Form 1120-S: U.S. Income Tax Return for an S Corporation

What Is Form 1120-S?

Form 1120-S, “U.S. Income Tax Return for an S Corporation,” is the annual federal tax return S corporations use to report their income, gains, losses, deductions, credits and other tax items to the Internal Revenue Service (IRS). Because an S corporation is a pass‑through entity for federal income tax purposes, the corporation itself normally does not pay federal income tax on its earnings; instead the items reported on Form 1120-S flow through to shareholders and are reported on each shareholder’s individual tax return via Schedule K‑1 (Form 1120‑S).

Purpose

– Summarize the S corporation’s financial activity for the tax year.
– Allocate each shareholder’s share of income, loss, deductions and credits (via Schedule K‑1).
– Reconcile book income to tax income and report balance sheet and other required information to the IRS.

Who Must File Form 1120‑S?

– Any corporation that has elected S corporation status (by timely filing Form 2553 and having the election accepted by the IRS) must file Form 1120‑S for each tax year that the S election is in effect.
– An S corporation with multiple shareholders must prepare a Schedule K‑1 for each shareholder showing that shareholder’s allocated share of tax items.

When Is Form 1120‑S Due?

– Due date: the 15th day of the 3rd month after the end of the corporation’s tax year.
– For calendar-year S corporations (tax year ends Dec. 31): Due March 15.
– For a fiscal-year S corporation that ends June 30: Due Sept. 15.
– If the due date falls on a Saturday, Sunday, or legal holiday, the due date is the next business day.
– To request an extension of time to file, file Form 7004 by the original due date. Form 7004 generally grants an automatic 6‑month extension of time to file the return (it does not extend time to pay taxes, where applicable).

Information Included on Form 1120‑S

The return collects:
– Basic entity information (name, address, EIN, tax year, accounting method).
– Income items (gross receipts/sales, cost of goods sold, ordinary business income/loss).
– Deductions (salaries, rent, repairs, depreciation, etc.).
– Tax and payments (e.g., built‑in gains tax, tax on excess passive income if applicable).
– Balance sheet (Schedule L) and reconciliation items (Schedule M-1) for larger S corps; Schedule M-2 shows changes to shareholder equity/accumulated adjustments.
– Schedule K (corporation-level summary) and Schedule K‑1 for each shareholder (items to be reported on individual returns).

Key Schedules and Attachments

– Schedule K (Form 1120‑S): Summarizes tax items that flow through to shareholders.
– Schedule K‑1 (Form 1120‑S): Prepared for each shareholder and reports that shareholder’s share of income, deductions, credits and other items. Shareholders use the K‑1 to complete their individual returns.
– Schedule L: Balance sheet per books (required if total receipts and total assets exceed certain thresholds).
– Schedule M‑1: Reconciliation of book income to taxable income (required for many filers).
– Schedule M‑2: Analysis of accumulated adjustments account, other adjustments and shareholder distributions.

Practical, Step‑by‑Step Guide to Preparing and Filing Form 1120‑S

1. Confirm S‑Election Status
– Verify that the corporation’s S corporation election (Form 2553) was filed timely and accepted by the IRS.
– If unsure, check IRS notices or contact the IRS to confirm acceptance.

2. Gather Financial Records

– Profit & loss (income statement), general ledger, and year‑end balance sheet.
– Payroll records, Forms 1099 issued/received, depreciation schedules, loans and capital accounts.
– Records of owner contributions, distributions and share changes during the year.

3. Determine Accounting Method and Tax Year

– Confirm the corporation’s accounting method (cash, accrual or hybrid) and the tax year (calendar or fiscal).
– Ensure consistency with prior returns or properly document a change in accounting method (if applicable).

4. Compute Taxable Income and Deductions

– Calculate gross receipts, cost of goods sold, ordinary business income (loss), and allowable deductions.
– Account for special items: depreciation, amortization, charitable contributions, Section 179, net operating losses, etc.

5. Prepare Schedules and Forms

– Complete Form 1120‑S (including Schedule K).
– Prepare a Schedule K‑1 for each shareholder showing each person’s allocated share of tax items and any separately stated items (e.g., capital gains, tax credits, passive activity items).
– Complete Schedule L, M‑1 and M‑2 if required.

