Major Changes for Form 1120S, Instructions, Schedules

Memo of 5Iajor Changes for 2007 Form 1120S. IT.S.Income Tax Return for an S
Corporation

'The majority of changes to this form were made in response to Rev. Proc. 2007-62
(which permits certain corporations an additional method of relief for making late
elections) and in response to changes made to IRC code section 904(d) by section 404 of
the American Jobs Creation Act of 2004 (PL 108-357).
We have made Item C (instead of item H) the checkbox used to indicate that Schedule

M-3 is attached. All subsequent entries in the opening section have been relettered.

Rev. Proc. 2007-62 permits, in certain situations, relief from a late election by attaching a
properly completed Form 2553 to Foml 1 120s. This applies to tax years ending on or
after December 3 1, 2007. We added text under the form's title to state that Form 2553
can be attached. Also, in reletiercd Item G , we have changed the question to ask if it is
the corporation's first return, and added a "Yes"checkbox and a "No" checkbox. If the S
Corp, checks "Yes".we added text to tell the S Corp. to attach Form 2553 to the return (if
Form 2553 has not been previously filed).

In relettered Item H, we require S corporations to check all applicable checkboxes. The
first four checkboxes on relettered Item H correspond to checkboxes (2) through ( 5 ) of
Item F of the 2006 Form 1 120s. On relettered Item H, checkbox ( 5 ) will read " S election
tzrniination or revocation." We are adding this at the request of LMSB and the service
centers because the lack of notification of terminated S elections, and reversion to C
status, i s causing erroneous refunds and unnecessary expenditure of staff time.
Since previous Item H is now relettered Item C, previous Item W has beer1 deleted.
Previous Item G is now Item

I.

Since TETR will not apply for 2007, we have deleted line 23d. and line 23e has been
renamcd line 23d. All subscq~~ent
line references have been renumbvred.
We have removed question 4 from Schedule B based on the advice of an S Corporation
LMSR technical advisor. The a d t icc pertains to imminent issuance o f a new regulation
stating that an S corporation cannot be a member of a controlled group. Subsequent
questions in Schedule B have bczn renumbered. Wc deleted the "Note" at the end of
Schedule B, as this item is no longer new.

On page 3, undcr 14, Foreign Transactions, we changed codes J Ihrough f and i through k
to read as follows:
d Passive category
e General category
f Other (attach sfatcl~lcnt)

i Passive category
j General category
k Other (attach statement)
These changes rename and reorder the categories of forcign gross income sources at the
shareholder level and deductions allocated and apportioned at the shareholder level to
foreign source income. This reflects changes made to section 904(d) by the American
Jobs Creation Act of 2004, PL 108-357, sec 404. Please note that as a result of these
changes, statements ivill now be attached to line 14( f) and line 14(k)(rather than line
14(e) and line 14Cj)).
Throughout the form, all year references have been updated.

Major Changes for Instructions for Form 1120s

Minor changes. Throughout the instructions we made minor changes such as updating
the tax year, certain other dates, and line references. We also made various editorial
changes to conform to changes made to similar text in the Instruct~onsfor Form 1120.
Page 1

What's New. We updated these items to reflect current changes which include the
following.
Revenue Procedure 2007-62 (see IRB 2007-41 dated October 9,2007) makes it
possible to get relief from a late S corporation election by filing Form 2553 with Form
11205 for the first tax year for wh~chthe election was intended.
The Small Business and Work Opportunity Tax Act of 2007 made changes to the tax
laws regarding S Corps. Section 8231 of the Act states that for tax years beginning after
May 25, 2007, gains from sales or exchanges of stock or securities will not be treated as
an item of passive investment income for S corporations.
Page 2

Who Must File. We revised this text to reflect changes made by Rev. Proc. 2007-62.

