Guide to IRS Form 1120-S: S-Corp Income Tax Return Simplified

Introduction

IRS Form 1120-S, officially called the “U.S. Income Tax Return for S-Corporation,” may sound like a mouthful, but it is an essential income tax form for many S-corporation entrepreneurs. This form is used to report annual income, losses, deductions, credits, and other transactions. S-Corps, business entities elected to be treated differently for tax purposes, are exempt from paying corporate income tax at the company level. Instead, the income flows through to individual shareholders’ tax returns. If you own a small business through an S-Corp, you will want to learn more about this form, as it holds significant importance in ensuring you and your fellow shareholders get the tax benefits you deserve! 

Key Takeaways 

• S-corporations are limited to 100 shareholders, one class of stock, and no foreign shareholders.
• Businesses registered or elected to be taxed as S-corporations (S-corps) must file an annual tax return on IRS Form 1120-S.
• This form is used to report the company’s income, gains, losses, credits, deductions, and other necessary information.
• All necessary schedules and forms must accompany Form 1120-S. Schedule K-1, which lists individual shareholders and their profit and loss allocations, must be submitted and provided to the shareholders.
• S-Corps do not pay federal income tax at the corporate level. Instead, income, expenses, and other tax items pass through directly to the shareholders, who report their share of the corporation’s tax items in their tax returns.

What Is an S-Corporation? 

An S-corporation is a tax classification rather than a distinct type of business entity, like an LLC or corporation. “S-Corp” derives its name from Subchapter S of the Internal Revenue Code. It is intended for small businesses with fewer than 100 shareholders and a single class of shares. S-corporations are pass-through entities, so they do not pay corporate taxes. On the other hand, individual shareholders report flow-through income and losses on their tax returns and pay tax at the individual income tax rate. Therefore, double taxation is avoided.

What Are the Qualifications for S-Corporation Status?

To qualify for S-corp status, a company must meet specific criteria set by the IRS. Here are the key qualifications:

1. It must be a domestic corporation.
2. It must have only eligible shareholders. Shareholders may only be individuals (US citizens and residents), a specific type of trust or estate, or a specific type of tax-exempt organization. Nonresident aliens, corporations, and partnerships are not eligible shareholders.
3. The corporation has a maximum of 100 shareholders.
4. It issues only one class of stock.
5. It is not an ineligible corporation (such as certain insurance providers, banks, or domestic international sales corporations).

Note: The corporation must submit Form 2553, Election by a Small Business Corporation, with the signatures of all shareholders to become an S-corporation. 

What is Form 1120-S? 

Form 1120-S is the income tax return form for businesses that have elected to be taxed as S-Corps. It is used to report the company’s income, gains, losses, deductions, and other credits for the tax year. S-Corps are pass-through tax entities, meaning the earnings and other tax items “pass through” to the owners, who report them on their tax returns. As a result, S-Corps do not pay federal income tax; instead, income is taxed at the owners’ individual tax rates.

Who Should File Form 1120-S? 

A corporation or other entity is required to file Form 1120-S if the following conditions are met: (a) the corporation or other entity elected to be an S-corporation by filing Form 2553; (b) the Internal Revenue Service accepted the election; and (c) the election is still in effect. After filing your election, you should have received confirmation that Form 2553 was accepted. This should be verified before filing your first Form 1120-S tax return.

For confirmation, you should contact the Internal Revenue Service at 800-829-4933 if you have not received notification of the election’s acceptance or rejection within two months of filing Form 2553 (five months if you checked box Q1 to ask for a letter ruling). Please note that Form 1120-S cannot be filed for any tax year before the year the election takes effect.

If you inadvertently failed to file Form 2553 within the required timeline or did not file it on time, you may be eligible for relief for a late-filed S-corporation election. Several revenue procedures can be utilized to claim a late S-corp election on Form 2553, and if you need assistance, our tax resolution experts can help you. To learn more about the grant of relief for late filing of the S-corporation election, read Rev. Proc. 2013-3 and Form 2553 Instructions.

