Have a Tax Question? Ask a Tax Expert
The answer to your question is no, you will not have to file two separate 1120s returns for the year.
If a shareholder terminates his or her interest in a corporation during the tax year, the corporation may, with the consent of all the shareholders (including those whose interest is terminated), may elect to allocate income and expenses as if the corporation's tax year consisted of 2 separate tax years, the first of which ends on the date of the shareholder's termination.
To make this election, the corporation must attach a statement to the form 1120S when it is filed for the tax year in which the election is being made. In the statement, the corporation must state that it is electing under section 1377(a)(2) and section 1.1377-1(b) to treat the tax year as if it consisted of 2 separate tax years. The statement must also explain how the shareholder's entire interest was terminated (for example, sale or gift) and state that the corporation and each affected shareholder consent to the corporation making the election. If this election is made, you should also enter "Section 1377(a)(2) Election Made" at the top of each affected shareholder's Schedule K-1 form.
For more details on this you can refer to Regulations section 1.1377-1(b).
If this was helpful please press the Accept button. Positive feedback is also appreciated.