Page 3
Electronic Filing. We deleted the bulleted items stating that amended returns and
returns with a name change could not be filed electronically to reflect current guidance a?
www.irs.qovlefile.
Where To File. We revised the mailing addresses to add "Department of the Treasury"
to at1 2 line addresses to reflect the new 3 line minimum USPS requirement. We also
made changes so that returns from corporations voluntarily attaching Schedule M-3 will
be filed with Ogden. Ogden is the only center set up to process Schedule M-3.

Page 6
Other Forms and Statements That May Be Required. Under "Reportable transaction
disclosure statement" we added item #6 to the list to reflect new reporting requirements
for "transactions of interest" as discussed in the circulated draft Instructions for Form
"Reportable transactions by material advisors" we revised text to reflect
under section 301.6111-3 and the requirement to file new Form 8918,
Disclosure Statement.
~ Q ~ . . jI.JP*W
&b h IJwdrrL 6 r LA
8 Y f 60

Extraterritorial Income Exclusion. We revised text to reflect the transition rules
covering exceptions to the December 31, 2006, expiration of this Code section 942

exclusion.

Name and Address. We adopted an employee suggestion to clarify that the address on
the return should be the corporation's principal place of business or the address of the
principal office.

Item C. Schedule M-3 Information. This item was moved to reflect changes to Form
1120s. II was previously item H.Items D and F were previously items C and E.
Item H. Final Return, Name Change, Address Change, Amended Return, or S
Election Termination or Revocation. This item was moved to reflect changes to Form
1120s. It was previously iiem F. We removed "initial return" since those instructions are
now part of line G on Form 1120s. We added "S election termination or revocation" to
reflect the new box on Form 1120s.

Page 12
Line 5. Other Income (toss). We added another example to the bulleted list (see page
13) to cover proceeds from certain corporate-owned life insurance contracts issued after
August 17, 2006, to reflect Code section 101(j).
Page 13
Limitations on Deductions. We added an item at the end of the bulleted list under
"Exceptions" to reflect the exception for Code section 1790 capital costs incurred to
comply with EPA sulfur regulations per Code section 263A(c)(3).
Page 14
Reducing certain expenses for which credits are allowable. We deleted the
reference to Form 5884-A, Credits for Employers Affected by Hurricane Katrina, Rita, or
Wilma. These credits expired before 2007 per Code section 1400P(fj.

Line 11. Rents. We revised the inclusion amount table lo reflect Revenue Procedure
2007-30 which raised the vehicle fair market value amount to $15,500 for lease terms
beginning after 12131106 but before 01101108. We also removed information for years
before 2004 since we also refer readers to Publication 463, Travel, Entertainment, Gift,
and Car Expenses.
Page 18

Line 23d. This was previously line 23e. We renumbered it because we deleted the
previous 23d which covered the credit for federal telephone excise lax p a ~ dwhich only
applied to 2006 returns.

Schedule 6. Other Information. Quest~on4 from the 2006 Form 1120s was deleted so
we have renumbered subsequent items. Under "Question 4" (former Question 5), we
added a reference to Form 8919, and deleted the reference to Form 8264 and related
material. Under "Question 7" (former question a), we added a sentence to state that
"Est~rnatesbased on retained earnings at the end of the tax year are acceptable." We

have received complaints from preparers that sometimes the actual amount is just not
available so an LMSB S Gorp technical advisor suggested this text.
Page 21
Item C . This item was added to tell corporations that e-file to enter "e-file" in the space
for "IRS Center where corporation filed return." We also deleted text for former items D
and E in Part I which dealt with former tax shelter registration requirements.

Page 25
Noncash contributions (50%)(code C). We added text to address the requ~rementto
use Form 8283, Noncash Charitable Contributions, when the claimed deduction exceeds
a p t A * w h k L-1. X p -.re /&h
0 , J.--(;.,J
r(Cpd i r d 7
$5.000, W e
t. tu r n r b b c*) Q J / r~ b t t d - o* f i t # rdsi- 4 p C # Jy- & r- f4
J k 5 - h ~ u-4&+.,
Qualified conservation contributions. We added a reference to Notice 2007-50 for
additional guidance.