Why is Form 1120-S Important? 

Form 1120-S is essential because it gives the IRS details about your company’s income, gains, losses, deductions, credits, and other information, including pertinent business details (mailing address, EIN, date of incorporation, and effective date of the S-corporation election). It also provides the IRS with information about the ownership percentages of various individual shareholders.

Shareholders receive a Schedule K-1, which reports their share of the corporation’s tax items (income, gains, deductions, and credits), and they use this information to report their tax liabilities on their tax returns. This will calculate any taxes owed to shareholders on their income tax filings, including any required refunds or payments. Passing tax liability on to the business owners is the primary purpose of electing an S-corp. 

What Is the Due Date for Form 1120-S?

In most cases, an S-Corp must file Form 1120-S by the 15th of the third month following the end of the tax year. This means that the due date for calendar-year corporations is March 15, and almost all S-Corps are calendar corporations because the tax year of a pass-through entity must reflect the tax year of the underlying owners, and only U.S. individuals and residents can own S-Corps, necessitating the use of a calendar year.

On the other hand, a dissolved corporation must file by the 15th day of the third month following the date of dissolution, which is one of the few exceptions to the calendar year filing requirement, and there is a rolling deadline based on the date of dissolution. If the deadline falls on a Saturday, Sunday, or official holiday, the company can file the following working day.

If the S-corporation election is revoked during the tax year and the corporation becomes a C-corporation, it must file Form 1120-S for its short year by the deadline (including extensions) of the C-corporation’s short-year return.

Is There a Filing Deadline Extension?

By filing IRS Form 7004 on or before the tax return’s due date, generally by the 15th of the third month following the end of its tax year, you may request an automatic 6-month extension to file Form 1120-S, typically extending the deadline to September 15th. This request can be submitted electronically or on paper, but electronic submission is preferable. If you file your tax return electronically but file Form 7004 on paper, your return will likely be processed before the extension is approved, which could result in a notice of penalty. 

Where is Form 1120-S Filed? 

S-corps often electronically file (e-file) Form 1120-S and related forms, schedules, statements, and attachments through a tax preparer using professional software. It is recommended to e-file to prevent processing from being delayed. However, if you self-prepare it, you can mail Form 1120-S to the appropriate IRS address, depending on your company’s location. 

Where Can I Find the Most Recent Version of Form 1120-S? 

The IRS website provides the newest version of Form 1120-S. Check back often because the forms are updated occasionally, and the filing rules can change. The IRS website also contains the instructions for the form. However, you should note that IRS instructions are not considered the authority for removing penalties for reasonable cause, and it is always better to work with a tax professional who can give you the most updated advice. You may access the IRS website 24 hours a day, seven days a week.

What Are the Potential Tax Savings and Financial Benefits of Filing Form 1120-S? 

S-corporations can provide tax savings and financial benefits, which include the following:

