Understanding the final line on Schedule K of Form 1120-S - what am I missing?

The last line of Schedule K on Form 1120-S is often misunderstood, so don't feel bad about it! That line summarizes all items that affect a shareholder's basis in the S corporation. The difference you're seeing between your ordinary business income ($142,000) and the amount on the last line ($119,650) is likely due to certain items that don't affect basis. Not all income and expense items on Schedule K affect shareholder basis in the same way. For example, if you had certain tax-exempt income or non-deductible expenses, these would create differences. Common things that cause this discrepancy include depreciation differences, meals and entertainment (which are often only partially deductible), certain tax penalties, life insurance premiums on shareholder policies, and tax-exempt income. Also check if you made any charitable contributions through the business, as those flow through differently.

Hey there! I had a similar issue last year and was pulling my hair out. Turns out I missed something that might help you - I used https://taxr.ai to upload my previous year's return and this year's documents. Their system pointed out that the last line on Schedule K is the sum of certain items (not all) that affect basis. In my case, I had some Section 179 depreciation that was affecting the calculation. I didn't realize that excess business interest and the basis adjustment to depletion were factored in differently than I thought. The site analyzed all my docs and showed exactly what was going on with that calculation. Saved me from making a costly mistake! Might be worth checking out if you're still stuck after looking at the items the previous commenter mentioned.

Just wanted to update - I tried taxr.ai after seeing it mentioned here and it was actually super helpful. I uploaded my partnership docs and it immediately identified that we had some passive activity losses that were affecting our basis calculation differently than I thought. The analysis explained exactly which items on Schedule K were included in that final line and which weren't. For us, it was some complicated stuff with built-in gains and separately stated items that was causing the confusion. The explanations were really clear and it even referenced the specific tax code sections so I could look them up if I wanted. Definitely saved me a lot of headache!

Another thing that might help - I had endless problems reaching the IRS for clarification on exactly this issue last year. After being on hold for literally hours (3+ hours twice!), I found this service called Claimyr at https://claimyr.com that got me connected to an actual IRS agent in about 20 minutes. They have this system that somehow monitors the IRS phone lines and calls you back when they can get you through. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. The IRS agent I spoke with walked me through exactly how to calculate that last line on Schedule K and what items to include/exclude. For S-Corps especially, there are weird rules about certain expenses and income types that affect basis differently. Highly recommend giving them a try if you're still confused after trying to figure it out yourself.

I was totally wrong about Claimyr being a scam. After my skeptical comment, I decided to try it because I was desperate to talk to someone at the IRS about my S-Corp basis issues. It actually worked! I got connected to an IRS business tax specialist in about 35 minutes (which is miraculous compared to my previous attempts). The agent explained that the last line of Schedule K includes income items that increase basis (ordinary business income, separately stated items, tax-exempt income) and subtracts items that decrease basis (certain non-deductible expenses, depletion for oil and gas). In my case, I had overlooked some non-deductible expenses that were reducing the total. The agent was super helpful and even emailed me a reference guide afterward. Definitely changed my opinion about this service!

Don't forget to check if you have any tax-exempt income or non-deductible expenses. Those two items alone can cause the kind of difference you're describing. In my S-Corp, we had about $18k in non-deductible expenses last year (some entertainment that wasn't 50% deductible, some club dues, and some political contributions the company made) and that reduced the number on that last line of Schedule K even though our ordinary business income wasn't affected. Also check for any separately stated items like Section 179 expenses or charitable contributions. Those flow through to shareholders in a different way than ordinary income.

Look at Box 16 on your K-1 too! That's where a lot of these items affecting basis are itemized. Your K-1 should have codes and amounts for each item that increases or decreases your basis. For example, Code A is for tax-exempt interest, Code B is for other tax-exempt income, Code C is for nondeductible expenses. If you add up all the positive items and subtract all the negative items from your ordinary business income, you should get the amount on that last line of Schedule K.

Glad to see you figured it out! Box 16 of the K-1 is definitely the key to understanding that final Schedule K line. For anyone else reading this thread who might have similar issues, here's a quick summary of what typically causes differences between ordinary business income and that last line: 1. Non-deductible expenses (Code C) - like the non-deductible portion of meals, penalties, life insurance premiums 2. Health insurance premiums for >2% shareholders 3. Separately stated items like charitable contributions 4. Tax-exempt income (rare for most small businesses but can happen) 5. Depreciation adjustments and Section 179 expenses The IRS instructions for Schedule K can be confusing, but remember that not every dollar of income or expense affects shareholder basis the same way. When in doubt, always cross-reference with your K-1 Box 16 - it breaks everything down by code so you can see exactly what's included in that summary line. Good luck with the rest of your return, Paolo!