Page 26
Reforestation expense deduction (code N). We added text to state that the increased
deduction for qualified timber property located in the Gulf Opportunity Zones (GO Zones)
does not apply to expenditures paid or incurred after December 31, 2007, per Code
section 1400N(i)(5)(A)(ii)(l).

Page 27

Domestic production activities deduction (code 0 ) .This entire section which covers
codes 0 , P, and Q was rewritten to reflect guidance provided by Revenue Procedure
2007-34.

Other deductions (code R). The bullet discussing film and television production
expenses was revised to reflect guidance provided by and to include a reference to
Temporary Regulations sections 1. I 8 1- l T through 1.181-6T.
Page 28
Other credits (code P). We removed the quallf~edelectric vehicle credit from the l ~ s t
because it expired at the end on 2006 per Code section 30(e).We also deleted the
reference to Form 5884-A, Credits for Ernplo-yersAffected by Hurricane Katrina, Rita, or
Wilma, since these credits expired before 2007 per Code section 1400P(f).

Page 29
Lines 14d-14f. Foreign Gross Income Sourced at Corporate Level. We revised the
instructions for lines 14d, t 4 e , and 14f to reflect changes made to Form 1120S,
Schedules K and K - I , and Form 1I 16, Foreign Tax Credit, and its instructions.

Page 30
Lines 14i-14k. Deductions Allocated and Apportioned at Corporate Level to
Foreign Source Income. 1'Ve revised these instructions to reflect changes made to
Form 1120S, Schedules K and K - I , and Form 1116, Foreign Tax Credit, and its
instructions.
Page 33

Recapture of other credits (code H). We added the alternative motor vehicle credit
(see Code section 30B(h)(8)) and the alternative fuel vehicle refueling property credit
(see Code section 30C(e)(5)) to the list to reflect changes made to the Form 1040
instructions.

Page 34
Other information (code T). We deleted the first bullet concerning the disclosure
requirements under Code section 61 11 and the list keeping requirements under
Regulations section 301.61 12-1 to reflect new Regulations under section 301.61 1 1-3.
Pages 38 - 40

Principal Business Activity Codes. We made changes to certain Principal Business
Activity Codes and the text accompanying the codes at the request of the IRS Statistics
of Income (SO])
Division.

Memo of Major Changes to Schedule K-1(Form llZOS), Shareholder's Share of
Income, Deductions, Credits, etc.

The revised 1.60114 regulations have been published. The regulations state that
investorswillnolongerberequiredtofileForms8271thataredueondafterAugust3,
2007. Therefore, we have revised Schedule K-1 (Fom 1 120s) to delete item D (Tax
Shelter Registration Number) and item E (Check if Form 8271 is attached). We relettered
the subsequent items to correspond with ths change. We moved "Part 11" so it comes
directly after Item C. We increased the size of the "ForIRS Use Only" box.

To conform to changes made to Schedule A (Form 1040), we updated the line references
for codes used in box 12. Box 12, Code J, now instructs taxpayers to enter the portfolio
(2% floor) amount that is part of Schedule A, line 23. Box 12, Code K, now instructs
taxpayers to enter the portfolio (other) amount that is part of Schedule A, line 28.

To conform to changes on Form 8903, Domestic Production Activities Deduction, we
updated the line reference for Box 12, Code Q.Box 12, Code Q now insbucts taxpayers
to enter employer's Form W-2 wages on Form 8903, line 15.
On page 2, under 14, Foreign transactions, we changed codes D through F and I through
K to read as follows:
D Passive category
E General category
F Other
I Passive category
J General category
K Other
These changes rename and reorder the categories of foreign gross income sources at the
shareholder level and deductions allocated and apportioned at the shareholder level to
foreign source income. This conforms to the changes we plan to make to Schedule K on
Form 1 120s and reflects changes made to section 904(d) by the American Jobs Creation
Act of 2004, PL 108-357, sec 404.
A11 year references have k e n updated appropriately.

