The corporation as the recipient will also receive the 1099-INT with the amount in Box 3. Once it's been included on the 1120S return, the interest will be reported on the Schedule K as interest. There will need to be statements included with the shareholder's K-1 that show the amount of interest received from Treasury bonds. That information from the statements will help make any necessary adjustments on the shareholder's state return to exclude the income.
