You essentially have a deemed sale by the corporation.

@Rick19744 is excellent at explaining the details of these transactions.

Thanks!

As noted by @tagteam , property distributions from an S corporation are treated as if there was a sale of the property at FMV.

• You will have a final return due the 15th day of the 3rd month after liquidation.
• Technically the S corporation should file a form 966 (not fatal)
• Liquidating distributions should be reported on form 1099-DIV and not the K-1
• Since there is a deemed sale of the property at FMV, you will have a gain at the S corp level and depreciation recapture.  No loss is allowed on property distributions.
• Since no loss is allowed, I would recommend you sell the inventory at the S corporation level.  Make sure this sale is to an unrelated party
• You will then have a gain or loss on the S corporation investment.  This will be determined by updating your tax basis schedule for the final K-1 activity and then computing the gain or loss.  This will be reported on form 8949 and Sch D.  TT will have some questions related to this since you will be indicating this is a final K-1.  Your "sales" price will be the FMV of all property distributions (amount reported on the form 1099-DIV) and then the cost will be your tax basis.
• Also make sure you touch base with your Secretary of State as there is most likely articles of dissolution required and possible other state requirements.
• You should also technically have a plan of liquidation, and as a result, it may be good to meet with an attorney.

Thank you so much for this response!  For much of today I thought I was going insane over this!  

Do you know how to find professional help that even understands this?  I called a few people today, tax consultants, and no luck.  I'm not even sure they knew what Special Depreciation is.  I want to call an attorney but then I'm not sure he/she will understand how to report on the actual tax return.

I'm going to print out what you wrote and have written in other discussions and show it to "someone".  It will be the guideline.

I would suggest contacting your state's CPA society or BAR association for referrals.  Tell them you're looking for a pro to handle the final return for an S-corporation that has been liquidated.  the assets of the corp were distributed to the stockholders. when calling referrals, I would suggest you get quotes because pros are not cheap.

if they don't know what special depreciation is hang up and try another.

You can try contacting an enrolled agent in your area,

See https://taxexperts.naea.org/listing/service/corporations

If you would rather use an attorney, find one that specializes in taxation.

See https://www.avvo.com/tax-lawyer.html