6. Review Ownership Changes and Allocation Rules

– If shareholders purchased, sold or transferred stock during the year, allocate items based on ownership percentages and rules for proration (per‑share, per‑day methods).
– Confirm each shareholder’s stock basis and any distributions that may be taxable.

7. Sign and Assemble the Return

– The return must be signed by an officer of the corporation (e.g., president, treasurer) or by a paid preparer who also attaches a completed paid preparer declaration.

8. Filing: Electronically or By Mail

– E‑file: The IRS encourages electronic filing; many tax software packages and tax professionals e‑file Form 1120‑S.
– Paper filing: Still accepted in most cases but can cause delays; mail to the address listed in the form instructions for your location.
– Provide each shareholder with their Schedule K‑1 by the same deadline as the Form 1120‑S (or earlier).

9. Pay Any Required Taxes or Deposits

– S corporations generally don’t pay federal income tax on earnings passed through to shareholders, but they may owe tax in limited circumstances (for example, built‑in gains tax, excess net passive income tax, or recapture items).
– Ensure payroll taxes are deposited on schedule and any state taxes (including franchise or entity-level taxes) are handled properly.

10. File an Extension if Necessary

– If you need more time to prepare the return, file Form 7004 by the original due date for an automatic extension (generally 6 months).
– Note: An extension to file does not extend the time to pay any tax due.

Practical Checklist Before Filing

– S‑election (Form 2553) accepted and effective date confirmed.
– EIN and contact information correct on the form.
– All shareholder K‑1s prepared and cover all shareholders, with correct allocation percentages.
– Book‑to‑tax differences reconciled and documented.
– Shareholder basis calculations up to date.
– Payroll taxes and any estimated taxes paid.
– Copies of supporting documents available in case of audit (contracts, loans, depreciation schedules, 1099s, etc.).

Common Warnings and Pitfalls

– Late Filing and Late K‑1 Delivery: Filing Form 1120‑S late or failing to provide K‑1s on time can trigger penalties. Penalties are calculated per shareholder and can accumulate for each month or part of a month the filing is late. See IRS instructions for current penalty rules and amounts.
– Incorrect Shareholder Allocations: Ownership changes during the year require proration of income and losses; incorrect allocation can cause underreporting on shareholder returns and potential adjustments/penalties.
– Shareholder Basis Tracking: Shareholder tax consequences depend on basis. Failing to track basis can lead to incorrect reporting of taxable distributions and losses.
– State Filing Requirements: S corporation treatment is a federal tax classification; some states do not recognize S status or impose entity‑level taxes or filing requirements. Check state tax obligations separately.
– Treating S corp as sole proprietor/partnership for payroll: Owners who perform services for the S corporation generally must be paid reasonable compensation subject to payroll taxes; misclassifying compensation as distributions can lead to employment tax issues.

Penalties and Consequences

– Penalties for late or incomplete returns and for failing to furnish Schedule K‑1 to shareholders can be significant. Penalties may be assessed per shareholder and per month (or part thereof) the return/K‑1s are late.
– Penalties and interest may also apply to late tax payments (where taxes are owed), and the IRS may adjust shareholder returns if allocations are incorrect.

Record Retention

– Keep copies of the filed Form 1120‑S, all Schedule K‑1s, supporting schedules and business records for at least three years (longer if you have items that may require longer retention per IRS guidance) in case of audit or future questions.

The Bottom Line

Form 1120‑S is the principal federal filing for S corporations. It reports the corporation’s financial results and allocates tax items to shareholders via Schedule K‑1. Timely and accurate preparation—confirming S election status, reconciling book and tax figures, tracking shareholder basis, and preparing correct K‑1s—is essential to avoid penalties and to ensure shareholders can correctly report their share of income on their personal returns. Many S corporations use tax software or hire tax professionals to help prepare Form 1120‑S because of the form’s complexity and the potential consequences of errors.

If you’d like, I can:

– Walk through a simple example of preparing Schedule K‑1 allocations with ownership changes during the year.
– Provide a printable filing checklist tailored to a calendar‑year S corporation.
– Review a sample Form 1120‑S and suggest items to double‑check before filing. Which would be most helpful?