1. Tax exemption at the entity level. S-corporations are exempt from paying federal income tax at the entity level. Any profit or loss from the business is “passed through” to the shareholders, who then include it in their income tax returns. 
2. Avoidance of double taxation.  The entity’s income is only taxed once—at the shareholder level—avoiding double taxation.
3. Treatment of pass-through losses. The S-corporation’s losses are passed on to the shareholders, allowing business losses to be deducted against other income on your tax returns (subject to certain limitations). This would result in tax savings. 
4. Personal income tax savings due to reduced self-employment tax. Shareholders who work for the business are considered employees. One benefit of being an S-corp is that the FICA payroll tax is only payable on wages received from employment. You’re only responsible for part of these taxes (7.65%), while your S-corporation pays the balance (7.65%) as employment taxes, which are treated as allowable business expenses. If you’re self-employed, you must pay both portions of this tax. However, amounts received as earnings or dividends beyond the wages paid are only taxed for income tax purposes and not for social security taxes, as long as the compensation is reasonable.
5. Tax-free corporate dividends. If the distribution does not exceed their stock basis, S-corp shareholders can receive tax-free corporate dividends, be paid salaries by the company, and work as employees. A capital gains tax, imposed at a reduced rate compared to regular income, applies to dividends exceeding a shareholder’s stock basis. There are no FICA taxes (Medicare and Social Security) on dividend distributions.
6. Company contributions. Generally speaking, FICA taxes do not apply to company contributions made to a retirement plan on behalf of a shareholder-employee.
7. Paying wages to its owners/employees is considered earned income for Social Security and Medicare purposes, while any additional net earnings that flow through the owners are considered dividend income. This means that if the owner actively participates in the business, the payments are exempt from the Self-Employed Contributions Act (SECA) tax and are not considered passive income. Wages paid must be reasonable compensation, meaning they are paid at fair market value equivalent rates for the type of service provided.
8. Limited liability protection. Though not directly related to tax savings, it’s worth noting that S-corporations provide limited liability protection to shareholders. The S-corporation protects the personal assets of its shareholders. A shareholder is not personally liable for the corporation’s debts and liabilities without an express personal guarantee. To satisfy business obligations, creditors cannot seize personal assets belonging to stockholders, such as homes or bank accounts.

What Are the Penalties for Late Filing of Returns or Late Payments of Tax?

Late filing of the return. A penalty may be imposed if the return is filed after the deadline (including extensions) or is incomplete unless there is a reasonable cause for each failure. The penalty for late or incomplete returns on which no tax is owed is $235 per month or part of a month (up to 12 months) multiplied by the corporation’s total number of shareholders during any part of the tax year for which the return is required.

If tax is owed, the penalty is calculated as the sum of the amount mentioned above plus 5% of the unpaid tax for every month or fraction of a month that the tax return is overdue. The maximum penalty allowed is 25% of the unpaid tax. For tax returns that must be submitted in 2024, the minimum penalty for a return filed more than 60 days late is the lesser of the amount of tax owed or $485.

Failure to furnish information on time. There may be a $310 fine for each Schedule K-1 (and Schedule K-3, if applicable) that is incomplete, inaccurate, or not provided to a shareholder by the due date. If the requirement to report correct information is willfully ignored, each $310 penalty is increased to $630, or 10% of the aggregate number of items required to be reported, whichever is greater. The penalty will be waived if the corporation can demonstrate that its failure to provide timely information was due to a reasonable cause.

Late payment of tax. If a corporation fails to pay the tax on time, it may be subject to a penalty equal to half of one percent of the tax that is not paid for each month or part of a month that the tax is not paid, with the maximum penalty being equal to twenty-five percent of the tax that is not paid. The penalty will be waived if the corporation can demonstrate that its failure to pay on time was due to a reasonable cause.

Interest. Even if an extension of time to file is granted, interest is charged on late payments. From the due date (including extensions) to the date of payment, interest is additionally assessed on penalties for failure to file, negligence, fraud, material misstatements of valuation, material understatements of taxes, and understatements of reportable transactions. The interest charge is calculated at the rate specified in Section 6621.

What Information is Required to File Form 1120-S?

In general, all accounting records and financial statements must be kept up-to-date when preparing IRS Forms because this information will be used to declare income, expenses, taxes owed, payments made, and other transactions. The form includes pertinent business information, such as:

1. Corporation name and mailing address
2. Employer identification number (EIN)
3. The effective date of the S-Corp election
4. Business activity code
5. Financial statements (used to calculate total assets, income, and expenses)
6. Any 1099 issued to the company by payment processors, marketplaces, financial institutions, or clients

How Do You Prepare Form 1120-S?