0"

Memo of Major Changes to the Instructions for Schedule K-1 (Form ll20S),
Shareholder's Instructions for Schedule K-1 (Form 11205)

Whenever appropriate, we updated line references to forms to conform to the 2007
version of the foms.
All year references have been updated appropriately.

Page 5

We deleted the specific instructions for Part I of Schedule K- l (Form 1 120s) because the
previous items D and E which we discussed were removed from the Schedule K-1 after it
was circulated per changes to Regulations section 1.60 114 effective August 3,2007. The
subsequent items in Part II of Schedule K- I were re-lettered.
Page 11
Code H. Work opportunity credit. We removed the references to Form 3800 because

this credit is no longer reported on Form 3800 per section 82 14 of the Small Business and
Work Opportunity Tax Act of 2007.
Code N. Credit for employer social security and Medicare taxes. We removed the
references to Form 3800 because this credit is no longer reported on Form 3800 per
section 82 14 of the Small Business and Work Opportunity Tax Act of 2007.
Code P. Other credits. We removed the qualified electric vehicle credit from the list
because it expired at the end of 2006 per Code section 30(e). We also deleted the
reference to Form 5884-A, Credits for Employers Affected by Hurricane Katrina, Rita,or
Wilma, since these credits expired before 2007 per Code section 1400P(f).

Page 13
Code H. Recapture of other credits. We added the alternative motor vehicle credit (see
Code section 30B(h)(8)) and the alternative he1 vehicle refueling property credit (see
Code section 30C(e)(5)) to the list to reflect changes made to the Form 1040 instructions.

Page 14

Code T. Other information. We deleted the first bullet point concerning the disclosure
requirements under Code section 61 1 1 and the list keeping requirements under
Regulations section 30 1.61 12- 1 to reflect new Regulations under section 301.6 1 1 1-3.

Memo of Major Changes to 2007 Schedule M-3 ('Form 1lZOS), Net Income (Loss)
for S Corporations With Total Assets of $10 Million or More

Changes on Page 1

The text of 1 a now states" Did the corporation prepare a certified audited non-tax-basis
income statement for the period ending with or within this tax year? (See instructions if
multiple non-tax-basis income statements are prepared.)

In the text for 1b, we replaced "an"with "a non-tax-basis".
On line 3b, we deleted the "3".
We changed line 7a to read "Net income (loss) of other disregarded entities (except
qualified subchapter S subsidiaries) (attach schedule)".
We changed line 7b to read "Net income (loss) of other qualified subchapter S
subsidiaries (QSubs) (attach schedule)". We deleted the parenthesis in the box f ~ line
r 7b.
We deleted the words "Privacy Act and" from the Paperwork Reduction Act Notice at the
bottom of the page.

Chunges orr Page 2
From columns (a) and (d), we deleted the parentheses and the word "optional".

On line 1 I , Interest income, we inserted: "(attach Form 89 16-A)"
On tine 15 , Cost of goods sold, we inserted parentheses in columns (a) and (d) since this
item is a negative amount that reduces income.

Changes on Page 3
From columns (a) and (d), we deleted the parentheses and the word "optional".

On line 26, Interest expense, we inserted "(attach Form 89 16-A)".
On thc schedule, all year references have been updated.

Major Changes to the 2007 Instructions for Schedule M-3 (Form 11205)

We made mrnor editorial changes throughout the instructions. We deleted the
word "federal" wherever used in the term "U.S. federal income tax return" since it
is redundant when used with "U.S." The years used in the examples were
updated as appropriate. Other minor editorial changes were made to conform
to the TFP style guide.

All technical changes described below were made at the request of the LMSB
M-3 Team.

Page 1
What's New. We inserted new text concerning changes made to the Instructions
for Schedule M-3.
Non-tax-basis and tax-basis financial statements defined for Schedule M-3
filers.

Changes to Part I, line 7a and 7b.
Form 891 6-A expanded to include Interest Income and lnteiest Expense.

