Income & deductions
Compensation of officers (line 7) is its own deduction line, separate from salaries and wages (line 8) — it's paid as ordinary W-2 wages and never touches a shareholder's K-1.
Schedule K — shareholders' pro rata share items
Line 1 pulls automatically from page 1. There's no guaranteed-payments line and no self-employment-earnings line on an S corp's Schedule K — pass-through ordinary income is never subject to SE tax for a shareholder. Enter everything else your corporation has for the year.
Schedule K-1 allocation
Every Schedule K line split across your shareholders by ownership percentage — the same single ratio for income, deductions, and distributions alike. Nothing to enter here; this updates as you fill in the sections above. Compensation of officers is never allocated — it's already baked into ordinary business income as a page-1 deduction, paid to the officer separately via W-2.
| Line item |
|---|
Schedule L — balance sheet
Beginning and end of tax year, per your books. The equity section uses the S corp stack — capital stock, additional paid-in capital, retained earnings, and adjustments — not a single "partners' capital" line.
Retained earnings (book) and ending AAA on Schedule M-2 (tax) are different numbers by design — AAA is a tax-basis running total built from taxable income only; retained earnings is a book/GAAP figure. They are not expected to match.
Schedule M-1 — reconciliation of income
Ties your book net income to the ordinary income reported on Schedule K. There's no guaranteed-payments add-back here — S corps don't have that line.
Schedule M-2 — AAA, PTI, AE&P & OAA
Entity-level, not per-shareholder — four named accounts tracked once for the whole corporation. This is the single biggest structural difference from a partnership's Schedule M-2, which rolls capital forward per partner. Only the beginning balances (row 1) are entered by hand; everything else derives from Schedule K above.
| Line item | (a) AAA | (b) PTI | (c) AE&P | (d) OAA |
|---|---|---|---|---|
| 1 Balance at beginning of tax year | $0 | $0 | ||
| 2 Ordinary income from page 1, line 21 | $0 | $0 | $0 | $0 |
| 3 Other additions | $0 | $0 | $0 | $0 |
| 4 Loss from page 1, line 21 | $0 | $0 | $0 | $0 |
| 5 Other reductions | $0 | $0 | $0 | $0 |
| 6 Combine lines 1 through 5 | $0 | $0 | $0 | $0 |
| 7 Distributions | $0 | $0 | $0 | $0 |
| 8 Balance at end of tax year | $0 | $0 | $0 | $0 |
PTI and AE&P stay at $0 for most S corporations — a company that has always been an S corporation carries no accumulated earnings & profits, and PTI is a legacy pre-1983 concept most corporations no longer carry. Both columns still exist on the official form and are shown here for completeness. Distributions draw first against AAA and cannot push it below zero in the year they're paid.
Shareholder stock basis (Form 7203)
A separate, illustrative per-shareholder tracker — off the K-1 and off Schedule M-2 entirely. Each shareholder computes their own stock basis on their own Form 7203, attached to their Form 1040, not to this return. Basis limits how much loss a shareholder can currently deduct and determines whether a distribution is tax-free or produces gain. Only the beginning-basis figures are entered by hand; the rest follows each shareholder's ownership % applied to the Schedule K income, deduction, and distribution lines above.
| Shareholder | Beginning basis | + Share of income | − Share of deductions | − Share of distributions | Est. ending basis | Distribution ≤ basis? |
|---|
Everything should read $0, 100%, or green
These confirm the return is internally consistent before it goes to your preparer.