Generally, it is not recommended to complete Form 1120-S without using tax software or a tax professional, but it is worth understanding what the form entails if you have an S-corp. To prepare IRS Form 1120, follow these general steps:

1. Gather the necessary information. Collect all financial records, including income statements, balance sheets, and supporting documents for deductions, credits, and other transactions.
2. Complete the entity information. Fill in the S-corporation’s basic information, such as name, address, Employer Identification Number (EIN), and tax year.
3. Report income and deductions. Enter the corporation’s income, deductions, and other relevant financial information on the appropriate lines of Form 1120-S. This includes revenue, cost of goods sold, operating expenses, and business-specific deductions or credits.
4. Prepare Schedule K. Complete Schedule K to report the corporation’s shareholders, ownership percentages, income share, deductions, and credits. Each shareholder will be given a Schedule K-1 with this information for personal tax filing purposes.
5. Calculate and report tax liabilities. Determine the S-corporation’s tax liability using the provided tax tables or the tax rate schedule. Report this amount on the appropriate line of Form 1120-S.
6. Attach additional schedules if necessary. If certain deductions, credits, or transactions require additional information, complete and attach the appropriate schedules, such as Schedule D for capital gains and losses or Schedule B for additional information.
7. Review and sign. Double-check all entries and calculations for accuracy. Form 1120-S must be signed and dated.
8. File the form. Submit the signed Form 1120-S to the IRS by the due date. It can be e-filed or mailed, depending on the corporation’s circumstances.

All applicable schedules must be completed with current information, and supporting documents must be retained for audit purposes. After completing all required forms and schedules, the assembly of schedules on page 5 of Form 1120-S must be provided in the following order:

1. Schedule B, Other information.
2. Schedule K, Shareholders’ Pro Rata Share Items.
3. Schedule L, Balance Sheet per Books.
4. Schedule M-1, Reconciliation of Income (Loss) per Books with Income (Loss) per Return.
5. Schedule M-2, Analysis of Accumulated Adjustments Account, Shareholders’ Undistributed Taxable Income Previously Taxed, Accumulated Earnings and Profits, and Other Adjustments.
6. Schedule N, Foreign Operations of U.S. Corporations.
7. Schedule D, Capital Gains and Losses and Built-in Gains.
8. Form 4797, Sales of Business Property.
9. Form 8949, Sales and Other Dispositions of Capital Assets.
10. Form 8996, Qualified Opportunity Fund.
11. Form 8825, Rental Real Estate Income and Expenses of a Partnership or an S Corporation.
12. Form 1125-A, Cost of Goods Sold.
13. Form 8050, Direct Deposit of Corporate Tax Refund.
14. Form 4136, Credit for Federal Tax Paid on Fuels.
15. Form 8941, Credit for Small Employer Health Insurance Premiums.
16. Form 3800, General Business Credit.
17. Form 8997, Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments.
18. Form 6252, Installment Sale Income.
19. Schedule A (Form 8936), Clean Vehicle Credit Amount.
20. Schedules K-1, Shareholder’s Share of Income, Deductions, Credits, etc.
21. Form 8938, Statement of Specified Foreign Financial Assets.
22. Additional schedules are listed in alphabetical order, including Schedule K-2 (Form 1120-S), Shareholders’ Pro Rata Share Items—International, and Schedules K-3 (Form 1120-S), Shareholder’s Share of Income, Deductions, Credits, etc.—International.
23. Additional forms are in numerical order.

Many S-corps, particularly those with more complicated tax situations, may choose to have it completed by a professional tax preparer or accountant. Having a tax professional complete and submit these forms reduces or eliminates the likelihood of errors.

Can Cleer Tax Assist Me With My Form 1120-S?

Absolutely! Our qualified tax professionals can prepare and submit your Form 1120-S to the IRS. We will double-check all provided information, verify the accuracy of names, numbers, and addresses, and include any required attachments. Cleer offers federal income tax preparation, which includes your state tax as well. We also offer all-inclusive bookkeeping packages, which include your monthly statements plus your federal and state tax returns.

If you need any help reducing your tax liability, schedule a consultation, or feel free to contact us.