Reportabte entity partner discussion
Clarification of entries in Part Ill

Purpose of Schedule

We revised text to clarify the purpose of Schedule M-3.
Who Must File
We removed text that provided non-specific guidance to 52-53-week tax year
filers.

Other Issues Affecting Schedule M - 3 Filing Requirements

We inserted a note referencing the instructions for Part 1, line 1, referring to nontax-basis income statements used in preparing Schedule M-3.

Page 2

Schedule 1

We inserted a new first paragraph concerning non-tax-basis income statements.
We also inserted "non-tax-basis" before "financial statements" wherever
applicable. We inserted a new third paragraph concerning differences in ending
of year and beginning of year total assets. The fourth paragraph (which is an
expansion of the second paragraph that appeared under Schedule L in the 2006
version of these instructions) concerns measuring total assets at the end of the
year.
Entity Considerations for Schedule M-3

We added text to reflect changes to Schedule M-3, Part I, line 7a and 7b. We
added a heading to the discussion of qualified subchapter S subsidiaries
(QSubs).

Reportable Entity Partner Reporting Responsibilities

We made the list in the second paragraph a numbered list. We updated
dates where applicable. We inserted a new paragraph concerning reportable
entity partner retention of copies of reports.
Page 3

Non-Tax-Basis Financial Statement and Tax-Basis Financial Statements.
We inserted "non-tax-basis" before "financial statements," where applicable. We
inserted a new header and text concerning non-tax-basis and tax-basis
financial statements as applied to Schedule M-3including the header and text for
"Order of priority in accounting standards."
Line 4. Worldwide consolidated Net lncome (Loss) per Income Statement

Where applicable, we revised Ihe third, fourth. and fifth paragraphs by inserting
"non-tax-basis" before "f~nancialstatemen is."

Page 4
Line 5 . Net Income (Loss) of Nonincludible Foreign Entities

We made several minor editorial changes for clarity.
Line 6. Net Income (toss) of Nonincludible U.S. Entities

We made several minor editorial changes for clarity.

Lines 7a and 7b. Net lncome (Loss) of Other Disregarded Entities (Except
Qualified Subchapter S Subsidiaries) and Net Income (Loss) of Other
Qualified Subchapter S Subsidiaries (QSubs)

We made multiple revisions to the text for this line in order to address
disregarded entities and qualified subchapter S subsidiaries. We made these
changes to conform to changes made to these lines on Schedule M-3.
Page 5
Line 8. Adjustment to Eliminations of Transaction Between Includible
Entities and Nonincludible Entities
We made several editorial changes for clarity
Page 8
Separately stated and adequately disclosed

We deleted the references to Rev. Proc. 2004-45 and 2005-75, and inserted a
reference to Rev. Proc. 2006-48. This conforms to the references used in the
Instructions for Schedule M-3 (Form 1120).
Page 11
Line 11. Interest Income

We inserted text stating that Form 8916-A, Part II must now be completed and
attached. This was done to cjarify what is reported on this line.
Page A2
Line 15. Cost of Goods Sold

We further clarified the text regarding completing and attaching Form 8916-A.
We inserted a "Note" to stress that the entries in columns (a) and (d) are negative
amounts.
Page I 4

Line 23. Total Income (Loss)Items.
We inserted a new header and a "Note" for thls ~temto stress that cost of goods
sold amounts (columns (a) and (d) of line f 5) should be subtracted from the
totals on line 23.

Part 111. Reconciliation of Net lncorne (Loss) per Income Statement of the
Corporation With Total Income (Loss) per Return-ExpensefDeduction
ltems

We inserted a "Note" concerning when certain amounts on Part Ill must be
reported as positive amounts.
Page 16

Line 26. Interest Expense

We inserted text stating that Form 8916-A, Part Ill must now be completed. This
text was added to clarify what is reported on this line.
Line 29. Other ExpenselDeduction ltems With Differences
In the section entitled "Reserves and contingent liabi!ities, we added a new first
paragraph.