The use of the item of property in
the rental activity started less than 12
months before the date of drspos~tion.
The use of an item of renlal property
begins on the first day on wh~ch(a) the
corporation owns an interest in the
property, (b) substantially all of the
property is either rented or held out for
rent and ready to be rented, and ( c ) no
significant value-enhancing services
remain to be performed.
c. The shareholder materiallv or
signif~cantlyparticipated for any tax
year rn an activity that involved
performing services to enhance the